AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 26, 2005
1933 ACT FILE NO. 333-104972
1940 ACT FILE NO. 811-21339
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 4 [X]
AND
REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 5 [X]
---------------------
MORGAN STANLEY INSTITUTIONAL LIQUIDITY FUNDS
(A MASSACHUSETTS BUSINESS TRUST)
(EXACT NAME OF REGISTRANT)
1221 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10020
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (800) 869-6397
AMY R. DOBERMAN
MORGAN STANLEY INVESTMENT MANAGEMENT INC.
1221 AVENUE OF THE AMERICAS
NEW YORK, NY 10020
(NAME AND ADDRESS OF AGENT FOR SERVICE)
---------------------
COPY TO:
CARL FRISCHLING, ESQ.
KRAMER LEVIN NAFTALIS & FRANKEL LLP
1177 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10036
---------------------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX)
[X] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485.
================================================================================
CASH MANAGEMENT CLASS PROSPECTUS
<R>
July 26, 2005
</R>
[MORGAN STANLEY GRAPHIC OMITTED]
Morgan Stanley Institutional Liquidity Funds
Money Market Portfolio
Prime Portfolio
Government Portfolio
Government Securities Portfolio
Treasury Portfolio
Treasury Securities Portfolio
Tax-Exempt Portfolio
SHAREHOLDER SERVICES:
1-888-378-1630
--------------------------------------------------------------------------------
PRICES AND INVESTMENT RESULTS:
www.morganstanley.com/im
--------------------------------------------------------------------------------
INVESTMENT ADVISER: MORGAN STANLEY INVESTMENT MANAGEMENT INC.
--------------------------------------------------------------------------------
Morgan Stanley Institutional Liquidity Funds (the "Fund") is a mutual fund
organized as a Massachusetts business trust currently consisting of the seven
Portfolios which are described in this prospectus. This prospectus offers Cash
Management Class Shares of the Portfolio described herein.
--------------------------------------------------------------------------------
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.
CASH MANAGEMENT CLASS PROSPECTUS
<R>
July 26, 2005
</R>
Table of Contents
PAGE
THE PORTFOLIOS
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Money Market Portfolio 1
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Prime Portfolio 2
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Government Portfolio 3
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Government Securities Portfolio 4
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Treasury Portfolio 5
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Treasury Securities Portfolio 6
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Tax-Exempt Portfolio 7
FEES AND EXPENSES OF THE PORTFOLIOS 8
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ADDITIONAL INVESTMENT STRATEGY AND RISK INFORMATION 9
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PORTFOLIO HOLDINGS 12
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PURCHASING SHARES 12
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REDEEMING SHARES 14
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GENERAL SHAREHOLDER INFORMATION 15
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INVESTMENT ADVISER 18
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FINANCIAL HIGHLIGHTS 19
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CASH MANAGEMENT CLASS PROSPECTUS
<R>
July 26, 2005
</R>
Money Market Portfolio
OBJECTIVE
The Money Market Portfolio seeks preservation of capital, daily liquidity and
maximum current income.
APPROACH
The Portfolio seeks to maintain a stable net asset value of $1.00 per share by
investing in liquid, high quality U.S. dollar-denominated money market
instruments of U.S. and foreign financial and non-financial corporations. The
Portfolio also invests in obligations of foreign governments and in obligations
of the U.S. government and its agencies and instrumentalities. The Portfolio's
money market investments may include commercial paper, corporate debt
obligations, funding agreements, debt obligations (including certificates of
deposit and promissory notes) of U.S. banks or foreign banks, or of U.S.
branches of foreign banks, or foreign branches of U.S. banks (such as Yankee
obligations), certificates of deposit of savings banks and savings and loan
organizations, short-term taxable municipal obligations, variable rate master
demand notes (including tax-exempt variable rate demand notes), asset-backed
securities and repurchase agreements. No individual security will have a
remaining maturity in excess of 397 days, except for adjustable rate government
securities with maturities in excess of 397 days.
PROCESS
Morgan Stanley Investment Management Inc. (the "Adviser") has retained Morgan
Stanley Investment Advisors Inc. (the "Sub-Adviser"), as sub-adviser for the
Portfolio. The Sub-Adviser follows a multi-pronged investment process with
respect to credit risk, interest rate risk and liquidity. Securities are
reviewed on an ongoing basis to maintain or improve creditworthiness taking
into consideration factors such as cash flow, asset quality, debt service
coverage ratios and economic developments. Additionally, exposure to guarantors
and liquidity providers is monitored separately as are the various
diversification requirements.
PRINCIPAL RISKS
The Portfolio's principal investment strategies are subject to the following
principal risks:
There is no assurance that the Portfolio will achieve its investment objective.
Although the Portfolio seeks to preserve the value of your investment at $1.00
per share, it is possible for an investor to lose money by investing in the
Portfolio. Shares of the Portfolio are not bank deposits and are not insured or
guaranteed by the FDIC or any other government agency.
A principal risk of investing in the Portfolio is associated with its debt
obligation investments. All debt obligations, such as bonds, are subject to two
types of risk: credit risk and interest rate risk. Credit risk refers to the
possibility that the issuer of a security will be unable to make interest
payments and/or repay the principal on its debt. Interest rate risk refers to
fluctuations in the value of a debt security resulting from changes in the
general level of interest rates. The Sub-Adviser actively manages the
Portfolio's assets to reduce the risk of losing any principal investment as a
result of credit or interest rate risks. The Portfolio's assets are reviewed to
maintain or improve creditworthiness. In addition, federal regulations require
money market funds to invest only in debt obligations of high quality and
short-term maturities. Repurchase agreements are subject to additional risks
associated with the possibility of default by the seller at a time when the
collateral has declined in value, or insolvency of the seller, which may affect
the Portfolio's right to control the collateral. Asset-backed securities raise
certain risk considerations including prepayment risk and the risk of
inadequate recovery on repossessed collateral. Because the Portfolio may
concentrate its investments in bank securities, an adverse development in the
banking industry may affect the value of the Portfolio's investments more than
if the Portfolio were not so concentrated.
The Portfolio may invest in U.S. dollar-denominated foreign securities and
money market instruments. Although the Portfolio will invest in these
securities only if the Sub-Adviser determines they are of comparable quality to
the Portfolio's U.S. investments, investing in securities of foreign issuers
involves some additional risks. These risks may include higher costs of foreign
investing, and the possibility of adverse political, economic or other
developments affecting the issuers of these securities.
You may obtain the Portfolio's 7-day current yield by calling 1-888-378-1630.
The Fund was recently organized and, as of the date of this Prospectus, the
Portfolio had no historical performance to report. Performance information will
be provided once the Portfolio has completed a full year of operation.
1
Prime Portfolio
OBJECTIVE
The Prime Portfolio seeks preservation of capital, daily liquidity and maximum
current income.
APPROACH
The Portfolio seeks to maintain a stable net asset value of $1.00 per share by
investing in liquid, high quality money market instruments of domestic
financial and non-financial corporations, as well as obligations of the U.S.
government and its agencies and instrumentalities. The Portfolio's money market
investments may include commercial paper, corporate debt obligations, funding
agreements, debt obligations (including certificates of deposit and promissory
notes) of U.S. banks or foreign branches of U.S. banks, certificates of deposit
of savings banks and savings and loan organizations, short-term taxable
municipal obligations, variable rate master demand notes (including tax-exempt
variable rate demand notes), asset-backed securities and repurchase agreements.
No individual security will have a remaining maturity in excess of 397 days,
except for adjustable rate government securities with maturities in excess of
397 days.
PROCESS
The Adviser has retained the Sub-Adviser as sub-adviser for the Portfolio. The
Sub-Adviser follows a multi-pronged investment process with respect to credit
risk, interest rate risk and liquidity. Securities are reviewed on an ongoing
basis to maintain or improve creditworthiness taking into consideration factors
such as cash flow, asset quality, debt service coverage ratios and economic
developments. Additionally, exposure to guarantors and liquidity providers is
monitored separately as are the various diversification requirements.
PRINCIPAL RISKS
The Portfolio's principal investment strategies are subject to the following
principal risks:
There is no assurance that the Portfolio will achieve its investment objective.
Although the Portfolio seeks to preserve the value of your investment at $1.00
per share, it is possible for an investor to lose money by investing in the
Portfolio. Shares of the Portfolio are not bank deposits and are not insured or
guaranteed by the FDIC or any other government agency.
A principal risk of investing in the Portfolio is associated with its debt
obligation investments. All debt obligations, such as bonds, are subject to two
types of risk: credit risk and interest rate risk. Credit risk refers to the
possibility that the issuer of a security will be unable to make interest
payments and/or repay the principal on its debt. Interest rate risk refers to
fluctuations in the value of a debt security resulting from changes in the
general level of interest rates. The Sub-Adviser actively manages the
Portfolio's assets to reduce the risk of losing any principal investment as a
result of credit or interest rate risks. The Portfolio's assets are reviewed to
maintain or improve creditworthiness. In addition, federal regulations require
money market funds to invest only in debt obligations of high quality and
short-term maturities. Repurchase agreements are subject to additional risks
associated with the possibility of default by the seller at a time when the
collateral has declined in value, or insolvency of the seller, which may affect
the Portfolio's right to control the collateral. Asset-backed securities raise
certain risk considerations including prepayment risk and the risk of
inadequate recovery on repossessed collateral. Because the Portfolio may
concentrate its investments in bank securities, an adverse development in the
banking industry may affect the value of the Portfolio's investments more than
if the Portfolio's investments were not so concentrated.
You may obtain the Portfolio's 7-day current yield by calling 1-888-378-1630.
The Fund was recently organized and, as of the date of this Prospectus, the
Portfolio had no historical performance to report. Performance information will
be provided once the Portfolio has completed a full year of operation.
2
CASH MANAGEMENT CLASS PROSPECTUS
<R>
July 26, 2005
Government Portfolio
</R>
OBJECTIVE
The Government Portfolio seeks preservation of capital, daily liquidity and
maximum current income.
APPROACH
The Portfolio seeks to maintain a stable net asset value of $1.00 per share by
investing exclusively in obligations of the U.S. government and its agencies
and instrumentalities and in repurchase agreements collateralized by such
securities. The Portfolio may change its principal investment strategies;
however you would be notified of any changes. No individual security will have
a remaining maturity in excess of 397 days.
The U.S. government securities that the Portfolio may purchase include:
o U.S. treasury bills, notes and bonds, all of which are direct obligations
of the U.S. government.
o Securities issued by agencies and instrumentalities of the U.S.
government which are backed by the full faith and credit of the United
States. Among the agencies and instrumentalities issuing these
obligations are the Government National Mortgage Association ("Ginnie
Mae") and the Federal Housing Administration.
o Securities issued by agencies and instrumentalities which are not backed
by the full faith and credit of the United States, but whose issuing
agency or instrumentality has the right to borrow, to meet its
obligations, from the U.S. Treasury. Among these agencies and
instrumentalities are the Federal National Mortgage Association ("Fannie
Mae"), the Federal Home Loan Mortgage Corporation ("Freddie Mac") and the
Federal Home Loan Banks.
o Securities issued by agencies and instrumentalities which are backed
solely by the credit of the issuing agency or instrumentality. Among
these agencies and instrumentalities is the Federal Farm Credit System.
PROCESS
The Adviser has retained the Sub-Adviser as sub-adviser for the Portfolio. The
Sub-Adviser follows an investment process that seeks to select maturities based
on the shape of the money market yield curve and based on expectations as to
future shifts in the level and shape of the curve, taking into consideration
such factors as current short-term interest rates, Federal Reserve policy
regarding interest rates and U.S. economic activity.
PRINCIPAL RISKS
The Portfolio's principal investment strategies are subject to the following
principal risks:
There is no assurance that the Portfolio will achieve its investment objective.
Although the Portfolio seeks to preserve the value of your investment at $1.00
per share, it is possible for an investor to lose money by investing in the
Portfolio. Shares of the Portfolio are not bank deposits and are not insured or
guaranteed by the FDIC or any other government agency.
A principal risk of investing in the Portfolio is associated with its debt
obligation investments. All debt obligations, such as bonds, are subject to two
types of risk: credit risk and interest rate risk. Credit risk refers to the
possibility that the issuer of a security will be unable to make interest
payments and/or repay the principal on its debt. Interest rate risk refers to
fluctuations in the value of a debt security resulting from changes in the
general level of interest rates. The Sub-Adviser actively manages the
Portfolio's assets to reduce the risk of losing any principal investment as a
result of credit or interest rate risks. The Portfolio's assets are reviewed to
maintain or improve creditworthiness. In addition, federal regulations require
money market funds to invest only in debt obligations of high quality and
short-term maturities. Repurchase agreements are subject to additional risks
associated with the possibility of default by the seller at a time when the
collateral has declined in value, or insolvency of the seller, which may affect
the Portfolio's right to control the collateral.
You may obtain the Portfolio's 7-day current yield by calling 1-888-378-1630.
The Fund was recently organized and, as of the date of this Prospectus, the
Portfolio had no historical performance to report. Performance information will
be provided once the Portfolio has completed a full year of operation.
3
Government Securities Portfolio
OBJECTIVE
The Government Securities Portfolio seeks preservation of capital, daily
liquidity and maximum current income.
APPROACH
The Portfolio seeks to maintain a stable net asset value of $1.00 per share by
investing substantially all of its assets in U.S. Treasury obligations and
certain U.S. government securities, the interest from which is generally exempt
from state income taxation. These securities may include those issued by the
U.S. Treasury and certain agencies, authorities or instrumentalities of the
U.S. government. The Portfolio may change its principal investment strategies;
however you would be notified of any changes. The Portfolio may also invest in
repurchase agreements, however, under normal circumstances it does not intend
to do so. No individual security will have a remaining maturity in excess of
397 days.
Shareholders should consult their individual tax adviser to determine whether
the Portfolio's distributions derived from interest on the Treasury obligations
and U.S. government securities referred to above are exempt from state taxation
in their own state.
PROCESS
The Adviser has retained the Sub-Adviser as sub-adviser for the Portfolio. The
Sub-Adviser follows an investment process that seeks to select maturities based
on the shape of the money market yield curve and based on expectations as to
future shifts in the level and shape of the curve, taking into consideration
such factors as current short-term interest rates, Federal Reserve policy
regarding interest rates and U.S. economic activity.
PRINCIPAL RISKS
The Portfolio's principal investment strategies are subject to the following
principal risks:
There is no assurance that the Portfolio will achieve its investment objective.
Although the Portfolio seeks
to preserve the value of your investment at $1.00 per share, it is possible for
an investor to lose money by investing in the Portfolio. Shares of the
Portfolio are not bank deposits and are not insured or guaranteed by the FDIC
or any other government agency.
A principal risk of investing in the Portfolio is associated with its debt
obligation investments. All debt obligations, such as bonds, are subject to two
types of risk: credit risk and interest rate risk. Credit risk refers to the
possibility that the issuer of a security will be unable to make interest
payments and/or repay the principal on its debt. Interest rate risk refers to
fluctuations in the value of a debt security resulting from changes in the
general level of interest rates. The Sub-Adviser actively manages the
Portfolio's assets to reduce the risk of losing any principal investment as a
result of credit or interest rate risks. The Portfolio's assets are reviewed to
maintain or improve creditworthiness. In addition, federal regulations require
money market funds to invest only in debt obligations of high quality and
short-term maturities. Repurchase agreements are subject to additional risks
associated with the possibility of default by the seller at a time when the
collateral has declined in value, or insolvency of the seller, which may affect
the Portfolio's right to control the collateral.
You may obtain the Portfolio's 7-day current yield by calling 1-888-378-1630.
The Fund was recently organized and, as of the date of this Prospectus, the
Portfolio had no historical performance to report. Performance information will
be provided once the Portfolio has completed a full year of operation.
4
CASH MANAGEMENT CLASS PROSPECTUS
<R>
July 26, 2005
</R>
Treasury Portfolio
OBJECTIVE
The Treasury Portfolio seeks preservation of capital, daily liquidity and
maximum current income.
APPROACH
The Portfolio seeks to maintain a stable net asset value of $1.00 per share by
investing exclusively in U.S. Treasury obligations and repurchase agreements
collateralized by such securities. The Portfolio may change its principal
investment strategies; however you would be notified of any changes. No
individual security will have a remaining maturity in excess of 397 days.
PROCESS
The Adviser has retained the Sub-Adviser as sub-adviser for the Portfolio. The
Sub-Adviser follows an investment process that seeks to select maturities based
on the shape of the money market yield curve and based on the expectations as
to future shifts in the level and shape of the curve, taking into consideration
such factors as current short-term interest rates, Federal Reserve policy
regarding interest rates and U.S. economic activity.
PRINCIPAL RISKS
The Portfolio's principal investment strategies are subject to the following
principal risks:
There is no assurance that the Portfolio will achieve its investment objective.
Although the Portfolio seeks to preserve the value of your investment at $1.00
per share, it is possible for an investor to lose money by investing in the
Portfolio. Shares of the Portfolio are not bank deposits and are not insured or
guaranteed by the FDIC or any other government agency.
A principal risk of investing in the Portfolio is associated with its debt
obligation investments. All debt obligations, such as bonds, are subject to two
types of risk: credit risk and interest rate risk. Credit risk refers to the
possibility that the issuer of a security will be unable to make interest
payments and/or repay the principal on its debt. Interest rate risk refers to
fluctuations in the value of a debt security resulting from changes in the
general level of interest rates. The Sub-Adviser actively manages the
Portfolio's assets to reduce the risk of losing any principal investment as a
result of credit or interest rate risks. The Portfolio's assets are reviewed to
maintain or improve creditworthiness. In addition, federal regulations require
money market funds to invest only in debt obligations of high quality and
short-term maturities. Repurchase agreements are subject to additional risks
associated with the possibility of default by the seller at a time when the
collateral has declined in value, or insolvency of the seller, which may affect
the Portfolio's right to control the collateral.
You may obtain the Portfolio's 7-day current yield by calling 1-888-378-1630.
The Fund was recently organized and, as of the date of this Prospectus, the
Portfolio has no historical performance to report. Performance information will
be provided once the Portfolio has completed a full year of operation.
5
Treasury Securities Portfolio
OBJECTIVE
The Treasury Securities Portfolio seeks preservation of capital, daily
liquidity and maximum current income.
APPROACH
The Portfolio seeks to maintain a stable net asset value of $1.00 per share by
investing exclusively in U.S. Treasury obligations. Such obligations are backed
by the full faith and credit of the U.S. government. The Portfolio may change
its principal investment strategies; however you would be notified of any
changes. No individual security will have a remaining maturity in excess of 397
days.
PROCESS
The Adviser has retained the Sub-Adviser as sub-adviser for the Portfolio. The
Sub-Adviser follows an investment process that seeks to select maturities based
on the shape of the money market yield curve and based on expectations as to
future shifts in the level and shape of the curve, taking into consideration
such factors as current short-term interest rates, Federal Reserve policy
regarding interest rates and U.S. economic activity.
PRINCIPAL RISKS
The Portfolio's principal investment strategies are subject to the following
principal risks:
There is no assurance that the Portfolio will achieve its investment objective.
Although the Portfolio seeks to preserve the value of your investment at $1.00
per share, it is possible for an investor to lose money by investing in the
Portfolio. Shares of the Portfolio are not bank deposits and are not insured or
guaranteed by the FDIC or any other government agency.
A principal risk of investing in the Portfolio is associated with its debt
obligation investments. All debt obligations, such as bonds, are subject to two
types of risk: credit risk and interest rate risk. Credit risk refers to the
possibility that the issuer of a security will be unable to make interest
payments and/or repay the principal on its debt. Interest rate risk refers to
fluctuations in the value of a debt security resulting from changes in the
general level of interest rates. The Sub-Adviser actively manages the
Portfolio's assets to reduce the risk of losing any principal investment as a
result of credit or interest rate risks. The Portfolio's assets are reviewed to
maintain or improve creditworthiness. In addition, federal regulations require
money market funds to invest only in debt obligations of high quality and
short-term maturities.
You may obtain the Portfolio's 7-day current yield by calling 1-888-378-1630.
The Fund was recently organized and, as of the date of this Prospectus, the
Portfolio had no historical performance to report. Performance information will
be provided once the Portfolio has completed a full year of operation.
6
CASH MANAGEMENT CLASS PROSPECTUS
<R>
July 26, 2005
</R>
Tax-Exempt Portfolio
OBJECTIVE
The Tax-Exempt Portfolio seeks to maximize current income exempt from federal
income tax to the extent consistent with preservation of capital and
maintenance of liquidity.
APPROACH
The Portfolio seeks to maintain a stable net asset value of $1.00 per share by
investing at least 80% of its assets in high quality short-term municipal
obligations, the interest of which is exempt from federal income taxes and is
not subject to the federal alternative minimum tax. This policy is fundamental
and may not be changed without shareholder approval. Municipal obligations are
securities issued by state and local governments and their agencies and
typically are either general obligation or revenue bonds, notes or commercial
paper. General obligation securities are secured by the issuer's faith and
credit including its taxing power for payment of principal and interest.
Revenue bonds, however, are generally payable from a specific revenue source.
They are issued for a wide variety of projects such as financing public
utilities, hospitals, housing, airports, highways and educational facilities.
Included within the revenue bonds category are participations in lease
obligations and installment purchase contracts of municipalities. Additionally,
the Portfolio's investments may include variable and floating rate demand
instruments, tender option bonds and custodial receipts.
The Portfolio may invest up to 20% of its assets in taxable money market
securities or in municipal obligations that pay interest income that may be
subject to the alternative minimum tax. However, it is currently intended that
the Portfolio will be managed so that income generated by the Portfolio will
not be subject to the alternative minimum tax. No individual security will have
a remaining maturity in excess of 397 days.
While at least 80% of the Portfolio's assets typically will be invested in
municipal obligations, the interest of which is exempt from federal income
taxes and is not subject to the federal alternative minimum tax, the Portfolio
may temporarily invest more than 20% of its assets in taxable money market
securities for defensive purposes under extraordinary market conditions.
PROCESS
The Adviser has retained the Sub-Adviser as sub-adviser for the Portfolio. The
Sub-Adviser follows a multi-pronged investment process with respect to credit
risk, interest rate risk and liquidity. Securities are reviewed on an ongoing
basis, taking into consideration factors such as economic developments,
budgetary trends, cash flow, debt service coverage ratios and tax-law changes.
Exposure to guarantors and liquidity providers is monitored. Weighted average
maturity is shifted in response to expectations as to the future course of
money market interest rates, the shape of the money market yield curve and the
Portfolio's recent cash flow experience.
PRINCIPAL RISKS
The Portfolio's principal investment strategies are subject to the following
principal risks:
There is no assurance that the Portfolio will achieve its investment objective.
Although the Portfolio seeks to preserve the value of your investment at $1.00
per share, it is possible for an investor to lose money by investing in the
Portfolio. Shares of the Portfolio are not bank deposits and are not insured or
guaranteed by the FDIC or any other government agency.
A principal risk of investing in the Portfolio is associated with its debt
obligation investments. All debt obligations, such as bonds, are subject to two
types of risk: credit risk and interest rate risk. Credit risk refers to the
possibility that the issuer of a security will be unable to make interest
payments and/or repay the principal on its debt. Interest rate risk refers to
fluctuations in the value of a debt security resulting from changes in the
general level of interest rates. The Sub-Adviser actively manages the
Portfolio's assets to reduce the risk of losing any principal investment as a
result of credit or interest rate risks. The Portfolio's assets are reviewed to
maintain or improve creditworthiness. In addition, federal regulations require
money market funds to invest only in debt obligations of high quality and
short-term maturities.
You may obtain the Portfolio's 7-day current yield by calling 1-888-378-1630.
The Fund was recently organized and, as of the date of this Prospectus, the
Portfolio had no historical performance to report. Performance information will
be provided once the Portfolio has completed a full year of operation.
7
Fees and Expenses of the Portfolios
The table below describes the fees and expenses that an investor may pay if he
or she buys and holds shares of the Cash Management Class of the Portfolios.
<R>
[sidebar]
The Portfolios do not
charge any sales loads or
other fees when you
purchase or redeem
shares.
[endsidebar]
<TABLE>
ANNUAL PORTFOLIO OPERATING EXPENSES
MONEY GOVERNMENT TREASURY
MARKET PRIME GOVERNMENT SECURITIES TREASURY SECURITIES TAX-EXEMPT
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
Advisory Fee 0.15% 0.15% 0.15% 0.15% 0.15% 0.15% 0.15%
------------------------------------------------------------------------------------------------------------------------------
Distribution and/or
Service (12b-1) Fee 0.05% 0.05% 0.05% 0.05% 0.05% 0.05% 0.05%
------------------------------------------------------------------------------------------------------------------------------
Other Expenses* 0.07% 0.07% 0.11% 0.25% 0.34% 0.25% 0.25%
------------------------------------------------------------------------------------------------------------------------------
Total Cash Management
Class Operating
Expenses** 0.27% 0.27% 0.31% 0.45% 0.54% 0.45% 0.45%
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
</R>
* Other Expenses are based on estimated amounts.
** The Adviser has voluntarily agreed to reduce its advisory fee and/or
absorb other expenses so that total operating expenses of each
Portfolio's Cash Management Class will not exceed 0.25%. This fee and
expense waiver may be discontinued at any time.
<R>
[sidebar]
The example assumes
that you invest $10,000
in each Portfolio's Cash
Management Class for the
time periods indicated and
then redeem all of your
shares at the end of those
periods. The example
assumes that your
investment has a 5%
return each year and that
the Cash Management
Class' operating expenses
remain the same.
Although your actual
costs may be higher or
lower, based on these
assumptions your costs
would be equal to the
amounts reflected in the
table to the right.
[endsidebar]
EXAMPLE
This example is intended to help you compare the cost of investing in the
Portfolio's Cash Management Class with the cost of investing in other mutual
funds.
<TABLE>
1 YEAR 3 YEARS
Money Market Portfolio $28 $ 87
------------------------------------------------------------------------------
Prime Portfolio 28 87
------------------------------------------------------------------------------
Government Portfolio 32 100
------------------------------------------------------------------------------
Government Securities Portfolio 46 144
------------------------------------------------------------------------------
Treasury Portfolio 55 173
------------------------------------------------------------------------------
Treasury Securities Portfolio 46 144
------------------------------------------------------------------------------
Tax-Exempt Portfolio 46 144
------------------------------------------------------------------------------
</TABLE>
</R>
8
CASH MANAGEMENT CLASS PROSPECTUS
<R>
July 26, 2005
</R>
Additional Investment Strategy and Risk Information
BANK OBLIGATIONS. Bank obligations include certificates of deposit, commercial
paper, unsecured bank promissory notes, bankers' acceptances, time deposits and
other debt obligations. Certain Portfolios may invest in obligations issued or
backed by U.S. banks when a bank has more than $1 billion in total assets at
the time of purchase or is a branch or subsidiary of such a bank. In addition,
certain Portfolios may invest in U.S. dollar-denominated obligations issued or
guaranteed by foreign banks that have more than $1 billion in total assets at
the time of purchase, U.S. branches of such foreign banks (Yankee obligations),
foreign branches of such foreign banks and foreign branches of U.S. banks
having more than $1 billion in total assets at the time of purchase. Bank
obligations may be general obligations of the parent bank or may be limited to
the issuing branch by the terms of the specific obligation or by government
regulation.
If a Portfolio invests more than 25% of its total assets in bank obligations
(whether foreign or domestic), it may be especially affected by favorable and
adverse developments in or related to the banking industry. The activities of
U.S. and most foreign banks are subject to comprehensive regulations which, in
the case of U.S. regulations, have undergone substantial changes in the past
decade. The enactment of new legislation or regulations, as well as changes in
interpretation and enforcement of current laws, may affect the manner of
operations and profitability of domestic and foreign banks. Significant
developments in the U.S. banking industry have included increased competition
from other types of financial institutions, increased acquisition activity and
geographic expansion. Banks may be particularly susceptible to certain economic
factors, such as interest rate changes and adverse developments in the real
estate markets. Fiscal and monetary policy and general economic cycles can
affect the availability and cost of funds, loan demand and asset quality and
thereby impact the earnings and financial conditions of banks.
U.S. GOVERNMENT SECURITIES. The U.S. government securities that certain
Portfolios may purchase include U.S. Treasury bills, notes and bonds, all of
which are direct obligations of the U.S. government. In addition, certain
Portfolios may purchase securities issued by agencies and instrumentalities of
the U.S. government which are backed by the full faith and credit of the United
States. Among the agencies and instrumentalities issuing these obligations are
the Government National Mortgage Association ("Ginnie Mae") and the Federal
Housing Administration. Certain of the Portfolios may also purchase securities
issued by agencies and instrumentalities which are not backed by the full faith
and credit of the United States, but whose issuing agency or instrumentality
has the right to borrow, to meet its obligations, from the U.S. Treasury. Among
these agencies and instrumentalities are the Federal National Mortgage
Association ("Fannie Mae"), the Federal Home Loan Mortgage Corporation
("Freddie Mac") and the Federal Home Loan Banks. Further, certain Portfolios
may purchase securities issued by agencies and instrumentalities which are
backed solely by the credit of the issuing agency or instrumentality. Among
these agencies and instrumentalities is the Federal Farm Credit System. Because
these securities are not backed by the full faith and credit of the United
States, there is a risk that the U.S. government will not provide financial
support to these agencies if it is not obligated to do so by law. 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.
FOREIGN SECURITIES. Certain Portfolios may invest in U.S. dollar-denominated
securities issued by foreign governmental or corporate issuers, including
Eurodollar and Yankee obligations. While these securities are subject to the
same type of risks that pertain to domestic issuers, namely credit risk and
interest rate risk, they are also subject to other additional risks which
include: adverse political and economic developments less securities regulation
and publicly available financial information, potential imposition of foreign
withholding taxes or expropriation of assets and more limited legal remedies
than those available in the United States.
CUSTODIAL RECEIPTS. Certain Portfolios may invest in custodial receipts
representing interests in U.S. Government Securities, municipal obligations or
other debt instruments held by a custodian or trustee. Custodial receipts
evidence ownership of future interest payments, principal payments or both on
notes or
9
bonds issued or guaranteed as to principal or interest by the U.S. government,
its agencies, instrumentalities, political subdivisions or authorities, or by a
state or local governmental body or authority, or by other types of issuers.
For certain securities law purposes, custodial receipts are not considered
obligations of the underlying issuers. In addition, if for tax purposes a
Portfolio is not considered to be the owner of the underlying securities held
in the custodial account, the Portfolio may suffer adverse tax consequences. As
a holder of custodial receipts, a Portfolio will bear its proportionate share
of the fees and expenses charged to the custodial account.
TENDER OPTION BONDS. A tender option bond is a municipal obligation (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 in conjunction with
the agreement of a third party, such as a bank, broker-dealer or other
financial institution, pursuant to which the institution grants the security
holder the option, at periodic intervals, to tender its securities to the
institution. As consideration for providing the option, the financial
institution receives periodic fees equal to the difference between the bond's
fixed coupon rate and the rate, as determined by a remarketing or similar
agent, 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. An institution will
normally not be obligated to accept tendered bonds in the event of certain
defaults or 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 a Portfolio's average portfolio
maturity. There is a risk that a Portfolio will not be considered the owner of
a tender option bond for federal income tax purposes, and thus will not be
entitled to treat such interest as exempt from federal income tax. Certain
tender option bonds may be illiquid or may become illiquid as a result of a
credit rating downgrade, a payment default or a disqualification from
tax-exempt status.
CORPORATE DEBT OBLIGATIONS. Corporate debt obligations are fixed income
securities issued by private corporations. Debtholders, as creditors, have a
prior legal claim over common and preferred stockholders of the corporation as
to both income and assets for the principal and interest due to the bondholder.
Certain Portfolios will buy corporate debt obligations subject to any quality
constraints set forth under Rule 2a-7 under the Investment Company Act of 1940,
as amended (the "1940 Act").
ASSET-BACKED SECURITIES. Asset-backed securities are securities secured by
non-mortgage assets such as company receivables, truck and auto loans, leases
and credit card receivables. Such securities are generally issued as
pass-through certificates, which represent undivided fractional ownership
interests in the underlying pools of assets. Such securities also may be debt
instruments, which are also known as collateralized obligations and are
generally issued as the debt of a special purpose entity, such as a trust,
organized solely for the purpose of owning such assets and issuing such debt.
Credit support for asset-backed securities may be based on the underlying
assets and/or provided by a third party through credit enhancements. Credit
enhancement techniques include letters of credit, insurance bonds, limited
guarantees (which are generally provided by the issuer), senior-subordinated
structures and over-collateralization.
Asset-backed securities are not issued or guaranteed by the U.S. government or
its agencies or instrumentalities; however, the payment of principal and
interest on such obligations may be guaranteed up to certain amounts for a
certain period by a letter of credit issued by a financial institution (such as
a bank or insurance company) unaffiliated with the issuers of such securities.
The purchase of asset-backed securities raises risk considerations peculiar to
the financing of the instruments underlying such securities. For example, there
is a risk that another party could acquire an interest in the obligations
superior to that of the holders of the asset-backed securities. There also is
the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on those securities. Asset-backed
securities entail prepayment risk, which may vary depending on the type of
asset. Securities subject to prepayment risk generally offer less potential for
gains when interest
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CASH MANAGEMENT CLASS PROSPECTUS
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rates decline, and may offer a greater potential for loss when interest rates
rise. In addition, rising interest rates may cause prepayments to occur at a
slower than expected rate, thereby effectively lengthening the maturity of the
security and making the security more sensitive to interest rate changes.
ADJUSTABLE RATE GOVERNMENT SECURITIES. Adjustable rate government securities
are variable rate securities where the variable rate of interest is readjusted
no less frequently than every 397 days and are deemed to have a maturity equal
to the period remaining until the next readjustment of the interest rate.
PROMISSORY NOTES. Promissory notes are generally debt obligations of the
issuing entity and are subject to the risks of investing in the banking
industry. Certain Portfolios may invest up to 10% of its net assets in illiquid
securities, including unsecured bank promissory notes.
FUNDING AGREEMENTS. A funding agreement is a contract between an issuer and a
purchaser that obligates the issuer to pay a guaranteed rate of interest on a
principal sum deposited by the purchaser. Funding agreements will also
guarantee the return of principal and may guarantee a stream of payments over
time. A funding agreement has a fixed maturity and may have either a fixed,
variable or floating interest rate that is based on an index and guaranteed for
a fixed time period. The secondary market, if any, for these funding agreements
is limited; thus, such investments purchased by the Portfolios may be treated
as illiquid. Certain Portfolios may invest up to 10% of its net assets in
illiquid securities, including funding agreements.
TAX-EXEMPT VARIABLE RATE DEMAND NOTES. Tax-exempt variable rate demand notes
are variable rate tax-exempt debt obligations that give investors the right to
demand principal repayment. Due to cyclical supply and demand considerations,
at times the yields on these obligations can exceed the yield on taxable money
market obligations.
11
Portfolio Holdings
A description of the Fund's policies and procedures with respect to the
disclosure of each Portfolio's securities is available in the Fund's Statement
of Additional Information ("SAI").
Purchasing Shares
The Fund is designed for institutional investors seeking maximum current
income, a stable net asset value ("NAV") and convenient liquidation privileges.
The Portfolios are particularly suitable for banks, corporations and other
financial institutions that seek investment of short-term funds for their own
accounts or for the accounts of their customers. Shares of the Government
Portfolio and Government Securities Portfolio are intended to qualify as
eligible investments for federally chartered credit unions pursuant to the
applicable provisions of the Federal Credit Union Act and the National Credit
Union Administration. Shares of the Government Portfolio and Government
Securities Portfolio, however, may not qualify as eligible investments for
particular state- chartered credit unions. A state-chartered credit union
should consult qualified legal counsel to determine whether these Portfolios
are permissible investments under the law applicable to it.
Cash Management Class Shares are available to clients of the Investment Adviser
with investments at the time of initial purchase of at least $10,000,000. The
Fund, in its sole discretion, may waive the minimum initial and additional
investment amounts in certain cases, including shares of the Portfolios
purchased through a financial intermediary.
This Prospectus offers Cash Management Class Shares of each Portfolio. The Fund
also offers other classes of shares through separate Prospectuses. Certain of
these classes may be subject to lower fees and expenses. For information
regarding other share classes, contact the Fund or your financial intermediary.
Cash Management Class Shares of the Portfolios may be purchased through a
financial intermediary (also referred to as a service organization). Investors
purchasing shares through a financial intermediary may be charged a
transaction-based or other fee by the financial intermediary for its services.
If you are purchasing Cash Management Class Shares through a financial
intermediary, please consult your intermediary for purchase instructions.
Customers of a financial intermediary will normally give their purchase
instructions to the financial intermediary, who, in turn, will place purchase
orders with the Fund. The financial intermediary will establish times by which
such purchase orders and payments from customers must be received by the
financial intermediary. Financial intermediaries are responsible for
transmitting purchase orders and payments to the Fund and the Fund's custodian
in a timely fashion.
Cash Management Class Shares of the Portfolios may be purchased at the NAV next
determined after the Fund receives your purchase order and the Fund's custodian
bank, J.P. Morgan Chase & Co. (the "Custodian") receives monies credited by a
Federal Reserve Bank ("Federal Funds") prior to the close of the Fed wire. You
begin earning dividends the same day your Cash Management Class Shares are
purchased provided the Fund receives your purchase amount in Federal Funds that
day as set forth above. Orders to purchase shares of a Portfolio must be
received by the Fund prior to the following times: for the Prime Portfolio,
Money Market Portfolio, Government Portfolio and Treasury Portfolio--5:00 p.m.
Eastern time; for the Government Securities Portfolio and Treasury Securities
Portfolio--3:00 p.m. Eastern time; and for the Tax-Exempt Portfolio--2:00 p.m.
Eastern time. On any business day that the New York Stock Exchange closes
early, or when the Bond Market Association recommends that the securities
markets close early, the Fund may close early and purchase orders received
after such earlier closing times will be processed the following business day.
Purchase orders received by the Fund will not be processed until receipt of
Federal Funds.
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PURCHASE BY WIRE
You may open an account, subject to acceptance by Morgan Stanley Institutional
Liquidity Funds, by completing and signing an Account Registration Form
provided by J.P. Morgan Investor Services Company ("J.P. Morgan"), the Fund's
transfer agent, which you can obtain by calling the Fund at 1-888-378-1630 and
mailing it to Morgan Stanley Institutional Liquidity Funds, 3435 Stelzer Road,
Columbus, OH 43219 and indicating the name of the Portfolio you wish to
purchase.
Upon approval of the application, you may purchase Cash Management Class Shares
of the Portfolios by wiring Federal Funds to the Custodian. You should forward
a completed Account Registration Form to the Fund in advance of the wire. See
the section below entitled "Valuation of Shares." Instruct your bank to send a
Federal Funds (monies credited by a Federal Reserve Bank) wire in a specified
amount to the Custodian using the following wire instructions:
J.P. MORGAN CHASE & CO.
1 Chase Manhattan Plaza
New York, NY 10081
ABA #021000021
DDA #323-255167
Attn: Morgan Stanley Institutional Liquidity Funds
Trust Subscription Account
Ref: (Portfolio Name, Account Number,
Account Name)
If notification of your order is received prior to the time required by each
respective Portfolio, as set forth above, and the Custodian receives the funds
the same day prior to the close of the Fed wire, then your purchase will become
effective and begin to earn income on that day. Otherwise, your purchase will
be effective on the next business day.
PURCHASE BY INTERNET
If you have properly authorized the Internet Trading Option on your Account
Registration Form and completed, signed and returned to the Fund an Electronic
Transactions Agreement, you may
place a purchase order for additional shares online through Morgan Stanley's
ClientLink service at www.morganstanley.com. For more information, call
Shareholder Services at 1-888-378-1630.
You are responsible for transmitting payments for shares purchased via the
Internet in a timely fashion, as set forth above.
AUTOMATIC PURCHASES
Selected accounts that utilize the Portfolios as their sweep vehicle will be
reviewed on each business day to determine whether the account has a positive
balance as a result of credits incurred that day. If an account has a positive
(credit) balance, shares of the respective Portfolio will automatically be
purchased. Any positive (credit) balance will be reduced by any debits to the
account on that day and shares of the Portfolio will automatically be sold.
ADDITIONAL INVESTMENTS
You may make additional investments of Cash Management Class Shares (minimum
additional investment $1,000) at the NAV next determined after the request is
received in good order, by wiring Federal Funds to the Custodian as outlined
above. J.P. Morgan must receive notification of receipt of your Federal Funds
wire by the time required by each respective Portfolio, as set forth above
under "Purchasing Shares." Shareholder accounts that utilize the Fund as their
sweep vehicle are not subject to the minimum additional investment requirement.
OTHER PURCHASE INFORMATION
The Fund may suspend the offering of shares, or any class of shares, of the
Portfolios or reject any purchase or exchange orders when we think it is in the
best interest of the Fund.
Purchases of a Portfolio's shares will be made in full and fractional shares of
the Portfolio calculated to three decimal places.
To help the government fight the funding of terrorism and money laundering
activities, federal law requires all financial institutions to obtain, verify,
and record information that identifies each person who opens an account. What
this means to you: When you open an account, we will ask your name, address,
date of birth, and other information that will allow us to identify you. If you
are unable to verify your identity, we reserve the right to restrict additional
transactions and/or liquidate your account at the next calculated net asset
value after your account is closed (less any applicable sales/account charges
and/or tax penalties)
or take any other action required by law.
13
Redeeming Shares
You may redeem shares of the Portfolios by mail, or, if authorized, by
telephone at no charge. The value of shares redeemed may be more or less than
the purchase price, depending on the NAV at the time of redemption. The
Portfolio will redeem shares at the NAV next determined after the request is
received in good order.
BY MAIL
Requests should be addressed to Morgan Stanley Institutional Liquidity Funds,
3435 Stelzer Road, Columbus, OH 43219.
To be in good order, redemption requests must include the following
documentation:
(a) A letter of instruction, if required, or a stock assignment specifying the
number of shares or dollar amount to be redeemed, signed by all registered
owners of the shares in the exact names in which the shares are registered;
(b) Any required signature guarantees; and
(c) Other supporting legal documents, if required, in the case of estates,
trusts, guardianships, custodianship, corporations, pension and profit sharing
plans and other organizations.
BY TELEPHONE
If you have authorized the Telephone Redemption Option on the Account
Registration Form, you may request a redemption of shares by calling the Fund
at 1-888-378-1630 and requesting that the redemption proceeds be mailed or
wired to you.
If we determine that it is in the best interest of other shareholders not to
pay redemption proceeds in cash, we may pay you in part by distributing to you
readily marketable securities held by the Portfolio from which you are
redeeming. You may incur brokerage charges when you sell those securities.
BY INTERNET
You may redeem shares online through
Morgan Stanley's ClientLink service at www.morganstanley.com, provided you have
a pre-established Internet trading account, as set forth above under
"Purchasing Shares." For more information, call Shareholder Services at
1-888-378-1630.
AUTOMATIC REDEMPTIONS
Selected accounts that utilize the Portfolio as their sweep vehicle will be
reviewed on each business day to determine whether the account has any debits
that were incurred that day and shares of the Portfolio will automatically be
redeemed to cover the debits if such debits have not been reduced by any
credits which may have accrued to the account on the same day.
ALL SALES
You will not earn a dividend on the day your shares are sold. Orders to sell
shares (redemption requests) will be processed on the day on which they are
received, provided they are received prior to the following times: for the
Prime Portfolio, Money Market Portfolio, Government Portfolio and Treasury
Portfolio--5:00 p.m. Eastern time; for the Government Securities Portfolio and
Treasury Securities Portfolio--3:00 p.m. Eastern time; and for the Tax-Exempt
Portfolio--1:00 p.m. Eastern time. On any business day that the New York Stock
Exchange closes early, the Fund may close early and redemption requests
received after such earlier closing times will be processed the following
business day. Generally, payment for Fund shares sold will be made on the day
on which the order is processed, but under certain circumstances may not be
made until the next business day. Redemption requests or payments may be
postponed or suspended as permitted pursuant to Section 22(e) of the 1940 Act.
Generally, under that section, redemption requests or payments may be postponed
or suspended if the NYSE is closed for trading, or trading is restricted, an
emergency exists which makes the disposal of securities owned by a Fund or the
fair determination of the value of the Fund's net assets not reasonably
practicable, or the Securities and Exchange Commission, by order, permits the
suspension of the right of redemption. Redemption payments may also be delayed
in the event of the closing of the Federal Reserve wire payment system. In
addition, when the Bond Market Association recommends that the securities
markets close early, payments with respect to redemption requests received
subsequent to the recommended close will be made the next business day.
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General Shareholder Information
VALUATION OF SHARES
The price of each Portfolio's shares is based on the amortized cost of the
Portfolio's securities. The amortized cost valuation method involves valuing a
debt obligation in reference to its cost rather than market forces.
The NAV per share of each Portfolio is determined once daily, normally at the
times set forth below, on each day that the New York Stock Exchange is open.
Shares will not be priced on days that the New York Stock Exchange is closed.
Prime Portfolio As of 5:00 p.m.
Money Market Portfolio Eastern time
Government Portfolio
Treasury Portfolio
Government Securities As of 3:00 p.m.
Portfolio Eastern time
Treasury Securities
Portfolio
Tax-Exempt Portfolio As of 2:00 p.m.
Eastern time
EXCHANGE PRIVILEGE
You may exchange a Portfolio's Cash Management Class Shares for Cash Management
Class Shares of other available Portfolios of the Fund based on their
respective NAVs. We charge no fee for exchanges. If you purchased Portfolio
shares through a financial intermediary, certain Portfolios of the Fund may be
unavailable for exchange. Contact your financial intermediary to determine
which portfolios are available for exchange. See also "Other Purchase
Information" for certain limitations relating to exchanges.
You can process your exchange by contacting
your financial intermediary or online through Morgan Stanley's ClientLink
service at www.morganstanley.com provided you have a pre-established Internet
trading account, as set forth above under "Purchasing Shares." Contact
Shareholder Services for additional information. Exchange requests can also be
made by calling 1-888-378-1630.
When you exchange for shares of another Portfolio, your transaction will be
treated the same as an initial purchase. You will be subject to the same
minimum initial investment and account size as an initial purchase. The Fund,
in its sole discretion, may waive the minimum initial investment amounts in
certain cases, including exchanges involving Portfolio shares purchased through
a financial intermediary.
FREQUENT PURCHASES AND REDEMPTIONS OF FUND SHARES
Because, as a money market fund, the Portfolios' principal investment strategy
is to maintain a stable share price, the policies and procedures adopted by the
Board of Trustees/Directors applicable to other funds in the Morgan Stanley
family of funds are generally not applicable with respect to frequent purchases
and redemptions of Portfolio shares. Therefore, reasonably frequent purchases
and redemptions of Portfolio shares by Portfolio shareholders do not present
risks for other shareholders of a Portfolio.We expect the Portfolios to be used
by shareholders for short-term investing and by certain selected accounts
utilizing the Portfolios as a sweep vehicle. However, frequent trading by
shareholders can disrupt management of the Portfolios and raise their
respective expenses. Therefore, we may not accept any request for a purchase or
exchange when we think it is being used as a tool for market timing, and we may
bar a shareholder who trades excessively from making further purchases for an
indefinite period.
TELEPHONE/INTERNET TRANSACTIONS
For your protection, we will employ reasonable procedures to confirm that
transaction instructions communicated over the telephone/Internet are genuine.
These procedures may include requiring various forms of personal instructions
such as name, mailing address, social security, other tax identification
information and password/authorization codes, including PIN (Personal
Information Number). Telephone Instructions also may be recorded. During
periods of drastic economic or market changes, it is possible that the
telephone/Internet orders may be difficult to implement, although this has not
been the case with the Fund in the past.
DISTRIBUTIONS
The Portfolios pass substantially all of their earnings along to their
investors as "distributions." The Portfolios earn interest from fixed-income
investments. These amounts are passed along to Portfolio shareholders as
"income dividend distributions."
15
Each Portfolio realizes capital gains whenever it sells securities for a higher
price than it paid for them. These amounts may be passed along as "capital gain
distributions;" the Adviser does not anticipate that there will be significant
capital gains distributions.
The Portfolios declare income dividends at approximately 4:00 p.m. on each
business day based on their respective estimated daily net income to
shareholders of record. To the extent actual income in greater or lesser than
the estimated amount, adjustments will be made to the following business day's
income dividends. These dividends accrue daily and are distributed on the last
business day of each month. Short-term capital gains, if any, are distributed
periodically. Long-term capital gains, if any, are distributed at least
annually. The Portfolio automatically reinvests all dividends and distributions
in additional shares. However, you may elect to receive distributions in cash
by giving written notice to your Financial Intermediary or by checking the
appropriate box in the Distribution Option section on the Account Registration
Form.
TAXES
The tax information provided in this Prospectus is provided as general
information. You should consult your own tax professional about the tax
consequences of an investment in a particular Portfolio.
It is each Portfolio's intention to qualify as a regulated investment company
and distribute all or substantially all of its taxable and tax-exempt income.
Except as noted below, dividends you receive will generally be taxable as
ordinary income, whether you receive them in cash or in additional shares.
With respect to the Government Securities Portfolio, while the Portfolio
intends to limit its investments to certain U.S. Treasury Obligations and U.S.
Government securities, the interest of which is generally exempt from state
income taxation, you should consult your own tax adviser to determine whether
distributions from the Government Securities Portfolio are exempt from state
taxation in your own state.
With respect to the Tax-Exempt Portfolio, your income dividend distributions
are normally exempt from federal income tax -- to the extent they are derived
from municipal obligations. Income derived from other portfolio securities may
be subject to federal, state and/or local income taxes. The income derived from
some municipal securities is subject to the federal "alternative minimum tax."
Certain tax-exempt securities whose proceeds are used to finance private,
for-profit organizations are subject to this special tax system that ensures
that individuals pay at least some federal taxes. Although interest on these
securities is generally exempt from federal income tax, some taxpayers who have
many tax deductions or exemptions nevertheless may have to pay tax on the
income.
Corporate shareholders may be entitled to a dividends-received deduction for
the portion of dividends they receive which are attributable to dividends
received by such Portfolios from U.S. corporations. In addition, dividends
received by non-corporate shareholders (for taxable years beginning on or
before December 31, 2008) attributable to dividends received by such Portfolios
from certain U.S. and qualifying foreign corporations may be subject to tax at
rates applicable to long-term capital gains. Capital gain distributions may be
taxable at different rates depending on the length of time the Portfolio holds
its assets. However, each Portfolio does not generally expect that dividends
will be eligible for the dividends received deduction or for treatment as
qualified dividend income.
Shareholders who are not citizens or residents of the United States and certain
foreign entities may be subject to withholding of United States tax on
distributions made by a Portfolio of investment income and short-term capital
gains. Under recently enacted legislation, dividends paid by a Portfolio to
shareholders who are nonresident aliens or foreign entities that are derived
from short-term capital gains and qualifying net interest income (including
income from original issue discount and market discount), if such dividends are
properly designated by the Portfolio as "interest-related dividends" or
"short-term capital gain dividends," will generally not be subject to U.S.
withholding tax, provided that the income would not be subject to U.S. federal
income tax if earned directly by the foreign shareholder. In addition,
distributions of the Fund attributable to gains from sales or exchanges of
"U.S. real property interests," as defined in the Internal Revenue Code
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(including gains on the sale or exchange of shares in certain U.S. real
property holding corporations) may be subject to U.S. withholding tax and may
give rise to an obligation on the part of the foreign stockholder to file a
U.S. federal income tax return. Also, such gain may be subject to a 30% branch
profits tax in the hands of a foreign stockholder that is a corporation. These
provisions generally would apply to distributions with respect to taxable years
of a Portfolio beginning after December 31, 2004 and before January 1, 2008.
Every January, you will be sent a statement (IRS Form 1099-DIV) showing the
taxable distributions paid to you in the previous year. The statement provides
information on your dividends and capital gains for tax purposes.
Exchanges and redemptions of shares in a Portfolio are taxable events and may
result in a taxable gain or loss to you.
When you open your account, you should provide your social security or tax
identification number on your investment application. By providing this
information, you will avoid being subject to federal backup withholding on
taxable distributions and redemption proceeds (as of the date of this
Prospectus, this rate is 28%). Any withheld amount would be sent to the IRS as
an advance payment of taxes due on your income for such year.
17
Investment Adviser
ADVISER
<R>
Morgan Stanley Investment Management Inc., the investment adviser, with
principal offices at 1221 Avenue of the Americas, New York, NY 10020, conducts a
worldwide portfolio management business and provides a broad range of portfolio
management services to customers in the United States and abroad. Morgan Stanley
is the direct parent of Morgan Stanley Investment Management Inc. and Morgan
Stanley Distribution, Inc., the Fund's Distributor. Morgan Stanley is a
preeminent global financial services firm that maintains leading market
positions in each of its three primary businesses -- securities, asset
management and credit services. Morgan Stanley is a full service securities firm
engaged in securities trading and brokerage activities, as well as providing
investment banking, research and analysis, financing and financial advisory
services. As of June 30, 2005, Morgan Stanley Investment Management Inc.,
together with its affiliated asset management companies, had approximately $418
billion in assets under management with approximately $219 billion in
institutional assets.
</R>
Each Portfolio pays the Adviser monthly compensation calculated daily by
applying the annual rate of 0.15% to each Portfolio's daily net assets.
SUB-ADVISER
Morgan Stanley Investment Advisors Inc. ("MSIA") serves as Sub-Adviser to the
Portfolios. As Sub-Adviser, MSIA makes day-to-day investment decisions for the
Portfolios and places the Portfolios' purchase and sales orders. The Adviser
pays MSIA 40% of the fee the Adviser receives from each Portfolio as
compensation for its sub-advisory services. MSIA, located at 1221 Avenue of the
Americas, New York, NY 10020, is a wholly-owned subsidiary of Morgan Stanley.
MSIA develops, markets and manages a broad spectrum of proprietary mutual funds
that are sold by Morgan Stanley financial advisors and offers professional
money management services on a customized basis to individuals, institutional
investors and retirement plan sponsors.
<R>
A discussion regarding the basis for the Board of Trustees approving the Fund's
Investment Advisory Agreement and Sub-Advisory Agreement is available in the
Fund's semi-annual report to shareholders for the six months ended April 30,
2005.
</R>
PORTFOLIO MANAGEMENT
The assets of the Prime Portfolio, Money Market Portfolio, Government
Securities Portfolio, Government Portfolio and Treasury Portfolio are managed
by the Taxable Money Market Group. Current members of the Taxable Money Market
Group include Jonathan Page, Managing Director, Dale Albright, Executive
Director and Jonas Kolk, Executive Director. The assets of the Tax-Exempt
Portfolio are managed by the Tax-Exempt Money Market Group. Current members of
the Tax-Exempt Money Market Group include Katherine Stromberg, Executive
Director, William Oliver, Vice President and Liam Carroll, Vice President.
DISTRIBUTOR
Shares of the Fund are distributed exclusively through Morgan Stanley
Distribution, Inc. ("the Distributor"), a wholly-owned subsidiary of the
Adviser. The Distributor has entered into arrangements with certain financial
intermediaries (also referred to as service organizations) who may accept
purchase and redemption orders for shares of the Portfolios on its behalf.
The Adviser and/or the Distributor may pay additional compensation (out of
their own funds and not as an expense of the Fund) to selected affiliated or
unaffiliated brokers or other service providers in connection with the sale,
distribution, retention and/or servicing of Fund shares. Such compensation may
be significant in amount and the prospect of receiving any such additional
compensation may provide affiliated or unaffiliated entities with an incentive
to favor sales of shares of the Fund over other investment options. Any such
payments will not change the net asset value or the price of Fund shares. For
more information, please see the Fund's SAI.
DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan for each Portfolio's Cash Management
Class Shares pursuant to Rule 12b-1 under the 1940 Act (the "Plan"). Under the
Plan, each Portfolio pays the Distributor a monthly or quarterly fee at an
annual rate of up to 0.05% of each Portfolio's average daily net assets
attributable to Cash Management Class Shares to compensate certain financial
intermediaries (also referred to as service organizations) who provide
distribution related services to the Fund. The Distributor also may retain part
of this fee as compensation for providing distribution related services.
18
CASH MANAGEMENT CLASS PROSPECTUS
<R>
July 26, 2005
</R>
Financial Highlights
<R>
The following financial highlights tables describe the performance of the
Institutional Class shares of the Portfolios for the six months ended April 30,
2005 and for the period from the commencement of operations of each Portfolio
to October 31, 2004. "Total Return" shows how much your investment in the Fund
would have increased (or decreased) during each period, assuming you had
reinvested all dividends and distributions. The information for the six months
ended April 30, 2005 has not been audited. The information for the period from
the commencement of operations to October 31, 2004 has been independently
audited by Ernst & Young LLP, whose report is included in the Fund's Annual
Report to Shareholders and is incorporated by reference in the SAI. No
financial information is provided for Cash Management Class shares which had
not been offered as of the date of the financial statements. The Rule 12b-1
distribution fee paid by the Cash Management Class will cause such shares to
have a higher expense ratio, to pay lower dividends, and to have a lower total
investment return than Institutional Class shares.
</R>
<R>
<TABLE>
DIVIDEND
NET ASSET VALUE- DISTRIBUTIONS
BEGINNING OF NET INVESTMENT (NET INVESTMENT NET ASSET VALUE-
PERIOD INCOME INCOME) END OF PERIOD
------------------------------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
11/1/04-4/30/05 (UNAUDITED) 1.000 0.011 (0.011) 1.000
2/2/04-10/31/04 1.000 0.009 (0.009) 1.000
------------------------------------------------------------------------------------------------------
PRIME PORTFOLIO
11/1/04-4/30/05 (UNAUDITED) 1.000 0.012 (0.012) 1.000
2/2/04-10/31/04 1.000 0.009 (0.009) 1.000
------------------------------------------------------------------------------------------------------
GOVERNMENT PORTFOLIO
11/1/04-4/30/05 (UNAUDITED) 1.000 0.012 (0.012) 1.000
8/9/04-10/31/04 1.000 0.004 (0.004) 1.000
------------------------------------------------------------------------------------------------------
TREASURY PORTFOLIO
11/1/04-4/30/05 (UNAUDITED) 1.000 0.011 (0.011) 1.000
8/9/04-10/31/04 1.000 0.004 (0.004) 1.000
------------------------------------------------------------------------------------------------------
TAX-EXEMPT PORTFOLIO
11/1/04-4/30/05 (UNAUDITED) 1.000 0.009 (0.009) 1.000
2/2/04-10/31/04 1.000 0.008 (0.008) 1.000
------------------------------------------------------------------------------------------------------
</TABLE>
</R>
<R>
<TABLE>
RATIO OF NET
NET ASSETS- RATIO OF EXPENSES INCOME TO
END OF PERIOD TO AVERAGE NET AVERAGE NET
TOTAL RETURN (THOUSANDS) ASSETS(1) ASSETS(1)
-------------------------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
11/1/04-4/30/05 (UNAUDITED) 1.15%# $ 3,051,880 0.10%* 2.30%*
2/2/04-10/31/04 0.95%# $ 3,077,029 0.07%* 1.41%*
-------------------------------------------------------------------------------------------------
PRIME PORTFOLIO
11/1/04-4/30/05 (UNAUDITED) 1.16%# $11,940,660 0.10%* 2.36%*
2/2/04-10/31/04 0.94%# $ 8,732,862 0.08%* 1.41%*
-------------------------------------------------------------------------------------------------
GOVERNMENT PORTFOLIO
11/1/04-4/30/05 (UNAUDITED) 1.19%# $ 1,149,008 0.05%* 2.48%*
8/9/04-10/31/04 0.38%# $ 414,567 0.05%* 1.73%*
-------------------------------------------------------------------------------------------------
TREASURY PORTFOLIO
11/1/04-4/30/05 (UNAUDITED) 1.11%# $ 100,072 0.05%* 2.17%*
8/9/04-10/31/04 0.36%# $ 187,770 0.05%* 1.57%*
-------------------------------------------------------------------------------------------------
TAX-EXEMPT PORTFOLIO
11/1/04-4/30/05 (UNAUDITED) 0.91%# $ 284,714 0.08%* 1.85%*
2/2/04-10/31/04 0.84%# $ 109,292 0.06%* 1.19%*
-------------------------------------------------------------------------------------------------
</TABLE>
</R>
<R>
19
</R>
NOTES TO THE FINANCIAL HIGHLIGHTS
# Not Annualized
* Annualized
<R>
(1) The advisor has voluntarily agreed to waive its advisory fees and/or
reimburse expenses to the extent necessary in order to keep Total Annual
Portfolio Operating Expenses actually deducted from portfolio assets for
the respective portfolios from exceeding voluntary expense limitations.
For the respective periods indicated below, the Ratio of Expenses to
Average Net Assets including these waived and/or reimbursed amounts are
listed below.
</R>
<R>
<TABLE>
RATIO OF EXPENSES TO AVERAGE NET ASSETS
BEFORE EXPENSES WAIVED/REIMBURSED BY ADVISER:
--------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
11/1/04-4/30/05 (UNAUDITED) 0.22%
2/2/04-10/31/04 0.24%
--------------------------------------------------------------------------------
PRIME PORTFOLIO
11/1/04-4/30/05 (UNAUDITED) 0.22%
2/2/04-10/31/04 0.24%
--------------------------------------------------------------------------------
GOVERNMENT PORTFOLIO
11/1/04-4/30/05 (UNAUDITED) 0.26%
8/9/04-10/31/04 0.37%
--------------------------------------------------------------------------------
TREASURY PORTFOLIO
11/1/04-4/30/05 (UNAUDITED) 0.49%
8/9/04-10/31/04 0.35%
--------------------------------------------------------------------------------
TAX-EXEMPT PORTFOLIO
11/1/04-4/30/05 (UNAUDITED) 0.40%
2/2/04-10/31/04 0.35%
--------------------------------------------------------------------------------
</TABLE>
</R>
20
Where to find Additional Information
<R>
In addition to this prospectus, the Fund has an SAI, dated July 26, 2005, which
contains additional, more detailed information about the Fund and the
Portfolio. The SAI is incorporated by reference into this Prospectus and,
therefore, legally forms a part of this Prospectus.
</R>
The Fund publishes annual and semi-annual reports ("Shareholder Reports") that
contain additional information about each Portfolio's investments. In the
Fund's annual report, you will find a discussion of the market conditions and
the investment strategies that significantly affected each Portfolio's
performance during the last fiscal year. For additional Fund information,
including information regarding a Portfolio's investments, please call the
toll-free number below.
You may obtain the SAI and Shareholder Reports, without charge, by contacting
the Fund at the toll-free number below. If you purchased shares through a
financial intermediary, you may also obtain these documents, without charge, by
contacting your financial intermediary.
Information about the Fund, including the SAI and Shareholder Reports, may be
obtained from the Securities and Exchange Commission in any of the following
ways. (1) In person: you may review and copy documents in the Commission's
Public Reference Room in Washington D.C. (for information on the operation of
the Public Reference Room call 1-202-942-8090); (2) On-line: you may retrieve
information from the Commission's web site at http://www.sec.gov; (3) By mail:
you may request documents, upon payment of a duplicating fee, by writing to
Securities and Exchange Commission, Public Reference Section, Washington, D.C.
20549-0102; or (4) By e-mail: you may request documents, upon payment of a
duplicating fee, by e-mailing the Securities and Exchange Commission at the
following address: publicinfo@sec.gov. To aid you in obtaining this
information, the Fund's Investment Company Act registration number is
811-21339.
MORGAN STANLEY INSTITUTIONAL LIQUIDITY FUNDS
3435 STELZER ROAD
COLUMBUS, OH 43219
FOR SHAREHOLDER INQUIRIES,
CALL 1-888-378-1630.
PRICES AND INVESTMENT RESULTS ARE AVAILABLE AT WWW.MORGANSTANLEY.COM/IM.
[MORGAN STANLEY GRAPHIC OMITTED]
MORGAN STANLEY INSTITUTIONAL LIQUIDITY FUNDS
STATEMENT OF ADDITIONAL INFORMATION
RELATING TO THE FOLLOWING PROSPECTUSES:
INSTITUTIONAL CLASS PROSPECTUS
SERVICE CLASS PROSPECTUS
INVESTOR CLASS PROSPECTUS
ADMINISTRATIVE CLASS PROSPECTUS
ADVISORY CLASS PROSPECTUS
PARTICIPANT CLASS PROSPECTUS
CASH MANAGEMENT CLASS PROSPECTUS
<R>
JULY 26, 2005
</R>
Morgan Stanley Institutional Liquidity Funds (the "Fund") is a mutual fund
currently consisting of the following seven portfolios: the Money Market
Portfolio, the Prime Portfolio, the Government Portfolio, the Government
Securities Portfolio, the Treasury Portfolio, the Treasury Securities Portfolio
and the Tax-Exempt Portfolio (the "Portfolios"). Each Portfolio offers the
following classes of shares: Institutional Class, Service Class, Investor
Class, Administrative Class, Advisory Class, Participant Class and Cash
Management Class. The Fund is designed to provide investors with a variety of
liquidity options. This Statement of Additional Information (the "SAI") sets
forth information about the Fund and information applicable to the Portfolios.
<R>
This SAI is not a prospectus but should be read in conjunction with the Fund's
prospectuses relating to the Institutional Class, Service Class, Investor
Class, Administrative Class, Advisory Class and Participant Class dated
February 28, 2005 and the Fund's prospectus relating to the Cash Management
Class dated July 26, 2005, as may be supplemented from time to time. To obtain
any of these prospectuses, please call Shareholder Services at the number
indicated below.
</R>
The Fund's most recent annual and semi-annual reports are separate documents
supplied with this SAI. The Fund's annual report includes the Fund's audited
financial statements, which are incorporated by reference into this SAI.
Shareholder Services: 1-888-378-1630
Prices and Investment Results: www.morganstanley.com/im
TABLE OF CONTENTS
<R>
INVESTMENTS AND INVESTMENT STRATEGIES ........................ 3
INVESTMENT OBJECTIVES AND LIMITATIONS ........................ 9
DISCLOSURE OF PORTFOLIO HOLDINGS ............................. 10
PURCHASE OF SHARES ........................................... 14
REDEMPTION OF SHARES ......................................... 14
TRANSACTIONS WITH BROKER/DEALERS ............................. 15
SHAREHOLDER SERVICES ......................................... 15
VALUATION OF SHARES .......................................... 15
MANAGEMENT OF THE FUND ....................................... 16
INVESTMENT ADVISER ........................................... 28
PRINCIPAL UNDERWRITER ........................................ 29
SERVICE AND DISTRIBUTION OF SHARES ........................... 29
FUND ADMINISTRATION .......................................... 32
OTHER SERVICE PROVIDERS ...................................... 33
BROKERAGE TRANSACTIONS ....................................... 33
GENERAL INFORMATION .......................................... 34
TAX CONSIDERATIONS ........................................... 35
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES .......... 37
PERFORMANCE INFORMATION ...................................... 45
FINANCIAL STATEMENTS ......................................... 46
APPENDIX A: PROXY VOTING POLICIES AND PROCEDURES ............. A-1
APPENDIX B: DESCRIPTION OF RATINGS ........................... B-1
</R>
2
INVESTMENTS AND INVESTMENT STRATEGIES
The following discussion of each Portfolio's investments and risks should be
read in conjunction with the sections of the Fund's Prospectus entitled
"Additional Investment Strategy and Risk Information." The Portfolios'
investments are limited by the quality, maturity and diversification
requirements adopted under Rule 2a-7 of the Investment Company Act of 1940, as
amended (the "1940 Act").
U.S. TREASURY OBLIGATIONS AND U.S. GOVERNMENT SECURITIES. U.S. Treasury
Obligations include securities issued or guaranteed by the U.S. Treasury ("U.S.
Treasury Obligations"). Payment of principal and interest on these obligations
is backed by the full faith and credit of the U.S. government. 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 obligations issued or guaranteed by U.S.
government agencies, authorities, instrumentalities or sponsored enterprises
("U.S. Government Securities"), which may or may not be backed by the full
faith and credit of the U.S. government. Some U.S. Government Securities are
supported by the full faith and credit of the U.S. Treasury (such as in the
case of those issued by the Government National Mortgage Association ("Ginnie
Mae")) through provisions in its charter that it may make "indefinite and
unlimited" drawings on the Treasury, if needed to service its debt); others
(such as those issued by the Federal Home Loan Banks) are not backed by the
full faith and credit of the United States but are supported by the right of
the issuer to borrow from the U.S. Treasury under certain circumstances; others
(such as those issued by the Federal National Mortgage Association ("Fannie
Mae")) are supported by the discretionary authority of the U.S. government to
purchase certain obligations of the issuer to assist them in meeting their debt
obligations; and others (such as those issued by the Federal Farm Credit
System) by only the credit of the issuer.
If a U.S. Government Security is not backed by the full faith and credit of the
United States, the investor must look principally to the agency or
instrumentality issuing or guaranteeing the obligation for ultimate repayment
and may not be able to assert a claim against the United States itself in the
event the agency or instrumentality does not meet its commitment.
An instrumentality is a government agency organized under federal charter with
government supervision. Instrumentalities issuing or guaranteeing securities
include, among others, Federal Home Loan Banks, the Federal Land Banks, Central
Bank for Cooperatives, Federal Intermediate Credit Banks and Fannie Mae.
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. Certain
debt issued by Resolution Funding Corporation has both its principal and
interest backed by the full faith and credit of the U.S. Treasury in that its
principal is defeased by U.S. Treasury zero coupon issues, while the U.S.
Treasury is explicitly required to advance funds sufficient to pay interest on
it, if needed.
Some Portfolios invest in U.S. Treasury Obligations and certain U.S. Government
Securities the interest from which is generally exempt from state income
taxation. Securities generally eligible for this exemption include those issued
by the U.S. Treasury and certain agencies, authorities or instrumentalities of
the U.S. government, including the Federal Home Loan Banks, Federal Farm Credit
Banks, Tennessee Valley Authority and Student Loan Marketing Association.
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.
ASSET-BACKED SECURITIES. Asset-backed securities are securities secured by
non-mortgage assets such as company receivables, truck and auto loans, leases
and credit card receivables. Such securities are
3
generally issued as pass-through certificates, which represent undivided
fractional ownership interests in the underlying pools of assets. Such
securities also may be debt instruments, which are also known as collateralized
obligations and are generally issued as the debt of a special purpose entity,
such as a trust, organized solely for the purpose of owning such assets and
issuing such debt. Credit support for asset-backed securities may be based on
the underlying assets and/or provided by a third party through credit
enhancements. Credit enhancement techniques include letters of credit,
insurance bonds, limited guarantees (which are generally provided by the
issuer), senior-subordinated structures and over-collateralization.
Asset-backed securities are not issued or guaranteed by the U.S. government or
its agencies or instrumentalities; however, the payment of principal and
interest on such obligations may be guaranteed up to certain amounts for a
certain period by a letter of credit issued by a financial institution (such as
a bank or insurance company) unaffiliated with the issuers of such securities.
The purchase of asset-backed securities raises risk considerations peculiar to
the financing of the instruments underlying such securities. For example, there
is a risk that another party could acquire an interest in the obligations
superior to that of the holders of the asset-backed securities. There also is
the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on those securities. Asset-backed
securities entail prepayment risk, which may vary depending on the type of
asset. Securities subject to prepayment risk generally offer less potential for
gains when interest rates decline, and may offer a greater potential for loss
when interest rates rise. In addition, rising interest rates may cause
prepayments to occur at a slower than expected rate, thereby effectively
lengthening the maturity of the security and making the security more sensitive
to interest rate changes.
BANK OBLIGATIONS. Bank obligations include certificates of deposit, commercial
paper, unsecured bank promissory notes, bankers' acceptances, time deposits and
other debt obligations. Certain Portfolios may invest in obligations issued or
backed by U.S. banks when a bank has more than $1 billion in total assets at
the time of purchase or is a branch or subsidiary of such a bank. In addition,
certain Portfolios may invest in U.S. dollar-denominated obligations issued or
guaranteed by foreign banks that have more than $1 billion in total assets at
the time of purchase, U.S. branches of such foreign banks (Yankee obligations),
foreign branches of such foreign banks and foreign branches of U.S. banks
having more than $1 billion in total assets at the time of purchase. Bank
obligations may be general obligations of the parent bank or may be limited to
the issuing branch by the terms of the specific obligation or by government
regulation.
If a Portfolio invests more than 25% of its total assets in bank obligations
(whether foreign or domestic), it may be especially affected by favorable and
adverse developments in or related to the banking industry. The activities of
U.S. and most foreign banks are subject to comprehensive regulations which, in
the case of U.S. regulations, have undergone substantial changes in the past
decade. The enactment of new legislation or regulations, as well as changes in
interpretation and enforcement of current laws, may affect the manner of
operations and profitability of domestic and foreign banks. Significant
developments in the U.S. banking industry have included increased competition
from other types of financial institutions, increased acquisition activity and
geographic expansion. Banks may be particularly susceptible to certain economic
factors, such as interest rate changes and adverse developments in the real
estate markets. Fiscal and monetary policy and general economic cycles can
affect the availability and cost of funds, loan demand and asset quality and
thereby impact the earnings and financial conditions of banks.
INVESTMENT COMPANIES. A Portfolio may invest in securities of other investment
companies subject to statutory limitations prescribed by the 1940 Act.
Currently, these limitations include a prohibition on any Portfolio acquiring
more than 3% of the voting shares of any other investment company, and a
prohibition on investing more than 5% of a Portfolio's total assets in
securities of any one investment company or more than 10% of its total assets
in securities of all investment companies. A Portfolio will indirectly bear its
proportionate share of any management fees and other expenses paid by such
other investment companies. Such other investment companies will have
investment objectives, policies and restrictions substantially similar to those
of the acquiring Portfolio and will be subject to substantially the same risks.
Although the Portfolios do not expect to do so in the foreseeable future, each
Portfolio 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 Portfolio.
4
CORPORATES. Corporate bonds ("Corporates") are fixed income securities issued
by private corporations. Bondholders, as creditors, have a prior legal claim
over common and preferred stockholders of the corporation as to both income and
assets for the principal and interest due to the bondholder. The Portfolios
will buy Corporates subject to any quality constraints set forth under Rule
2a-7 of the 1940 Act.
CUSTODIAL RECEIPTS. Certain Portfolios may invest in custodial receipts
representing interests in U.S. Government Securities, municipal obligations or
other debt instruments held by a custodian or trustee. Custodial receipts
evidence ownership of future interest payments, principal payments or both on
notes or bonds issued or guaranteed as to principal or interest by the U.S.
government, its agencies, instrumentalities, political subdivisions or
authorities, or by a state or local governmental body or authority, or by other
types of issuers. For certain securities law purposes, custodial receipts are
not considered obligations of the underlying issuers. In addition, if for tax
purposes a Portfolio is not considered to be the owner of the underlying
securities held in the custodial account, the Portfolio may suffer adverse tax
consequences. As a holder of custodial receipts, a Portfolio will bear its
proportionate share of the fees and expenses charged to the custodial account.
INDUSTRIAL DEVELOPMENT AND POLLUTION CONTROL BONDS. The Tax-Exempt Portfolio
may invest more than 25% of its total assets in industrial development and
pollution control bonds (two kinds of tax-exempt municipal bonds) whether or
not the users of the facilities financed by such bonds are in the same
industry. In cases where such users are in the same industry, there may be
additional risk to the Portfolio in the event of an economic downturn in such
industry, which may result generally in a lowered need for such facilities and
a lowered ability of such users to pay for the use of such facilities.
LEASE OBLIGATIONS. Included within the revenue bonds category in which certain
Portfolios may invest are participations in lease obligations or installment
purchase contracts (collectively called "lease obligations") of municipalities.
State and local governments issue lease obligations to acquire equipment and
facilities.
Lease obligations may have risks not normally associated with general
obligation or other revenue bonds. Leases and installment purchase or
conditional sale contracts (which may provide for title to the leased asset to
pass eventually to the issuer) have developed as a means for governmental
issuers to acquire property and equipment without the necessity of complying
with the constitutional and statutory requirements generally applicable for the
issuance of debt. Certain lease obligations contain "non-appropriation" clauses
that provide that the governmental issuer has no obligation to make future
payments under the lease or contract unless money is appropriated for such
purpose by the appropriate legislative body on an annual or other periodic
basis. Consequently, continued lease payments on those lease obligations
containing "non-appropriation" clauses are dependent on future legislative
actions. If such legislative actions do not occur, the holders of the lease
obligation may experience difficulty in exercising their rights, including
disposition of the property.
FLOATING AND VARIABLE RATE OBLIGATIONS. The Portfolios may purchase floating
and variable rate obligations, including floating and variable rate municipal
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.
Subject to the conditions for using amortized cost valuation under the 1940
Act, a Portfolio may consider the maturity of a variable or floating rate
obligation to be shorter than its ultimate stated maturity if the obligation is
a U.S. Treasury Obligation or U.S. Government Security, if the obligation has a
remaining maturity of 397 calendar days or less, or if the obligation has a
demand feature that permits the Portfolio to receive payment at any time or at
specified intervals not exceeding 397 calendar days. 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 which have a branch, agency or subsidiary in
the United States. A Portfolio 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 institution.
5
ADJUSTABLE RATE GOVERNMENT SECURITIES. Adjustable rate government securities
are variable rate securities where the variable rate of interest is readjusted
no less frequently than every 397 days and deemed to have a maturity equal to
the period remaining until the next readjustment of the interest rate.
PROMISSORY NOTES. Promissory notes are generally debt obligations of the
issuing entity and are subject to the risks of investing in the banking
industry. Certain Portfolios may invest up to 10% of its net assets in illiquid
securities, including unsecured bank promissory notes.
FUNDING AGREEMENTS. A funding agreement is a contract between an issuer and a
purchaser that obligates the issuer to pay a guaranteed rate of interest on a
principal sum deposited by the purchaser. Funding agreements will also
guarantee the return of principal and may guarantee a stream of payments over
time. A funding agreement has a fixed maturity and may have either a fixed,
variable or floating interest rate that is based on an index and guaranteed for
a fixed time period. The secondary market, if any, for these funding agreements
is limited; thus, such investments purchased by the Portfolios may be treated
as illiquid. Certain Portfolios may invest up to 10% in illiquid securities,
including funding agreements.
REPURCHASE AGREEMENTS. The Portfolios may invest in repurchase agreements. When
cash may be available for only a few days, it may be invested by the Portfolios
in repurchase agreements until such time as it may otherwise be invested or
used for payments of obligations of the Portfolio. These agreements, which may
be viewed as a type of secured lending by the Portfolios, typically involve the
acquisition by the Portfolios of debt securities from a selling financial
institution such as a bank, savings and loan association or broker-dealer. The
agreement provides that a Portfolio will sell back to the institution, and that
the institution will repurchase, the underlying security serving as collateral
at a specified price and at a fixed time in the future, usually not more than
seven days from the date of purchase. The collateral will be marked-to-market
daily to determine that the value of the collateral, as specified in the
agreement, does not decrease below the purchase price plus accrued interest. If
such a decrease occurs, additional collateral will be requested and, when
received, added to the account to maintain full collateralization. The
Portfolio will accrue interest from the institution until the time when the
repurchase is to occur. Although this date is deemed by the Portfolio to be the
maturity date of a repurchase agreement, the maturities of securities subject
to repurchase agreements are not subject to any limits.
While repurchase agreements involve certain risks not associated with direct
investments in debt securities, the Portfolios follow procedures approved by
the Trustees designed to minimize such risks. These procedures include
effecting repurchase transactions only with large, well capitalized and well
established financial institutions, whose financial condition will be
continually monitored by the Sub-Adviser. In addition, as described above, the
value of the collateral underlying the repurchase agreement will always be at
least equal to the repurchase price which consists of the acquisition price
paid to the seller of the securities plus the accrued resale premium, which is
defined as the amount specified in the repurchase agreement or the daily
amortization of the difference between the acquisition price and the resale
price specified in the repurchase agreement. In the event of a default or
bankruptcy by a selling financial institution, the Funds will seek to liquidate
such collateral. However, the exercising of the Portfolio's right to liquidate
such collateral could involve certain costs or delays and, to the extent that
proceeds from any sale upon a default of the obligation to repurchase were less
than the repurchase price, the Portfolio could suffer a loss. In addition,
certain Portfolios may invest in repurchase agreements backed by
non-governmental collateral. Such repurchase agreements may be subject to the
automatic stay provision of the Bankruptcy Code, and may result in the
inability of a Portfolio to immediately liquidate the collateral in the event
of default or bankruptcy by the seller. It is the current policy of the
Portfolios not to invest in repurchase agreements that do not mature within
seven days if any such investment, together with any other illiquid assets held
by a Portfolio, amounts to more than 10% of its net assets. A Portfolio's
investments in repurchase agreements may at times be substantial as set forth
in the Prospectus.
REVERSE REPURCHASE AGREEMENTS. The Portfolios may also use reverse repurchase
agreements. Reverse repurchase agreements involve sales by the Portfolios of
portfolio assets concurrently with an agreement by the Portfolio to repurchase
the same assets at a later date at a fixed price. Generally, the effect of such
a transaction is that the Portfolio can recover all or most of the cash
invested in the portfolio securities
6
involved during the term of the reverse repurchase agreement, while it will be
able to keep the interest income associated with those portfolio securities.
Such transactions are only advantageous if the interest cost to the Portfolio
of the reverse repurchase transaction is less than the cost of obtaining the
cash otherwise. Opportunities to achieve this advantage may not always be
available, and the Portfolio intends to use the reverse repurchase technique
only when it will be to its advantage to do so. The Portfolio will establish a
segregated account with its Custodian bank in which it will maintain cash or
cash equivalents or other portfolio securities equal in value to its
obligations in respect of reverse repurchase agreements. Reverse repurchase
agreements are considered borrowings by a Portfolio and for purposes other than
meeting redemptions may not exceed 5% of a Portfolio's total assets.
PRIVATE PLACEMENTS. The Portfolios may invest in commercial paper issued in
reliance on the so-called "private placement" exemption afforded by Section
4(2) of the Securities Act of 1933 ("Securities Act") and which may be sold to
other institutional investors pursuant to Rule 144A under the Securities Act.
Rule 144A permits the Portfolios to sell restricted securities to qualified
institutional buyers without limitation. The Sub-Adviser, pursuant to
procedures adopted by the Trustees, will make a determination as to the
liquidity of each restricted security purchased by the Portfolios. If a
restricted security is determined to be "liquid," the security will not be
included within the category "illiquid securities."
PUT OPTIONS. Certain Portfolios may purchase securities together with the right
to resell them to the seller at an agreed upon price or yield within a
specified period prior to the maturity date of such securities. Such a right to
resell is commonly known as a "put," and the aggregate price which the
Portfolio pays for securities with puts may be higher than the price which
otherwise would be paid for the securities. The primary purpose of this
practice is to permit the Portfolio to be fully invested in securities, the
interest on which is exempt from Federal income tax, while preserving the
necessary flexibility and liquidity to purchase securities on a when-issued
basis, to meet unusually large redemptions and to purchase at a later date
securities other than those subject to the put. The Fund's policy is,
generally, to exercise the puts on their expiration date, when the exercise
price is higher than the current market price for the related securities. Puts
may be exercised prior to the expiration date in order to fund obligations to
purchase other securities or to meet redemption requests. These obligations may
arise during periods in which proceeds from sales of Portfolio shares and from
recent sales of portfolio securities are insufficient to meet such obligations
or when the funds available are otherwise allocated for investment. In
addition, puts may be exercised prior to their expiration date in the event the
Sub-Adviser revises their evaluation of the creditworthiness of the issuer of
the underlying security. In determining whether to exercise puts prior to their
expiration date and in selecting which puts to exercise in such circumstances,
the Sub-Adviser considers, among other things, the amount of cash available to
the Portfolio, the expiration dates of the available puts, any future
commitments for securities purchases, the yield, quality and maturity dates of
the underlying securities, alternative investment opportunities and the
desirability of retaining the underlying securities in the Portfolio.
The Fund values securities which are subject to puts at their amortized cost
and values the put, apart from the security, at zero. Thus, the cost of the put
will be carried on the Portfolio's books as an unrealized loss from the date of
acquisition and will be reflected in realized gain or loss when the put is
exercised or expires. Since the value of the put is dependent on the ability of
the put writer to meet its obligation to repurchase, the Fund's policy is to
enter into put transactions only with municipal securities dealers who are
approved by the Fund's Trustees. Each dealer will be approved on its own merits
and it is the Fund's general policy to enter into put transactions only with
those dealers which are determined to present minimal credit risks. In
connection with such determination, the Board of Trustees will review, among
other things, the ratings, if available, of equity and debt securities of such
municipal securities dealers, their reputations in the municipal securities
markets, the net worth of such dealers and their efficiency in consummating
transactions. Bank dealers normally will be members of the Federal Reserve
System, and other dealers will be members of the NASD or members of a national
securities exchange. The Trustees have directed the Adviser and the Sub-Adviser
not to enter into put transactions with, and to exercise outstanding puts of,
any municipal securities dealer which, in the judgment of the Adviser or
Sub-Adviser, ceases at any time to present a minimal credit risk. In the event
that a dealer should default on its obligation to repurchase an underlying
security, the Fund is unable to predict whether all or any portion of any loss
sustained could be subsequently recovered from such dealer.
7
In Revenue Ruling 82-144, the Internal Revenue Service stated that, under
certain circumstances, a purchaser of tax-exempt obligations which are subject
to puts will be considered the owner of the obligations for Federal income tax
purposes.
TENDER OPTION BONDS. A tender option bond is a municipal obligation (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 in conjunction with
the agreement of a third party, such as a bank, broker-dealer or other
financial institution, pursuant to which the institution grants the security
holder the option, at periodic intervals, to tender its securities to the
institution. As consideration for providing the option, the financial
institution receives periodic fees equal to the difference between the bond's
fixed coupon rate and the rate, as determined by a remarketing or similar
agent, 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. An institution will
normally 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 a Fund's average portfolio
maturity. There is a risk that a Fund will not be considered the owner of a
tender option bond for federal income tax purposes, and thus will not be
entitled to treat such interest as exempt from federal income tax. Certain
tender option bonds may be illiquid or may become illiquid as a result of a
credit rating downgrade, a payment default or a disqualification from
tax-exempt status.
VARIABLE RATE MASTER DEMAND NOTES. These are obligations that permit a
Portfolio to invest fluctuating amounts, at varying rates of interest, pursuant
to direct arrangements between the Portfolio, as lender, and the borrower.
These obligations permit daily changes in the amounts borrowed. Because these
obligations are direct lending arrangements between the lender and borrower, it
is not contemplated that such instruments generally will be traded, and there
generally is no established secondary market for these obligations, although
they are redeemable at face value, plus accrued interest. Accordingly, where
these obligations are not secured by letters of credit or other credit support
arrangements, the Portfolio's right to redeem is dependent on the ability of
the borrower to pay principal and interest on demand.
WHEN-ISSUED SECURITIES. Certain fixed income securities are purchased on a
"when-issued" basis. This means that the securities are purchased at a certain
price, but may not be delivered for up to 90 days. No payment or delivery is
made until a Portfolio receives payment or delivery from the other party to the
transaction. Although the Portfolio receives no income from the above described
securities prior to delivery, the market value of such securities is still
subject to change. As a consequence, it is possible that the market price of
the securities at the time of delivery may be higher or lower than the purchase
price. The Portfolio will maintain with the custodian a segregated account
consisting of cash or liquid securities in an amount at least equal to these
commitments.
YANKEE AND EUROBOND OBLIGATIONS. Certain Portfolios may invest in Eurobond and
Yankee obligations provided that such obligations are U.S. dollar-denominated.
Eurobonds may be issued by government and corporate issuers in Europe. Yankee
bank obligations are U.S. dollar-denominated obligations issued in the U.S.
capital markets by foreign banks.
Eurobond and Yankee obligations are subject to the same risks that pertain to
domestic issues, notably credit risk and market risk. However, Eurobond (and to
a limited extent, Yankee) obligations also are subject to certain sovereign
risks. One such risk is the possibility that a sovereign country might prevent
capital from flowing across its borders. Other risks include: adverse political
and economic developments; the extent and quality of government regulation of
financial markets and institutions; the imposition of foreign withholding
taxes, and the expropriation or nationalization of foreign issuers. The
Sub-Adviser, on behalf of a Portfolio, will perform the same credit analysis on
Eurobond and Yankee obligations that it purchases as it does on domestic
issues, and will seek to invest in obligations of issuers that have at least
the same financial strength as the domestic issuers whose securities it
purchases.
ZERO COUPONS. Zero coupon bonds are fixed income securities that do not make
regular interest payments. Instead, zero coupon obligations are sold at
substantial discounts from their face value. The difference between a zero
coupon obligation's issue or purchase price and its face value represents the
8
imputed interest an investor will earn if the obligation is held until
maturity. For tax purposes, a portion of this imputed interest is deemed as
income received by zero coupon bondholders each year. The Fund, which expects
to qualify as a regulated investment company, intends to pass along such
interest as a component of the Portfolios' distributions of net investment
income.
Zero Coupons may offer investors the opportunity to earn higher yields than
those available on ordinary interest-paying obligations of similar credit
quality and maturity. However, zero coupon obligation prices may also exhibit
greater price volatility than ordinary fixed income securities because of the
manner in which their principal and interest are returned to the investor. Zero
Coupon Treasury Bonds are sold under a variety of different names, such as:
Certificate of Accrual on Treasury Securities ("CATS"), Treasury Receipts
("TRS"), Separate Trading of Registered Interest and Principal of Securities
("STRIPS") and Treasury Investment Growth Receipts ("TIGERS").
LEVERAGING. Each Portfolio may borrow money from a bank in an amount up to
331/3% of its respective total assets (including the amount borrowed) less its
liabilities (not including any borrowings but including the fair market value
at the time of computation of any other senior securities then outstanding).
Each Portfolio will maintain asset coverage in accordance with the 1940 Act.
Leveraging portfolio assets has speculative characteristics. The use of
leverage may cause a Portfolio to liquidate portfolio positions when it may not
be advantageous to do so to satisfy its obligations or to maintain asset
coverage. Leverage, including borrowing, may cause a Portfolio to be more
volatile than if the Portfolio had not been leveraged. This is because leverage
tends to exaggerate the effect of any increase or decrease in the value of a
Portfolio's portfolio securities.
INVESTMENT OBJECTIVES AND LIMITATIONS
FUNDAMENTAL OBJECTIVES/LIMITATIONS. Each Portfolio's investment objective has
been adopted as fundamental and the Portfolios are subject to the following
restrictions which are also fundamental policies and may not be changed without
the approval of the lesser of (1) at least 67% of the voting securities of the
respective Portfolio present at a meeting if the holders of more than 50% of
the outstanding voting securities of the Portfolio are present or represented
by proxy, or (2) more than 50% of the outstanding voting securities of the
respective Portfolio.
As a matter of fundamental policy, each Portfolio will not change its
investment objective and will not:
(1) invest in physical commodities or contracts on physical commodities;
(2) purchase or sell real estate, although it may purchase and sell
securities of companies which deal in real estate, other than real estate
limited partnerships, and may purchase and sell marketable securities which are
secured by interests in real estate;
(3) make loans except: (i) by purchasing debt securities in accordance
with its investment objectives and policies, or entering into repurchase
agreements, (ii) by lending its portfolio securities, and (iii) by lending
Portfolio assets to other Portfolios of the Fund, so long as such loans are not
inconsistent with the 1940 Act, or the rules and regulations, or
interpretations or orders of the SEC thereunder;
(4) with respect to 75% of its assets, purchase a security if, as a
result, it would hold more than 10% (taken at the time of such investment) of
the outstanding voting securities of any issuer;
(5) purchase any securities other than obligations of U.S. regulated
banks or of the U.S. government, or its agencies or instrumentalities, and,
with respect to the Tax-Exempt Portfolio, industrial development bonds, if
immediately after such purchase, 25% or more of the value of the Portfolio's
total assets would be invested in the securities of issuers in the same
industry; there is no limitation as to investments in bank obligations or in
obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities, and, with respect to the Tax-Exempt Portfolio, to industrial
development bonds where the users of the facilities financed by such bonds are
in the same industry;
(6) with respect to 75% of its assets, purchase securities of any issuer
if, as a result, more than 5% of the Portfolio's total assets, taken at market
value at the time of such investment, would be invested in the securities of
such issuer except that this restriction does not apply to securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities;
9
(7) borrow money, except (i) each Portfolio may borrow money from a bank
in an amount up to 5% of its total assets; (ii) as a temporary measure for
extraordinary or emergency purposes, or to meet redemption requests which might
otherwise require the untimely disposition of securities, and (iii) in
connection with reverse repurchase agreements, provided that (i), (ii) and
(iii) in combination do not exceed 331/3% of the Portfolio's total assets
(including the amount borrowed) less liabilities (exclusive of borrowings);
(8) issue senior securities as defined in the 1940 Act except insofar as
the Fund may be deemed to have issued a senior security by reason of (a)
entering into any repurchase agreements or reverse repurchase agreements, (b)
purchasing any securities on a when-issued or delayed delivery basis; (c)
borrowing money as set forth above; or (d) lending portfolio securities; and
(9) underwrite the securities of other issuers (except to the extent
that the Fund may be deemed to be an underwriter within the meaning of the
Securities Act of 1933 in connection with the disposition of restricted
securities).
In addition, as a non-fundamental policy, each Portfolio may not invest its
assets in securities of any investment company, except as permitted by the 1940
Act or the rules, regulations, interpretations or orders of the SEC and its
staff thereunder. Each Portfolio may invest substantially all of its assets in
a single open-end investment company or series thereof that has substantially
the same investment objectives, policies and restrictions as the Portfolio.
Unless otherwise indicated, if a percentage limitation on investment or
utilization of assets as set forth above is adhered to at the time an
investment is made, a later change in percentage resulting from changes in the
value or total cost of a Portfolio's assets will not be considered a violation
of the restriction, and the sale of securities will not be required unless
otherwise noted or required by law (such as limitations relating to borrowing
or investments in illiquid securities).
DISCLOSURE OF PORTFOLIO HOLDINGS
<R>
The Fund's Board of Trustees, Morgan Stanley Investment Management Inc. (the
"Adviser") and Morgan Stanley Investment Advisors Inc. (the "Sub-Adviser") have
adopted policies and procedures regarding disclosure of portfolio holdings (the
"Policy"). Pursuant to the Policy, the Adviser and the Sub-Adviser may disclose
information concerning Fund portfolio holdings only if such disclosure is
consistent with the antifraud provisions of the federal securities laws and the
Fund's, the Adviser's and the Sub-Adviser's fiduciary duties to the Fund
shareholders. Neither the Adviser nor the Sub-Adviser may receive compensation
or any other consideration in connection with the disclosure of information
about the portfolio securities of the Fund. Consideration includes any agreement
to maintain assets in the Fund or in other investment companies or accounts
managed by the Adviser, the Sub-Adviser or by any affiliated person of the
Adviser or the Sub-Adviser. Material non-public information concerning portfolio
holdings may be divulged to third parties only when the Fund has a legitimate
business purpose for doing so and the recipients of the information are subject
to a duty of confidentiality. Under no circumstances shall current or
prospective Fund shareholders receive non-public portfolio holdings information,
except as described below.
</R>
The Fund makes available on its public website top five, top ten or top fifteen
holdings monthly with a minimum five calendar day lag.
The Fund provides a complete schedule of portfolio holdings for the second and
fourth fiscal quarters in its semiannual and annual reports, and for the first
and third fiscal quarters in its filings with the SEC on Form N-Q.
All other portfolio holdings information that has not been disseminated in a
manner making it available to investors generally as described above, is
non-public information for purposes of the Policy.
The Fund makes its complete portfolio holdings available on the
password-protected part of its website every 15 days with a minimum 15 calendar
day lag. In addition, prospective investors generally may receive portfolio
holdings information if they enter into an agreement or undertaking to keep the
information confidential.
The Fund may make selective disclosure of non-public portfolio holdings. Third
parties eligible to receive such disclosures currently include fund rating
agencies, information exchange subscribers, consultants and
10
<R>
analysts, portfolio analytics providers and service providers, provided that the
third party expressly agrees to maintain the disclosed information in confidence
and not to trade portfolio securities based on the material nonpublic
information. Non-public portfolio holdings information may not be disclosed to a
third party unless and until the arrangement has been reviewed and approved
pursuant to the requirements set forth in the Policy. Subject to the terms and
conditions of any agreement between the Adviser, the Sub-Adviser or the Fund and
the third party recipient, if these conditions for disclosure are satisfied,
there shall be no restriction on the frequency with which Fund non-public
portfolio holdings information is released, and no lag period shall apply
(unless otherwise indicated below).
The Adviser and the Sub-Adviser may provide interest lists to broker-dealers who
execute securities transactions for the Fund without entering into a
non-disclosure agreement with the broker-dealers, provided that the interest
list satisfies all of the following criteria: (1) the interest list must contain
only the CUSIP numbers and/or ticker symbols of securities held in all
registered management investment companies advised by the Adviser, the
Sub-Adviser or any affiliate of the Adviser or Sub-Adviser (the "MSIM Funds") on
an aggregate, rather than a fund-by-fund basis; (2) the interest list must not
contain information about the number or value of shares owned by a specified
MSIM Fund; (3) the interest list may identify the investment strategy, but not
the particular MSIM Funds, to which the list relates; and (4) the interest list
may not identify the portfolio manager or team members responsible for managing
the MSIM Funds.
</R>
Fund shareholders may elect in some circumstances to redeem their shares of the
Fund in exchange for their pro rata share of the securities held by the Fund.
Under such circumstances, Fund shareholders may receive a complete listing of
the holdings of the Fund up to seven (7) calendar days prior to making the
redemption request provided that they represent orally or in writing that they
agree not to disclose or trade on the basis of the portfolio holdings
information.
The Fund may discuss or otherwise disclose performance attribution analyses
(i.e., mention the effects of having a particular security in the portfolio(s))
where such discussion is not contemporaneously made public, provided that the
particular holding has been disclosed publicly. Additionally, any discussion of
the analyses may not be more current than the date the holding was disclosed
publicly.
The Fund may disclose portfolio holdings to transition managers, provided that
the Fund has entered into a non-disclosure or confidentiality agreement with
the party requesting that the information be provided to the transition manager
and the party to the non-disclosure agreement has, in turn, entered into a
non-disclosure or confidentiality agreement with the transition manager.
The Adviser and/or the Fund have entered into ongoing arrangements to make
available public and/or non-public information about the Fund's portfolio
securities. Provided that the recipient of the information falls into one or
more of the categories listed below, and the recipient has entered into a
non-disclosure agreement with the Fund, or owes a duty of trust or confidence
to the Fund, the recipient may receive portfolio holdings information pursuant
to such agreement without obtaining pre-approval from either the Portfolio
Holdings Review Committee (the "PHRC") or the Fund's Board of Trustees. In all
such instances, however, the PHRC will be responsible for reporting to the
Fund's Board of Trustees, or designated Committee thereof, material information
concerning the ongoing arrangements at each Board's next regularly scheduled
Board meeting. Categories or parties eligible to receive information pursuant
to such ongoing arrangements include fund rating agencies, information exchange
subscribers, consultants and analysts, portfolio analytics providers, service
providers and asset allocators.
11
The Adviser and/or the Fund currently have entered into ongoing arrangements
with the following parties:
<TABLE>
NAME INFORMATION DISCLOSED FREQUENCY(1) LAG TIME
------------------------------ -------------------------------- ------------------------------ -----------------------------
SERVICE PROVIDERS
Institutional Shareholder Complete portfolio holdings Twice a month (2)
Services (ISS) (proxy
voting agent)(*)
JP Morgan Investor Complete portfolio holdings As needed (2)
Services Co.(*)
JP Morgan Chase Bank(*) Complete portfolio holdings As needed (2)
JP Morgan Investor Complete portfolio holdings As needed (2)
Services Company(*)
FUND RATING AGENCIES
Lipper(*) Top Ten and Complete Quarterly basis Approximately 15 days after
portfolio holdings quarter end and
approximately 30 days after
quarter end
Morningstar(**) Complete portfolio holdings Quarterly basis Approximately 15 days after
quarter end and
approximately 30 days after
quarter end
Standard & Poor's(*) Complete portfolio holdings Quarterly basis Approximately 15 day lag
CONSULTANTS AND ANALYSTS
Americh Massena & Top Ten and Complete portfolio Quarterly basis(5) Approximately 10-12 days
Associates, Inc.(*) holdings after quarter end
Bloomberg(**) Complete portfolio holdings Quarterly basis Approximately 30 days after
quarter end
Callan Associates(*) Top Ten and Complete portfolio Monthly and quarterly basis, Approximately 10-12 days
holdings respectively(5) after month/quarter end
Cambridge Associates(*) Top Ten and Complete portfolio Quarterly basis(5) Approximately 10-12 days
holdings after quarter end
CTC Consulting, Inc.(**) Top Ten and Complete portfolio Quarterly basis Approximately 15 days after
holdings quarter end and
approximately 30 days after
quarter end, respectively
Fund Evaluation Group(**) Top Ten portfolio holdings(3) Quarterly basis At least 15 days after
quarter end
Jeffrey Slocum & Complete portfolio holdings(4) Quarterly basis(5) Approximately 10-12 days
Associates(*) after quarter end
Hammond Associates(**) Complete portfolio holdings(4) Quarterly basis At least 30 days after
quarter end
Hartland & Co.(**) Complete portfolio holdings(4) Quarterly basis At least 30 days after
quarter end
Hewitt Associates(*) Top Ten and Complete portfolio Monthly and quarterly basis, Approximately 10-12 days
holdings respectively(5) after month/quarter end
Mobius(**) Top Ten portfolio holdings(3) Monthly basis At least 15 days after month
end
Nelsons(**) Top Ten holdings(3) Quarterly basis At least 15 days after
quarter end
Prime Buchholz & Complete portfolio holdings(4) Quarterly basis At least 30 days after
Associates, Inc.(**) quarter end
PSN(**) Top Ten holdings(3) Quarterly basis At least 15 days after
quarter end
PFM Asset Management Top Ten and Complete portfolio Quarterly basis(5) Approximately 10-12 days
LLC(*) holdings after quarter end
Russell Investment Top Ten and Complete portfolio Monthly and quarterly basis At least 15 days after month
Group/Russell/Mellon holdings end and at least 30 days
Analytical Services, after quarter end,
Inc.(**) respectively
Stratford Advisory Group, Top Ten portfolio holdings(6) Quarterly basis(5) Approximately 10-12 days
Inc.(*) after quarter end
Thompson Financial(**) Complete portfolio holdings(4) Quarterly basis At least 30 days after
quarter end
</TABLE>
12
<TABLE>
NAME INFORMATION DISCLOSED FREQUENCY(1) LAG TIME
----------------------- -------------------------------- -------------------- -------------------------
Watershed Investment Top Ten and Complete portfolio Quarterly basis(5) Approximately 10-12 days
Consultants, Inc.(*) holdings after quarter end
Yanni Partners(**) Top Ten portfolio holdings(3) Quarterly basis At least 15 days after
quarter end
</TABLE>
----------
(*) This entity has agreed to maintain Fund non-public portfolio holdings
information in confidence and not to trade portfolio securities based on
the non-public portfolio holdings information.
(**) The Fund does not currently have a non-disclosure agreement in place with
this entity and therefore the entity can only receive publicly available
information.
(1) Dissemination of portfolio holdings information to entities listed above
may occur less frequently than indicated (or not at all).
(2) Information will typically be provided on a real time basis or as soon
thereafter as possible.
<R>
(3) Complete portfolio holdings will also be provided upon request from time to
time on a quarterly basis, with at least a 30 day lag.
</R>
(4) Top Ten portfolio holdings will also be provided upon request from time to
time, with at least a 15 day lag.
(5) This information will also be provided upon request from time to time.
<R>
(6) Complete portfolio holdings will also be provided upon request from time to
time.
In addition, persons who owe a duty of trust or confidence to the Adviser, the
Sub-Adviser or the Fund may receive non-public portfolio holdings information
without entering into a non-disclosure agreement. Currently, these persons
include, (i) the Fund's independent registered public accounting firm (as of the
Fund's fiscal year end and on an as needed basis), (ii) counsel to the Fund (on
an as needed basis), (iii) counsel to the independent trustees (on an as needed
basis) and (iv) members of the Board of Trustees (on an as needed basis).
Further, certain entities such as municipalities, which may not be authorized to
enter into a non-disclosure agreement, may enter into an undertaking to keep any
nonpublic holdings information confidential.
All selective disclosures of non-public portfolio holdings information made to
third parties pursuant to the exemptions set forth in the Policy must be
pre-approved by both the PHRC and the Fund's Board of Trustees (or designated
Committee thereof), except for (i) disclosures made to third parties pursuant to
ongoing arrangements (described above); (ii) disclosures made to third parties
pursuant to Special Meetings of the PHRC; (iii) broker-dealer interest lists;
(iv) shareholder in-kind distributions; (v) attribution analyses; or (vi) in
connection with transition managers. The Adviser and the Sub-Adviser shall
report quarterly to the Board of Trustees (or a designated Committee thereof)
information concerning all parties receiving non-public portfolio holdings
information pursuant to an exemption. Procedures to monitor the use of such
non-public portfolio holdings information include requiring annual
certifications that the recipients have utilized such information only pursuant
to the terms of the agreement between the recipient and the Adviser and, for
those recipients receiving information electronically, acceptance of the
information will constitute reaffirmation that the third party expressly agrees
to maintain the disclosed information in confidence and not to trade portfolio
securities based on the material nonpublic information.
In no instance may the Adviser, Sub-Adviser or the Fund receive any compensation
or consideration in exchange for the portfolio holdings information.
</R>
The PHRC is responsible for creating and implementing the Policy and, in this
regard, has expressly adopted it. The following are some of the functions and
responsibilities of the PHRC:
(a) The PHRC, which will consist of executive officers of the Fund and
the Adviser, is responsible for establishing portfolio holdings disclosure
policies and guidelines and determining how portfolio holdings information will
be disclosed on an ongoing basis.
(b) The PHRC will periodically review and have the authority to amend as
necessary the Fund's portfolio holdings disclosure policies and guidelines (as
expressed by the Policy).
<R>
(c) The PHRC will meet at least quarterly to (among other matters): (1)
address any outstanding issues relating to the Policy; (2) review non-disclosure
agreements that have been executed with third parties and determine whether the
third parties will receive portfolio holdings information; and (3) generally
review the procedures that the Adviser and the Sub-Adviser employ to ensure that
disclosure of information
</R>
13
<R>
about portfolio securities is in the best interests of Fund shareholders,
including procedures to address conflicts between the interests of Fund
shareholders, on the one hand, and those of the Adviser, the Sub-Adviser, or the
Distributor; or any affiliated person of the Fund, the Adviser, the Sub-Adviser
or the Distributor, on the other.
</R>
(d) Any member of the PHRC may call a Special Meeting of the PHRC to
consider whether a third party may receive non-public portfolio holdings
information pursuant to a validly executed non-disclosure agreement. At least
three members of the PHRC, or their designees, and one member of the Funds
Audit Committee, or his or her designee, shall be present at the Special
Meeting in order to constitute a quorum. At any Special Meeting at which a
quorum is present, the decision of a majority of the PHRC members present and
voting shall be determinative as to any matter submitted to a vote; provided,
however, that the Audit Committee member, or his or her designee, must concur
in the determination in order for it to become effective.
(e) The PHRC, or its designee(s), will document in writing all of their
decisions and actions, which documentation will be maintained by the PHRC, or
its designee(s) for a period of at least six years. The PHRC, or its
designee(s), will report their decisions to the Board of Trustees at each
Board's next regularly scheduled Board meeting. The report will contain
information concerning decisions made by the PHRC during the most recently
ended calendar quarter immediately preceding the Board meeting.
PURCHASE OF SHARES
<R>
The name of the Portfolio requested should be designated on the Account
Registration Form. Each Portfolio reserves the right in its sole discretion (i)
to suspend the offering of its shares, (ii) to reject purchase orders, and (iii)
to reduce or waive the minimum for initial and subsequent investments. The
officers of the Fund may from time to time waive the minimum initial and
subsequent investment requirements in connection with investments in the Fund by
certain investors, including but not limited to (a) employees of the Adviser or
Sub-Adviser and their affiliates, and (b) other investors with whom the Adviser
or Sub-Adviser wish to develop a relationship or whose investments are expected,
over a reasonable period of time, to exceed the minimum initial investment
requirement.
</R>
The Portfolios declare dividends daily and, therefore, at the time of a
purchase, must have funds immediately available for investment. As a result,
you must pay for shares of each Portfolio with Federal Funds (monies credited
to the Portfolio's custodian by a Federal Reserve Bank).
Investors purchasing and redeeming shares of the Portfolio through a financial
intermediary may be charged a transaction-based fee or other fee for the
financial intermediary's services. Each financial intermediary is responsible
for sending you a schedule of fees and information regarding any additional or
different conditions regarding purchases and redemptions. Customers of
financial intermediaries should read this SAI in light of the terms governing
accounts with their organization. The Fund does not pay compensation to or
receive compensation from financial intermediaries for the sale of
Institutional Class Shares but does pay compensation in connection with other
share classes.
<R>
Neither Morgan Stanley Distribution, Inc., as distributor (the "Distributor")
nor the Fund will be responsible for any loss, liability, cost, or expense for
acting upon facsimile instructions or upon telephone instructions that they
reasonably believe to be genuine. In order to confirm that telephone
instructions in connection with redemptions are genuine, the Fund and
Distributor will provide written confirmation of transactions initiated by
telephone.
</R>
REDEMPTION OF SHARES
The Portfolio may suspend redemption privileges or postpone the date of payment
(i) during any period that the New York Stock Exchange ("NYSE") is closed, or
trading on the NYSE is restricted as determined by the SEC, (ii) during any
period when an emergency exists as defined by the rules of the SEC as a result
of which it is not reasonably practicable for a Portfolio to dispose of
securities owned by it, or fairly to determine the value of its assets, and
(iii) for such other periods as the SEC may permit.
The Fund has made an election with the SEC pursuant to Rule 18f-1 under the
1940 Act to pay in cash all redemptions requested by any shareholder of record
limited in amount during any 90-day period to the
14
lesser of $250,000 or 1% of the net assets of a Portfolio at the beginning of
such period. Such commitment is irrevocable without the prior approval of the
SEC. Redemptions in excess of the above limits may be paid in whole or in part
in investment securities or in cash, as the Trustees may deem advisable;
however, payment will be made wholly in cash unless the Trustees believe that
economic or market conditions exist which would make such a practice
detrimental to the best interests of the Fund. If redemptions are paid in
investment securities, such securities will be valued as set forth in the
Fund's prospectuses under "Valuation of Shares" and a redeeming shareholder
would normally incur brokerage expenses in converting these securities to cash.
No charge is made by the Portfolio for redemptions. Redemption proceeds may be
more or less than the shareholder's cost depending on the market value of the
securities held by the Portfolio.
TRANSACTIONS WITH BROKER/DEALERS
The Fund has authorized certain brokers to receive on its behalf purchase and
redemption orders. Some of these brokers are authorized to designate other
intermediaries to receive purchase and redemption orders on the Fund's behalf.
For purposes of determining the purchase price of shares, the Fund will be
deemed to have received a purchase or redemption order when an authorized
broker, or if applicable, a broker's authorized designee, receives the order in
proper form. In other words, orders will be priced at the net asset value next
computed after such orders are received in proper form by an authorized broker
or the broker's authorized designee.
SHAREHOLDER SERVICES
TRANSFER OF SHARES
Shareholders may transfer shares of the Portfolios to another person by written
request to the Shareholder Services Group at the address noted above. If shares
are being transferred to a new account, requests for transfer must be
accompanied by a completed Account Registration Form for the receiving party.
If shares are being transferred to an existing account, the request should
clearly identify the account and number of shares to be transferred and include
the signature of all registered owners and all share certificates, if any,
which are subject to the transfer. The signature on the letter of request, the
share certificate or any stock power must be guaranteed in the same manner as
described under "Redemption of Shares." As in the case of redemptions, the
written request must be received in good order before any transfer can be made.
VALUATION OF SHARES
For the purpose of calculating each Portfolio's NAV, securities are valued by
the amortized cost method of valuation, which does not take into account
unrealized gains or losses. This involves valuing an instrument at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which value based on amortized cost is higher or
lower than the price each Portfolio would receive if it sold the instrument.
The use of amortized cost and the maintenance of each Portfolio's per share NAV
at $1.00 is based on its election to operate under the provisions of Rule 2a-7
under the 1940 Act. As conditions of operating under Rule 2a-7, each Portfolio
must maintain a dollar-weighted average Portfolio maturity of 90 days or less,
purchase only instruments having remaining maturities of thirteen months or
less and invest only in U.S. dollar-denominated securities which are determined
by the Trustees to present minimal credit risks and which are of eligible
quality as determined under the rule.
The Board has established procedures reasonably designed, taking into account
current market conditions and each Portfolio's investment objective, to
stabilize the net asset value per share as computed for the purposes of sales
and redemptions at $1.00. These procedures include periodic review, as the
15
Trustees deem appropriate and at such intervals as are reasonable in light of
current market conditions, of the relationship between the amortized cost value
per share and a net asset value per share based upon available indications of
market value. In such a review, investments for which market quotations are
readily available are valued at the most recent bid price or quoted yield
equivalent for such securities or for securities of comparable maturity,
quality and type as obtained from one or more of the major market makers for
the securities to be valued. Other investments and assets are valued at fair
value, as determined in good faith by the Board.
In the event of a deviation of over 1/2 of 1% between a Portfolio's NAV based
upon available market quotations or market equivalents and $1.00 per share
based on amortized cost, the Trustees will promptly consider what action, if
any, should be taken. The Board will also take any action they deem appropriate
to eliminate or to reduce to the extent reasonably practicable any material
dilution or other unfair results which might arise from differences between the
two. This action may include redeeming shares in kind, selling instruments
prior to maturity to realize capital gains or losses or to shorten average
maturity, withholding dividends, paying distributions from capital gains or
losses, or utilizing a NAV not equal to $1.00 based upon available market
quotations.
MANAGEMENT OF THE FUND
OFFICERS AND TRUSTEES. The Board of the Fund consists of nine Trustees. These
same individuals also serve as directors or trustees for certain of the funds
advised by the Adviser and Morgan Stanley AIP GP LP (the "Institutional Funds")
and all of the funds advised by Morgan Stanley Investment Advisors Inc. (the
"Retail Funds"). Seven Trustees have no affiliation or business connection with
the Adviser or any of its affiliated persons and do not own any stock or other
securities issued by the Adviser's parent company, Morgan Stanley. These
Trustees are the "non-interested" or "Independent Trustees" of the Fund. The
other two Trustees (the "Management Trustees") are affiliated with the Adviser.
INDEPENDENT TRUSTEES. The Independent Trustees of the Fund, their age, address,
term of office and length of time served, their principal business occupations
during the past five years, the number of portfolios in the Fund Complex
(defined below) overseen by each Independent Trustee (as of December 31, 2004)
and other directorships, if any, held by the Trustees, are shown below. The
Fund Complex includes all open-end and closed-end funds (including all of their
portfolios) advised by the Adviser and any funds that have an investment
advisor that is an affiliated person of the Adviser (including, but not limited
to, Morgan Stanley Investment Advisers Inc.).
16
<R>
<TABLE>
NUMBER OF
PORTFOLIOS IN
FUND
POSITION(S) COMPLEX OTHER
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED (1) DURING PAST 5 YEARS (2) TRUSTEE HELD BY TRUSTEE
------------------------------ ------------- ----------------- --------------------------------- -------------- ----------------
Michael Bozic (63) Trustee Since July 2003 Private investor; Director or 197 Director of
c/o Kramer Levin Naftalis & Trustee of the Retail Funds various business
Frankel LLP (since April 1994) and the organizations.
Counsel to the Institutional Funds (since
Independent Trustees July 2003); formerly Vice
1177 Avenue of the Chairman of Kmart
Americas Corporation (December
New York, NY 10036 1998-October 2000),
Chairman and Chief
Executive Officer of Levitz
Furniture Corporation
(November 1995-November
1998) and President and Chief
Executive Officer of Hills
Department Stores (May
1991-July 1995); formerly
variously Chairman, Chief
Executive Officer, President
and Chief Operating Officer
(1987-1991) of the Sears
Merchandise Group of Sears,
Roebuck & Co.
Edwin J. Garn (72) Trustee Since July 2003 Consultant; Director or 197 Director of
1031 N. Chartwell Court Trustee of the Retail Funds Franklin Covey
Salt Lake City, UT 84103 (since January 1993) and the (time management
Institutional Funds (since July systems), BMW
2003); member of the Utah Bank of North
Regional Advisory Board of America, Inc.
Pacific Corp. (utility (industrial loan
company); formerly Managing corporation),
Director of Summit Ventures Escrow Bank USA
LLC (lobbying and consulting (industrial loan
firm) (2000-2004); United corporation),
States Senator United Space
(R- Utah) (1974-1992) and Alliance (joint
Chairman, Senate Banking venture between
Committee (1980-1986), Lockheed Martin
Mayor of Salt Lake City, and the Boeing
Utah (1971-1974), Astronaut, Company) and
Space Shuttle Discovery Nuskin Asia
(April 12-19, 1985), and Vice Pacific (multilevel
Chairman, Huntsman marketing);
Corporation (chemical member of the
company). board of various
civic and
charitable
organizations.
</TABLE>
</R>
----------
(1) This is the earliest date the Trustee began serving the Institutional
Funds. Each Trustee serves an indefinite term, until his or her successor
is elected.
(2) The dates referenced below indicating commencement of service as
Director/Trustee for the Retail and Institutional Funds reflect the
earliest date the Director/Trustee began serving the Retail and
Institutional Funds, as applicable.
17
<TABLE>
NUMBER OF
PORTFOLIOS IN
FUND
POSITION(S) COMPLEX OTHER
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED (1) DURING PAST 5 YEARS (2) TRUSTEE HELD BY TRUSTEE
------------------------------ ------------- ----------------- --------------------------------- -------------- -------------------
Wayne E. Hedien (70) Trustee Since July 2003 Retired; Director or Trustee 197 Director of The
c/o Kramer Levin Naftalis & of the Retail Funds (since PMI Group Inc.
Frankel LLP September 1997) and the (private mortgage
Counsel to the Institutional Funds (since July insurance); Trustee
Independent Trustees 2003); formerly associated and Vice Chairman
1177 Avenue of the with the Allstate Companies of The Field
Americas (1966-1994), most recently as Museum of
New York, NY 10036 Chairman of The Allstate Natural History;
Corporation (March director of various
1993-December 1994) and other business and
Chairman and Chief charitable
Executive Officer of its organizations.
wholly-owned subsidiary,
Allstate Insurance Company
(July 1989-December 1994).
Dr. Manuel H. Johnson (55) Trustee Since July 2003 Senior Partner, Johnson 197 Director of NVR,
c/o Johnson Smick Smick International, Inc., a Inc. (home
Group Inc. consulting firm; Chairman of construction);
888 16th Street, NW the Audit Committee and Director of KFX
Suite 740 Director or Trustee of the Energy; Director
Washington, D.C. 20006 Retail Funds (since July 1991) of RBS Greenwich
and the Institutional Funds Capital Holdings
(since July 2003); Co- (financial holding
Chairman and a founder of company).
the Group of Seven Council
(G7C), an international
economic commission;
formerly Vice Chairman of
the Board of Governors of
the Federal Reserve System
and Assistant Secretary of the
U.S. Treasury.
Joseph J. Kearns (62) Trustee Since August President, Kearns & 198 Director of Electro
c/o Kearns & Associates 1994 Associates LLC (investment Rent Corporation
LLC consulting); Deputy Chairman (equipment
PMB754 of the Audit Committee and leasing), The Ford
23852 Pacific Coast Highway Director or Trustee of the Family
Malibu, CA 90265 Retail Funds (since July 2003) Foundation, and
and the Institutional Funds the UCLA
(since August 1994); Foundation.
previously Chairman of the
Audit Committee of the
Institutional Funds
( October 2001-July 2003);
formerly CFO of the J. Paul
Getty Trust.
</TABLE>
----------
(1) This is the earliest date the Trustee began serving the Institutional
Funds. Each Trustee serves an indefinite term, until his or her successor
is elected.
(2) The dates referenced below indicating commencement of service as
Director/Trustee for the Retail and Institutional Funds reflect the
earliest date the Director/Trustee began serving the Retail and
Institutional Funds, as applicable.
18
<TABLE>
NUMBER OF
PORTFOLIOS IN
FUND
POSITION(S) COMPLEX OTHER
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED (1) DURING PAST 5 YEARS (2) TRUSTEE HELD BY TRUSTEE
---------------------------- ------------- ----------------- -------------------------------- -------------- --------------------
Michael E. Nugent (68) Trustee Since July 2001 General Partner of Triumph 197 Director of various
c/o Triumph Capital, L.P. Capital, L.P., a private business
445 Park Avenue investment partnership; organizations.
New York, NY 10022 Chairman of the Insurance
Committee and Director or
Trustee of the Retail Funds
(since July 1991) and the
Institutional Funds (since July
2001); formerly Vice
President, Bankers Trust
Company and BT Capital
Corporation (1984-1988).
Fergus Reid (72) Trustee Since June 1992 Chairman of Lumelite Plastics 198 Trustee and
c/o Lumelite Plastics Corporation; Chairman of the Director of certain
Corporation Governance Committee and investment
85 Charles Colman Blvd. Director or Trustee of the companies in the
Pawling, NY 12564 Retail Funds (since July 2003) JPMorgan Funds
and the Institutional Funds complex managed
(since June 1992). by JPMorgan
Investment
Management Inc.
</TABLE>
----------
(1) This is the earliest date the Trustee began serving the Institutional
Funds. Each Trustee serves an indefinite term, until his or her successor
is elected.
(2) The dates referenced below indicating commencement of service as
Director/Trustee for the Retail and Institutional Funds reflect the
earliest date the Director/Trustee began serving the Retail and
Institutional Funds, as applicable.
[This space intentionally left blank].
19
MANAGEMENT TRUSTEES. The Trustees who are affiliated with the Adviser or
affiliates of the Adviser (as set forth below) and executive officers of the
Fund, their age, address, term of office and length of time served, their
principal business occupations during the past five years, the number of
portfolios in the Fund Complex overseen by each Management Trustee (as of
December 31, 2004) and the other directorships, if any, held by the Trustee,
are shown below.
<TABLE>
NUMBER OF
PORTFOLIOS IN
FUND OTHER
COMPLEX DIRECTORSHIPS
POSITION(S) OVERSEEN BY HELD BY
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) MANAGEMENT MANAGEMENT
MANAGEMENT TRUSTEE REGISTRANT TIME SERVED (3) DURING PAST 5 YEARS (4) TRUSTEE TRUSTEE
------------------------------- ------------- ----------------- -------------------------------- -------------- ---------------
Charles A. Fiumefreddo (71) Chairman Since July 2003 Chairman and Director or 197 None
c/o Morgan Stanley Trust of the Trustee of the Retail Funds
Harborside Financial Center, Board and (since July 1991) and the
Plaza Two, Trustee Institutional Funds (since
Jersey City, NJ 07311 July 2003); formerly Chief
Executive Officer of the
Retail Funds (until
September 2002).
James F. Higgins (57) Trustee Since July 2003 Director or Trustee of the 197 Director of
c/o Morgan Stanley Trust Retail Funds (since June AXA Financial,
Harborside Financial Center, 2000) and the Institutional Inc. and The
Plaza Two, Funds (since July 2003); Equitable Life
Jersey City, NJ 07311 Senior Advisor of Morgan Assurance
Stanley (since August 2000); Society of the
Director of Morgan Stanley United States
Distributors Inc. and Dean (financial
Witter Realty Inc.; previously services).
President and Chief
Operating Officer of the
Private Client Group of
Morgan Stanley (May
1999-August 2000), and
President and Chief
Operating Officer of
Individual Securities of
Morgan Stanley (February
1997-May 1999).
</TABLE>
----------
(3) This is the date the Trustee began serving the Institutional Funds. Each
Trustee serves an indefinite term, until his or her successor is elected.
(4) The dates referenced below indicating commencement of service as
Director/Trustee for the Retail and Institutional Funds reflect the
earliest date the Director/Trustee began serving the Retail and
Institutional Funds, as applicable.
20
OFFICERS:
<TABLE>
POSITION(S)
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF
EXECUTIVE OFFICER REGISTRANT TIME SERVED (5) PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS (6)
------------------------------ ---------------- ----------------- ----------------------------------------------------
Mitchell M. Merin (51) President Since July 2003 President and Chief Operating Officer of Morgan
1221 Avenue of the Americas Stanley Investment Management Inc.; President,
New York, NY 10020 Director and Chief Executive Officer of Morgan
Stanley Investment Advisors Inc. and Morgan
Stanley Services Company Inc.; Chairman and
Director of Morgan Stanley Distributors Inc.;
Chairman and Director of Morgan Stanley Trust;
Director of various Morgan Stanley subsidiaries;
President of the Institutional Funds (since July
2003) and President of the Retail Funds (since
May 1999); Trustee (since July 2003) and
President (since December 2002) of the Van
Kampen Closed-End Funds; Trustee (since May
1999) and President (since October 2002) of the
Van Kampen Open-End Funds.
Ronald E. Robison (66) Executive Vice Since July 2003 Principal Executive Officer of funds in the Fund
1221 Avenue of the Americas President and Complex (since May 2003); Managing Director of
New York, NY 10020 Principal Morgan Stanley & Co. Incorporated, Morgan
Executive Stanley and Morgan Stanley Investment
Officer Management Inc.; Managing Director, Chief
Administrative Officer and Director of Morgan
Stanley Investment Advisors Inc. and Morgan
Stanley Services Company Inc.; Chief Executive
Officer and Director of Morgan Stanley Trust;
Managing Director and Director of Morgan
Stanley Distributors Inc.; Executive Vice President
and Principal Executive Officer of the Retail
Funds (since April 2003) and the Institutional
Funds (since July 2003); Director of Morgan
Stanley SICAV (since May 2004); previously
President and Director of Retail Funds (March
2001-July 2003) and Chief Global Operations
Officer and Managing Director of Morgan Stanley
Investment Management Inc.
Joseph J. McAlinden (62) Vice President Since July 2003 Managing Director and Chief Investment Officer
1221 Avenue of the Americas of Morgan Stanley Investment Advisors Inc. and
New York, NY 10020 Morgan Stanley Investment Management Inc.;
Director of Morgan Stanley Trust, Chief
Investment Officer of the Van Kampen Funds;
Vice President of the Institutional Funds (since
July 2003) and the Retail Funds (since July 1995).
</TABLE>
----------
(5) This is the date the Officer began serving the Institutional Funds. Each
Officer serves an indefinite term, until his or her successor is elected.
(6) The dates referenced below indicating commencement of service as an
Officer for the Retail and Institutional Funds reflect the earliest date
the Officer began serving the Retail or Institutional Funds, as
applicable.
21
<TABLE>
POSITION(S)
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF
EXECUTIVE OFFICER REGISTRANT TIME SERVED (5) PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS (6)
------------------------------ ---------------- ----------------- ---------------------------------------------------
Barry Fink (50) Vice President Since July 2003 General Counsel (since May 2000) and Managing
1221 Avenue of the Americas Director (since December 2000) of Morgan
New York, NY 10020 Stanley Investment Management; Managing
Director (since December 2000), Secretary (since
February 1997) and Director (since July 1998) of
Morgan Stanley Investment Advisors Inc. and
Morgan Stanley Services Company Inc.; Assistant
Secretary of Morgan Stanley DW Inc.; Vice
President and General Counsel of the Retail
Funds; Managing Director, Secretary and Director
of Morgan Stanley Distributors Inc.; previously
Secretary of the Retail Funds (February 1997-July
2003); previously Vice President and Assistant
General Counsel of Morgan Stanley Investment
Advisors Inc. and Morgan Stanley Services
Company Inc. (February 1997-December 2001).
Amy R. Doberman (43) Vice President Since July 2004 Managing Director and General Counsel, U.S.
1221 Avenue of the Americas Investment Management; Managing Director of
New York, NY 10020 Morgan Stanley Investment Management Inc. and
Morgan Stanley Investment Advisors Inc.; Vice
President of the Institutional and Retail Funds
(since July 2004); previously, Managing Director
and General Counsel-Americas, USB Global
Asset Management (July 2000-July 2004) and
General Counsel, Aeltus Investment Management,
Inc. (January 1997-July 2000).
Carsten Otto (41) Chief Since October Executive Director and U.S. Director of
1221 Avenue of the Americas Compliance 2004 Compliance for Morgan Stanley Investment
New York, NY 10020 Officer Management Inc. (since October 2004); Executive
Director of Morgan Stanley Investment Advisors
Inc. and Morgan Stanley Investment Management
Inc.; formerly Assistant Secretary and Assistant
General Counsel for the Retail Funds.
Stefanie V. Chang (38) Vice President Since December Executive Director of Morgan Stanley & Co.
1221 Avenue of the Americas 1997 Incorporated and Morgan Stanley Investment
New York, NY 10020 Management Inc. and Morgan Stanley Investment
Advisors Inc.; Vice President of the Institutional
Funds (since December 1997) and the Retail
Funds (since July 2003); formerly practiced law
with the New York law firm of Rogers & Wells
(now Clifford Chance US LLP).
Mary E. Mullin (38) Secretary Since June 1999 Executive Director of Morgan Stanley & Co.
1221 Avenue of the Americas Incorporated, Morgan Stanley Investment
New York, NY 10020 Advisors Inc. and Morgan Stanley Investment
Management Inc.; Secretary of the Institutional
Funds (since June 1999) and the Retail Funds
(since July 2003); formerly practiced law with the
New York law firms of McDermott, Will & Emery
and Skadden, Arps, Slate, Meagher & Flom LLP.
</TABLE>
----------
(5) This is the date the Officer began serving the Institutional Funds. Each
Officer serves an indefinite term, until his or her successor is elected.
(6) The dates referenced below indicating commencement of service as an
Officer for the Retail and Institutional Funds reflect the earliest date
the Officer began serving the Retail or Institutional Funds, as
applicable.
22
<TABLE>
POSITION(S)
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF
EXECUTIVE OFFICER REGISTRANT TIME SERVED (5) PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS (6)
--------------------------------- ----------------- ------------------- ------------------------------------------------
James Garrett (36) Treasurer and Treasurer since Head of Global Fund Administration; Executive
1221 Avenue of the Americas Chief Financial February 2002 Director of Morgan Stanley & Co. Incorporated
New York, NY 10020 Officer and Chief and Morgan Stanley Investment Management Inc.;
Financial Officer Treasurer and Chief Financial Officer of the
since July 2003 Institutional Funds; previously with
PriceWaterhouse LLP (now
PricewaterhouseCoopers LLP).
Michael Leary (39) Assistant Since March Assistant Director and Vice President of Fund
JPMorgan Investor Services Co. Treasurer 2003 Administration, JPMorgan Investors Services Co.
73 Tremont Street (formerly Chase Global Funds Services
Boston, MA 02108 Company); formerly Audit Manager at Ernst&
Young, LLP.
</TABLE>
----------
(5) This is the date the Officer began serving the Institutional Funds. Each
Officer serves an indefinite term, until his or her successor is elected.
(6) The dates referenced below indicating commencement of service as an
Officer for the Retail and Institutional Funds reflect the earliest date
the Officer began serving the Retail or Institutional Funds, as
applicable.
For each Trustee, the dollar range of equity securities beneficially owned by
the Trustee in the Fund and in the Family of Investment Companies (Family of
Investment Companies includes all of the registered investment companies
advised by the Adviser, Morgan Stanley Investment Advisors Inc. and Morgan
Stanley AIP GP LP) for the calendar year ended December 31, 2004 is set forth
in the table below.
<TABLE>
AGGREGATE DOLLAR RANGE OF EQUITY SECURITIES
DOLLAR RANGE IN ALL REGISTERED INVESTMENT COMPANIES
OF EQUITY SECURITIES OVERSEEN BY TRUSTEE IN FAMILY OF
IN THE FUND INVESTMENT COMPANIES
NAME OF TRUSTEE (AS OF DECEMBER 31, 2004) (AS OF DECEMBER 31, 2004)
----------------------------- --------------------------- --------------------------------------------
INDEPENDENT:
Michael Bozic ............... None over $100,000
Edwin J. Garn ............... None over $100,000
Wayne E. Hedien ............. None over $100,000
Dr. Manuel H. Johnson ....... None over $100,000
Joseph J. Kearns(1) ......... None over $100,000
Michael E. Nugent ........... None over $100,000
Fergus Reid(1) .............. None over $100,000
INTERESTED:
Charles A. Fiumefreddo ...... None over $100,000
James F. Higgins ............ None over $100,000
</TABLE>
----------
(1) Includes the total amount of compensation deferred by the Trustee at his
election pursuant to a deferred compensation plan. Such deferred
compensation is placed in a deferral account and deemed to be invested in
one or more of the Retail Funds or Institutional Funds (or portfolio
thereof) that are offered as investment options under the plan. As of
December 31, 2004, Messrs. Kearns and Reid had deferred a total of
$584,856 and $667,002, respectively, pursuant to the deferred
compensation plan.
As to each Independent Trustee and his immediate family members, no person
owned beneficially or of record securities in an investment advisor or
principal underwriter of the Fund, or a person (other than a registered
investment company) directly or indirectly controlling, controlled by or under
common control with an investment advisor or principal underwriter of the Fund.
<R>
As of July 19, 2005, the Trustees and officers of the Fund, as a group, owned
less than 1% of the outstanding common stock of each Portfolio of the Fund.
</R>
INDEPENDENT TRUSTEES AND THE COMMITTEES. Law and regulation establish both
general guidelines and specific duties for the Independent Trustees. The
Institutional Funds seek as Independent Trustees
23
individuals of distinction and experience in business and finance, government
service or academia; these are people whose advice and counsel are in demand by
others and for whom there is often competition. To accept a position on the
Institutional Funds' Boards, such individuals may reject other attractive
assignments because the Institutional Funds make substantial demands on their
time. All of the Independent Trustees serve as members of the Audit Committee.
In addition, three Trustees, including two Independent Trustees, serve as
members of the Insurance Committee, and three Independent Trustees serve as
members of the Governance Committee.
The Independent Trustees are charged with recommending to the full Board
approval of management, advisory and administration contracts, Rule 12b-1 plans
and distribution and underwriting agreements, continually reviewing fund
performance, checking on the pricing of portfolio securities, brokerage
commissions, transfer agent costs and performance, and trading among funds in
the same complex; and approving fidelity bond and related insurance coverage
and allocations, as well as other matters that arise from time to time. The
Independent Trustees are required to select and nominate individuals to fill
any Independent Trustee vacancy on the board of any fund that has a Rule 12b-1
plan of distribution.
The Board of Trustees has a separately-designated standing Audit Committee
established in accordance with Section 3(a)(58)(A) of the Securities Exchange
Act of 1934, as amended. The Audit Committee is charged with recommending to
the full Board the engagement or discharge of the Fund's independent registered
public accounting firm; directing investigations into matters within the scope
of the independent registered public accounting firm's duties, including the
power to retain outside specialists; reviewing with the independent registered
public accounting firm the audit plan and results of the auditing engagement;
approving professional services provided by the independent registered public
accounting firm and other accounting firms prior to the performance of the
services; reviewing the independence of the independent registered public
accounting firm; considering the range of audit and non-audit fees; reviewing
the adequacy of the Fund's system of internal controls; and preparing and
submitting Committee meeting minutes to the full Board. The Fund has adopted a
formal, written Audit Committee Charter. The Fund held seven Audit Committee
meetings during its fiscal year ended October 31, 2004.
The members of the Audit Committee of the Fund are currently Michael Bozic,
Edwin J. Garn, Wayne E. Hedien, Dr. Manuel H. Johnson, Joseph J. Kearns,
Michael E. Nugent and Fergus Reid. None of the members of the Fund's Audit
Committee is an "interested person," as defined under the 1940 Act, of any of
the Funds (with such disinterested Trustees being Independent Trustees or
individually, Independent Trustee). Each Independent Trustee is also
"independent" from the Fund under the listing standards of the New York Stock
Exchange, Inc. (NYSE). The current Chairman of the Audit Committee of the Fund
is Dr. Manuel H. Johnson.
The Board of Trustees of the Fund also has a Governance Committee. The
Governance Committee identifies individuals qualified to serve as Independent
Trustees on the Fund's Board and on committees of the Board and recommends such
qualified individuals for nomination by the Fund's Independent Trustees as
candidates for election as Independent Trustees, advises the Fund's Board with
respect to Board composition, procedures and committees, develops and
recommends to the Fund's Board a set of corporate governance principles
applicable to the Fund, monitors and makes recommendations on corporate
governance matters and policies and procedures of the Fund's Board of Trustees
and any Board committees and oversees periodic evaluations of the Fund's Board
and its committees. The members of the Governance Committee of the Fund are
currently Michael Bozic, Edwin J. Garn and Fergus Reid, each of whom is an
Independent Trustee. The current Chairman of the Governance Committee is Fergus
Reid. The Governance Committee held one meeting during its fiscal year ended
October 31, 2004.
The Fund does not have a separate nominating committee. While the Fund's
Governance Committee recommends qualified candidates for nominations as
Independent Trustees, the Board of Trustees of the Fund believes that the task
of nominating prospective Independent Trustees is important enough to require
the participation of all current Independent Trustees, rather than a separate
committee consisting of only certain Independent Trustees. Accordingly, each
current Independent Trustee (Michael Bozic, Edwin J. Garn, Wayne E. Hedien, Dr.
Manuel H. Johnson, Joseph J. Kearns, Michael E. Nugent and Fergus Reid, for all
Funds) participates in the election and nomination of candidates for election
as Independent Trustees for the Fund for which the Independent Trustee serves.
Persons recommended by
24
the Fund's Governance Committee as candidates for the nomination as Independent
Trustees shall possess such knowledge, experience, skills, expertise and
diversity so as to enhance the Board's ability to manage and direct the affairs
and business of the Fund, including, when applicable, to enhance the ability of
committees of the Board to fulfill their duties and/or to satisfy any
independence requirements imposed by law, regulation or any listing
requirements of the NYSE. While the Independent Trustees of the Fund expect to
be able to continue to identify from their own resources an ample number of
qualified candidates for the Fund's Board as they deem appropriate, they will
consider nominations from shareholders to the Board. Nominations from
shareholders should be in writing and sent to the Independent Trustees as
described below.
There were 28 meetings of the Board of Trustees of the Fund held during the
fiscal year ended October 31, 2004. The Independent Trustees of the Fund also
met four times during that period, in addition to the 28 meetings of the full
Board.
Finally, the Board has formed an Insurance Committee to review and monitor the
insurance coverage maintained by the Fund. The Insurance Committee currently
consists of Messrs. Nugent, Fiumefreddo and Hedien. Messrs. Nugent and Hedien
are Independent Trustees. The Insurance Committee held six Insurance Committee
meetings during the fiscal year ended October 31, 2004.
ADVANTAGES OF HAVING THE SAME INDIVIDUALS AS INDEPENDENT TRUSTEES FOR THE
RETAIL FUNDS AND INSTITUTIONAL FUNDS. The Independent Trustees and the funds'
management believe that having the same Independent Trustees for each of the
Retail Funds and Institutional Funds avoids the duplication of effort that
would arise from having different groups of individuals serving as Independent
Trustees for each of the funds or even of sub-groups of funds. They believe
that having the same individuals serve as Independent Trustees of these funds
tends to increase their knowledge and expertise regarding matters which affect
the Fund Complex generally and enhances their ability to negotiate on behalf of
each fund with the funds' service providers. This arrangement also precludes
the possibility of separate groups of Independent Trustees arriving at
conflicting decisions regarding operations and management of the funds and
avoids the cost and confusion that would likely ensue. Finally, having the same
Independent Trustees serve on the boards of the Retail Funds and Institutional
Funds enhances the ability of each fund to obtain, at modest cost to each, the
services of Independent Trustees of the caliber, experience and business acumen
of the individuals who serve as Independent Trustees of the Retail Funds and
Institutional Funds.
TRUSTEE AND OFFICER INDEMNIFICATION. The Fund's Declaration of Trust provides
that no Trustee, officer, employee or agent of the Fund is liable to the Fund
or to a shareholder, nor is any Trustee, officer, employee or agent liable to
any third persons in connection with the affairs of the Fund, except as such
liability may arise from his/her or its own bad faith, willful misfeasance,
gross negligence or reckless disregard of his/her or its duties. It also
provides that all third persons shall look solely to the Fund property for
satisfaction of claims arising in connection with the affairs of the Fund. With
the exceptions stated, the Declaration of Trust provides that a Trustee,
officer, employee or agent is entitled to be indemnified against all liability
in connection with the affairs of the Fund.
SHAREHOLDER COMMUNICATIONS. Shareholders may send communications to the Fund's
Board of Trustees. Shareholders should send communications intended for the
Fund's Board by addressing the communications directly to the Board (or
individual Board members) and/or otherwise clearly indicating in the salutation
that the communication is for the Board (or individual Board members) and by
sending the communication to either the Fund's office or directly to such Board
member(s) at the address specified for each trustee previously noted. Other
shareholder communications received by the Fund not directly addressed and sent
to the Board will be reviewed and generally responded to by management, and
will be forwarded to the Board only at management's discretion based on the
matters contained therein.
COMPENSATION OF TRUSTEES AND OFFICERS.
Each Independent Trustee receives an annual retainer fee of $168,000 for
serving the Retail Funds and Institutional Funds. In addition, each Independent
Trustee receives $2,000 for attending each of the four quarterly board meetings
and two performance meetings that occur each year, so that an Independent
Trustee who attended all six meetings would receive total compensation of
$180,000 for serving the funds.
25
The Chairman of the Audit Committee receives an additional annual retainer fee
of $60,000. Other Committee Chairmen and the Deputy Chairman of the Audit
Committee receive an additional annual retainer fee of $30,000. The aggregate
compensation paid to each Independent Trustee is paid by the Retail Funds and
Institutional Funds, and is allocated on a pro rata basis among each of the
operational funds/portfolios of the Retail Funds and Institutional Funds based
on the relative net assets of each of the funds/portfolios. Mr. Fiumefreddo
receives an annual fee for his service as Chairman of the Board and for
administrative services provided to each Board.
The Fund also reimburses such Trustees for travel and other out-of pocket
expenses incurred by them in connection with attending such meetings. Trustees
and officers of the Fund who are employed by the Adviser or an affiliated
company receive no compensation or expense reimbursement from the Fund for
their services as Trustee.
Effective April 1, 2004, the Fund began a Deferred Compensation Plan (the "DC
Plan"), which allows each Independent Trustee to defer payment of all, or a
portion, of the fees he or she receives for serving on the Board of Trustees
throughout the year. Each eligible Trustee generally may elect to have the
deferred amounts credited with a return equal to the total return on one or
more of the Retail Funds or Institutional Funds (or portfolios thereof) that
are offered as investment options under the Plan. At the Trustee's election,
distributions are either in one lump sum payment, or in the form of equal
annual installments over a period of five years. The rights of an eligible
Trustee and the beneficiaries to the amounts held under the DC Plan are
unsecured and such amounts are subject to the claims of the creditors of the
Fund.
Prior to April 1, 2004, the Fund maintained a similar Deferred Compensation
Plan (the "Prior DC Plan"), which also allowed each Independent Trustee to
defer payment of all, or a portion, of the fees he or she received for serving
on the Board of Trustees throughout the year. The Plan amends and supersedes
the Prior DC Plan and all amounts payable under the Prior DC Plan are now
subject to the terms of the Plan (except for amounts paid during the calendar
year 2004 which remain subject to the terms of the Prior DC Plan).
The following table shows aggregate compensation paid to the Fund's Trustees
from the Fund for the fiscal year ended October 31, 2004.
FUND COMPENSATION
<TABLE>
AGGREGATE
COMPENSATION
NAME OF TRUSTEE: FROM FUND (4)
------------------------------------ --------------
Michael Bozic(1)(3) .................................. $ 5,944
Charles A. Fiumefreddo*(2) ........................... 12,036
Edwin J. Garn(1)(3) .................................. 5,944
Wayne E. Hedien(1)(2) ................................ 5,944
James F. Higgins* .................................... 0
Manuel H. Johnson(1) ................................. 7,950
Joseph J. Kearns(1)(4) ............................... 6,876
Michael E. Nugent(1)(2) .............................. 6,947
Fergus Reid(1)(3) .................................... 6,947
</TABLE>
----------
(*) Messrs. Fiumefreddo and Higgins are deemed to be "interested persons" of
the Fund as that term is defined in the 1940 Act.
(1) Member of the Audit Committee. Dr. Johnson is the Chairman of the Audit
Committee, and Mr. Kearns is the Deputy Chairman of the Audit Committee.
(2) Member of the Insurance Committee. Mr. Nugent is the Chairman of the
Insurance Committee.
(3) Member of the Governance Committee. Mr. Reid is the Chairman of the
Governance Committee.
(4) Includes amounts deferred at the election of Trustees under the DC Plan.
The total amount of deferred compensation (including interest) payable or
accrued by Mr. Kearns is $3,438.
The following table shows aggregate compensation paid to each of the Fund's
Trustees by the Fund Complex (which includes all of the Retail and
Institutional Funds) for the calendar year ended December 31, 2004. Because the
funds in the Fund Complex have different fiscal year ends, the amounts shown in
this table are presented on a calendar-year basis.
26
CASH COMPENSATION FROM FUND COMPLEX
<TABLE>
NUMBER OF PORTFOLIOS TOTAL COMPENSATION
IN THE FUND COMPLEX FROM THE FUND COMPLEX
FROM WHICH THE TRUSTEE PAYABLE TO TRUSTEES
NAME OF TRUSTEE: RECEIVED COMPENSATION (AS OF DECEMBER 31, 2004)
--------------------------------- ------------------------ --------------------------
Michael Bozic ................... 197 $178,000
Charles A. Fiumefreddo* ......... 197 $360,000
Edwin J. Garn ................... 197 $178,000
Wayne E. Hedien ................. 197 $178,000
James F. Higgins* ............... 197 $ 0
Manuel H. Johnson ............... 197 $238,000
Joseph J. Kearns(1)(2) .......... 198 $219,903
Michael E. Nugent ............... 197 $208,000
Fergus Reid(2) .................. 198 $221,376
</TABLE>
----------
(*) Messrs. Fiumefreddo and Higgins are deemed to be "interested persons" of
the Fund as that term is defined in the 1940 Act.
(1) Includes $76,250 of compensation deferred at the election of Trustee under
the DC Plan and Prior DC Plan.
(2) The total amounts of deferred compensation under the DC Plan and the Prior
DC Plan (including interest) payable or accrued by Messrs. Kearns and Reid
are $584,856 and $667,002, respectively.
Prior to December 31, 2003, 49 of the Retail Funds (the "Adopting Funds"), not
including the Fund, had adopted a retirement program under which an Independent
Trustee who retired after serving for at least five years as an Independent
Trustee of any such fund (an "Eligible Trustee") would have been entitled to
retirement payments, based on factors such as length of service, upon reaching
the eligible retirement age. On December 31, 2003, the amount of accrued
retirement benefits for each Eligible Trustee was frozen, and will be payable,
together with a return of 8% per annum, at or following each such Eligible
Trustee's retirement as shown in the table below.
The following table illustrates the retirement benefits accrued to the Fund's
Independent Trustees by the Adopting Funds for the calendar year ended December
31, 2004, and the estimated retirement benefits for the Independent Trustees
from the Adopting Funds for each calendar year following retirement. Messrs.
Kearns and Reid did not participate in the retirement program.
<TABLE>
RETIREMENT BENEFITS ACCRUED ESTIMATED ANNUAL BENEFITS
AS FUND EXPENSES UPON RETIREMENT (1)
NAME OF INDEPENDENT TRUSTEE BY ALL ADOPTING FUNDS FROM ALL ADOPTING FUNDS
------------------------------- ----------------------------- --------------------------
Michael Bozic ................. $19,437 $46,871
Edwin J. Garn ................. $28,779 $46,917
Wayne E. Hedien ............... $37,860 $40,020
Dr. Manuel H. Johnson ......... $19,701 $68,630
Michael E. Nugent ............. $35,471 $61,377
</TABLE>
----------
(1) Total compensation accrued under the retirement plan, together with a
return of 8% per annum, will be paid annually commencing upon retirement
and continuing for the remainder of the Trustee's life.
In addition, as a result of the liquidation of one of the Adopting Funds in
2004, the Fund's Independent Trustees received a lump sum benefit payment as
follows:
<TABLE>
LUMP SUM
NAME OF INDEPENDENT TRUSTEE BENEFIT PAYMENT
------------------------------- ----------------
Michael Bozic ................................... $3,639
Edwin J. Garn ................................... $6,935
Wayne E. Hedien ................................. $5,361
Dr. Manuel H. Johnson ........................... $2,915
Michael E. Nugent ............................... $6,951
</TABLE>
27
INVESTMENT ADVISER
<R>
Morgan Stanley Investment Management Inc. (the "Adviser") is the investment
adviser to the Fund pursuant to an Investment Advisory Agreement (the
"Agreement"). The Adviser is wholly owned by subsidiaries of Morgan Stanley
("Morgan Stanley"). The Adviser, located at 1221 Avenue of the Americas, New
York, New York 10020, conducts a worldwide portfolio management business and
provides a broad range of portfolio management services to customers which
include employee benefit plans, endowment funds, foundations and other
institutional investors in the United States and abroad. As of June 30, 2005,
the Adviser, together with its affiliated asset management companies, had
approximately $418 billion in assets under management with approximately $219
billion in institutional assets.
</R>
Under the Investment Advisory Agreement with the Fund, the Adviser, subject to
the control and supervision of the Fund's Board and in conformance with the
stated investment objectives and policies of the Portfolios, manages the
investment and reinvestment of the assets of the Portfolios. In this regard, it
is the responsibility of the Adviser to supervise investment decisions for the
Portfolios and the placement of the Portfolios' purchase and sales orders for
investment securities by the sub-adviser.
As compensation for the services rendered by the Adviser under the Agreement
and the assumption by the Adviser of the expenses related thereto (other than
the cost of securities purchased for each Portfolio and the taxes and brokerage
commissions, if any, payable in connection with the purchase and/or sale of
such securities), each Portfolio pays the Adviser monthly compensation
calculated daily by applying the annual rate of 0.15% to each Portfolio's daily
net assets.
The Adviser has voluntarily agreed to reduce its advisory fees and/or absorb or
reimburse certain expenses to the extent necessary so that total annual
operating expenses of each Institutional Class, Service Class, Investor Class,
Administrative Class, Advisory Class and Participant Class will not exceed
0.20%, 0.25%, 0.30%, 0.35%, 0.45% and 0.60%, of their average daily net assets,
respectively. This fee and expense waiver may be discontinued at any time.
For the fiscal year ended October 31, 2004, the Fund paid the following
advisory fees:
<TABLE>
ADVISORY FEES PAID ADVISORY FEES WAIVED
-------------------- ---------------------
2004 2004
PORTFOLIO (000) (000)
----------------------------------------- -------------------- ---------------------
Money Market Portfolio .................. 0** $2,036
Prime Portfolio ......................... 0** 5,232
Government Portfolio .................... 0** 92
Government Securities Portfolio ......... -* *
Treasury Portfolio ...................... 0** 72
Treasury Securities Portfolio ........... -* *
Tax-Exempt Portfolio .................... 0** 93
</TABLE>
----------
* Not in operation during period.
<R>
** Waiver in excess of advisory fee owed.
The Fund bears all of its own costs and expenses, including but not limited to:
services of its independent accountants, its administrator and dividend
disbursing and transfer agent, legal counsel, taxes, insurance premiums, costs
incidental to meetings of its shareholders and Trustees, the cost of filing its
registration statements under federal and state securities laws, reports to
shareholders, and custodian fees. These Fund expenses are, in turn, allocated
to each Portfolio, based on their relative net assets. Each Portfolio, bears
its own advisory fees and brokerage commissions and transfer taxes in
connection with the acquisition and disposition of its investment securities.
</R>
The Agreement continues for successive one year periods, only if each renewal
is specifically approved by an in-person vote of the Fund's Board, including
the affirmative votes of a majority of the Trustees who are not parties to the
agreement or "interested persons" (as defined in the 1940 Act) of any such
party at a meeting called for the purpose of considering such approval. In
addition, the question of continuance of the Agreement may be presented to the
shareholders of the Fund; in such event, continuance shall be
28
effected only if approved by the affirmative vote of a majority of the
outstanding voting securities of the Portfolio. If the holders of the Portfolio
fail to approve the Agreement, the Adviser may continue to serve as investment
adviser to each Portfolio which approved the Agreement, and to any Portfolio
which did not approve the Agreement until new arrangements have been made. The
Agreement is automatically terminated if assigned, and may be terminated by the
Portfolio without the payment of any penalty, at any time, (1) by vote of a
majority of the entire Board or (2) by vote of a majority of the outstanding
voting securities of the Portfolio on sixty (60) days' written notice to the
Adviser or (3) by the Adviser without the payment of any penalty, upon 90 days'
written notice to the Fund.
INVESTMENT SUB-ADVISER
Morgan Stanley Investment Advisers Inc. ("MSIA" or the "Sub-Adviser"), with
principal offices at 1221 Avenue of the Americas, New York, New York 10020,
serves as the investment sub-adviser to the Portfolios pursuant to an
investment sub-advisory agreement with the Adviser. As compensation for
managing the day-to-day investments of the Portfolios, the Adviser pays MSIA
40% of the investment advisory fee that the Adviser receives from each
Portfolio (net of applicable fee waivers).
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
<R>
The Fund's policies and procedures with respect to the voting of proxies
relating to the Fund's portfolio securities are attached hereto as Appendix A.
Information on how the Fund voted proxies relating to portfolio securities
during the most recent twelve-month period ended June 30 is available without
charge, upon request, by calling (800) 869-NEWS or by visiting the Mutual Fund
Center on our web site at www.morganstanley.com. This information is also
available on the Securities and Exchange Commission's (the "SEC") web site at
http://www.sec.gov.
</R>
PRINCIPAL UNDERWRITER
Morgan Stanley Distribution, Inc. serves as the Fund's distributor (the
"Distributor"). The principal business address of the Distributor is One Tower
Bridge Road, West Conshohocken, Pennsylvania 19428. The Distributor is a
wholly-owned subsidiary of the Adviser and an indirect subsidiary of Morgan
Stanley.
The Distributor distributes the shares of the Fund pursuant to a distribution
agreement (the "Distribution Agreement"). Under the Distribution Agreement, the
Distributor, as agent of the Fund, agrees to use its best efforts as sole
distributor of the Fund's shares.
The Distribution Agreement continues in effect so long as such continuance is
approved at least annually by the Fund's Board, including a majority of those
Trustees who are parties to such Distribution Agreement nor interested persons
of any such party. The Distribution Agreement provides that the Fund will bear
the costs of the registration of its shares with the SEC and various states and
the printing of its prospectuses, statements of additional information and
reports to shareholders.
Mitchell M. Merrin, Ronald E. Robison and Stefanie V. Chang, directors and/or
officers of the Fund, also serve as directors or officers of the Distributor.
SERVICE AND DISTRIBUTION OF SHARES
ADMINISTRATION PLANS
<R>
The Fund has entered into an Administration Plan with respect to its Service
Class Shares pursuant to which the Service Class Shares will pay the Distributor
a monthly or quarterly administration fee of 0.05% of the average daily net
assets of such class of shares to compensate Service Organizations (defined
below) for providing the following services: processing and issuing
confirmations concerning shareholder orders to purchase, redeem and exchange
shares of such class; receiving and transmitting funds representing the purchase
price or redemption proceeds of such shares; and forwarding shareholder
communications such as proxies and shareholder reports.
</R>
29
<R>
The Fund also has entered into an Administration Plan with respect to its
Investor Class Shares pursuant to which the Investor Class Shares will pay the
Distributor a monthly or quarterly administration fee of 0.10% of the average
daily net assets of such class of shares to compensate Service Organizations
(defined below) for providing the following services: (a) acting, or arranging
for another party to act, as recordholder and nominee of all shares of such
class beneficially owned by shareholders of the Fund; (b) providing
sub-accounting with respect to shares of such class of a Portfolio beneficially
owned by shareholders or the information necessary for sub-accounting, including
establishing and maintaining individual accounts and records with respect to
shares of such class owned by each shareholder; (c) processing and issuing
confirmations concerning shareholder orders to purchase, redeem and exchange
shares of such class; (d) receiving and transmitting funds representing the
purchase price or redemption proceeds of such shares; (e) providing periodic
statements to each shareholder showing account balances and transactions during
the relevant period; (f) processing dividend payments; and (g) forwarding
shareholder communications such as proxies and shareholder reports.
The Fund has entered into an Administration Plan with respect to its
Administrative Class Shares pursuant to which the Administrative Class Shares
will pay the Distributor a monthly or quarterly administration fee of up to
0.15% of the average daily net assets of such class of shares to compensate
Service Organizations (defined below) for providing certain shareholder
administration services. An initial 0.10% of the average daily net assets of the
Administrative Class Shares will be assessed for providing the services listed
in (a) through (g) above; an additional 0.05% of the average daily net assets of
the Administrative Class Shares will be assessed for providing some or all of
the following shareholder administration services: (h) receiving, tabulating and
transmitting proxies; (i) responding to shareholder inquiries relating to such
class of shares or these services; and (j) providing sweep services ("Sweep
Services") which may include: (i) providing the necessary computer hardware and
software which links the service organization to an account management system;
(ii) providing software that aggregates a shareholder's orders and establishes
an order to purchase or redeem shares of a Portfolio based on established target
levels for the shareholder's demand deposit accounts; (iii) providing periodic
statements showing a shareholder's account balance and, to the extent
practicable, integrating such information with other shareholder transactions
otherwise effected through or with the Service Organization; and (iv) furnishing
(either separately or on an integrated basis with other reports sent to a
shareholder by the Service Organization) monthly and year-end statements and
confirmations of purchases, exchanges and redemptions.
</R>
Service Organizations include institutions that (i) act directly or indirectly
as nominees and recordholders of shares of each class for their respective
customers who are or may become beneficial owners of such shares; (ii) provide
services to other Service Organizations intended to facilitate or improve a
Service Organization's services to shareholders of the Fund with respect to the
Portfolios; and/or (iii) perform certain account administration services with
respect to the shareholders pursuant to agreements between the Fund, on behalf
of the respective class of each Portfolio, and such Service Organizations.
For the fiscal year ended October 31, 2004, the Money Market, Government and
Tax-Exempt Portfolios of the Investor Class paid $3,259, $23,633 and $1,658,
respectively, to compensate the Distributor pursuant to the Administration
Plan. These fees were used to reimburse third-parties for various Fund
administration activities performed on behalf of the Fund.
SERVICE AND SHAREHOLDER ADMINISTRATION PLAN
<R>
The Fund has also entered into a Service and Shareholder Administration Plan
with respect to its Advisory Class Shares pursuant to which its Advisory Class
Shares will pay the Distributor a monthly or quarterly administration fee of up
to 0.25% of the average daily net assets of such class of shares, to compensate
Service Organizations (described above) for providing certain shareholder
administration maintenance services. An initial 0.10% of the average daily net
assets of the Advisory Class Shares will be assessed for providing the services
listed in (a) through (g) above; an additional 0.05% of the average daily net
assets of the Advisory Class Shares will be assessed for providing some or all
of the services listed in (h) through (j) above; and an additional 0.10% of the
average daily net assets of the Advisory Class Shares will be assessed for
providing some or all of the following shareholder services: (k) providing
facilities to answer inquiries and respond to correspondence with shareholders
of the Fund and other
</R>
30
<R>
investors about the status of their accounts or about other aspects of the Fund
or the applicable Portfolio; (l) acting as liaison between shareholders and the
Fund, including obtaining information from the Fund and assisting the Fund in
correcting errors and resolving problems; (m) assisting shareholders of the Fund
in completing application forms, selecting dividend and other account options
and opening custody accounts with the Service Organization; and (n) displaying
and making prospectuses available to existing shareholders on the Service
Organization's premises.
</R>
For the fiscal year ended October 31, 2004, the Money Market, Prime,
Government, Treasury and Tax-Exempt Portfolios paid $1,251, $18,362, $4,874,
$11,270 and $4,369, respectively, to compensate the Distributor pursuant to the
Service and Shareholder Administration Plan. These fees were used to reimburse
third-parties for shareholder administration-related and personal and account
maintenance services performed on behalf of the Fund.
<R>
SHAREHOLDER SERVICE PLAN
The Fund has entered into a Shareholder Service Plan and a Distribution Plan
(described below) with respect to its Participant Class Shares. Pursuant to the
Shareholder Service Plan, the Fund's Participant Class Shares will pay the
Distributor a monthly or quarterly service fee of up to 0.25% of the average
daily net assets of such class of shares, to compensate Service Organizations
(described above) for providing, as the case may be, shareholder administration
services. An initial 0.10% of the average daily net assets of the Participant
Class Shares will be assessed for providing the services listed in (a) through
(g) above; an additional 0.05% of the average daily net assets of the
Participant Class Shares will be assessed for providing some or all of the
services listed in (h) through (j) above; and an additional 0.10% of the average
daily net assets of the Participant Class Shares will be assessed for providing
some or all of the services listed in (k) through (n) above.
DISTRIBUTION PLANS
The Fund has also entered into a Distribution Plan with respect to its
Participant Class Shares pursuant to which its Participant Class Shares will pay
the Distributor a monthly or quarterly service fee of 0.15% of the average daily
net assets of such class of shares to compensate Service Organizations for any
activities or expenses primarily intended to result in the sale of Participant
Class Shares, including, but not limited to the following distribution related
services: (i) printing and distribution of sales literature and advertising
materials; and (ii) compensation to broker/dealers who sell Participant Class
Shares. The Fund, on behalf of the Participant Class Shares, has adopted this
Plan in accordance with the provisions of Rule 12b-1 under the 1940 Act which
regulates circumstances under which an investment company may directly or
indirectly bear expenses relating to the distribution of shares.
</R>
Finally, the Fund has entered into a Distribution Plan with respect to its Cash
Management Class Shares pursuant to which its Cash Management Shares will pay
the Distributor a monthly or quarterly distribution fee of up to 0.05% of the
average daily net assets of such class of shares, as compensation for providing
or to compensate financial institutions for providing distribution related
services. Distribution related services for which the Distributor may be
compensated include any activities primarily intended to result in the sale of
Cash Management Class Shares including but not limited to printing and
distribution of sales literature and advertising materials and compensation to
broker/dealers who sell Cash Management Class Shares. The Fund, on behalf of
the Cash Management Class Shares, has adopted this Plan in accordance with the
provisions of Rule 12b-1 under the 1940 Act which regulates circumstances under
which an investment company may directly or indirectly bear expenses relating
to the distribution of shares.
Continuance of each Plan must be approved annually by a majority of the
Trustees of the Fund and the Trustees who are not "interested persons" of the
Fund within the meaning of the 1940 Act. The Plans require that quarterly
written reports of amounts spent under each respective Plan and the purposes of
such expenditures be furnished to and review by Trustees. The Plans may not be
amended to increase materially the amount which may be spent thereunder by each
class without approval by a majority of the outstanding shares of each
respective class. All material amendments of the Plans will require approval by
a majority of the Trustees of the Fund and of the Trustees who are not
"interested persons" of the Fund.
31
<R>
REVENUE SHARING
The Adviser or the Distributor may pay additional compensation, out of their own
funds and not as an expense of the Portfolios, to affiliates, certain insurance
companies and/or other financial intermediaries ("Intermediaries") in connection
with the sale or retention of shares of the Portfolios and/or shareholder
servicing. For example, the Adviser or the Distributor may pay additional
compensation to Intermediaries for the purpose of promoting the sale of
Portfolio shares, maintaining share balances, and/or for sub-accounting,
recordkeeping, administrative or transaction processing services. Such payments
are in addition to any distribution-related or shareholder servicing fees that
may be payable by the Portfolios. The additional payments are generally based on
other measures as determined by the Adviser or the Distributor (e.g. gross sales
or number of accounts).
</R>
The additional payments currently made to certain affiliated entities of the
Adviser or the Distributor ("Affiliated Entities") and Intermediaries include
the following annual amounts paid out of the Adviser's or the Distributor's own
funds;
(1) For sales of shares of the Fund, a range in an amount equal to 0.03%
to 0.10% of the assets in the accounts.
The prospect of receiving, or the receipt of, additional compensation as
described above by Affiliated Entities or other Intermediaries may provide
Affiliated Entities and such Intermediaries and their representatives or
employees with an incentive to favor sales of shares of the Portfolios over
other investment options with respect to which the Affiliated Entity or the
Intermediary does not receive additional compensation (or receives lower levels
of additional compensation). These payment arrangements, however, will not
change the price that an investor pays for shares of a Portfolio. You may wish
to take such payment arrangements into account when considering and evaluating
any recommendations relating to Fund shares. Investors should review carefully
any disclosure provided by an Affiliated Entity or Intermediary as to its
compensation.
FUND ADMINISTRATION
The Adviser also provides administrative services to the Fund pursuant to an
Administration Agreement. The services provided under the Administration
Agreement are subject to the supervision of the officers and the Board of
Trustees of the Fund and include day-to-day administration of matters related
to the corporate existence of the Fund, maintenance of records, preparation of
reports, supervision of the Fund's arrangements with its custodian, and
assistance in the preparation of the Fund's registration statement under
federal laws. The Administration Agreement also provides that the Adviser,
through its agents, will provide dividend disbursing and transfer agent
services to the Fund. For its services under the Administration Agreement, the
Fund pays the Adviser a monthly fee which on an annual basis equals 0.05% of
the average daily net assets of each Portfolio. The Adviser may compensate
other service providers for performing shareholder servicing and administrative
services.
SUB-ADMINISTRATOR. Under an agreement between the Adviser and J.P. Morgan
Investor Services Co. ("J.P. Morgan"), J.P. Morgan, a corporate affiliate of
J.P. Morgan Chase Bank, provides certain administrative services to the Fund.
The Adviser supervises and monitors the administrative services provided by
J.P. Morgan. Their services are also subject to the supervision of the officers
and Board of Trustees of the Fund.
For the fiscal year ended October 31, 2004, the fund paid the following
administrative fees (no administrative fees were waived):
32
<TABLE>
ADMINISTRATIVE
FEES PAID (1)
---------------
2004
PORTFOLIO (000)
----------------------------------------- ---------------
Money Market Portfolio .............................. $ 679
Prime Portfolio ..................................... 1,744
Government Portfolio ................................ 31
Government Securities Portfolio ..................... *
Treasury Portfolio .................................. 24
Treasury Securities Portfolio ....................... *
Tax-Exempt Portfolio ................................ 31
</TABLE>
----------
(1) The figures in this table do not include certain out-of-pocket expenses of
the Administrator that were reimbursed by the Fund.
* Not operational during the period.
OTHER SERVICE PROVIDERS
CUSTODIAN. J.P. Morgan Chase & Co., located at 3 Chase MetroTech Center,
Brooklyn, NY 11245, serves as Custodian for the Fund. The Custodian holds cash,
securities, and other assets of the Fund as required by the 1940 Act.
TRANSFER AND DIVIDEND DISBURSING AGENT. J.P. Morgan, 73 Tremont Street, Boston,
MA 02108-3913, serves as the Funds' Transfer Agent and Dividend Disbursing
Agent.
<R>
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM. Ernst & Young LLP serves as
independent auditor for the Fund and audits the annual financial statements of
the Portfolios of the Fund.
</R>
FUND COUNSEL. Clifford Chance US LLP, located at 31 West 52nd Street, New York,
NY 10019, acts as the Fund's legal counsel.
BROKERAGE TRANSACTIONS
PORTFOLIO TRANSACTIONS
The investment advisory agreement authorizes the Adviser and/or the Sub-Adviser
to select the brokers or dealers that will execute the purchases and sales of
investment securities for the Portfolios and directs the Adviser and/or the
Sub-Adviser to use its best efforts to obtain the best execution with respect
to all transactions for each Portfolio and any other portfolios the Fund may
establish. In so doing, the Adviser and/or the Sub-Adviser will consider all
matters it deems relevant, including the following: the Adviser's and/or
Sub-Adviser's knowledge of negotiated commission rates and spreads currently
available; the nature of the security or instrument being traded; the size and
type of the transaction; the nature and character of the markets for the
security or instrument to be purchased or sold; the desired timing of the
transaction; the activity existing and expected in the market for the
particular security or instrument; confidentiality; the execution, clearance,
and settlement capabilities of the broker or dealer selected and other brokers
or dealers considered; the reputation and perceived soundness of the broker or
dealer selected and other brokers or dealers considered; the Adviser's and/or
Sub-Adviser's knowledge of any actual or apparent operational problems of a
broker or dealer; and the reasonableness of the commission or its equivalent
for the specific transaction.
In seeking to implement the Fund's policies, the Adviser and/or the Sub-Adviser
effects transactions with those brokers and dealers who the Adviser and/or the
Sub-Adviser believe provide the most favorable prices and are capable of
providing efficient executions. If the Adviser and/or the Sub-Adviser believe
the prices and executions are obtainable from more than one broker or dealer,
it may give consideration to placing portfolio transactions with those brokers
and dealers who also furnish research and other services to the Portfolios and
any other portfolios the Fund may establish or the Adviser and/or the
Sub-Adviser. The services may include, but are not limited to, any one or more
of the following: information as to the availability of securities for purchase
or sale; statistical or factual information or opinions pertaining to
investment; wire services; and appraisals or evaluations of portfolio
securities. The information and services received by the Adviser from brokers
and dealers may be of benefit to them and any of their asset management
affiliates in the management of accounts of some of their other clients and may
not in all cases benefit the Fund directly.
33
The Adviser and/or Sub-Adviser is prohibited from directing brokerage
transactions on the basis of the referral of clients or the sale of shares of
advised investment companies. However, the Adviser may place Portfolio orders
with qualified broker-dealers who recommend the Portfolios or who act as agents
in the purchase of shares of the Portfolios for their clients.
The Adviser and certain of its affiliates currently serve as investment adviser
to a number of clients, including other investment companies, and may in the
future act as investment adviser to others. It is the practice of the Adviser
and its affiliates to cause purchase and sale transactions to be allocated among
clients whose assets they manage (including the Fund) in such manner they deem
equitable. In making such allocations among the Fund and other client accounts,
various factors may be considered, including the respective investment
objectives, the relative size of portfolio holdings of the same or comparable
securities, the availability of cash for investment, the size of investment
commitments generally held and the opinions of the persons responsible for
managing the Portfolios and any other portfolios the Fund may establish and
other client accounts. The Adviser and its affiliates may operate one or more
order placement facilities and each facility will implement order allocation in
accordance with the procedures described above. From time to time, each facility
may transact in a security at the same time as other facilities are trading in
that security.
As a direct subsidiary of Morgan Stanley, the Adviser is affiliated with
certain U.S.-registered broker-dealers and foreign broker-dealers
(collectively, the "Affiliated Brokers"). The Adviser may, in the exercise of
its discretion under its investment advisory agreement, effect transactions in
securities or other instruments for the Fund through the Affiliated Brokers.
GENERAL INFORMATION
FUND HISTORY
Morgan Stanley Institutional Liquidity Funds is an open end management
investment company established under Massachusetts law as a Massachusetts
business trust under a Declaration of Trust dated February 13, 2003.
DESCRIPTION OF SHARES AND VOTING RIGHTS
The shareholders of the Fund are entitled to a full vote for each full share of
beneficial interest held. The Fund is authorized to issue an unlimited number
of shares of beneficial interest. All classes of shares of beneficial interest
of each Fund are of $0.01 par value and are equal as to earnings, assets and
voting privileges except that each Class will have exclusive voting privileges
with respect to matters relating to distribution expenses borne solely by such
Class or any other matter in which the interests of one Class differ from the
interests of any other Class. The Service Class, Investor Class, Administrative
Class, Advisory Class and Participant Class bear expenses related to
compensating service organizations who provide personal and account maintenance
services and administrative services to shareholders and distribution related
services to the Fund, as the case may be (see, "Service and Distribution of
Shares").
The Fund's Declaration of Trust permits the Trustees to authorize the creation
of additional portfolios of shares (the proceeds of which would be invested in
separate, independently managed portfolios) and additional classes of shares
within any portfolio. The Trustees have not presently authorized any such
additional series of classes of shares other than as set forth in the
Prospectuses.
The Fund is not required to hold annual meetings of shareholders and in
ordinary circumstances the Fund does not intend to hold such meetings. The
Trustees may call special meetings of shareholders for action by shareholder
vote as may be required by the 1940 Act or the Declaration of Trust. Under
certain circumstances, the Trustees may be removed by the actions of the
Trustees. In addition, under certain circumstances, the shareholders may call a
meeting to remove the Trustees, and the Fund is required to provide assistance
in communicating with shareholders about such a meeting. The voting rights of
shareholders are not cumulative, so that holders of more than 50 percent of the
shares voting can, if they choose, elect all Trustees being selected, while the
holders of the remaining shares would be unable to elect any Trustees.
34
Under Massachusetts law, shareholders of a business trust may, under certain
limited circumstances, be held personally liable as partners for the
obligations of each Fund. However, each Declaration of Trust contains an
express disclaimer of shareholder liability for acts or obligations of the
Fund, requires that notice of such Fund obligations include such disclaimer,
and provides for indemnification out of the Fund's property for any shareholder
held personally liable for the obligations of the Fund. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which a Fund itself would be unable to meet its
obligations. Given the above limitations on shareholder personal liability, and
the nature of the Fund's assets and operations, the possibility of a Fund being
unable to meet its obligations is remote and thus, in the opinion of
Massachusetts counsel to the Funds, the risk to the Fund's shareholders of
personal liability is remote.
The Trustees themselves have the power to alter the number and the terms of
office of the Trustees (as provided for in the Declaration of Trust), and they
may at any time lengthen or shorten their own terms or make their terms of
unlimited duration and appoint their own successors, provided that always at
least a majority of the Trustees has been elected by the shareholders of the
respective Fund.
DIVIDENDS AND DISTRIBUTIONS
The Fund's policy is to distribute substantially all of the Portfolios' net
investment income, if any, together with any net realized capital gains in the
amount and at the times that will avoid both income (including capital gains)
taxes on it and the imposition of the federal excise tax on undistributed
income and capital gains. The amounts of any income dividends or capital gains
distributions cannot be predicted.
Unless the shareholder elects otherwise in writing, all dividends and
distributions are automatically received in additional shares of the Portfolios
at net asset value (as of the business day following the record date). This
will remain in effect until the Fund is notified by the shareholder in writing
at least three days prior to the record date that either the Income Option
(income dividends in cash and capital gains distributions in additional shares
at net asset value) or the Cash Option (both income dividends and capital gain
distributions in cash) has been elected. An account statement is sent to
shareholders whenever a dividend or distribution is paid.
The Portfolios and any other portfolios which the Fund may establish from time
to time are treated as a separate entity (and hence, as a separate "regulated
investment company") for federal tax purposes. Any net capital gains recognized
by a Portfolio are distributed to its investors without need to offset (for
federal income tax purposes) such gains against any net capital losses of
another Portfolio.
SPECIAL CONSIDERATIONS FOR THE PORTFOLIO. The Portfolios declare income
dividends at approximately 4:00 p.m. on each business day based on their
respective estimated daily net income to shareholders of record. To the extent
actual income is greater or lesser than the estimated amount, adjustments will
be made to the following business day's income dividends. Shareholders of
record are those shareholders who have submitted a purchase order prior to the
following times for each Portfolio and who have submitted payment for their
shares prior to the close of Fed wire that day: for the Money Market Portfolio,
Prime Portfolio, Government Portfolio and Treasury Portfolio -- 5.00 p.m.
Eastern Time; for the Government Securities Portfolio and Treasury Securities
Portfolio -- 3:00 p.m. Eastern Time; and for the Tax-Exempt Portfolio -- 2:00
p.m. Eastern Time. Shareholders who redeem prior to such respective times are
not entitled to dividends for that day. Dividends declared for Saturdays,
Sundays and holidays are payable to shareholders of record as of such
respective times on the preceding business day on which the Portfolio was open
for business. These dividends accrue daily and are distributed on the last
business day of each month. Net realized short-term capital gains, if any, of
the Portfolios will be distributed whenever the Trustees determine that such
distributions would be in the best interest of shareholders, but at least once
a year. The Portfolios do not expect to realize any long-term capital gains.
Should any such gains be realized, they will be distributed annually.
TAX CONSIDERATIONS
The Portfolios and any other portfolios which the Fund may establish from time
to time each is or will be treated as a separate entity for federal income tax
purposes and intends to qualify for the special tax
35
treatment afforded regulated investment companies. As such, each Portfolio will
not be subject to federal income tax to the extent it distributes net investment
company taxable income and net capital gains to shareholders. The Fund will
notify you annually as to the tax classification of all distributions.
The Portfolios intend to declare and pay dividends and capital gain
distributions so as to avoid imposition of the federal excise tax. To do so,
the Portfolios expect to distribute an amount at least equal to (i) 98% of its
calendar year ordinary income, (ii) 98% of its capital gains net income for the
one-year period ending October 31st, and (iii) 100% of any undistributed
ordinary and capital gain net income from the prior year.
In order for a Portfolio to continue to qualify for federal income tax treatment
as a regulated investment company, at least 90% of its gross income for a
taxable year must be derived from qualifying income including, but not limited
to, dividends, interest, income derived from loans of securities, and gains from
the sale of securities or foreign currencies, or other income derived with
respect to its business of investing in such securities or currencies. It is
anticipated that any net gain realized from the closing out of futures contracts
will be considered gain from the sale of securities and therefore be qualifying
income for purposes of the 90% requirement. In addition, (i) the Portfolio must
distribute annually to its shareholders at least the sum of 90% of its net
interest income excludable from gross income and 90% of its investment company
taxable income; and (ii) at the close of each quarter of the Portfolio's taxable
year, the Portfolio must diversify its assets, including the requirement that
(a) at least 50% of its total assets must be represented by cash and cash items,
U.S. government securities, securities of other regulated investment companies
and such other securities with limitations, and (b) at the close of each quarter
of the Portfolio's taxable year, not more than 25% of the value of its assets
may be invested in securities of any one issuer, or of two or more issuers
engaged in same or similar businesses if the Portfolio owns at least 20% of the
voting power of such issuers. Pursuant to recently enacted legislation, for
taxable years of a regulated investment company beginning after October 22,
2004, net income derived from an interest in a "qualified publicly traded
partnership," as defined in the Internal Revenue Code, will be treated as
qualifying income. In addition, the outstanding voting securities of any issuer
includes the equity securities of a qualified publicly traded partnership, and
no more than 25% of the value of a regulated investment company's total assets
may be invested in the securities of one or more qualified publicly traded
partnerships.
Each Portfolio will distribute to shareholders annually any net capital gains
which have been recognized for federal income tax purposes including unrealized
gains at the end of the Portfolio's fiscal year on certain futures
transactions. Such distributions will be combined with distributions of capital
gains realized on the Portfolio's other investments and shareholders will be
advised of the nature of the payments.
The Fund is required by federal law to withhold 28% of reportable payments
(which may include dividends and capital gains distributions) paid to
shareholders (as of the date of this Prospectus is 28%). In order to avoid this
backup withholding requirement, you must certify on your Account Registration
Form that your Social Security Number or Taxpayer Identification Number is
correct, and that you are not subject to backup withholding.
Shareholders who are not citizens or residents of the United States and certain
foreign entities may be subject to withholding of United States tax on
distributions made by a Portfolio of investment income and short-term capital
gains. Under recently enacted legislation, dividends paid by a Portfolio to
shareholders who are nonresident aliens or foreign entities that are derived
from short-term capital gains and qualifying net interest income (including
income from original issue discount and market discount), and that are properly
designated by the Portfolio as "interest-related dividends" or "short-term
capital gain dividends," will generally not be subject to U.S. withholding tax,
provided that the income would not be subject to U.S. federal income tax if
earned directly by the foreign shareholder. In addition, distributions of the
Fund attributable to gains from sales or exchanges of "U.S. real property
interests," as defined in the Internal Revenue Code (including gains on the
sale or exchange of shares in certain U.S. real property holding corporations)
may be subject to U.S. withholding tax and may give rise to an obligation on
the part of the foreign stockholder to file a U.S. federal income tax return.
Also, such gain may be subject to a 30% branch profits tax in the hands of a
foreign stockholder that is a corporation. These provisions generally would
apply to distributions with respect to taxable years of a Portfolio beginning
after December 31, 2004 and before January 1, 2008.
36
Although income received on direct U.S. Government obligations is taxable at
the Federal level, such income may be exempt from state tax, depending on the
state, when received by a shareholder. Each Portfolio will inform shareholders
annually of the percentage of income and distributions derived from direct U.S.
Government obligations. Shareholders should consult their tax advisers to
determine whether any portion of dividends received from the Portfolio is
considered tax exempt in their particular states.
Any gain or loss recognized on a sale or redemption of shares of a Portfolio by
a shareholder who is not a dealer in securities will generally be treated as
long-term capital gain or loss if the shares have been held for more than twelve
months and short-term if for twelve months or less. Under current law, the
maximum rate on long-term capital gains available to non-corporate shareholders
generally is 15%. Without future congressional action, the maximum tax rate on
long-term capital would return to 20% in 2009. If shares held for six months or
less are sold or redeemed for a loss, two special rules apply: First, if shares
on which a net capital gain distribution has been received are subsequently sold
or redeemed, and such shares have been held for six months or less, any loss
recognized will be treated as long-term capital loss to the extent of the
long-term capital gain distributions. Second, any loss recognized by a
shareholder upon the sale or redemption of shares of a municipal portfolio fund
held for six months or less will be disallowed to the extent of any
exempt-interest dividends received by the Shareholder with respect to such
shares.
Gain or loss on the sale or redemption of shares of a Portfolio is measured by
the difference between the amount received and the tax basis of the shares.
Shareholders should keep records of investments made (including shares acquired
through reinvestment of dividends and distributions) so they can compute the
tax basis of their shares. Under certain circumstances a shareholder may
compute and use an average cost basis in determining the gain or loss on the
sale or redemption of shares.
Exchanges of shares of a Portfolio for shares of another Portfolio are also
subject to similar tax treatment. Such an exchange is treated for tax purposes
as a sale of the original shares in the first portfolio, followed by the
purchase of shares in the second portfolio.
If a shareholder realizes a loss on the redemption or exchange of a Portfolio's
shares and reinvests in that Portfolio's shares within 30 days before or after
the redemption or exchange, the transactions may be subject to the "wash sale"
rules, resulting in a postponement of the recognition of such loss for tax
purposes. The ability to deduct capital losses may be subject to other
limitations under the Internal Revenue Code.
<R>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of July 11, 2005, the following represents persons or entities that own of
record or beneficially, more than 5% of the shares of any Class of the
following Portfolio's outstanding shares:
</R>
<R>
<TABLE>
------------------------------------------------------------------------------------
PARTICIPANT CLASS
------------------------------------------------------------------------------------
NUMBER OF
PORTFOLIO NAME AND ADDRESS SHARES % OF CLASS
------------------------------------------------------------------------------------
Money Market Morgan Stanley Investment Management 100,000 100.00%
------------------------------------------------------------------------------------
Prime Morgan Stanley Investment Management 100,000 100.00%
------------------------------------------------------------------------------------
Government Morgan Stanley Investment Management 100,000 100.00%
------------------------------------------------------------------------------------
Treasury Morgan Stanley Investment Management 100,000 100.00%
------------------------------------------------------------------------------------
Tax-Exempt Morgan Stanley Investment Management 100,000 98.49%
------------------------------------------------------------------------------------
</TABLE>
</R>
37
<R>
<TABLE>
------------------------------------------------------------------------------------------
ADVISORY CLASS
------------------------------------------------------------------------------------------
NUMBER OF
PORTFOLIO NAME AND ADDRESS SHARES % OF CLASS
------------------------------------------------------------------------------------------
Money Market Hare & Co
Stif Dept
111 Sanders Creek Pky
East Syracuse NY 13057 1,582,673.62 99.97%
------------------------------------------------------------------------------------------
Prime SEI Trust Company
Morgan Stanley Stable Value Fund
Attn John Hemak
One Freedom Valley Dr
Oaks PA 19456 27,832,392.78 68.97%
------------------------------------------------------------------------------------------
Prime Hare & Co
Stif Dept
111 Sanders Creek Pky
East Syracuse NY 13057 10,322,978.95 25.58%
------------------------------------------------------------------------------------------
Prime Sceptor Industries
Suite 101
8301 State Line Road
Kansas City MO 64114 2,039,156.30 5.05%
------------------------------------------------------------------------------------------
Government US Title As Escrow For
Caplaco Nineteen Inc
Attn Stephanie Gray 8137 Forsyth Blvd
Clayton MO 63105 14,932,130.20 38.90%
------------------------------------------------------------------------------------------
Government Joseph B Gibson & Jacqulyn C Gibson
Tr Ua 2-24-82 Joseph B Gibson Trust
23 Lemans Court
Prarie Village KS 66208 7,656,834.44 19.95%
------------------------------------------------------------------------------------------
Government JE Dunn Construction Co
Attn Gordon E Lansford III
929 Holmes St
Kansas City MO 64106 4,310,000.00 11.23%
------------------------------------------------------------------------------------------
Government Starlight Theatre Association
Attn Brenda Mortensen
6601 Swope Parkway
Kansas City MO 64132-1276 3,006,906.70 7.83%
------------------------------------------------------------------------------------------
Government Dunn Industries Inc
Attn Gordon E Lansford III
929 Holmes St
Kansas City MO 64106 2,811,925.12 7.33%
------------------------------------------------------------------------------------------
Government KUMC Research Institute
Attn Steven P Geiger
3901 Rainbow Blvd
MS 1039
Kansas City KS 66160 2,458,621.24 6.41%
------------------------------------------------------------------------------------------
Treasury Community Health Group
Attn Michael Kerr
1001 East 101st Terrace
Suite 300
Kansas City MO 64131 3,200,194.71 67.13%
------------------------------------------------------------------------------------------
</TABLE>
</R>
38
<R>
<TABLE>
------------------------------------------------------------------------------------------
ADVISORY CLASS
------------------------------------------------------------------------------------------
NUMBER OF
PORTFOLIO NAME AND ADDRESS SHARES % OF CLASS
------------------------------------------------------------------------------------------
Treasury EBS Building L.L.C.
Attn Julaine Lampton
C/O FTI Consulting
One Atlantic Center
1201 W Peachtree St Suite 500
Atlanta GA 30309 1,345,200.62 28.22%
------------------------------------------------------------------------------------------
Tax-Exempt Tracker Marine LLC
Attn Mary Thompson
2500 E Kearney
Springfield MO 65898 22,316,152.04 49.21%
------------------------------------------------------------------------------------------
Tax-Exempt JE Dunn Construction Co
Attn Gordon E Lansford III
929 Holmes St
Kansas City MO 64106 21,211,022.04 46.77%
------------------------------------------------------------------------------------------
</TABLE>
</R>
<R>
<TABLE>
------------------------------------------------------------------------------------------
INVESTOR CLASS
------------------------------------------------------------------------------------------
NUMBER OF
PORTFOLIO NAME AND ADDRESS SHARES % OF CLASS
------------------------------------------------------------------------------------------
Money Market Morgan Stanley Investment
Management
Attn Peter Gabriele-
Controllers
195 Broadway 18th Floor
New York NY 10007 100,000 100.00%
------------------------------------------------------------------------------------------
Prime Worldspan Limited
Partnership
Attn Melody Henley
M/STP N20C1
300 Galleria Parkway NW
Atlanta GA 30339 13,027,222.90 99.24%
------------------------------------------------------------------------------------------
Government Argus Health Systems Inc
General Depository A/C
Attn Eric Mitchell Fin & Control
1300 Washington St
Kansas City MO 64105-1433 129,771,146.00 52.81%
------------------------------------------------------------------------------------------
Government Suntrust Bank As Trustee
For Reunion West
CDD Series 2004
Attn Stacey Johnson
225 East Robinson Street
Suite 250
Orlando FL 32801 15,827,083.56 6.44%
------------------------------------------------------------------------------------------
Treasury Morgan Stanley Investment
Management
Attn Peter Gabriele-
Controllers
195 Broadway 18th Floor
New York NY 10007 100,000 100.00%
------------------------------------------------------------------------------------------
</TABLE>
</R>
39
<R>
<TABLE>
------------------------------------------------------------------------------------------
INVESTOR CLASS
------------------------------------------------------------------------------------------
NUMBER OF
PORTFOLIO NAME AND ADDRESS SHARES % OF CLASS
------------------------------------------------------------------------------------------
Tax-Exempt Morgan Stanley Investment
Management
Attn Peter Gabriele-
Controllers
195 Broadway 18th Floor
New York NY 10007 104,380 100.00%
------------------------------------------------------------------------------------------
</TABLE>
</R>
<R>
<TABLE>
------------------------------------------------------------------------------------------
INSTITUTIONAL CLASS
------------------------------------------------------------------------------------------
NUMBER OF
PORTFOLIO NAME AND ADDRESS SHARES % OF CLASS
------------------------------------------------------------------------------------------
Money Market Bear Stearns Securities Corp
FBO Delphi Asset Mgt Corp
Attn Denise Dilorenzo
1 Microtech Center North
Brooklyn NY 11021 276,000,000.00 6.78%
------------------------------------------------------------------------------------------
Money Market Chicago Mercantile Exchange Co
Firm Account
Attn Tim Doar
20 S Wacker Drive
Chicago IL 60606 271,791,385.49 6.68%
------------------------------------------------------------------------------------------
</TABLE>
</R>
<R>
<TABLE>
------------------------------------------------------------------------------------------
INSTITUTIONAL CLASS
------------------------------------------------------------------------------------------
NUMBER OF
PORTFOLIO NAME AND ADDRESS SHARES % OF CLASS
------------------------------------------------------------------------------------------
Money Market Morgan Stanley & Co Inc
901 South Bond Street
6th Floor
Baltimore MD 21231 262,592,620.51 6.45%
------------------------------------------------------------------------------------------
Money Market Morgan Stanley & Co Inc
901 South Bond Street
6th Floor
Baltimore MD 21231 213,654,784.68 5.25%
------------------------------------------------------------------------------------------
Money Market Morgan Stanley & Co Inc
901 South Bond Street
6th Floor
Baltimore MD 21231 212,671,239.69 5.23%
------------------------------------------------------------------------------------------
Prime Hare & Co
Stif Dept
111 Sanders Creek Pky
East Syracuse NY 13057 1,832,406,328.46 15.57%
------------------------------------------------------------------------------------------
Prime Mellon Bank NA
Attn Pam Palmer
One Mellon Financial Center
500 Grant Street 151-0440
Pittsburgh PA 15258 1,325,973,476.46 11.27%
------------------------------------------------------------------------------------------
Prime Harris Nesbitt Corp Brkr & Svc Agt &
Harris Bank Omnibus Cust/Sub-Svc Agt
For Harris Fcm Client Grp
Attn Mutual Fund Unit
111 West Monroe Lower Level East
Chicago IL 60603 911,629,200.00 7.75%
------------------------------------------------------------------------------------------
Prime Brown Brothers Harriman & Co
Attn Graeme Henderson
140 Broadway
New York NY 10005 742,795,733.08 6.31%
------------------------------------------------------------------------------------------
</TABLE>
</R>
40
<R>
<TABLE>
------------------------------------------------------------------------------------------
INSTITUTIONAL CLASS
------------------------------------------------------------------------------------------
NUMBER OF
PORTFOLIO NAME AND ADDRESS SHARES % OF CLASS
------------------------------------------------------------------------------------------
Prime Chicago Mercantile Exchange Co
Customer Segregated Account
Attn Tim Doar
20 S Wacker Drive
Chicago IL 60606 731,608,911.68 6.22%
------------------------------------------------------------------------------------------
Prime Chicago Mercantile Exchange Co
Firm Account
Attn Tim Doar
20 S Wacker Drive
Chicago IL 60606 630,507,076.80 5.36%
------------------------------------------------------------------------------------------
Government Mellon Bank NA
Attn Pam Palmer
One Mellon Financial Center
500 Grant Street 151-0440
Pittsburgh PA 15258 730,455,042.33 47.50%
------------------------------------------------------------------------------------------
Government Morgan Stanley & Co
Incorporated
Secured Amount Account
Pursuant To CFTC Rule 30 7
Attn Dion Gamble
1 Pierrepont Plaza
Brooklyn NY 11201 250,000,000.00 16.26%
------------------------------------------------------------------------------------------
Government Morgan Stanley & Co
Incorporated
Commodity Customer Funds
Segregated Pursuant To CEA 4d
Attn Dion Gamble
1 Pierrepont Plaza
Brooklyn NY 11201 100,000,000.00 6.50%
------------------------------------------------------------------------------------------
Government Hare & Co
Stif Dept
111 Sanders Creek Pky
East Syracuse NY 13057
81,878,782.21 5.32%
------------------------------------------------------------------------------------------
Treasury Morgan Stanley & Co Inc
901 South Bond Street
6th Floor
Baltimore MD 21231 18,012,914.78 22.18%
------------------------------------------------------------------------------------------
Treasury Morgan Stanley & Co Inc
901 South Bond St
6th Floor
Baltimore MD 21231 14,555,301.99 17.93%
------------------------------------------------------------------------------------------
Treasury Morgan Stanley & Co Inc
901 South Bond Street
6th Floor
Baltimore MD 21231 13,641,277.87 16.80%
------------------------------------------------------------------------------------------
Treasury Mellon Financial Markets
FBO United Health Group
Attn Jeff Recker 014
One Mellon Center Suite 0475
Pittsburgh PA 15258 8,000,752.08 9.85%
------------------------------------------------------------------------------------------
</TABLE>
</R>
41
<R>
<TABLE>
------------------------------------------------------------------------------------------
INSTITUTIONAL CLASS
------------------------------------------------------------------------------------------
NUMBER OF
PORTFOLIO NAME AND ADDRESS SHARES % OF CLASS
------------------------------------------------------------------------------------------
Treasury Morgan Stanley & Co Inc
901 South Bond Street
6th Floor
Baltimore MD 21231 7,943,251.10 9.78%
------------------------------------------------------------------------------------------
Treasury Morgan Stanley & Co Inc
901 South Bond Street
6th Floor
Baltimore MD 21231 6,351,133.15 7.82%
------------------------------------------------------------------------------------------
Treasury Morgan Stanley & Co Inc
901 South Bond Street
6th Floor
Baltimore MD 21231 4,678,899.31 5.76%
------------------------------------------------------------------------------------------
Treasury Morgan Stanley & Co Inc
901 South Bond St
6th Floor
Baltimore MD 21231 4,278,582.70 5.27%
------------------------------------------------------------------------------------------
Tax-Exempt Mellon Bank NA
Attn Pam Palmer
One Mellon Financial Center
500 Grant Street 151-0440
Pittsburgh PA 15258 53,839,304.13 14.45%
------------------------------------------------------------------------------------------
Tax-Exempt Office Depot Inc
Attn Michael Filon
2200 Old Germantown Rd Mc Accm
Delray Beach FL 33445 50,007,757.70 13.43%
------------------------------------------------------------------------------------------
Tax-Exempt CH Energy Group Inc
Attn William J Kyle
284 South Ave
Poughkeepsie NY 12601-4879 42,738,974.68 11.47%
------------------------------------------------------------------------------------------
Tax-Exempt Morgan Stanley & Co Inc
901 S Bond St 6th Floor
Baltimore MD 21231 40,233,567.85 10.80%
------------------------------------------------------------------------------------------
Tax-Exempt PDI Investment Co Inc
Attn Delisle Callander
1 Route 17 South
Saddle River Executive Center
Saddle River NJ 07458-4812 34,853,120.23 9.36%
------------------------------------------------------------------------------------------
Tax-Exempt Band & Co
C/O US Bank
PO Box 1787
Milwaukee WI 53201 25,000,000.00 6.71%
------------------------------------------------------------------------------------------
Tax-Exempt Morgan Stanley & Co Inc
901 S Bond St 6th Floor
Baltimore MD 21231 24,589,128.10 6.60%
------------------------------------------------------------------------------------------
Tax-Exempt Morgan Stanley & Co Inc
901 S Bond St 6th Floor
Baltimore MD 21231 24,197,785.14 6.50%
------------------------------------------------------------------------------------------
Tax-Exempt Thomas J Gahan
Dolores Rice Gahan Jtwros
75 Birch Lane
Manhasset NY 11030 18,740,921.32 5.03%
------------------------------------------------------------------------------------------
</TABLE>
</R>
42
<R>
<TABLE>
------------------------------------------------------------------------------------------
SERVICE CLASS
------------------------------------------------------------------------------------------
NUMBER OF
PORTFOLIO NAME AND ADDRESS SHARES % OF CLASS
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
Money Market Morgan Stanley Investment
Management
Attn Peter Gabriele-
Controllers
195 Broadway 18th Floor
New York NY 10007 100,000 100.00%
------------------------------------------------------------------------------------------
Prime Morgan Stanley Investment
Management
Attn Peter Gabriele-
Controllers
195 Broadway 18th Floor
New York NY 10007 100,000 100.00%
------------------------------------------------------------------------------------------
Government Omahasteaks.Com Inc
11030 O St
Omaha NE 68137 4,177,970.39 56.58%
------------------------------------------------------------------------------------------
Government Omaha Steaks Inc
11030 O St
Omaha NE 68137 3,087,241.24 41.81%
------------------------------------------------------------------------------------------
Treasury Morgan Stanley Investment
Management
Attn Peter Gabriele-
Controllers
195 Broadway 18th Floor
New York NY 10007 100,000 100.00%
------------------------------------------------------------------------------------------
Tax-Exempt Morgan Stanley Investment
Management
Attn Peter Gabriele-
Controllers
195 Broadway 18th Floor
New York NY 10007 100,000 100.00%
------------------------------------------------------------------------------------------
</TABLE>
</R>
<R>
<TABLE>
------------------------------------------------------------------------------------------
ADMINISTRATIVE CLASS
------------------------------------------------------------------------------------------
NUMBER OF
PORTFOLIO NAME AND ADDRESS SHARES % OF CLASS
------------------------------------------------------------------------------------------
Money Market Morgan Stanley Investment
Management
Attn Peter Gabriele-
Controllers
195 Broadway 18th Floor
New York NY 10007 100,000 100.00%
------------------------------------------------------------------------------------------
Prime Morgan Stanley Investment
Management
Attn Peter Gabriele-
Controllers
195 Broadway 18th Floor
New York NY 10007 100,000 100.00%
------------------------------------------------------------------------------------------
Government Lockton Companies Inc
Attn Mindy Smith
444 W 47th Street Suite 900
Kansas City MO 64112-1906 5,351,815.44 47.47%
------------------------------------------------------------------------------------------
</TABLE>
</R>
43
<R>
<TABLE>
------------------------------------------------------------------------------------------
ADMINISTRATIVE CLASS
------------------------------------------------------------------------------------------
NUMBER OF
PORTFOLIO NAME AND ADDRESS SHARES % OF CLASS
------------------------------------------------------------------------------------------
Government Lockton Management LLC
Central Treasury
Attn Mindy Smith
444 W 47th Street Suite 900
Kansas City MO 64112-1906 2,538,299.86 22.51%
------------------------------------------------------------------------------------------
Government Lockton Companies Inc
Lockton Benefit Company
Attn Mindy Smith
444 W 47th Street Suite 900
Kansas City MO 64112-1906 1,998,123.36 17.72%
------------------------------------------------------------------------------------------
Government The Lockton Family Foundation
Attn Cheryl Lockton
444 W 47th Street Suite 900
Kansas City MO 64112-1906 1,263,851.55 11.21%
------------------------------------------------------------------------------------------
Treasury Morgan Stanley Investment
Management
Attn Peter Gabriele-
Controllers
195 Broadway 18th Floor
New York NY 10007 100,000 100.00%
------------------------------------------------------------------------------------------
Tax-Exempt Morgan Stanley Investment
Management
Attn Peter Gabriele-
Controllers
195 Broadway 18th Floor
New York NY 10007 100,000 100.00%
------------------------------------------------------------------------------------------
</TABLE>
</R>
<R>
The persons listed above as owning 25% or more of the outstanding shares of a
Portfolio may be presumed to "control" (as that term is defined in the 1940
Act) such Portfolio. As a result, those persons would have the ability to vote
a majority of the shares of the Portfolios on any matter requiring the approval
of shareholders of such Portfolios.
</R>
As of the date of this Statement of Additional Information, the aggregate
number of shares of beneficial interest of the Portfolios owned by the Fund's
officers and Trustees as a group was less than 1% of each Portfolio's shares of
beneficial interest outstanding.
44
PERFORMANCE INFORMATION
The aggregate total return and average annual total return of the Institutional
Class Shares of each Portfolio for the periods noted is set forth below:
<R>
<TABLE>
AVERAGE
AGGREGATE ANNUALIZED
AGGREGATE TOTAL RETURN TOTAL RETURN
TOTAL RETURN FISCAL YEAR SINCE
PORTFOLIO 11/1/04 -- 4/30/05 2004 INCEPTION INCEPTION DATE
-------------------------------- -------------------- -------------- ------------- ---------------
Money Market Portfolio ......... 1.15% 0.95% 1.86% 02/02/04
Prime Portfolio ................ 1.16% 0.94% 1.86% 02/02/04
Government Portfolio ........... 1.19% 0.38% 2.34% 08/09/04
Treasury Portfolio ............. 1.11% 0.36% 2.22% 08/09/04
Tax-Exempt Portfolio ........... 0.91% 0.84% 1.56% 02/02/04
</TABLE>
</R>
<R>
The aggregate total return and average annual total return of the Service Class
Shares of each Portfolio for the periods noted is set forth below:
</R>
<R>
<TABLE>
AVERAGE
AGGREGATE ANNUALIZED
AGGREGATE TOTAL RETURN TOTAL RETURN
TOTAL RETURN FISCAL YEAR SINCE
PORTFOLIO 11/1/04 -- 4/30/05 2004 INCEPTION INCEPTION DATE
-------------------------------- -------------------- -------------- ------------- ---------------
Money Market Portfolio ......... 1.13% * 2.47% 11/01/04
Prime Portfolio ................ 1.14% * 2.49% 11/01/04
Government Portfolio. .......... 1.16% * 2.53% 11/01/04
Treasury Portfolio ............. 1.09% * 2.39% 11/01/04
Tax-Exempt Portfolio ........... 0.89% * 1.99% 11/01/04
</TABLE>
</R>
<R>
* Not in operation during period.
</R>
The aggregate total return and average annual total return of the Investor
Class Shares of each Portfolio for the periods noted is set forth below:
<R>
<TABLE>
AVERAGE
AGGREGATE ANNUALIZED
AGGREGATE TOTAL RETURN TOTAL RETURN
TOTAL RETURN FISCAL YEAR SINCE
PORTFOLIO 11/1/04 -- 4/30/05 2004 INCEPTION INCEPTION DATE
-------------------------------- -------------------- -------------- ------------- ---------------
Money Market Portfolio ......... 1.10% * 2.42% 11/01/04
Prime Portfolio ................ 1.11% * 2.44% 11/01/04
Government Portfolio ........... 1.14% 0.35% 2.23% 08/09/04
Treasury Portfolio ............. 1.06% * 2.34% 11/01/04
Tax-Exempt Portfolio ........... 0.86% 0.45% 1.64% 06/08/04
</TABLE>
</R>
<R>
* Not in operation during period.
The aggregate total return and average annual total return of the
Administrative Class Shares of each Portfolio for the periods noted is set
forth below:
</R>
<R>
<TABLE>
AVERAGE
AGGREGATE ANNUALIZED
AGGREGATE TOTAL RETURN TOTAL RETURN
TOTAL RETURN FISCAL YEAR SINCE
PORTFOLIO 11/1/04 -- 4/30/05 2004 INCEPTION INCEPTION DATE
-------------------------------- -------------------- -------------- ------------- ---------------
Money Market Portfolio ......... 1.08% * 2.37% 11/01/04
Prime Portfolio ................ 1.09% * 2.39% 11/01/04
Government Portfolio ........... 1.11% * 2.43% 11/01/04
Treasury Portfolio ............. 1.04% * 2.29% 11/01/04
Tax-Exempt Portfolio ........... 0.84% * 1.89% 11/01/04
</TABLE>
</R>
<R>
* Not in operation during period.
</R>
45
The aggregate total return and average annual total return of the Advisory
Class Shares of each Portfolio for the periods noted is set forth below:
<R>
<TABLE>
AVERAGE
AGGREGATE ANNUALIZED
AGGREGATE TOTAL RETURN TOTAL RETURN
TOTAL RETURN FISCAL YEAR SINCE
PORTFOLIO 11/1/04 -- 4/30/05 2004 INCEPTION INCEPTION DATE
-------------------------------- -------------------- -------------- ------------- ---------------
Money Market Portfolio ......... 1.03% 0.76% 1.61% 02/06/04
Prime Portfolio ................ 1.04% 0.57% 1.77% 04/29/04
Government Portfolio ........... 1.06% 0.13% 2.23% 10/01/04
Treasury Portfolio ............. 0.99% 0.30% 1.97% 08/09/04
Tax-Exempt Portfolio ........... 0.79% 0.24% 1.72% 06/15/04
</TABLE>
</R>
<R>
The aggregate total return and average annual total return of the Participant
Class Shares of each Portfolio for the periods noted is set forth below:
</R>
<R>
<TABLE>
AVERAGE
AGGREGATE ANNUALIZED
AGGREGATE TOTAL RETURN TOTAL RETURN
TOTAL RETURN FISCAL YEAR SINCE
PORTFOLIO 11/1/04 -- 4/30/05 2004 INCEPTION INCEPTION DATE
-------------------------------- -------------------- -------------- ------------- ---------------
Money Market Portfolio ......... 0.95% * 2.11% 11/01/04
Prime Portfolio ................ 0.96% * 2.13% 11/01/04
Government Portfolio ........... 0.98% * 2.17% 11/01/04
Treasury Portfolio ............. 0.91% * 2.03% 11/01/04
Tax-Exempt Portfolio ........... 0.71% * 1.64% 11/01/04
</TABLE>
</R>
<R>
* Not in operation during period.
</R>
FINANCIAL STATEMENTS
<R>
The Fund's audited financial statements for the fiscal year ended October 31,
2004, including notes thereto and the reports of Ernst & Young LLP thereon, and
the Fund's unaudited financial statements for the six months ended April 30,
2005, are incorporated herein by reference. A copy of the Annual Report dated
October 31, 2004 and Semi-Annual Report dated April 30, 2005 will accompany the
delivery of this Statement of Additional Information.
</R>
*****
This Statement of Additional Information and the Prospectus do not contain all
of the information set forth in the Registration Statement the Fund has filed
with the SEC. The complete Registration Statement for the Fund may be obtained
from the SEC.
46
APPENDIX A
MORGAN STANLEY INVESTMENT MANAGEMENT
PROXY VOTING POLICY AND PROCEDURES
--------------------------------------------------------------------------------
I. POLICY STATEMENT
INTRODUCTION. Morgan Stanley Investment Management's ("MSIM") policies and
procedures for voting proxies with respect to securities held in the accounts
of clients applies to those MSIM entities that provide discretionary Investment
Management services and for which a MSIM entity has the authority to vote their
proxies. The policies and procedures and general guidelines in this section
will be reviewed and, as necessary, updated periodically to address new or
revised proxy voting issues. The MSIM entities covered by these policies and
procedures currently include the following: Morgan Stanley Investment Advisors
Inc., Morgan Stanley Alternative Investment Partners, L.P., Morgan Stanley AIP
GP LP, Morgan Stanley Investment Management Inc., Morgan Stanley Investment
Group Inc., Morgan Stanley Investment Management Limited, Morgan Stanley
Investment Management Company, Morgan Stanley Asset & Investment Trust
Management Co., Limited, Morgan Stanley Investment Management Private Limited,
Morgan Stanley Investments LP, Morgan Stanley Hedge Fund Partners GP LP, Morgan
Stanley Hedge Fund Partners LP, Van Kampen Investment Advisory Corp., Van
Kampen Asset Management Inc., and Van Kampen Advisors Inc. (each a "MSIM
Affiliate" and collectively referred to as the "MSIM Affiliates").
Each MSIM Affiliate will vote proxies as part of its authority to manage,
acquire and dispose of account assets. With respect to the MSIM registered
management investment companies (Van Kampen, Institutional and Advisor
Funds)(collectively referred to as the "MSIM Funds"), each MSIM Fund will vote
proxies pursuant to authority granted under its applicable investment advisory
agreement or, in the absence of such authority, as authorized by its Board of
Directors or Trustees. A MSIM Affiliate will not vote proxies if the "named
fiduciary" for an ERISA account has reserved the authority for itself, or in
the case of an account not governed by ERISA, the Investment Management
Agreement does not authorize the MSIM Affiliate to vote proxies. MSIM
Affiliates will, in a prudent and diligent manner, vote proxies in the best
interests of clients, including beneficiaries of and participants in a client's
benefit plan(s) for which we manage assets, consistent with the objective of
maximizing long-term investment returns ("Client Proxy Standard"). In certain
situations, a client or its fiduciary may provide a MSIM Affiliate with a
statement of proxy voting policy. In these situations, the MSIM Affiliate will
comply with the client's policy unless to do so would be inconsistent with
applicable laws or regulations or the MSIM Affiliate's fiduciary
responsibility.
PROXY RESEARCH SERVICES. To assist the MSIM Affiliates in their
responsibility for voting proxies and the overall global proxy voting process,
Institutional Shareholder Services ("ISS") and the Investor Responsibility
Research Center ("IRRC") have been retained as experts in the proxy voting and
corporate governance area. ISS and IRRC are independent advisers that
specialize in providing a variety of fiduciary-level proxy-related services to
institutional investment managers, plan sponsors, custodians, consultants, and
other institutional investors. The services provided to MSIM Affiliates include
in-depth research, global issuer analysis, and voting recommendations. In
addition to research, ISS provides vote execution, reporting, and
recordkeeping. MSIM's Proxy Review Committee (see Section IV.A. below) will
carefully monitor and supervise the services provided by the proxy research
services.
VOTING PROXIES FOR CERTAIN NON-US COMPANIES. While the proxy voting
process is well established in the United States and other developed markets
with a number of tools and services available to assist an investment manager,
voting proxies of non-US companies located in certain jurisdictions,
particularly emerging markets, may involve a number of problems that may
restrict or prevent a MSIM Affiliate's ability to vote such proxies. These
problems include, but are not limited to: (i) proxy statements and ballots
being written in a language other than English; (ii) untimely and/or inadequate
notice of shareholder meetings; (iii) restrictions on the ability of holders
outside the issuer's jurisdiction of organization to exercise votes; (iv)
requirements to vote proxies in person, (v) the imposition of restrictions on
the sale of the securities for a period of time in proximity to the shareholder
meeting; and (vi) requirements to provide local agents with power of attorney
to facilitate the MSIM Affiliate's voting
A-1
instructions. As a result, clients' non-U.S. proxies will be voted on a best
efforts basis only, consistent with the Client Proxy Standard. ISS has been
retained to provide assistance to the MSIM Affiliates in connection with voting
their clients' non-US proxies.
II. GENERAL PROXY VOTING GUIDELINES
To ensure consistency in voting proxies on behalf of its clients, MSIM
Affiliates will follow (subject to any exception set forth herein) these Proxy
Voting Policies and Procedures, including the guidelines set forth below. These
guidelines address a broad range of issues, including board size and
composition, executive compensation, anti-takeover proposals, capital structure
proposals and social responsibility issues and are meant to be general voting
parameters on issues that arise most frequently. The MSIM Affiliates, however,
may vote in a manner that is contrary to the following general guidelines,
pursuant to the procedures set forth in Section IV. below, provided the vote is
consistent with the Client Proxy Standard.
III. GUIDELINES
A. MANAGEMENT PROPOSALS
1. When voting on routine ballot items the following proposals are
generally voted in support of management, subject to the review and
approval of the Proxy Review Committee, as appropriate.
o Selection or ratification of auditors.
o Approval of financial statements, director and auditor reports.
o Election of Directors.
o Limiting Directors' liability and broadening indemnification of
Directors.
o Requirement that a certain percentage (up to 662/3%) of its Board's
members be comprised of independent and unaffiliated Directors.
o Requirement that members of the company's compensation, nominating
and audit committees be comprised of independent or unaffiliated
Directors.
o Recommendations to set retirement ages or require specific levels of
stock ownership by Directors.
o General updating/corrective amendments to the charter.
o Elimination of cumulative voting.
o Elimination of preemptive rights.
o Provisions for confidential voting and independent tabulation of
voting results.
o Proposals related to the conduct of the annual meeting except those
proposals that relate to the "transaction of such other business
which may come before the meeting."
2. The following non-routine proposals, which potentially may have a
substantive financial or best interest impact on a shareholder, are
generally voted in support of management, subject to the review and
approval of the Proxy Review Committee, as appropriate.
Capitalization changes
o Capitalization changes that eliminate other classes of stock and
voting rights.
o Proposals to increase the authorization of existing classes of common
stock (or securities convertible into common stock) if: (i) a clear
and legitimate business purpose is stated; (ii) the number of shares
requested is reasonable in relation to the purpose for which
authorization is requested; and (iii) the authorization does not
exceed 100% of shares currently authorized and at least 30% of the
new authorization will be outstanding.
A-2
o Proposals to create a new class of preferred stock or for issuances
of preferred stock up to 50% of issued capital.
o Proposals for share repurchase plans.
o Proposals to reduce the number of authorized shares of common or
preferred stock, or to eliminate classes of preferred stock.
o Proposals to effect stock splits.
o Proposals to effect reverse stock splits if management
proportionately reduces the authorized share amount set forth in the
corporate charter. Reverse stock splits that do not adjust
proportionately to the authorized share amount will generally be
approved if the resulting increase in authorized shares coincides
with the proxy guidelines set forth above for common stock increases.
Compensation
o Director fees, provided the amounts are not excessive relative to
other companies in the country or industry.
o Employee stock purchase plans that permit discounts up to 15%, but
only for grants that are part of a broad based employee plan,
including all non-executive employees.
o Establishment of Employee Stock Option Plans and other employee
ownership plans.
Anti-Takeover Matters
o Modify or rescind existing supermajority vote requirements to amend
the charters or bylaws.
o Adoption of anti-greenmail provisions provided that the proposal: (i)
defines greenmail; (ii) prohibits buyback offers to large block
holders not made to all shareholders or not approved by disinterested
shareholders; and (iii) contains no anti-takeover measures or other
provisions restricting the rights of shareholders.
3. The following non-routine proposals, which potentially may have a
substantive financial or best interest impact on the shareholder, are
generally voted against (notwithstanding management support), subject to
the review and approval of the Proxy Review Committee, as appropriate.
o Capitalization changes that add classes of stock which substantially
dilute the voting interests of existing shareholders.
o Proposals to increase the authorized number of shares of existing
classes of stock that carry preemptive rights or supervoting rights.
o Creation of "blank check" preferred stock.
o Changes in capitalization by 100% or more.
o Compensation proposals that allow for discounted stock options which
have not been offered to employees in general.
o Amendments to bylaws that would require a supermajority shareholder
vote to pass or repeal certain provisions.
o Proposals to indemnify auditors.
A-3
4. The following types of non-routine proposals, which potentially may
have a potential financial or best interest impact on an issuer, are
voted as determined by the Proxy Review Committee.
Corporate Transactions
o Mergers, acquisitions and other special corporate transactions (i.e.,
takeovers, spin-offs, sales of assets, reorganizations,
restructurings and recapitalizations) will be examined on a
case-by-case basis. In all cases, ISS and IRRC research and analysis
will be used along with MSIM Affiliates' research and analysis, based
on, among other things, MSIM internal company-specific knowledge.
o Change-in-control provisions in non-salary compensation plans,
employment contracts, and severance agreements that benefit
management and would be costly to shareholders if triggered.
o Shareholders rights plans that allow appropriate offers to
shareholders to be blocked by the board or trigger provisions that
prevent legitimate offers from proceeding.
o Executive/Director stock option plans. Generally, stock option plans
should meet the following criteria:
(i) Whether the stock option plan is incentive based;
(ii) For mature companies, should be no more than 5% of the
issued capital at the time of approval;
(iii) For growth companies, should be no more than 10% of the
issued capital at the time of approval.
Anti-Takeover Provisions
o Proposals requiring shareholder ratification of poison pills.
o Anti-takeover and related provisions that serve to prevent the
majority of shareholders from exercising their rights or effectively
deter the appropriate tender offers and other offers.
B. SHAREHOLDER PROPOSALS
1. The following shareholder proposals are generally supported, subject to
the review and approval of the Proxy Review Committee, as appropriate:
o Requiring auditors to attend the annual meeting of shareholders.
o Requirement that members of the company's compensation, nominating
and audit committees be comprised of independent or unaffiliated
Directors.
o Requirement that a certain percentage of its Board's members be
comprised of independent and unaffiliated Directors.
o Confidential voting.
o Reduction or elimination of supermajority vote requirements.
2. The following shareholder proposals will be voted as determined by the
Proxy Review Committee.
o Proposals that limit tenure of directors.
o Proposals to limit golden parachutes.
o Proposals requiring directors to own large amounts of stock to be
eligible for election.
o Restoring cumulative voting in the election of directors.
A-4
o Proposals that request or require disclosure of executive
compensation in addition to the disclosure required by the Securities
and Exchange Commission ("SEC") regulations.
o Proposals that limit retirement benefits or executive compensation.
o Requiring shareholder approval for bylaw or charter amendments.
o Requiring shareholder approval for shareholder rights plan or poison
pill.
o Requiring shareholder approval of golden parachutes.
o Elimination of certain anti-takeover related provisions.
o Prohibit payment of greenmail.
3. The following shareholder proposals are generally not supported,
subject to the review and approval of the Committee, as appropriate.
o Requirements that the issuer prepare reports that are costly to
provide or that would require duplicative efforts or expenditures
that are of a non-business nature or would provide no pertinent
information from the perspective of institutional shareholders.
o Restrictions related to social, political or special interest issues
that impact the ability of the company to do business or be
competitive and that have a significant financial or best interest
impact to the shareholders.
o Proposals that require inappropriate endorsements or corporate
actions.
IV. ADMINISTRATION OF PROXY POLICIES AND PROCEDURES
A. PROXY REVIEW COMMITTEE
1. The MSIM Proxy Review Committee ("Committee") is responsible for
creating and implementing MSIM's Proxy Voting Policy and Procedures and,
in this regard, has expressly adopted them. Following are some of the
functions and responsibilities of the Committee.
(a) The Committee, which will consist of members designated by
MSIM's Chief Investment Officer, is responsible for
establishing MSIM's proxy voting policies and guidelines and
determining how MSIM will vote proxies on an ongoing basis.
(b) The Committee will periodically review and have the authority
to amend as necessary MSIM's proxy voting policies and
guidelines (as expressed in these Proxy Voting Policy and
Procedures) and establish and direct voting positions
consistent with the Client Proxy Standard.
(c) The Committee will meet at least monthly to (among other
matters): (1) address any outstanding issues relating to
MSIM's Proxy Voting Policy and Procedures; and (2) generally
review proposals at upcoming shareholder meetings of MSIM
portfolio companies in accordance with this Policy and
Procedures including, as appropriate, the voting results of
prior shareholder meetings of the same issuer where a similar
proposal was presented to shareholders. The Committee, or its
designee, will timely communicate to ISS MSIM's Proxy Voting
Policy and Procedures (and any amendments to them and/or any
additional guidelines or procedures it may adopt).
(d) The Committee will meet on an ad hoc basis to (among other
matters): (1) authorize "split voting" (i.e., allowing
certain shares of the same issuer that are the subject of the
same proxy solicitation and held by one or more MSIM
portfolios to be voted differently than other shares) and/or
"override voting" (i.e., voting all MSIM portfolio shares in
a manner contrary to the Procedures); (2) review and approve
upcoming votes, as appropriate, for matters for which
specific direction has been provided in Sections I, II, and
III above; and (3) determine how to vote matters for which
specific direction has not been provided in Sections I, II
and III above. Split votes will generally not be approved
within a single Global Investor Group team. The Committee may
take into account ISS recommendations and the research
provided by IRRC as well as any other relevant information
they may request or receive.
A-5
(e) In addition to the procedures discussed above, if the
Committee determines that an issue raises a potential
material conflict of interest, or gives rise to the
appearance of a potential material conflict of interest, the
Committee will designate a special committee to review, and
recommend a course of action with respect to, the conflict(s)
in question ("Special Committee"). The Special Committee may
request the assistance of the Law and Compliance Departments
and will have sole discretion to cast a vote. In addition to
the research provided by ISS and IRRC, the Special Committee
may request analysis from MSIM Affiliate investment
professionals and outside sources to the extent it deems
appropriate.
(f) The Committee and the Special Committee, or their
designee(s), will document in writing all of their decisions
and actions, which documentation will be maintained by the
Committee and the Special Committee, or their designee(s) for
a period of at least 6 years. To the extent these decisions
relate to a security held by a MSIM U.S. registered
investment company, the Committee and Special Committee, or
their designee(s), will report their decisions to each
applicable Board of Trustees/Directors of those investment
companies at each Board's next regularly Scheduled Board
meeting. The report will contain information concerning
decisions made by the Committee and Special Committee during
the most recently ended calendar quarter immediately
preceding the Board meeting.
(g) The Committee and Special Committee, or their designee(s),
will timely communicate to applicable PMs, the Compliance
Departments and, as necessary to ISS, decisions of the
Committee and Special Committee so that, among other things,
ISS will vote proxies consistent with their decisions.
A-6
APPENDIX B -- DESCRIPTION OF RATINGS
I. EXCERPTS FROM MOODY'S INVESTORS SERVICE, INC.'S CORPORATE BOND RATINGS:
Aaa: judged to be the best quality; carry the smallest degree of
investment risk; Aa -- judged to be of high quality by all standards; A:
possess many favorable investment attributes and are to be considered as higher
medium grade obligations; Baa: considered as lower medium grade obligations,
i.e., they are neither highly protected nor poorly secured; Ba: B: protection
of interest and principal payments is questionable.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest. Ca: Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings. C: Bonds which are rated C are lowest rated class of bonds
and issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's may apply numerical modifiers, 1, 2 and 3 in each generic
rating classification from Aa through B in its corporate bond rating system.
The modifier 1 indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
II. EXCERPTS FROM STANDARD & POOR'S CORPORATION'S CORPORATE BOND RATINGS:
AAA: highest grade obligations; possess the ultimate degree of protection
as to principal and interest; AA: also qualify as high grade obligations, and
in the majority of instances differs from AAA issues only in small degree; A:
regarded as upper medium grade; have considerable investment strength but are
not entirely free from adverse effects of changes in economic and trade
conditions. Interest and principal are regarded as safe; BBB: regarded as
borderline between definitely sound obligations and those where the speculative
element begins to predominate; this group is the lowest which qualifies for
commercial bank investments.
BB, B, CCC, CC, C: Debt rated BB, B, CCC, CC and C is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions. CI: The rating CI is reserved for income bonds
on which no interest is being paid. D: Debt rated D is in payment default. The
D rating category is used when interest payments or principal payments are not
made on the date due even if the applicable grace period has not expired,
unless S&P's believes that such payments will be made during such grace period.
The D rating also will be used upon the filing of a bankruptcy petition if debt
service payments are jeopardized.
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.
III. EXCERPTS FROM FITCH IBCA CORPORATE BOND RATINGS:
AAA: Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA: Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA". Because bonds rated
in the "AAA" and "AA" categories are not significantly vulnerable to
foreseeable future developments, short term debt of these issuers is generally
rated "-,+".
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions
and circumstances than bonds with higher ratings.
B-1
BBB: Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these bonds,
and therefore impair timely payment. The likelihood that the ratings of these
bonds will fall below investment grade is higher than for bonds with higher
ratings.
BB: Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified which
could assist the obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued
timely payment of principal and interest reflects the obligor's limited margin
of safety and the need for reasonable business and economic activity throughout
the life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
DDD, DD, and D: Bonds are in default on interest and/or principal
payments. Such bonds are extremely speculative and should be valued on the
basis of their ultimate recovery value in liquidation or reorganization of the
obligor. "DDD" represents the highest potential for recovery on the these
bonds, and "D" represents the lowest potential for recovery.
Plus (+) Minus (-) Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "DDD", "DD", or "D" categories.
IV. EXCERPTS FROM DUFF & PHELPS CORPORATE BOND RATINGS:
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time of economic conditions.
A+, A, A-: Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
BBB+, BBB, BBB-: Below average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may move
up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that obligations
will not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or
into a higher or lower rating grade.
CCC: Well below investment grade securities. Considerable uncertainty
exists as to timely payment of principal, interest or preferred dividends.
Protections factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD: Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
DP: Preferred stock with dividend arrearage.
V. EXCERPTS FROM MOODY'S INVESTORS SERVICE, INC.'S PREFERRED STOCK RATINGS:
aaa: An issue which is rated aaa is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks.
B-2
aa: An issue which is rated aa is considered a high-grade preferred stock. This
rating indicates that there is reasonable assurance that earnings and asset
protection will remain relatively well maintained in the foreseeable future. a:
An issue which is rated a is considered to be an upper medium grade preferred
stock. While risks are judged to be somewhat greater than in the aaa and aa
classifications, earnings and asset protection are, nevertheless expected to be
maintained at adequate levels. baa: An issue which is rated baa is considered
to be medium grade, neither highly protected nor poorly secured. Earnings and
asset protection appear adequate at present but may be questionable over any
great length of time. ba: an issue which is rated ba is considered to have
speculative elements and its future cannot be considered well assured. Earnings
and asset protection may be very moderate and not well safeguarded during
adverse periods. Uncertainty of position characterizes preferred stocks in this
class. b: An issue which is rated b generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small. caa: An issue
which is rated caa is likely to be in arrears on dividend payments. This rating
designation does not purport to indicate the future status of payment. ca: An
issue which is rated ca is speculative in a high degree an is likely to be in
arrears on dividends with little likelihood of eventual payment. c: This is the
lowest rated class of preferred of preference stock. Issues so rated can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
Note: Moody's may apply numerical modifiers 1, 2 and 3 in each rating
classification from "aa" through "b" in its preferred stock rating system. The
modifier 1 indicated that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range raking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
VI. EXCERPTS FROM STANDARD & POOR'S CORPORATION'S PREFERRED STOCK RATINGS:
AAA: This is the highest rating that may be assigned by S&P's to a
preferred stock issue and indicates an extremely strong capacity to pay the
preferred stock obligations. AA: A preferred stock issue rated AA also
qualifies as a high quality fixed income security. The capacity to pay
preferred stock obligations is very strong, although not as overwhelming as for
issues rated AAA. A: An issue rated A is backed by a sound capacity to pay the
preferred stock obligations, although it is somewhat more susceptible to the
adverse effect of the changes in circumstances and economic conditions. BBB: An
issue rated BBB is regarded as backed by an adequate capacity to pay the
preferred stock obligations. Whereas it normally exhibits adequate protection
parameter, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to make payments for a preferred stock in
this category than for issues in the A category. BB, B, CCC: Preferred stock
rated BB, B, and CCC are regarded, on balance, as predominantly speculative
with respect to the issuer's capacity to pay preferred stock obligations. Bb
indicates the lowest degree of speculation and CCC the highest degree of
speculation. While such issues will likely have some quality and protective
characteristics, these are outweighed by large uncertainties of major risk
exposures to adverse conditions. CC: The rating CC is reserved for a preferred
stock in arrears on dividends or sinking fund payments but that is currently
paying. C: A preferred stock rated C is a non-paying issue. D: A preferred
stock rated D is a non-paying issue with the issuer in default on debt
instruments.
Plus (+) or Minus (-): The ratings from "AA" for "B" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
VII. EXCERPTS FROM FITCH IBCA PREFERRED STOCK RATINGS:
AAA: Preferred stocks assigned this rating are the highest quality. Strong
asset protection, conservative balance sheet ratios, and positive indications
of continued protection of preferred dividend requirements are prerequisites
for an "AAA" rating.
AA: Preferred of preference issues assigned this rating are good quality.
Asset protection and coverages of preferred dividends are considered adequate
and are expected to be maintained.
A: Preferred of preference issues assigned this rating are good quality.
Asset protection and coverages of preferred dividends are considered adequate
and are expected to be maintained.
B-3
BBB: Preferred or preference issues assigned this rating are reasonably
safe but lack the protections of the "A" to "AAA" categories. Current results
should be watched for possible of deterioration.
BB: Preferred or preference issues assigned this rating are considered
speculative. The margin of protection is slim or subject to wide fluctuations.
The longer-term financial capacities of the enterprises cannot be predicted
with assurance.
B: Issues assigned this rating are considered highly speculative. While
earnings should normally cover dividends, directors may reduce or omit payment
due to unfavorable developments, inability to finance, or wide fluctuations in
earnings.
CCC: Issues assigned this rating are extremely speculative and should be
assessed on their prospects in a possible reorganization. Dividend payments may
be in arrears with the status of the current dividend uncertain.
CC: Dividends are not currently being paid and may be in arrears. The
outlook for future payments cannot be assured.
C: Dividends are not currently being paid and may be in arrears. Prospects
for future payments are remote.
D: Issuer is in default on its debt obligations and has filed for
reorganization or liquidation under the bankruptcy law.
Plus (+) Minus (-) Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "AAA", "CCC", "CC", "C", and "D"
categories.
B-4
Morgan Stanley Institutional Liquidity Funds
PART C: OTHER INFORMATION
Post-Effective Amendment No. 4
ITEM 23. EXHIBITS
(a) Declaration of Trust of the Registrant, dated February 13, 2003, is
incorporated by reference to Exhibit (a) of the Initial Registration
Statement on Form N-1A, filed on May 2, 2003.
(b) Amended and Restated By-Laws of the Registrant dated October 23,
2003, is incorporated by reference to Exhibit (b) to Pre-Effective
Amendment No. 1 to Registration Statement on Form N-1A, filed on
October 31, 2003.
(c) None
(d) (1) Investment Management Agreement between the Registrant and Morgan
Stanley Investment Management Inc. is incorporated by reference to
Exhibit (d)(1) to Pre-Effective Amendment No. 1 to Registration
Statement on Form N-1A, filed on October 31, 2003.
(d) (2) Sub-Advisory Agreement between Morgan Stanley Investment Management
Inc. and Morgan Stanley Investment Advisors Inc. is incorporated by
reference to Exhibit (d)(2) to Pre-Effective Amendment No. 1 to
Registration Statement on Form N-1A, filed on October 31, 2003.
(e) Distribution Agreement between the Registrant and Morgan Stanley &
Co. Incorporated is incorporated by reference to Exhibit (e) to
Pre-Effective Amendment No. 1 to Registration Statement on Form
N-1A, filed on October 31, 2003.
(f) Not applicable
(g) Custodian Agreement is incorporated by reference to Exhibit (g) to
Pre-Effective Amendment No. 1 to Registration Statement on Form
N-1A, filed on October 31, 2003.
(h) (1) Administration/Service Agreement between Registrant and Morgan
Stanley Investment Management Inc. is incorporated by reference to
Exhibit (h)(1) to Pre-Effective Amendment No. 1 to Registration
Statement on Form N-1A, filed on October 31, 2003.
(h) (2) Sub-Administration Agreement between Morgan Stanley Investment
Management Inc. and JP Morgan Chase, is incorporated by reference to
Exhibit (h)(2) to Pre-Effective Amendment No. 1 to Registration
Statement on Form N-1A, filed in October 31, 2003.
(i) (1) Opinion and Consent of Clifford Chance US LLP, filed herein.
(i) (2) Opinion and Consent of Dechert LLP, Massachusetts counsel, filed
herein.
1
(j) Consent of Independent Registered Public Accounting Firm, filed
herein.
(k) Not applicable
(l) Investment Letter of Morgan Stanley Investment Management Inc. is
incorporated by reference to Exhibit (l) to Pre-Effective Amendment
No. 1 to Registration Statement on Form N-1A, filed on October 31,
2003.
(m) (1) Administration Plans adopted by the Registrant for each of the
Service Class, Administrative Class, Advisory Class, Investor Class
and Participant Class, filed herein.
(m) (2) Amended and Restated Plan of Distribution pursuant to Rule 12b-1
with respect to the Participant Class, filed herein.
(m) (3) Plan of Distribution pursuant to Rule 12b-1 with respect to the Cash
Management Class, is incorporated by reference to Exhibit (m)(3) to
Post-Effective Amendment No. 3 to Registration Statement on Form
N1-A, filed on May 20, 2005.
(n) Amended Multiple Class Plan pursuant to Rule 18f-3, filed herein.
(o) Not applicable
(p) (1) Code of Ethics of Morgan Stanley Investment Management is
incorporated by reference to Exhibit (p)(1) to Post-Effective
Amendment No. 2 to Registration Statement on Form N1-A, filed on
February 25, 2005.
(p) (2) Code of Ethics of the Morgan Stanley Funds is incorporated by
reference to Exhibit (p)(2) to Pre-Effective Amendment No. 1 to
Registration Statement on Form N-1A, filed on October 31, 2003.
Other Powers of Attorney of Trustees, dated May 1, 2005, is incorporated
by reference to Exhibit - Other to Post-Effective Amendment No. 3 to
Registration Statement on Form N1-A, filed on May 20, 2005.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE FUND
None.
ITEM 25. INDEMNIFICATION
Pursuant to Section 5.3 of the Registrant's Declaration of Trust and
under Section 4.8 of the Registrant's By-Laws, the indemnification of the
Registrant's trustees, officers, employees and agents is permitted if it is
determined that they acted under the belief that their actions were in or not
opposed to the best interest of the Registrant, and, with respect to any
criminal proceeding, they had reasonable cause to believe their conduct was not
unlawful. In addition, indemnification is permitted only if it is determined
that the actions in question did not render them liable by reason of willful
misfeasance, bad faith or gross negligence in the performance of their duties or
by reason of reckless disregard of their obligations and duties to the
Registrant. Trustees, officers, employees and agents will be indemnified for the
expense of litigation if it is determined that they are entitled to
indemnification against any liability established in such litigation. The
Registrant may also advance money for these expenses provided that they give
their undertakings to repay the Registrant unless their conduct is later
determined to permit indemnification.
Pursuant to Section 5.2 of the Registrant's Declaration of Trust and
paragraph 8 of the Registrant's Investment Management Agreement, neither the
Investment Manager nor any trustee, officer,
2
employee or agent of the Registrant shall be liable for any action or failure to
act, except in the case of bad faith, willful misfeasance, gross negligence or
reckless disregard of duties to the Registrant.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to trustees, officers and controlling
persons of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a trustee, officer, or controlling person of the Registrant
in connection with the successful defense of any action, suit or proceeding) is
asserted against the Registrant by such trustee, officer or controlling person
in connection with the shares being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act, and will
be governed by the final adjudication of such issue.
The Registrant hereby undertakes that it will apply the indemnification
provision of its by-laws in a manner consistent with Release 11330 of the
Securities and Exchange Commission under the Investment Company Act of 1940, so
long as the interpretation of Sections 17(h) and 17(i) of such Act remains in
effect.
The Registrant, in conjunction with the Investment Manager, the
Registrant's Trustees, and other registered investment management companies
managed by the Investment Manager, maintains insurance on behalf of any person
who is or was a Trustee, officer, employee, or agent of the Registrant, or who
is or was serving at the request of the Registrant as a trustee, director,
officer, employee or agent of another trust or corporation, against any
liability asserted against him and incurred by him or arising out of his
position. However, in no event will the Registrant maintain insurance to
indemnify any such person for any act for which the Registrant itself is not
permitted to indemnify him.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
See "Fund Management" in the Prospectus regarding the business of the
investment adviser. The following information is given regarding officers of
Morgan Stanley Investment Management Inc. ("Morgan Stanley Investment
Management"). Morgan Stanley Investment Management is a wholly-owned subsidiary
of Morgan Stanley & Co.
Set forth below is the name and principal business address of each
company for which each director or officer of Morgan Stanley Investment
Management serves as a director, officer or employee:
MORGAN STANLEY SERVICES COMPANY INC. ("MORGAN STANLEY SERVICES")
c/o Morgan Stanley Trust, Harborside Financial Center, Plaza Two, Jersey City,
New Jersey 07311
MORGAN STANLEY DISTRIBUTORS INC. ("MORGAN STANLEY DISTRIBUTORS")
MORGAN STANLEY DW INC. ("MORGAN STANLEY DW")
MORGAN STANLEY FUNDS
MORGAN STANLEY INVESTMENT ADVISORS INC.
MORGAN STANLEY INVESTMENT MANAGEMENT
MORGAN STANLEY INVESTMENT MANAGEMENT INC.
MORGAN STANLEY INVESTMENT GROUP INC. ("MORGAN STANLEY INVESTMENT GROUP")
3
THE UNIVERSAL INSTITUTIONAL FUNDS, INC. ("UNIVERSAL INSTITUTIONAL FUNDS")
1221 Avenue of the Americas, New York, New York 10020
MORGAN STANLEY DEAN WITTER INVESTMENT MANAGEMENT LTD.
MORGAN STANLEY & CO. INTERNATIONAL LIMITED ("MORGAN STANLEY & CO.
INTERNATIONAL")
25 Cabot Square, London, England
MORGAN STANLEY INVESTMENTS LP
MORGAN STANLEY INSTITUTIONAL FUND TRUST
MORGAN STANLEY DISTRIBUTION, INC.
One Tower Bridge, West Conshohocken, PA 19428
VAN KAMPEN INVESTMENT ASSET MANAGEMENT INC. ("VAN KAMPEN")
1 Parkview Plaza, P.O. Box 5555, Oakbrook Terrace, IL 60181
MORGAN STANLEY TRUST ("MORGAN STANLEY TRUST")
Harborside Financial Center, Plaza Two, Jersey City, New Jersey 07311
<TABLE>
------------------------------------------------------------ ---------------------------------------------------------
NAME AND POSITION WITH MORGAN STANLEY INVESTMENT OTHER SUBSTANTIAL BUSINESS, PROFESSION
MANAGEMENT INC. OR VOCATION
------------------------------------------------------------ ---------------------------------------------------------
Mitchell M. Merin President, Chief Operating Officer and Director of
Morgan Stanley Investment Advisors Inc.; Chairman and
Director of Morgan Stanley Distributors Inc.; Chairman
President, Chief Operating Officer and Director and Director of Morgan Stanley Trust; President, Chief
Executive Officer and Director of Morgan Stanley
Services Company Inc.; President of the Morgan Stanley
Retail Funds and the Institutional Funds; Director of
various Morgan Stanley subsidiaries; Trustee, President
and Chief Executive Officer of the Van Kampen Open-End
Funds; President and Chief Executive Officer of the Van
Kampen Closed-End Funds.
Ronald E. Robison Principal Executive Officer-Office of the Fund;
Managing Director, Chief Administrative Officer and
Managing Director, Chief Administrative Officer and Director of Morgan Stanley Investment Advisors Inc. and
Director Morgan Stanley Services Company Inc.; Chief Executive
Officer and Director of Morgan Stanley Trust; Managing
Director of Morgan Stanley Distributors Inc.; Executive
Vice President and Principal Executive Officer of the
Morgan Stanley Funds; Director of Morgan Stanley SICAV.
Joseph J. McAlinden Chief Investment Officer and Managing Director of
Morgan Stanley Investment Advisors Inc.; Director of
Managing Director and Chief Investment Officer Morgan Stanley Trust.
Rajesh K. Gupta Managing Director and Chief of Administrative
Officer-Investments of Morgan Stanley Investment
Managing Director and Chief Administrative Officer - Advisors Inc.
Investments
P. Dominic Caldecott Managing Director of Morgan Stanley Investment Advisors
Inc. and Morgan Stanley Investment
</TABLE>
4
<TABLE>
------------------------------------------------------------ ---------------------------------------------------------
NAME AND POSITION WITH MORGAN STANLEY INVESTMENT OTHER SUBSTANTIAL BUSINESS, PROFESSION
MANAGEMENT INC. OR VOCATION
------------------------------------------------------------ ---------------------------------------------------------
Managing Director Management Limited; Vice President and Investment Manager
of Morgan Stanley & Co. International.
Barry Fink Managing Director and General Counsel of Morgan Stanley
Investment Advisors Inc.; Managing Director and
General Counsel and Managing Director Director of Morgan Stanley Services Company Inc.;
Managing Director, Secretary, and Director of Morgan
Stanley Distributors Inc.; Vice President of the Morgan
Stanley Funds.
Alexander C. Frank Global Treasurer of Morgan Stanley.
Managing Director and Treasurer
</TABLE>
In addition, Morgan Stanley Investment Management Inc. acts as
investment adviser or subadviser to several other registered investment
companies.
ITEM 27. PRINCIPAL UNDERWITERS
(a) Morgan Stanley Distribution, Inc. ("Morgan Stanley Distribution")
acts as the distributor for Morgan Stanley Institutional Fund Inc., Morgan
Stanley Institutional Fund Trust and the Universal Funds, Inc., registered
open-end management investment companies.
(b) The following information is given regarding directors and officers
of Morgan Stanley Distribution not listed in Item 26 above. The principal
address of Morgan Stanley Distribution and each director, officer and partner
listed below is One Tower Bridge Road, West Conshohoken, PA 19428. None of the
following persons has any position or office with the Registrant.
<TABLE>
---------------------------------- ------------------------------------------------------- ---------------------------
NAME AND PRINCIPAL BUSINESS POSITION AND OFFICES WITH POSITIONS AND OFFICES
ADDRESS MORGAN STANLEY DISTRIBUTION, INC. WITH THE FUND
---------------------------------- ------------------------------------------------------- ---------------------------
Mitchell M. Merin Director President
---------------------------------- ------------------------------------------------------- ---------------------------
Ronald E. Robison Director Executive Vice
President
---------------------------------- ------------------------------------------------------- ---------------------------
Michael Kiley Director N/A
---------------------------------- ------------------------------------------------------- ---------------------------
Jonathan Thomas Chairman, President and Chief Executive Officer N/A
---------------------------------- ------------------------------------------------------- ---------------------------
Stefanie Chang Yu Executive Director and Assistant Secretary Vice President
---------------------------------- ------------------------------------------------------- ---------------------------
Brian Drummond Vice President and Client Account Manager N/A
---------------------------------- ------------------------------------------------------- ---------------------------
Winston McLaughlin Vice President and Chief Compliance Officer N/A
---------------------------------- ------------------------------------------------------- ---------------------------
Gina Germane Vice President and Chief AML Officer N/A
---------------------------------- ------------------------------------------------------- ---------------------------
Michael Kiley Vice President and Alternative AML Officer N/A
---------------------------------- ------------------------------------------------------- ---------------------------
Bud Rein Vice President N/A
---------------------------------- ------------------------------------------------------- ---------------------------
Bruce R. Sandberg Vice President N/A
---------------------------------- ------------------------------------------------------- ---------------------------
Eric J. Marmoll Vice President N/A
---------------------------------- ------------------------------------------------------- ---------------------------
Bernard V. Peterson Secretary N/A
---------------------------------- ------------------------------------------------------- ---------------------------
</TABLE>
5
<TABLE>
---------------------------------- ------------------------------------------------------- ---------------------------
NAME AND PRINCIPAL BUSINESS POSITION AND OFFICES WITH POSITIONS AND OFFICES
ADDRESS MORGAN STANLEY DISTRIBUTION, INC. WITH THE FUND
---------------------------------- ------------------------------------------------------- ---------------------------
Kevin Perry Treasurer N/A
---------------------------------- ------------------------------------------------------- ---------------------------
David R. Breck Assistant Secretary N/A
---------------------------------- ------------------------------------------------------- ---------------------------
Mary Ann Fappiano Assistant Treasurer N/A
---------------------------------- ------------------------------------------------------- ---------------------------
Laurence Murphy Assistant Treasurer N/A
---------------------------------- ------------------------------------------------------- ---------------------------
Justin Caulfield Assistant Treasurer N/A
---------------------------------- ------------------------------------------------------- ---------------------------
</TABLE>
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
J.P. Morgan Investor Services Co., Registrant's sub-transfer agent and
sub-dividend disbursing agent, P.O. Box 2798, Boston, Massachusetts, 02208-2798,
maintains physical possession of each such account, book or other document of
the Fund.
In particular, with respect to the records required by Rule
31a-1(b)(1), J.P. Morgan Investor Services Co. maintains physical possession of
all journals containing itemized daily records of all purchases and sales of
securities, including sales and redemptions of Fund securities, and also
maintains physical possession of all receipts and deliveries of securities
(including certificate numbers if such detail is not recorded by custodian or
transfer agent), all receipts and disbursements of cash, and all other debts and
credits.
In addition, Morgan Stanley Investment Management, Inc., Registrant's
investment adviser and administrator, 1221 Avenue of the Americas, New York, New
York 10020, maintains possession of the Fund's corporate organizational records,
in addition to certain other records required by Rule 31a-1(b).
ITEM 29. MANAGEMENT SERVICES
Not applicable.
ITEM 30. UNDERTAKINGS
Not applicable.
6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, and the Investment Company Act of 1940, as amended, the Fund certifies
that it meets all of the requirements for effectiveness of this Registration
Statement pursuant to Rule 485(b) under the Securities Act of 1933, as amended,
and has duly caused this Post-Effective Amendment No. 4 to Registration
Statement No. 333-104972 to be signed on its behalf by the undersigned, duly
authorized, in the City of New York and State of New York on the 26th day of
July, 2005.
MORGAN STANLEY INSTITUTIONAL LIQUIDITY FUNDS
By: /s/ Ronald E. Robison
---------------------
Ronald E. Robison
Principal Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities
indicated on the 26th day of July, 2005.
<TABLE>
SIGNATURE TITLE DATE
----------------------------------------------- ------------------------------ -----------------------------
(1) Principal Executive Officer Executive Vice President and July 26, 2005
Principal Executive Officer
*/s/ Ronald E. Robison
-----------------------------------------------
Ronald E. Robison
Treasurer and Chief Financial July 26, 2005
Officer
(2) Principal Financial Officer
*/s/ James Garrett
-----------------------------------------------
James Garrett
(3) Majority of the Trustees
------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
------------------------------------------------------------------------------------------------------------------------
Michael Bozic Joseph J. Kearns
Edwin J. Garn Michael E. Nugent
Wayne E. Hedien Fergus Reid
Dr. Manuel H. Johnson
/s/ Carl Frischling July 26, 2005
-----------------------------------------------
By: Carl Frischling
Attorney-In-Fact for the
Independent Trustees
-----------------------------------------------------------------------------------------------------------------------
MANAGEMENT TRUSTEES
-----------------------------------------------------------------------------------------------------------------------
Charles A. Fiumefreddo
James F. Higgins
*/s/ Barry Fink July 26, 2005
-----------------------------------------------
By: Barry Fink
Attorney-In-Fact for the
Management Trustees
</TABLE>
7
MORGAN STANLEY INSTITUTIONAL LIQUIDITY FUNDS
EXHIBIT INDEX
Ex-(i)(1) Opinion and consent of Clifford Chance.
Ex-(i)(2) Opinion and consent of Dechert LLP.
Ex-(j) Consent of independent registered public accounting firm.
Ex-(m)(1) Administration Plans.
Ex-(m)(2) Plan of Distribution pursuant to Rule 12b-1 with respect to the
Participant Class.
Ex-(n) Amended Multiple Class Plan pursuant to Rule 18f-3.
8