U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[X] Pre-Effective Amendment No. 2
Post-Effective Amendment No. __
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X] Amendment No. 2
Franklin Templeton Limited Duration Income Trust
(Exact Name of Registrant as Specified in Declaration of Trust)
c/o Franklin Advisers, Inc.
One Franklin Parkway
San Mateo, California 94403-1906
(Address of Principal Executive Offices)
(Number, Street, City, State, Zip Code)
(650) 312-2000
(Registrant's Telephone Number, including Area Code)
Murray L. Simpson, Esq.
One Franklin Parkway
San Mateo, California 94403-1906
(Name and Address (Number, Street, City, State, Zip Code) of Agent for
Service)
With a copy to:
David A. Hearth, Esq.
Paul, Hastings, Janofsky & Walker LLP
55 Second Street, 24th Floor
San Francisco, California 94105
Approximate Date of Proposed Public Offering:
As soon as practicable after the effective date of this Registration
Statement
If any of the securities being registered on this form will be offered on a delayed or continuous basis in reliance on Rule 415 under the Securities Act of 1933, other than securities offered in connection with a dividend reinvestment plan, check the following box.[ ]
It is proposed that this filing will become effective (check appropriate box)
[X] when declared effective pursuant to section 8(c)
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
PROPOSED PROPOSED
MAXIMUM MAXIMUM
AMOUNT OFFERING AGGREGATE AMOUNT OF
TITLE OF SECURITIES BEING PRICE PER OFFERING REGISTRATION
BEING REGISTERED REGISTERED UNIT PRICE/1/ FEE /2/
------------------------------------------------------------------------
Common Shares 5,000,000 $15.00 $75,000,000 $6,075.00
shares
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/2/ $1.21 of which was previously paid.
SUBJECT TO COMPLETION, DATED JULY 24, 2003
PROSPECTUS
[FRANKLIN(R) TEMPLETON(R) INVESTMENTS LOGO]
5,000,000 SHARES
FRANKLIN TEMPLETON LIMITED DURATION INCOME TRUST
COMMON SHARES
$15.00 PER SHARE
INVESTMENT OBJECTIVES. The Fund is a newly organized, diversified, closed-end management investment company. The Fund's primary investment objective is to seek high current income. Its secondary objective is to seek capital appreciation to the extent it is possible and is consistent with the Fund's primary objective.
NO PRIOR HISTORY. Because the Fund is newly organized, its common shares have no history of public trading. Shares of closed-end investment companies frequently trade at a discount from their net asset value, which creates a risk of loss for the investors purchasing shares in the initial public offering. The Fund expects that its common shares will be listed on the American Stock Exchange under the symbol "FTF."
DURATION AND CREDIT QUALITY. Under normal market conditions, Franklin Advisers, Inc., the Fund's investment adviser, expects the Fund to maintain an estimated average portfolio duration of between two and five years (including the effect of anticipated leverage). Initially, the Fund is expected to have an estimated average portfolio duration of approximately three years (including the effect of anticipated leverage). Under normal market conditions, the Fund expects to maintain a weighted average portfolio credit quality of investment grade.
MAIN INVESTMENT STRATEGIES. Under normal market conditions, the Fund will
seek to achieve its investment objectives by investing in debt securities and
other income-producing instruments, allocated primarily among three distinct
investment categories: (1) mortgage-backed securities and other asset-backed
securities; (2) bank loans made to corporate and other business entities; and
(3) below investment grade debt securities and other income-producing
instruments. There is no limitation on the percentage of the Fund's assets that
may be allocated to each of these investment categories; provided that, under
normal market conditions, the Fund will invest at least 25% of its total assets
in each category. Under normal circumstances, the Fund's allocation to the
investment category of mortgage-backed and other asset-backed securities will be
primarily composed of investments in mortgage-backed securities.
(CONTINUED ON INSIDE COVER PAGE)
INVESTING IN THE FUND INVOLVES RISKS THAT YOU SHOULD CAREFULLY CONSIDER BEFORE INVESTING IN THE FUND. PLEASE SEE "RISKS" BEGINNING ON PAGE 33 OF THIS PROSPECTUS.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
PER SHARE TOTAL(2)
------------- ------------
Public Offering Price $ 15.00 $
Sales Load $ $
Estimated Offering Expenses(1) $ $
Proceeds to the Fund $ $
----------
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(1) The Fund will pay or reimburse organizational and offering expenses estimated at $341,365 from the proceeds of the offering. Franklin Advisers, Inc. has agreed to pay (i) the amount by which the Fund's offering costs (other than the sales load) exceed $0.03 per share and (ii) all of the Fund's organizational expenses, except that the Fund has agreed to reimburse Franklin Advisers, Inc. for such organizational expenses to the extent that the aggregate of such organizational expenses and offering costs (other than the sales load) does not exceed $0.03 per share.
(2) The Underwriters have been granted an option to purchase up to additional Common Shares at the public offering price less the sales load within 45 days of the date of this prospectus, solely to cover over-allotments, if any. If such option is exercised in full, the total public offering price, sales load, estimated offering expenses and proceeds to the Fund will be $ , $ , $ and $ , respectively. See "Underwriting."
The Underwriters (defined below) expect to deliver the Common Shares to purchasers on or about , 2003.
CITIGROUP
MERRILL LYNCH & CO.
UBS INVESTMENT BANK
WACHOVIA SECURITIES
ADVEST, INC.
H&R BLOCK FINANCIAL ADVISORS, INC.
FERRIS, BAKER WATTS INCORPORATED
J.J.B. HILLIARD, W.L. LYONS, INC.
JANNEY MONTGOMERY SCOTT LLC
QUICK & REILLY, INC.
RBC CAPITAL MARKETS
STIFEL, NICOLAUS & COMPANY INCORPORATED
WELLS FARGO SECURITIES, LLC
, 2003
[SIDENOTE]
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
(CONTINUED FROM PREVIOUS PAGE)
Debt securities and income-producing instruments include all varieties of fixed-income securities, including bonds, mortgage-backed and other asset-backed securities, convertible securities, bank loans, and other instruments described in this prospectus.
The Fund anticipates that, under current market conditions, at least 25% of its initial portfolio will consist of below investment grade debt securities and other income-producing instruments. Below investment grade bonds, commonly referred to as "junk bonds," are bonds that are rated below investment grade by each of the nationally-recognized statistical rating organizations (each, a "Rating Agency") such as Standard & Poor's Ratings Services ("S&P"), Moody's Investors Service, Inc. ("Moody's"), or Fitch Ratings ("Fitch"), that cover the security, or, if unrated, are determined to be of comparable quality by the portfolio managers. A debt security rated below the top four ratings categories by a Rating Agency will be considered below investment grade. Securities of below investment grade quality are regarded as having predominantly speculative characteristics with respect to the issuer's capacity to pay interest and repay principal. The Fund's strategies may result in an above average amount of risk and volatility or loss of principal. The Fund cannot ensure that it will achieve its investment objectives.
The Fund will not invest more than 10% of its total assets in securities that are rated CCC/Caa or lower by each Rating Agency rating the security or that are unrated but judged by the portfolio managers to be of comparable quality. The Fund may invest in debt securities or other obligations whose issuers are in default. However, under normal conditions, the Fund will not invest more than 5% of its total assets in debt securities or other obligations whose issuers are in default at the time of purchase. The Fund may use swaps and other derivative instruments. The Fund may invest in issuers located anywhere in the world; however, the Fund will not invest more than 15% of its total assets in securities or other income-producing instruments issued by companies and governments in any foreign country. The Fund may also invest up to 5% of its total assets in securities or other income-producing instruments denominated in foreign currencies.
Because the Fund's holdings will fluctuate in price, the value of your investment in the Fund will go up and down. This means you could lose money over short or even extended periods.
LEVERAGE. The Fund presently intends to use leverage by issuing preferred shares representing approximately 33% of the Fund's Managed Assets (as defined on page four of this prospectus), although the Fund is permitted to use leverage representing up to 38% of the Fund's Managed Assets. The Fund may also enter into transactions that may give rise to a form of leverage, including among others: loans of portfolio securities, swap contracts and other derivative instruments, reverse repurchase agreements, as well as when-issued, delayed delivery or forward commitment transactions. The Fund will segregate liquid assets against or otherwise cover its future obligations under such transactions, in order to provide that, immediately after entering into such a transaction, the Fund's future commitments that it has not segregated liquid assets against or otherwise covered, together with any outstanding preferred shares, will not exceed 38% of the Fund's Managed Assets. By using leverage, the Fund will seek to obtain a higher return for holders of common shares than if the Fund did not use leverage. Leveraging is a speculative technique and there are special risks involved. There can be no assurance that a leveraging strategy will be used or that it will be successful during any period in which it is employed. See "Preferred Shares and Related Leverage" and "Risks -- Leverage Risk."
You should read this prospectus, which contains important information about the Fund, before deciding whether to invest, and retain it for future reference. A Statement of Additional Information dated , 2003, as it may be supplemented (the "Statement of Additional Information"), containing additional information about the Fund, has been filed with the Securities and Exchange Commission ("SEC") and is incorporated by reference in its entirety into this prospectus, which means that it is part of the prospectus for legal purposes. You can review the table of contents of the Statement of Additional Information on page 58 of this prospectus. You may request a free copy of the Statement of Additional Information by calling 1-800/DIAL BEN(R) (1-800/342-5236), TDD (Hearing Impaired) 1-800/851-0637, or by writing to the Fund. You can obtain copies of this information, after paying a duplicating fee, by writing to the SEC's Public Reference Section, Washington, D.C. 20549-0102 or by electronic request at the following e-mail address: publicinfo@sec.gov. You also can obtain information about the Fund by visiting the SEC's Public Reference Room in Washington, D.C. (phone 1-202/942-8090) or the EDGAR Database on the SEC's Internet site at http://www.sec.gov.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR SOLICITING AN OFFER TO BUY THE SHARES HEREIN DESCRIBED IN ANY STATE, JURISDICTION OR COUNTRY IN WHICH THE OFFERING IS NOT PERMITTED.
NO SALES REPRESENTATIVE, DEALER, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. You should rely only on the information contained or incorporated by reference in this prospectus. The Fund has not, and the Underwriters have not, authorized anyone to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front of this prospectus. The Fund's business, financial condition, results of operations and prospects may have changed since that date.
TABLE OF CONTENTS
Summary 1 Summary of Fund Expenses 15 The Fund 16 Use of Proceeds 16 Investment Objectives and Strategies 17 Portfolio Contents and Other Information 19 Preferred Shares and Related Leverage 31 Risks 33 How the Fund Manages Risk 42 Management of the Fund 45 Net Asset Value 46 Distributions 47 Dividend Reinvestment Plan 47 Description of Shares 49 Anti-Takeover and Other Provisions in the Declaration of Trust 51 Repurchase of Common Shares; Conversion to Open-End Fund 52 Tax Matters 53 Underwriting 55 Custodian 57 Shareholder Servicing Agent and Transfer Agent 57 Administrator 58 Legal Matters 58 |
Table of Contents for the Statement of Additional Information 58
[THIS PAGE INTENTIONALLY LEFT BLANK]
SUMMARY
THIS IS ONLY A SUMMARY. THIS SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER BEFORE INVESTING IN THE FUND'S SHARES. YOU SHOULD REVIEW THE MORE DETAILED INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS AND IN THE STATEMENT OF ADDITIONAL INFORMATION, ESPECIALLY THE INFORMATION UNDER THE HEADING "RISKS."
The Fund Franklin Templeton Limited Duration Income
Trust (the "Fund") is a newly organized,
diversified, closed-end management
investment company. See "The Fund."
The Offering The Fund is offering common shares of
beneficial interest (the "Common Shares")
at $15.00 per share through a group of
underwriters (the "Underwriters") led by
Citigroup Global Markets Inc., Merrill
Lynch, Pierce, Fenner & Smith Incorporated,
UBS Securities LLC, Wachovia Securities,
LLC, Advest, Inc., H&R Block Financial
Advisors, Inc., Ferris, Baker Watts,
Incorporated, J.J.B. Hilliard, W.L. Lyons,
Inc., Janney Montgomery Scott LLC, Quick &
Reilly, Inc. A FleetBoston Financial
Company, RBC Dain Rauscher, Inc., Stifel,
Nicolaus & Company, Incorporated and Wells
Fargo Securities, LLC. You must purchase at
least 100 Common Shares. The Underwriters
have been granted an option to purchase up
to additional Common Shares at the
public offering price less the sales load
within 45 days of the date of this
prospectus, solely to cover
over-allotments, if any. See
"Underwriting." Franklin Advisers, Inc.,
the Fund's investment adviser (the
"Manager"), has agreed to pay (i) the
amount by which the Fund's offering costs
(other than the sales load) exceed $0.03
per share and (ii) all of the Fund's
organizational expenses, except that the
Fund has agreed to reimburse the Manager
for such organizational expenses to the
extent that the aggregate of such
organizational expenses and offering costs
(other than the sales load) does not exceed
$0.03 per share.
Investment Objectives The Fund's primary investment objective is
to seek high current income. Its secondary
objective is to seek capital appreciation
to the extent it is possible and is
consistent with the Fund's primary
objective. Under normal market conditions,
the Fund will seek to achieve its
investment objectives by investing in debt
securities and other income-producing
instruments, allocated primarily among
three distinct investment categories: (1)
mortgage-backed securities and other
asset-backed securities; (2) bank loans
made to corporate and other business
entities; and (3) below investment grade
debt securities and other income-producing
instruments. There is no limitation on the
percentage of the Fund's assets that may be
allocated to each of these investment
categories; provided that, under normal
market conditions, the Fund will invest at
least 25% of its total assets in each
category. Under normal circumstances, the
Fund's allocation to the investment
category of mortgage-backed and other
asset-backed securities will be primarily
composed of investments in mortgage-backed
securities.
Limited Duration Under normal market conditions, the Manager
expects the Fund to maintain an estimated
average portfolio duration of between two
and five years (including the effect of
anticipated leverage). This duration policy
may only be changed following provision of
60 days' prior notice to holders of Common
Shares ("Common Shareholders"). Initially,
the Fund is expected to have an estimated
average portfolio duration of approximately
three years (including the effect of
anticipated leverage). In comparison to
maturity (which is the date on which a debt
instrument ceases and the issuer is
obligated to repay the principal amount),
duration is a measure of the price
volatility of a debt instrument as a result
of changes in market rates of interest,
based on the weighted average timing of the
instrument's expected principal and
interest payments. Duration differs from
maturity in that it considers a security's
yield, coupon payments, principal payments
and call features in addition to the amount
of time until the security finally matures.
As the value of a security changes over
time, so will its duration. Prices of
securities with longer durations tend to be
more sensitive to interest rate changes
than securities with shorter durations. In
general, a portfolio of securities with a
longer duration can be expected to be more
sensitive to interest rate changes than a
portfolio with a shorter duration.
Sector Allocation Strategy The Fund will use an active sector
allocation strategy to try to achieve its
goals of income and capital appreciation.
This means the Fund will allocate its
assets among securities in various market
sectors based on the Manager's assessment
of changing economic, global market,
industry, and issuer conditions.
Consequently, the Fund, from time to time,
may have significant positions in
particular sectors. There can be no
assurance that the Manager's assessments
will be correct. See "Investment Objectives
and Strategies -- Portfolio Management
Strategies."
Credit Quality Under normal market conditions, the Fund
will invest at least 25% of its assets in
debt securities or other instruments rated
below investment grade, sometimes called
"junk bonds." The Fund may also invest in
investment grade debt securities.
Investment grade debt securities are rated
in one of the top four ratings categories
by a nationally-recognized statistical
rating organization (a "Rating Agency")
such as S&P, Moody's or Fitch. A debt
security rated below the top four ratings
categories by each Rating Agency rating the
security will be considered below
investment grade. The Fund may also buy
unrated debt securities or other
income-producing instruments.
The Manager will monitor the credit quality
and price of the Fund's holdings, as well
as other investments that are available to
the Fund. Under normal market conditions,
the Fund expects to maintain a weighted
average portfolio credit quality of
investment grade, as determined by the
Manager based on the credit quality of the
Fund's portfolio holdings (as rated by the
Rating Agencies or, if unrated, as
determined by the Manager). For this
purpose, when a portfolio holding is rated
by more than one of these rating agencies,
the Manager generally will use the highest
rating.
The Fund will not invest more than 10% of
its total assets in securities that are, at
the time of purchase, rated CCC/Caa or
lower by each Rating Agency rating the
security or that are unrated but judged by
the portfolio managers to be of comparable
quality. The Fund may invest in securities
or other instruments whose issuers are in
default or bankruptcy. Under normal
conditions, the Fund will not invest more
than 5% of its total assets in debt
securities or other obligations whose
issuers are in default at the time of
purchase.
Independent Credit Analysis The Manager will rely heavily on its own
analysis of the credit quality and risks
associated with individual debt obligations
considered for the Fund, rather than
relying exclusively on rating agencies or
third-party research. The Manager will use
this information in an attempt to minimize
credit risk and identify issuers,
industries or sectors that are undervalued
or that offer attractive yields relative to
the Manager's assessment of their credit
characteristics. The Fund's success in
achieving its investment objectives may
depend more heavily on the Manager's credit
analysis than if the Fund invested solely
in higher-quality and rated securities.
Diversification Subject to the availability of suitable
investment opportunities, the Manager will
seek to diversify the Fund's investments
broadly in an attempt to minimize the
portfolio's sensitivity to credit and other
risks associated with a particular issuer,
industry or sector, or to the impact of a
single economic, political or regulatory
event.
Portfolio Contents The Fund's portfolio may include bonds,
debentures, notes and other similar types
of debt instruments, such as asset-backed
securities, as well as bank loans and loan
participations, commercial and
agency-issued mortgage securities,
payment-in-kind securities, zero-coupon
securities, bank certificates of deposit,
fixed time deposits and bankers'
acceptances, structured notes and other
hybrid instruments, preferred shares,
municipal or U.S. government securities,
debt securities issued by foreign
corporations or supra-national government
agencies, mortgage-backed securities issued
on a public or private basis, and other
types of asset-backed securities. The rate
of interest on an income-producing
security may be fixed, floating or
variable. The Fund may use swaps and other
derivative instruments. The Fund will not
invest in inverse floating rate instruments
or interest-only or principal-only mortgage
securities.
The Fund may hold equity securities;
however, under ordinary circumstances, such
investments will be limited to convertible
securities, dividend-paying common or
preferred stocks, or equity securities
acquired in connection with a
restructuring, bankruptcy, default, or the
exercise of a conversion or purchase right.
Since the Fund is diversified, with respect
to 75% of its investment portfolio, the
Fund generally may not hold more than 5% of
its assets in the securities of a single
issuer or hold more than 10% of the
outstanding voting securities of an issuer.
The Fund generally will not invest more
than 25% of its total assets in securities
of issuers in any one industry. See "How
the Fund Manages Risk -- Investment
Limitations."
Proposed Offering of
Preferred Shares and
Other Forms of Leverage Subject to market conditions, approximately
one to three months after completion of
this offering, the Fund intends to offer
preferred shares of beneficial interest
("Preferred Shares") representing
approximately 33% of the Fund's Managed
Assets, although the Fund is permitted to
use leverage representing up to 38% of the
Fund's Managed Assets. "Managed Assets"
means the total assets of the Fund
(including any assets attributable to
leverage) minus the sum of accrued
liabilitites (other than debt representing
financial leverage). The issuance of
Preferred Shares will leverage your
investment in Common Shares. Leverage
involves special risks. There can be no
assurance that a leveraging strategy will
be used or that it will be successful
during any period in which it is employed.
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See "Risks -- Leverage Risk." The net proceeds the Fund obtains from selling the Preferred Shares will be invested in accordance with the Fund's investment objectives and policies as described in this prospectus. The Preferred Shares are expected to pay dividends based on short-term interest rates which would be reset periodically through an auction or remarketing procedure, although the terms of the Preferred Shares may also enable the Fund to lengthen such intervals. So long as the rate of return, net of applicable Fund expenses, on the debt obligations and other investments purchased by the Fund exceeds Preferred Share dividend rates, the investment of the proceeds of the Preferred Shares will generate more income than will be needed to pay dividends on the Preferred Shares. If so, the excess will be used to pay higher dividends to Common Shareholders than if the Fund were not so leveraged through the issuance of Preferred Shares.
The Fund may also enter into transactions that may give rise to a form of leverage, including among others: loans of portfolio securities, swap contracts and other derivative instruments, reverse repurchase agreements, as well as when-issued, delayed delivery or forward commitment transactions. The Fund will segregate liquid assets against or otherwise cover its future obligations under such transactions, in order to provide that, immediately after entering into such a transaction, the Fund's future commitments that it has not segregated liquid assets against or otherwise covered, together with any outstanding Preferred Shares, will not exceed 38% of the Fund's Managed Assets. By using leverage, the Fund will seek to obtain a higher return for Common Shareholders than if the Fund did not use leverage. Leveraging is a speculative technique and there are special risks involved.
The Fund's use of derivative instruments (other than swaps) will also be limited by the Fund's 15% limit on illiquid investments to the extent they are determined to be illiquid. See "Investment Objectives and Strategies -- Portfolio Contents and Other Information" and "Risks -- Liquidity Risk." The Fund cannot assure you that the issuance of Preferred Shares or the use of other forms of leverage will result in a higher yield on your Common Shares. Once Preferred Shares are issued and/or other forms of leverage are used, the net asset value and market price of the Common Shares and the yield to Common Shareholders will be more volatile. See "Preferred Shares and Related Leverage," "Description of Shares -- Preferred Shares" and "Risks -- Leverage Risk." In addition, fees and expenses paid by the Fund are borne entirely by the Common Shareholders (and not by Preferred Shareholders, if any). These include costs associated with any offering of Preferred Shares by the Fund (which costs are estimated to be approximately 1.20% of the total dollar amount of a Preferred Share offering), which will be borne immediately by Common Shareholders (as will the costs associated with any borrowings or other forms of leverage utilized by the Fund) and result in a reduction of the net asset value of the Common Shares.
Investment Adviser Franklin Advisers, Inc. (the "Manager")
serves as the investment adviser of the
Fund. Subject to the supervision of the
Board of Trustees, the Manager is
responsible for managing the investment
activities of the Fund, for which it will
receive an annual fee, payable monthly, in
an amount equal to 0.50% of the average
daily value of the Fund's Managed Assets.
The Manager and its affiliates
(collectively known as "Franklin Templeton
Investments") provide investment management
and advisory services to closed-end and
open-end investment company clients, as
well as private accounts. As of June 30,
2003, Franklin Templeton Investments had
approximately $287 billion in assets under
management for more than five million
mutual fund shareholder and other accounts.
Administrator In addition to the fee paid to the Manager,
the Fund pays a monthly fee equal to an
annual rate of 0.20% of the Fund's average
daily Managed Assets to Franklin Templeton
Services, LLC ("FT Services"), an affiliate
of the Manager. FT Services is the Fund's
administrator and provides certain
administrative services and facilities for
the Fund. See "Administrator."
Portfolio Management Team Christopher Molumphy, CFA, Eric G. Takaha,
CFA, Roger Bayston, CFA, and Richard C.
D'Addario will serve as the portfolio
management team responsible for managing
the Fund's portfolio investments. They are
sometimes referred to herein as the
"portfolio managers." Each of them has
experience managing mutual funds and
private accounts with Franklin Templeton
Investments. See "Management of the Fund --
Portfolio Management Team."
Distributions Commencing with the Fund's first dividend,
the Fund intends to make regular monthly
cash distributions to Common Shareholders
based on the projected performance of the
Fund. The dividend rate that the Fund pays
on its Common Shares will depend on a
number of factors, including dividends
payable on any Preferred Shares and the
expenses of any other leveraging
transactions. As portfolio and market
conditions change, the rate of dividends on
the Common Shares and the Fund's dividend
policy could change. At least annually, the
Fund intends to distribute to Common
Shareholders their pro rata share of any
available net capital gains. Your initial
distribution is expected to be declared
within approximately 45 days, and paid
within approximately 60 to 75 days, from
the completion of this offering, depending
on market conditions. The amount of any
distributions will vary, and there is no
guarantee the Fund will pay either income
dividends or capital gain distributions.
Unless you elect to receive distributions
in cash, all of your distributions will be
automatically reinvested in additional
Common Shares under the Fund's Dividend
Reinvestment Plan. See "Distributions" and
"Dividend Reinvestment Plan."
Dividend Reinvestment Plan Under the Fund's Dividend Reinvestment
Plan, all Common Shareholders whose shares
are registered in their own names will have
all dividends, including any capital gain
distributions, reinvested automatically in
additional Common Shares by PFPC, Inc.,
unless the Common Shareholder "opts out" of
the plan and elects to receive cash. See
"Dividend Reinvestment Plan."
Listing The Common Shares are expected to be listed
on the American Stock Exchange (the "AMEX")
under the symbol "FTF." See "Description of
Shares -- Common Shares."
Custodian The Bank of New York acts as custodian of
the Fund's securities and other assets. See
"Custodian."
Shareholder Servicing and
Transfer Agent PFPC, Inc. is the Fund's shareholder
servicing agent and acts as the Fund's
transfer agent and dividend-paying agent.
See "Shareholder Servicing and Transfer
Agent."
Market Price of Shares Shares of closed-end investment companies
frequently trade at prices lower than net
asset value. The Fund cannot assure you
that the Common Shares will trade at a
price higher than net asset value in the
future. The Fund's net asset value will be
reduced immediately following the offering
by the sales load and the amount of
organization and offering expenses paid by
the Fund, and immediately following any
offering of Preferred Shares by the costs
of that offering paid by the Fund. See "Use
of Proceeds." In addition to net asset
value, market price may be affected by such
factors relating to the Fund or its
portfolio holdings as dividend levels
(which are in turn affected by expenses,
including the costs of leverage), dividend
stability, portfolio credit quality and
liquidity and call protection and market
supply and demand. See "Preferred Shares
and Related Leverage," "Risks,"
"Description of Shares," and "Repurchase of
Common Shares; Conversion to Open-End Fund"
in this prospectus, and the Statement of
Additional Information under "Repurchase of
Common Shares; Conversion to Open-End
Fund." The Common Shares are designed
primarily for long-term investors, and you
should not view the Fund as a vehicle for
trading purposes.
SPECIAL RISK CONSIDERATIONS
Lack of Operating History The Fund is a newly organized, diversified,
closed-end management investment company
with no history of operations.
Market Discount Risk As with any stock, the price of the Common
Shares will fluctuate with market
conditions and other factors. If Common
Shares are sold, the price received may be
more or less than the original investment.
The Common Shares may trade at a price that
is less than the initial offering price or
at a discount from their net asset value.
This risk may be greater for investors who
sell their shares relatively shortly after
completion of the initial offering. The
Common Shares are designed for long-term
investors.
Credit Risk An issuer of a debt security may be unable
to make interest payments and repay
principal. Changes in an issuer's financial
strength or in a security's credit rating
may affect a security's value and, thus,
impact Fund performance. See "Risks --
Credit Risk."
Mortgage-Related Risk Rising interest rates tend to extend the
duration of mortgage-related securities,
which in turn could lengthen the average
duration of the Fund's portfolio, making
the portfolio more sensitive to changes in
interest rates, and may reduce the market
value of the portfolio's mortgage-related
securities. This possibility is often
referred to as extension risk. In addition,
mortgage-related securities are subject to
prepayment risk -- the risk that borrowers
may pay off their mortgages sooner than
expected, particularly when interest rates
decline. See "Risks -- Mortgage-Related
Risk."
Loan Risk Bank loans, loan participations and
assignments involve credit risk, interest
rate risk, liquidity risk, and the risks of
being a lender, as well as other risks. If
the Fund purchases a loan, it may be able
to enforce its rights only through the
lender, and may assume the credit risk of
both the lender and the borrower.
Corporate loans in which the Fund may
invest may be unrated and generally will
not be registered with the Securities and
Exchange Commission (the "SEC") or listed
on a securities exchange. Because the
amount of public information available with
respect to corporate loans generally is
less extensive than that available for more
widely rated, registered and
exchange-listed securities, corporate loans
can be more difficult to value. See "Risks
-- Loan Risk."
High Yield Risk The Fund may invest in debt securities and
other income-producing instruments that are
rated below investment grade or unrated.
These securities and instruments generally
have more credit risk than higher-rated
securities. The issuers of such securities
or instruments typically do not have the
track record needed to receive an
investment grade rating, have borrowed to
finance acquisitions or to expand their
operations, are seeking to refinance their
debt at lower rates, or have been
downgraded due to financial difficulties.
Due to the risks involved in investing in
high yield debt securities and other
income-producing instruments, an investment
in the Fund should be considered
speculative.
Companies issuing high yield, fixed-income
securities are not as strong financially as
those issuing securities with higher credit
ratings. These companies are more likely to
encounter financial difficulties and are
more vulnerable to changes in the economy,
such as a recession or a sustained period
of rising interest rates, that could affect
their ability to make interest and
principal payments. The high yield market
has experienced a large number of defaults
in recent years. If a company defaults
because it stops making interest and/or
principal payments, payments on the
securities may never resume because such
securities are generally unsecured and are
often subordinated to other creditors of
the issuer. These securities may be
worthless and the Fund could lose its
entire investment.
The prices of high yield, fixed-income
securities fluctuate more than
higher-quality debt securities. Prices are
especially sensitive to developments
affecting the company's business and to
changes in the ratings assigned by rating
agencies. Prices often are closely linked
with the company's stock prices and
typically rise and fall in response to
factors that affect stock prices. In
addition, the entire high yield securities
market can experience sudden and sharp
price swings due to changes in economic
conditions, stock market activity, large
sustained sales by major investors, a
high-profile default, or other factors.
High yield securities generally are less
liquid than higher-quality securities. Many
of these securities do not trade
frequently, and when they do their prices
may be significantly higher or lower than
expected. See "Risks -- High Yield Risk."
Interest Rate Risk Changes in interest rates may present risks
to the Fund. When interest rates rise, debt
security prices generally fall. The
opposite is also true: debt security prices
generally rise when interest rates fall.
Because market interest rates are currently
near their lowest levels in many years,
there is a great risk that the Fund's
investments will decline in value.
The prices of fixed-rate securities with
longer durations tend to be more sensitive
to changes in interest rates than
securities with shorter durations, usually
making them more volatile. Because the Fund
will normally have an estimated average
portfolio duration of between two and five
years (including the effects of anticipated
leverage), the Common Shares' net asset
value and market price will tend to
fluctuate more in response to changes in
market interest rates than if the Fund
invested mainly in short-term debt
securities and less than if the Fund
invested mainly in longer-term debt
securities.
The Preferred Shares, if any are issued,
are expected to pay dividends based on
certain interest rates. If the Preferred
Share dividend rate exceeds the rate of
return on the debt obligations and other
investments held by the Fund that were
acquired during periods of generally lower
interest rates, the returns to Common
Shareholders may be reduced. The Fund's use
of leverage, as described in the
prospectus, will tend to increase Common
Share interest rate risk.
The Fund may employ certain strategies for
the purpose of reducing the interest rate
sensitivity of the portfolio and decreasing
the Fund's exposure to interest rate risk,
although entire there is no assurance that
it will do so or that such strategies will
be successful. See "Risks -- Interest Rate
Risk."
Inflation Risk Inflation risk is the risk that the value
of assets or income from the Fund's
investments will be worth less in the
future as inflation decreases the value of
money.
Leverage Risk The Fund's use of leverage through the
issuance of Preferred Shares, the lending
of portfolio securities, and the use of
swaps, other derivatives, reverse
repurchase agreements, and when-issued,
delayed delivery or forward commitment
transactions, creates the opportunity for
increased Common Share net income, but also
creates special risks for Common
Shareholders. To mitigate leverage risk
from such transactions, the Fund will
segregate liquid assets against or
otherwise cover its future obligations
under such transactions.
So long as the Fund's securities portfolio
provides a higher rate of return (net of
Fund expenses) than the Preferred Share
dividend rate, the leverage will allow
Common Shareholders to receive a higher
current rate of return than if the Fund
were not leveraged. If, however, interest
rates rise, which may be likely because
interest rates are currently near their
lowest levels in many years, the Preferred
Share dividend rate could exceed the rate
of return on the debt obligations and other
investments held by the Fund that were
acquired during periods of generally lower
interest rates, reducing return to Common
Shareholders. Preferred Shares are expected
to pay cumulative dividends, which may
increase leverage risk.
The Fund's use of leverage may, during
periods of rising interest rates, adversely
affect the Fund's income, distributions and
total returns to Common Shareholders.
Leverage creates two major types of risks
for Common Shareholders:
- the likelihood of greater volatility of
net asset value and market price of
Common Shares, because changes in the
value of the Fund's portfolio of
income-producing securities (including
securities bought with the proceeds of
the Preferred Shares offering) are borne
entirely by the Common Shareholders; and
- the possibility either that Common Share
income will fall if the Preferred Share
dividend rate rises, or that Common Share
income will fluctuate because the
Preferred Share dividend rate varies.
Because the fees received by the Manager
are based on the Managed Assets of the
Fund (including assets attributable to
any Preferred Shares that may be
outstanding), the Manager has a financial
incentive for the Fund to issue
Preferred Shares, which may create a
conflict of interest between the Manager
and the Common Shareholders.
By using leverage, the Fund will seek to
obtain a higher return for holders of
Common Shares than if the Fund did not use
leverage. Leveraging is a speculative
technique and there are special risks
involved. There can be no assurance that a
leveraging strategy will be used or that it
will be successful during any period in
which it is employed. The Fund's use of
leverage strategies could result in larger
losses than if the strategies were not
used.
Portfolio Security Issuer Risk The value of the Fund's investments may
decline for a number of reasons that
directly relate to the issuer, such as
management performance, financial leverage
and performance and factors affecting the
issuer's industry.
Management Risk The Fund is subject to management risk
because it is an actively managed
portfolio. The Manager will apply
investment techniques and risk analyses in
making investment decisions for the Fund,
but there can be no guarantee that they
will produce the desired results.
Foreign (Non-U.S.) Investment Risk Investing in foreign securities, including
securities of foreign governments,
typically involves more risks than
investing in U.S. securities. These risks
can increase the potential for losses in
the Fund and may include, among others,
currency risks, country risks (political,
diplomatic, regional conflicts, terrorism,
war, social and economic instability,
currency devaluations and policies that
have the effect of limiting or restricting
foreign investment or the movement of
assets), different trading practices, less
government supervision, less publicly
available information, limited trading
markets and greater volatility. See "Risks
-- Foreign (Non-U.S.) Investment Risk."
Investing in securities of issuers based in
developing or emerging markets entails all
of the risks of investing in securities of
foreign issuers to a heightened degree as
well as other risks. See "Risks -- Foreign
(Non-U.S.) Investment Risk -- Developing
Countries and Emerging Markets."
Debt issued by foreign governments, their
agencies or instrumentalities, or other
government-related entities, is subject to
several risks, such as the fact that there
are generally no bankruptcy proceedings
similar to those in the United States by
which defaulted sovereign debt may be
collected. Other risks include: potential
limits on the flow of capital; political
and economic risk; the extent and quality
of financial regulations; tax risk; and the
potential expropriation or nationalization
of foreign issuers. See "Risks -- Foreign
(Non-U.S.) Investment Risk -- Sovereign
Issuers."
Derivatives Risk Derivatives (such as futures contracts and
options thereon, options, swaps and short
sales) are subject to a number of risks
such as liquidity risk, interest rate risk,
credit risk, leverage risk, volatility risk
and management risk. They also involve the
risk of mispricing or improper valuation,
the risk of ambiguous documentation, and
the risk that changes in the value of a
derivative may not correlate perfectly with
an underlying asset, interest rate or
index. There can be no assurance that the
Fund will engage in suitable derivative
transactions to reduce exposure to other
risks when that would be beneficial. See
"Risks -- Derivatives Risk."
Counterparty Risk The Fund will be subject to credit risk
with respect to the counterparties to any
derivative contracts purchased by the Fund.
If a counterparty becomes bankrupt or
otherwise fails to perform its obligations
under a derivative contract due to
financial difficulties, the Fund may
experience significant delays in obtaining
any recovery under the derivative contract.
|
See "Risks -- Counterparty Risk."
Volatility Risk The market values for some or all of the
Fund's holdings may be volatile. The Fund's
investment grade or long-term debt
securities will generally be more sensitive
to changing interest rates and less
sensitive to changes in the economic
environment. The Fund's investments may
also be subject to liquidity constraints
and as a result, higher price volatility.
The Fund's use of leverage may increase the
volatility of the Fund's investment
portfolio. See "Risks -- Volatility Risk."
Reinvestment Risk The Fund may distribute or reinvest the
proceeds from matured, traded or called
debt obligations. If the Fund reinvests
such proceeds at lower interest rates, the
market price or the overall return of the
Common Shares may decline. See "Risks --
Reinvestment Risk."
Call Risk A debt security may be prepaid (called)
before maturity. An issuer is more likely
to call its securities when interest rates
are falling, because the issuer can issue
new securities with lower interest
payments. If a debt security is called, the
Fund may have to replace it with a
lower-yielding security. At any time, the
Fund may have a large amount of its assets
invested in securities subject to call
risk. A call of some or all of these
securities may lower the Fund's income and
yield and its distributions to
shareholders. See "Risks -- Call Risk."
Liquidity Risk The Fund may invest up to 15% of its total
assets in securities (excluding swaps)
which are illiquid at the time of
investment (securities that cannot be
disposed of within seven days in the o
rdinary course of business at approximately
the value at which the Fund has valued the
securities). Illiquid securities may trade
at a discount from comparable, more liquid
investments, and may be subject to wide
fluctuations in market value. Also, the
Fund may not be able to dispose of illiquid
securities when that would be beneficial at
a favorable time or price. See "Risks --
Liquidity Risk."
Income Risk Because the Fund can distribute only what
it earns, the Fund's distributions to
shareholders may decline. See "Risks --
Income Risk."
Zero-Coupon Securities Risk Zero-coupon securities are especially
sensitive to changes in interest rates, and
their prices generally are more volatile
than debt securities that pay interest
periodically. Lower quality zero-coupon
bonds are generally subject to the same
risks as high yield debt securities. The
Fund typically will not receive any
interest payments on these securities until
maturity. If the issuer defaults, the Fund
may lose its entire investment, which will
affect the Fund's share price. See "Risks
-- Zero-Coupon Securities Risk."
Smaller Company Risk Although the Fund does not presently intend
to invest a significant portion of its
assets in smaller companies, the Fund may
invest some of its assets in such
companies. These companies may be subject
to greater levels of credit, market and
issuer risk than companies with larger
market capitalizations. Also, securities of
smaller companies may trade less frequently
and in lesser volume than more widely held
securities and their values may fluctuate
more sharply than other securities. See
"Risks -- Smaller Company Risk."
Real Estate Risk Since the Fund may invest in real estate
investment trusts and mortgage securities
secured by real estate, the Fund may be
subject to risks similar to those
associated with the direct ownership of
real estate. These risks include declines
in the value of real estate, general and
local economic risk, management risk,
interest rate risk, possible lack of
availability of mortgage funds,
overbuilding, extended vacancies of
properties, increased competition,
increases in property taxes and operating
expenses, changes in zoning laws,
environmental risk, casualty or
condemnation losses, and rent controls.
See "Risks -- Real Estate Risk."
Market Disruption and
Geopolitical Risk The war with Iraq, its aftermath, the
continuing occupation of Iraq, terrorism
and related geopolitical risks have led,
and may in the future lead to increased
short-term market volatility and may
have adverse effects on U.S. and world
economies and markets generally. These
risks could also adversely affect
individual issuers and securities markets,
interest rates, auctions, secondary
trading, ratings, credit risk, inflation
and other factors relating to the Common
Shares. See "Risks -- Market Disruption and
Geopolitical Risk."
Anti-Takeover Provisions The Fund's Amended and Restated Agreement
and Declaration of Trust, dated June 19,
2003 (the "Declaration"), includes
provisions that could limit the ability of
other entities or persons to acquire
control of the Fund or convert the Fund to
open-end status. Also, these provisions
could have the effect of depriving the
Common Shareholders of opportunities to
sell their Common Shares at a premium over
the then-current market price of the Common
Shares. See "Anti-Takeover and Other
Provisions in the Declaration of Trust."
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SUMMARY OF FUND EXPENSES
The following table and the expenses shown assume the issuance of Preferred Shares in an amount equal to 33% of the Fund's Managed Assets, and show Fund expenses as a percentage of Managed Assets attributable only to Common Shares. Footnote 3 to the table also shows Fund expenses as a percentage of Managed Assets attributable to Common Shares, but assumes that no Preferred Shares are issued or outstanding (such as will be the case prior to the Fund's expected issuance of Preferred Shares).
SHAREHOLDER TRANSACTION EXPENSES Sales Load (as a percentage of offering price) 4.50% Dividend Reinvestment Plan Fees None(1) |
ANNUAL EXPENSES
Management Fees 0.75%
Other Expenses 0.46%(2),(4)
----
Total Annual Expenses 1.21%(5)
====
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(1) You will pay brokerage charges if you direct the plan agent to sell your
Common Shares held in a dividend reinvestment account.
(2) Other expenses include an administrative services fee of 0.20% of the Fund's
Managed Assets, payable to FT Services, an affiliate of the Manager.
(3) The table presented below in this footnote estimates what the Fund's annual
expenses would be, stated as percentages of the Fund's Managed Assets
attributable to Common Shares but, unlike the table above, assumes that no
Preferred Shares are issued or outstanding. This will be the case, for
instance, prior to the Fund's expected issuance of Preferred Shares. In
accordance with these assumptions, the Fund's expenses would be estimated to
be as follows:
Management Fees 0.50%
Other Expenses 0.30%(2),(4)
----
Total Annual Expenses 0.80%(5)
====
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(4) If the Fund offers Preferred Shares, costs of that offering, estimated to be
approximately 1.20% of the total dollar amount of the Preferred Share
offering, will be borne immediately by Common Shareholders and result in a
reduction of the net asset value of the Common Shares. Assuming the issuance
of Preferred Shares in an amount equal to 33% of the Fund's Managed Assets
(calculated after their issuance), these offering costs are estimated to be
approximately 0.60% of the offering price. These offering costs are not
included among the expenses shown in this table.
(5) The Manager has agreed to pay (i) the amount by which the Fund's offering
costs (other than the sales load) exceed $0.03 per share (0.20% of the
offering price) and (ii) all of the Fund's organizational expenses, except
that the Fund has agreed to reimburse the Manager for such organizational
expenses to the extent that the aggregate of such organizational expenses
and offering costs (other than the sales load) does not exceed $0.03 per
share. The offering costs to be paid by the Fund are not included among the
expenses shown in the table. However, these expenses will be borne by Common
Shareholders and result in a reduction of the net asset value of the Common
Shares.
The purpose of the table above is to help you understand all fees and expenses that you, as a Common Shareholder, would bear directly or indirectly. The Other Expenses shown in the table and related footnotes are based on estimated amounts for the Fund's first year of operations and assume that the Fund issues approximately 33 million Common Shares. If the Fund issues fewer Common Shares, all other things being equal, these expenses would increase. See "Management of the Fund" and "Dividend Reinvestment Plan."
As required by relevant SEC regulations, the following example illustrates the expenses (including the sales load of $0.675 per Common Share, estimated offering expenses of this offering of $0.01 per Common Share, and the estimated offering costs of issuing Preferred Shares assuming the Fund issues Preferred Shares representing 33% of the Fund's capital (calculated after their issuance) of approximately $0.09 per Common Share) that you would pay on a $1,000 investment in Common Shares, assuming the sales load and the offering expenses listed in the parenthetical above, and (a) total net annual expenses of 1.21% of net assets attributable to Common Shares (assuming the issuance of Preferred Shares) in years one through ten, and (b) a 5% annual return(1):
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
Total Expenses Incurred $ 63 $ 88 $ 115 $ 191
----------
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(1) THE EXAMPLE ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES. ACTUAL EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. The example assumes that the estimated Other Expenses set forth in the Annual Expenses table are accurate and that all dividends and distributions are reinvested at net asset value. Actual expenses may be greater or less than those assumed. Moreover, the Fund's actual rate of return may be greater or less than the hypothetical 5% annual return shown in the example.
THE FUND
The Fund is a newly organized, diversified, closed-end management investment company registered under the Investment Company Act of 1940, as amended, and the rules and regulations thereunder (the "1940 Act"). The Fund was organized as a Delaware statutory trust on May 8, 2003, pursuant to the Declaration, which is governed by the laws of the State of Delaware. As a newly organized entity, the Fund has no operating history. The Fund's principal office is located at One Franklin Parkway, San Mateo, California 94403-1906, and its telephone number is 1-800/DIAL-BEN (1-800/342-5236).
USE OF PROCEEDS
The net proceeds of the offering of Common Shares will be approximately $ (or $ if the Underwriters exercise the over-allotment option in full) after payment of the estimated organizational and offering costs. The Manager has agreed to pay (i) the amount by which the Fund's offering costs (other than the sales load) exceed $0.03 per share and (ii) all of the Fund's organizational expenses, except that the Fund has agreed to reimburse the Manager for such organizational expenses to the extent that the aggregate of such organizational expenses and offering costs (other than the sales load) does not exceed $0.03 per share. The Fund will invest the net proceeds of the offering in accordance with the Fund's investment objectives and policies as stated below. It is presently anticipated that the Fund will be able to invest substantially all of the net proceeds in debt obligations and other investments that meet its investment objectives and policies within three months after the completion of the offering. Pending such investment, it is anticipated that the proceeds will be invested in high quality, short-term securities.
INVESTMENT OBJECTIVES AND STRATEGIES
INVESTMENT OBJECTIVES
The Fund's primary investment objective is to seek high current income. Its secondary objective is to seek capital appreciation to the extent it is possible and is consistent with the Fund's primary objective. Under normal market conditions, the Fund will seek to achieve its investment objectives by investing in debt securities and other income-producing instruments, allocated primarily among three distinct investment categories: (1) mortgage-backed and other asset-backed securities; (2) bank loans made to corporate and other business entities; and (3) below investment grade debt securities and other income-producing instruments, as described under "Portfolio Contents and Other Information." The Manager has broad discretion to allocate the Fund's assets among the three principal investment categories. There is no limitation on the percentage of the Fund's assets that may be allocated to each of these investment categories; provided that, under normal market conditions, the Fund will invest at least 25% of its total assets in each category. Under normal circumstances, the Fund's allocation to the investment category of mortgage-backed and other asset-backed securities will be primarily composed of investments in mortgage-backed securities. The Fund cannot assure you that it will achieve its investment objectives.
Under normal market conditions, the Fund expects to maintain a weighted average portfolio credit quality of investment grade, which will be determined by the Manager based on the credit quality of the Fund's portfolio holdings (as rated by the Rating Agencies, or if unrated, as determined by the Manager). For this purpose, when a portfolio holding is rated by more than one of these rating agencies, the Manager generally will use the highest rating.
Under normal market conditions, the Manager expects the Fund to maintain an estimated average portfolio duration of between two and five years (including the effect of anticipated leverage). This duration policy may only be changed following provision of 60 days' prior notice to Common Shareholders. Initially, the Fund is expected to have an estimated average portfolio duration of approximately three years (including the effect of anticipated leverage). In comparison to maturity (which is the date on which a debt instrument ceases and the issuer is obligated to repay the principal amount), duration is a measure of the price volatility of a debt instrument as a result of changes in market rates of interest, based on the weighted average timing of the instrument's expected principal and interest payments. Duration differs from maturity in that it considers a security's yield, coupon payments, principal payments and call features in addition to the amount of time until the security finally matures. As the value of a security changes over time, so will its duration. Prices of securities with longer durations tend to be more sensitive to interest rate changes than securities with shorter durations. In general, a portfolio of securities with a longer duration can be expected to be more sensitive to interest rate changes than a portfolio with a shorter duration.
The Fund cannot change its investment objectives without the approval of the holders of a "majority of the outstanding" Common Shares and any Preferred Shares voting together as a single class, and of the holders of a "majority of the outstanding" Preferred Shares voting as a separate class. A "majority of the outstanding" shares (whether voting together as a single class or voting as a separate class) means (i) 67% or more of such shares present at a meeting, if the holders of more than 50% of those shares are present or represented by proxy, or (ii) more than 50% of such shares, whichever is less. See "Description of Shares -- Voting Rights" for additional information with respect to the voting rights of holders of Preferred Shares.
The Fund may not necessarily be leveraged at all times and the amount of borrowing or leverage, if any, may vary depending upon a variety of factors, including the Manager's outlook for the market for debt securities and other income-producing instruments and the costs that the Fund would incur as a result of such leverage.
The Fund presently intends to use leverage by issuing Preferred Shares representing approximately 33% of the Fund's Managed Assets (calculated after their issuance), although the Fund is permitted to use leverage representing up to 38% of the Fund's Managed Assets. The Fund may also enter into transactions that may give rise to a form of leverage, including among others: loans of portfolio securities, swap contracts and other derivative instruments, reverse repurchase agreements, as well as when-issued, delayed delivery or forward commitment transactions. The Fund will segregate liquid assets against or otherwise cover its future obligations under such transactions, in order to provide that, immediately after entering into such a transaction, the Fund's future commitments that it has not segregated liquid assets against or otherwise covered, together with any outstanding Preferred Shares, will not exceed 38% of the Fund's Managed Assets. The Fund's use of derivative instruments (other than swaps) will also be limited by the Fund's 15% limit on illiquid investments to the extent they are determined to be illiquid. See "Preferred Shares and Related Leverage" and "Risks -- Liquidity Risk."
By using leverage, the Fund will seek to obtain a higher return for holders of Common Shares than if the Fund did not use leverage. Leveraging is a speculative technique and there are special risks involved. There can be no assurance that a leveraging strategy will be used or that it will be successful during any period in which it is employed.
PORTFOLIO MANAGEMENT STRATEGIES
The Fund will use an active sector allocation strategy to try to achieve its goals of income and capital appreciation. This means the Fund allocates its assets among securities in various market sectors based on the Manager's assessment of changing economic, global market, industry, and issuer conditions. Consequently, the Fund, from time to time, may have significant positions in particular sectors. The Manager will use a "top-down" analysis of macroeconomic trends combined with a "bottom-up" fundamental analysis of market sectors, industries, and issuers to try to take advantage of varying sector reactions to economic events. The Manager will evaluate business cycles, yield curves, and values between and within markets, as well as country risk and currency risk. The Fund's ability to achieve its investment goals depends in part upon the Manager's skill in determining the Fund's asset allocation mix and sector weightings. There can be no assurance that the Manager's analysis of the outlook for the economy and the business cycle will be correct.
The Manager also intends to utilize a research driven, fundamental strategy that relies on a team of analysts to provide in-depth industry expertise and that uses both qualitative and quantitative analysis to evaluate companies. Employing a "bottom-up" investment strategy, the Manager intends to focus on individual securities. In selecting securities for the Fund's investment portfolio, the Manager will not rely principally on the ratings assigned by rating agencies, but will perform its own independent investment analysis to evaluate the creditworthiness of the issuer. The Manager will consider a variety of factors, including the issuer's experience and managerial strength, its sensitivity to economic conditions, and its current financial condition.
At the same time, the Manager will use a variety of techniques, described below and elsewhere in the prospectus, designed to evaluate risk and manage the Fund's exposure to investments that the Manager believes are more likely to default or otherwise depreciate in value over time and detract from the Fund's overall return to investors. The Fund cannot assure you that such securities will ultimately continue to pay current income or be paid in full at maturity.
When the Manager believes market or economic conditions are unfavorable for investors, the Manager may invest up to 100% of the Fund's assets in a temporary defensive manner by holding all or a substantial portion of its assets in cash, cash equivalents or other high quality short-term investments. Temporary defensive investments generally may include U.S. government securities, commercial paper, repurchase agreements and other money market securities. The Manager also may invest in these types of securities or hold cash while looking for suitable investment opportunities or to maintain liquidity. In these circumstances, the Fund may be unable to achieve its investment goals.
PORTFOLIO CONTENTS AND OTHER INFORMATION
This section provides additional information regarding the types of securities and other instruments in which the Fund will ordinarily invest. A more detailed discussion of these and other instruments and investment techniques that may be used by the Fund is provided under "Investment Objectives and Policies" in the Statement of Additional Information.
The Fund will invest in a diversified portfolio of debt securities and other income-producing instruments of varying maturities. These may include bonds, debentures, notes and other similar types of debt instruments, such as asset-backed securities, as well as convertible securities, bank loans and loan participations, commercial and agency-issued mortgage securities, payment-in-kind securities, zero-coupon securities, bank certificates of deposit, fixed time deposits and bankers' acceptances, structured notes and other hybrid instruments, real estate investment trusts, preferred shares, U.S. government securities, municipal securities, debt securities issued by foreign corporations or supra-national government agencies, mortgage-backed securities issued on a public or private basis, and other types of asset-backed securities. The Fund will not invest in inverse floaters or interest-only or principal-only mortgage securities.
Certain debt instruments, such as convertible bonds, also may include the right to participate in equity appreciation, and the Manager will generally evaluate those instruments based primarily on their debt characteristics. The Fund may hold equity securities; however, under ordinary circumstances, such investments will be limited to convertible securities, dividend-paying common or preferred stocks, or equity securities acquired in connection with a restructuring, a bankruptcy, a default, or the exercise of a conversion or purchase right. See "Additional Investment Practices -- Equity Securities."
The rate of interest on an income-producing security may be fixed, floating or variable. The principal and/or interest rate on some debt instruments may be determined by reference to the performance of a benchmark asset or market, such as an index of securities, or the differential performance of two assets or markets, such as the level of exchange rates between the U.S. dollar and a foreign currency or currencies.
The Fund may invest in debt securities and other income-producing instruments that are rated below investment grade. The Fund may invest up to 15% of its total assets in securities or other income-producing instruments issued by companies and governments in any foreign country, including developed or developing countries.
The Fund also may invest up to 5% of its total assets in securities or other income-producing instruments denominated in foreign currencies, including obligations of non-U.S. governments and their respective sub-divisions, agencies and government-sponsored enterprises. The Fund also may utilize a variety of derivative instruments for hedging, duration management, investment and risk management purposes, such as options, futures contracts, swap agreements and short sales, and may seek to obtain market exposure to the securities in which it primarily invests by entering into a series of purchase and sales contracts.
The Fund may invest up to 15% of its total assets in illiquid securities (I.E., securities that cannot be disposed of within seven days in the ordinary course of business at approximately the value at which the Fund has valued the securities). Given the current structure of the markets for Rule 144A securities, the Fund may treat some of these securities as illiquid, except that Rule 144A securities may be deemed liquid by the Manager under guidelines adopted by the Board of Trustees. Although structured notes, bank loans and loan participations are not necessarily illiquid, to the extent such investments are deemed to be illiquid by the Manager, they will be subject to the Fund's restrictions on investments in illiquid securities. The Fund's investment in swaps will not be included as illiquid investments for purposes of determining compliance with the 15% limit on illiquid investments. Accordingly, the Fund may invest more than 15% of its total assets in swaps. However, the Fund's use of derivative instruments (other than swaps) will be limited by the Fund's 15% limit on illiquid investments to the extent such derivatives are determined to be illiquid.
COMMERCIAL AND OTHER MORTGAGE-RELATED AND ASSET-BACKED SECURITIES
Under normal market conditions, the Fund will invest at least 25% of its assets in mortgage-backed and other asset-backed securities. Mortgage-related securities are debt instruments which provide periodic payments consisting of interest and/or principal that are derived from or related to payments of interest and/or principal on underlying mortgages. Additional payments on mortgage-related securities may be made out of unscheduled prepayments of principal resulting from the sale of the underlying property, refinancing or foreclosure, net of fees or costs that may be incurred. Under normal conditions, the Fund's allocation to the investment category of mortgage-backed and other asset-backed securities will be primarily composed of investments in mortgage-backed securities.
The Fund may invest a significant portion of its assets in commercial mortgage-related securities issued by corporations. These are securities that represent an interest in, or are secured by, mortgage loans secured by commercial property, such as industrial and warehouse properties, office buildings, retail space and shopping malls, multifamily properties and cooperative apartments, hotels and motels, nursing homes, hospitals, and senior living centers. They may pay fixed or adjustable rates of interest. The commercial mortgage loans that underlie commercial mortgage-related securities have certain distinct risk characteristics. Commercial mortgage loans generally lack standardized terms, which may complicate their structure. Commercial properties themselves tend to be unique and difficult to value. Commercial mortgage loans tend to have shorter maturities than residential mortgage loans, and may not be fully amortizing, meaning that they may have a significant principal balance, or "balloon" payment, due on maturity. In addition, commercial properties, particularly industrial and warehouse properties, are subject to environmental risks and the burdens and costs of compliance with environmental laws and regulations.
Other mortgage-related securities in which the Fund may invest include mortgage pass-through securities, mortgage dollar rolls, and other securities that directly or indirectly represent a participation in, or are secured by and payable from, mortgage loans on real property. The Fund will not invest in interest-only or principal-only mortgage securities.
The Fund may invest in securities issued by trusts and special purpose corporations with principal and interest payouts backed by, or supported by, any of various types of assets. These assets typically include receivables related to the purchase of manufactured housing, automobiles, credit card loans, and home equity loans. These securities generally take the form of a structured type of security, including pass-through, pay-through and senior subordinated payout structures.
The Fund may invest in other types of asset-backed securities that are offered in the marketplace, including Enhanced Equipment Trust Certificates ("EETCs"). Although any entity may issue EETCs, to date, U.S. airlines are the primary issuers. An airline EETC is an obligation secured directly by aircraft or aircraft engines as collateral. EETCs tend to be less liquid than bonds. Other asset-backed securities may be collateralized by the fees earned by service providers. The value of asset-backed securities may be substantially dependent on the servicing of the underlying asset pools and are therefore subject to risks associated with the negligence of, or defalcation by, their servicers. In certain circumstances, the mishandling of related documentation may also affect the rights of the security holders in and to the underlying collateral. The insolvency of entities that generate receivables or that utilize the assets may result in added costs and delays in addition to losses associated with a decline in the value of the underlying assets.
Please see "Investment Restrictions and Additional Investment Information -- Mortgage-Related and Other Asset-Backed Securities" in the Statement of Additional Information and "Risks -- Mortgage-Related Risk" in this prospectus for a more detailed description of the types of mortgage-related and other asset-backed securities in which the Fund may invest and their related risks.
BANK LOANS AND LOAN PARTICIPATIONS
Under normal market conditions, the Fund will invest at least 25% of its total assets in bank loans made to corporate and other business entities. Such bank loans typically pay interest at rates which are re-determined periodically on the basis of a floating base lending rate such as the London Interbank Offered Rate ("LIBOR") plus a premium. The Fund may acquire loan participations and other related direct or indirect bank debt obligations (bank loans or loan participations), in which the Fund will buy from a lender a portion of a larger loan that the lender has made to a borrower. The Manager generally considers loan participations to be liquid. To the extent loan participations are deemed to be liquid by the Manager, they will not be subject to the Fund's restrictions on investments in illiquid securities.
Generally, loan participations are sold without guarantee or recourse to the lending institution and are subject to the credit risks of both the borrower and the lending institution. Loan participations, however, may enable the Fund to acquire an interest in a loan from a financially strong borrower which it could not do directly. While loan participations generally trade at par value, the Fund may be permitted to buy loan participations that sell at a discount because of the borrower's credit problems or other issues associated with the credit risk of the loan. To the extent the credit problems are resolved, loan participations may appreciate in value.
Indebtedness of companies whose creditworthiness is poor involves substantially greater risks, and may be highly speculative. Some companies may never pay off their indebtedness, or may pay only a small fraction of the amount owed. Consequently, when investing in indebtedness of companies with poor credit, the Fund bears a substantial risk of losing the entire amount invested. If the Fund purchases a loan, it may only be able to enforce its rights through the lender, and may assume the credit risk of both the lender and the borrower.
Bank loans and other floating-rate debt instruments are subject to the risk of non-payment of scheduled interest or principal. Such non-payment would result in a reduction of income to the Fund, a reduction in the value of the investment and a potential decrease in the net asset value of the Fund. Some bank loans may be secured by collateral; however, there can be no assurance that the liquidation of any collateral securing a bank loan would satisfy the borrower's obligation in the event of non-payment of scheduled interest or principal payments, or that such collateral could be readily liquidated. In the event of bankruptcy of a borrower, the Fund could experience delays or limitations with respect to its ability to realize the benefits of any collateral securing a bank loan. Collateral securing a bank loan may lose all or substantially all of its value in the event of bankruptcy of a borrower. Some bank loans are subject to the risk that a court, pursuant to fraudulent conveyance or other similar laws, could subordinate the bank loans to presently existing or future indebtedness of the borrower or take other action detrimental to the holders of the bank loans including, in certain circumstances, invalidating such bank loans or causing interest previously paid to be refunded to the borrower. If interest were required to be refunded, it could negatively affect the Fund's performance.
Many bank loans in which the Fund will invest may not be rated by a Rating Agency, will not be registered with the SEC or any state securities commission and will not be listed on any national securities exchange. The amount of public information available with respect to bank loans will generally be less extensive than that available for registered or exchange listed securities. In evaluating the creditworthiness of borrowers, the Manager will consider, and may rely in part, on analyses performed by others. Borrowers may have outstanding debt obligations that are rated below investment grade by a Rating Agency. A portion, and potentially all, of the bank loans in the Fund may be assigned ratings below investment grade by a Rating Agency, or unrated but judged by the Manager to be of comparable quality.
No active trading market may exist for some bank loans and some loans may be subject to restrictions on resale. A secondary market may be subject to irregular trading activity, wide bid/ask spreads and extended trade settlement periods, which may impair the ability to realize full value and thus cause a material decline in the Fund's net asset value. In addition, the Fund may not be able to readily dispose of its bank loans at prices that approximate those at which the Fund could sell such loans if they were more widely-traded and, as a result of such illiquidity, the Fund may have to sell other investments or engage in borrowing transactions if necessary to raise cash to meet its obligations. During periods of limited supply and liquidity of bank loans, the Fund's yield may be lower. See "Risks -- Liquidity Risk."
HIGH YIELD INVESTMENTS
Under normal market conditions, the Fund will invest at least 25% of its total assets in debt securities and other income-producing instruments that are rated below investment grade by Moody's, S&P or Fitch (below Baa by Moody's, below BBB by S&P or Fitch) or that are unrated but judged by the portfolio managers to be of comparable quality. These debt securities are sometimes referred to as "high yield" securities or "junk bonds." Investing in high yield securities and instruments involves greater risks (in particular, greater risk of default) and special risks in addition to the risks associated with investments in investment grade debt obligations. While offering a greater potential opportunity for capital appreciation and higher yields, high yield investments typically entail greater potential price volatility and default risk and may be less liquid than higher-rated securities. Compared to issuers of higher-rated securities, issuers of high yield securities or other income-producing instruments may be perceived to have greater difficulty meeting principal and interest payments. They also may be more susceptible to real or perceived adverse economic and competitive conditions related to the issuer's industry than higher-rated securities. High yield investments may be less liquid than higher rated securities. The Fund may also invest in debt securities or other obligations whose issuers are in bankruptcy. See "Risks -- Liquidity Risk."
The market values of high yield investments tend to reflect individual developments of the issuer to a greater extent than do higher-quality securities, which tend to react mainly to fluctuations in the general level of interest rates. In addition, lower-quality debt securities tend to be more sensitive to economic conditions. Certain "emerging market" governments that issue high yield securities are among the largest debtors to commercial banks, foreign governments and supra-national organizations such as the World Bank, and may not be able or willing to make principal and/or interest payments as they come due.
The Fund may purchase unrated securities (which are not rated by a rating agency) if the Manager determines that the securities are of comparable quality to rated securities that the Fund may purchase. Unrated securities may be less liquid than comparable rated securities and involve the risk that the Manager may not accurately evaluate the security's comparative credit rating.
The Fund will not invest more than 10% of its total assets in securities that are, at the time of purchase, rated CCC/Caa or lower by each Rating Agency rating the security or that are unrated but judged by the portfolio managers to be of comparable quality. Lower rated securities generally provide higher yields than more highly rated securities to compensate investors for the higher risk. The Fund will seek to invest in securities offering the highest yield and expected total return without taking on an excessive amount of risk. These lower rated securities may also include defaulted securities for which payments of interest or principal or both are unpaid and overdue or for which other defaults have occurred. Under normal conditions, the Fund will not invest more than 5% of its total assets in debt securities or other obligations whose issuers are in default at the time of purchase.
Because the securities the Fund holds fluctuate in price, the value of your investment in the Fund will go up and down. This means you could lose money over short or even extended periods.
CREDIT RATINGS AND UNRATED SECURITIES
Rating Agencies are private services that provide ratings of the credit quality of debt obligations, including convertible securities, based on an assessment of default risk. Appendix A to the Statement of Additional Information describes the various ratings assigned to debt obligations by Moody's, S&P and Fitch. Ratings assigned by a Rating Agency are the individual agency's opinion of credit quality and do not evaluate market risks. Rating Agencies may fail to make timely changes in credit ratings or may make an inaccurate assessment of the factors affecting credit quality, and an issuer's current financial condition may be better or worse than a rating indicates. The Fund will not necessarily sell a security when its rating is reduced below its rating at the time of purchase. As described below under "-- Independent Credit Analysis," the Manager does not rely solely on credit ratings, and develops its own analysis of issuer credit quality. The ratings of a debt security may change over time. The Rating Agencies monitor and evaluate the ratings assigned to securities on an ongoing basis. As a result, debt instruments held by the Fund could receive a higher rating (which would tend to increase their value) or a lower rating (which would tend to decrease their value) during the period in which they are held.
INDEPENDENT CREDIT ANALYSIS
The Manager will rely heavily on its own analysis of the credit quality and risks associated with individual debt obligations considered for the Fund, rather than relying exclusively on rating agencies or third-party research. The Manager will use this information in an attempt to minimize credit risk and identify issuers, industries or sectors that are undervalued or that offer attractive yields relative to the Manager's assessment of their credit characteristics. The Manager will monitor the creditworthiness of the Fund's portfolio. Analysis of the creditworthiness of issuers of high yield securities may be more complex than for issuers of higher-quality debt obligations. The Fund's success in achieving its investment objectives may depend more heavily on the Manager's credit analysis than if the Fund invested solely in higher-quality and rated securities.
ADDITIONAL INVESTMENT PRACTICES
SWAPS
As described under "Preferred Shares and Related Leverage," the Fund may enter into swap contracts for hedging purposes, to change the duration of the overall portfolio, to mitigate default risk, or to add leverage to the portfolio; such swaps may include but are not limited to interest rate swaps, credit default swaps or currency swaps. When used for hedging purposes, the Fund would be the buyer of a swap contract. When the Fund is the seller of a swap contract, the Fund will segregate assets in the form of cash and cash equivalents in an amount equal to the aggregate market value of such swaps, marked to market on a daily basis. The Fund's investment in swaps will not be included as illiquid investments for purposes of determining compliance with the 15% limit on illiquid investments. Accordingly, the Fund may invest more than 15% of its total assets in swaps. However, the Fund's use of derivative instruments (other than swaps) will be limited by the Fund's 15% limit on illiquid investments to the extent such derivatives are determined to be illiquid.
INTEREST RATE SWAPS. An interest rate swap is the transfer between two counterparties of interest rate obligations. One obligation has an interest rate fixed to maturity while the other has an interest rate that changes with changes in a designated benchmark, such as LIBOR, prime, commercial paper, or other benchmarks. The obligations to make repayment of principal on the underlying securities are not transferred. These transactions generally require the participation of an intermediary, frequently a bank. The entity holding the fixed rate obligation will transfer the obligation to the intermediary, and the entity will then be obligated to pay to the intermediary a floating rate of interest, generally including a fractional percentage as a commission for the intermediary. The intermediary also makes arrangements with a second entity that has a floating-rate obligation that substantially mirrors the obligation desired by the first entity. In return for assuming a fixed obligation, the second entity will pay the intermediary all sums that the intermediary pays on behalf of the first entity, plus an arrangement fee and other agreed upon fees. To the extent the Fund does not own the underlying obligation, the Fund will maintain, in a segregated account with its custodian bank, cash or liquid debt securities with an aggregate value equal to the amount of the Fund's outstanding swap obligation.
Interest rate swaps permit the party seeking a floating rate obligation the opportunity to acquire the obligation at a lower rate than is directly available in the credit market, while permitting the party desiring a fixed rate obligation the opportunity to acquire a fixed rate obligation, also frequently at a price lower than is available in the capital markets. The success of the transaction depends in large part on the availability of fixed rate obligations at a low enough coupon rate to cover the cost involved.
CREDIT DEFAULT SWAPS. The Fund may purchase credit default swaps. In that case, the Fund would be entitled to receive the par (or other agreed-upon) value of a referenced debt obligation from the counterparty to the contract in the event of a default by a third party, such as a U.S. or foreign issuer, on the debt obligation. In return, the Fund would pay to the counterparty a periodic stream of payments over the term of the contract provided that no event of default has occurred. If no default occurs, the Fund would have spent the stream of payments and received no benefit from the contract. When the Fund is the seller of a swap contract, it receives the stream of payments but is obligated to pay upon default of the referenced debt obligation. As the seller, the Fund would effectively add leverage to its portfolio because, in addition to its total assets, the Fund would be subject to investment exposure on the notional amount of the swap.
COMMERCIAL PAPER
Commercial paper represents short-term unsecured promissory notes issued in bearer form by corporations such as banks or bank holding companies and finance companies. The rate of return on commercial paper may be linked or indexed to the level of exchange rates between the U.S. dollar and a foreign currency or currencies.
BANK OBLIGATIONS
The Fund may invest in certain bank obligations, including certificates of deposit, bankers' acceptances, and fixed time deposits. Certificates of deposit are negotiable certificates issued against funds deposited in a commercial bank for a definite period of time and earning a specified return. Bankers' acceptances are negotiable drafts or bills of exchange, normally drawn by an importer or exporter to pay for specific merchandise, which are "accepted" by a bank, meaning, in effect, that the bank unconditionally agrees to pay the face value of the instrument on maturity. Fixed time deposits are bank obligations payable at a stated maturity date and bearing interest at a fixed rate. Fixed time deposits may be withdrawn on demand by the investor, but may be subject to early withdrawal penalties, which vary depending upon market conditions and the remaining maturity of the obligation.
ZERO-COUPON SECURITIES
Zero-coupon or deferred interest securities are debt obligations that make no periodic interest payments before maturity or a specified date when the securities begin paying current interest (the cash payment date), and therefore are generally issued and traded at a discount from their face amount or par value. The discount varies depending on the time remaining until maturity or the cash payment date, as well as prevailing interest rates, liquidity of the security, and the perceived credit quality of the issuer. The discount, in the absence of financial difficulties of the issuer, typically decreases as the final maturity or cash payment date approaches.
Because of the lack of current income, the value of zero-coupon securities is generally more volatile than the value of other fixed-income securities that pay interest periodically. Zero-coupon securities are also likely to respond to changes in interest rates to a greater degree than other fixed-income securities having similar maturities and credit quality. For federal income tax purposes, holders of these bonds, such as the Fund, are deemed to receive interest over the life of the bonds and are taxed as if interest were paid on a current basis although the holder does not receive cash interest payments until the bonds mature. Accordingly, during times when the Fund does not receive any cash interest payments on its zero-coupon or deferred interest securities, it may have to sell portfolio securities to meet distribution requirements and these sales may be subject to the risk factors discussed above. The Fund is not limited in the amount of its assets that may be invested in these types of securities.
PAY-IN-KIND SECURITIES
Pay-in-kind securities pay interest by issuing more bonds. The Fund is deemed to receive interest over the life of these bonds and is treated as if the interest were paid on a current basis for federal income tax purposes, although the Fund does not receive any cash interest payments until maturity or the cash payment date. Accordingly, during times when the Fund does not receive any cash interest payments on its pay-in-kind securities, it may have to sell portfolio securities to meet distribution requirements and these sales may be subject to the risk factors discussed above. The Fund is not limited in the amount of its assets that may be invested in pay-in-kind securities.
FOREIGN (NON-U.S.) INVESTMENTS AND CURRENCIES
The Fund may invest up to 15% of its total assets in securities or other income-producing instruments issued by companies and governments in any foreign country, developed or developing. Foreign investments held by the Fund generally will be traded on U.S. markets.
The Fund also may invest up to 5% of its total assets in securities or other income-producing instruments denominated in foreign currencies, including obligations of non-U.S. governments and their respective sub-divisions, agencies and government-sponsored enterprises. Investing in foreign securities involves special risks and considerations not typically associated with investing in U.S. securities. See "Risks -- Foreign (Non-U.S.) Investment Risk."
FOREIGN CURRENCIES AND RELATED TRANSACTIONS. The Fund's investments in securities that trade in, or receive revenues in, foreign currencies will be subject to currency risk, which is the risk that fluctuations in the exchange rates between the U.S. dollar and foreign currencies may negatively affect any investment. The Fund may engage in a variety of transactions involving foreign currencies in order to hedge against foreign currency risk, to increase exposure to a foreign currency, or to shift exposure to foreign currency fluctuations from one currency to another. For instance, the Fund may purchase foreign currencies on a spot (cash) basis and enter into forward foreign currency exchange contracts, foreign currency futures contracts and options on foreign currencies and futures. Suitable hedging transactions may not be available in all circumstances and there can be no assurance that the Fund will engage in such transactions at any given time or from time to time. Also, these transactions may not be successful and may eliminate any chance for the Fund to benefit from favorable fluctuations in relevant foreign currencies. The Fund will normally seek to hedge at least 75% of its exposure to foreign currencies.
Please see "Investment Objectives and Policies -- Foreign (Non-U.S.) Securities," "Investment Objectives and Policies -- Foreign Currency Transactions" and "Investment Objectives and Policies -- Foreign Currency Exchange-Related Securities" in the Statement of Additional Information for a more detailed description of the types of foreign investments and foreign currency transactions in which the Fund may invest and their related risks.
DERIVATIVES
The Fund may invest in a variety of derivatives without limit for hedging purposes, and may invest up to 25% (but not more than 10% within 90 days of the date of the prospectus) of its total assets in derivatives for non-hedging purposes. Generally, derivatives are financial contracts whose value depends upon, or is derived from, the value of an underlying asset, reference rate or index, and may relate to individual debt instruments, interest rates, currencies or currency exchange rates, commodities, and related indexes. Examples of derivative instruments that the Fund may use include options contracts, futures contracts, options on futures contracts and swap agreements. The Fund's use of derivative instruments (other than swaps) will be limited by the Fund's 15% limit on illiquid investments to the extent they are determined to be illiquid. The Fund's use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investment directly in securities and other more traditional investments. See "Risks -- Derivatives Risk." Certain types of derivative instruments that the Fund may utilize with some frequency are described elsewhere in this section, including those described under "-- Structured Notes and Related Instruments" and "-- Swaps." Please see "Investment Objective and Policies -- Derivative Instruments" in the Statement of Additional Information for additional information about these and other derivative instruments that the Fund may use and the risks associated with such instruments. There is no assurance that these derivative strategies will be available at any time or that the Manager will determine to use them for the Fund or, if used, that the strategies will be successful. In addition, the Fund may be subject to certain restrictions on its use of derivative strategies imposed by guidelines of one or more Rating Agencies that may issue ratings for Preferred Shares issued by the Fund.
EQUITY SECURITIES
The Fund may invest in equity securities. The purchaser of an equity security typically receives an ownership interest in the company as well as certain voting rights. The owner of an equity security may participate in a company's success through the receipt of dividends which are distributions of earnings by the company to its owners; however, the Fund may hold equity securities that do not issue dividends. Equity security owners may also participate in a company's success or lack of success through increases or decreases in the value of the company's shares as traded in the public trading market for such shares. Equity securities generally take the form of common stock or preferred stock. Preferred stockholders typically receive greater dividends but may receive less appreciation than common stockholders and may have greater voting rights as well. Equity securities may also include convertible securities, warrants or rights. Warrants or rights give the holder the right to purchase a common stock at a given time for a specified price.
The Fund's equity investments generally will be limited to convertible securities and dividend-paying common or preferred stocks. The Fund may also acquire equity securities in connection with the Fund's other investment activities, including through: the restructuring of loans or other debt securities; the resolution of a bankruptcy or a default; the entry of an issuer into receivership, a corporate or securities transaction by the issuer that affects securities held by the Fund; or the exercise by the Fund of conversion or purchase rights associated with a convertible or other fixed-income security purchased by the Fund. These equity securities may have risk and other characteristics of stocks or of both stocks and bonds. By holding and investing in equity securities, the Fund may expose an investor to certain risks that could cause the investor to lose money, particularly if there is a sudden decline in a holding's share price or an overall decline in the stock market. The value of an investment in the Fund could decline because of equity securities held by the Fund based on the day-to-day fluctuation or the decline in their value related to movements in the stock market, as well as in response to the activities of individual companies. In addition, some of the equity securities that the Fund would obtain as a result of the special circumstances described above could be subject to restrictions on transfer or sale that may reduce their market value compared to freely tradable securities.
PREFERRED STOCKS. Preferred stock represents an equity interest in a company that generally entitles the holder to receive, in preference to the holders of other stocks such as common stocks, dividends and a fixed share of the proceeds resulting from liquidation of the company. Some preferred stocks also entitle their holders to receive additional liquidation proceeds on the same basis as holders of a company's common stock, and thus also represent an ownership interest in the company. Some preferred stocks offer a fixed rate of return with no maturity date. Because they never mature, these preferred stocks act like long-term bonds and can be more volatile than other types of preferred stocks and may have heightened sensitivity to changes in interest rates. Other preferred stocks have a variable dividend, generally determined on a quarterly or other periodic basis, either according to a formula based upon a specified premium or discount to the yield on particular U.S. Treasury securities or based on an auction process, involving bids submitted by holders and prospective purchasers of such stocks. Because preferred stocks represent an equity ownership interest in a company, their value usually will react more strongly than bonds and other debt instruments to actual or perceived changes in a company's financial condition or prospects, or to fluctuations in the equity markets.
CONVERTIBLE SECURITIES AND SYNTHETIC CONVERTIBLE SECURITIES. The Fund may invest in convertible securities, which are generally a debt obligation or preferred stock that may be converted within a specified period of time into a certain amount of common stock of the same or a different issuer. A convertible security provides a fixed income stream and the opportunity, through its conversion feature, to participate in the capital appreciation resulting from a market price advance in its underlying common stock. As with a straight fixed-income security, a convertible security tends to increase in market value when interest rates decline and decrease in value when interest rates rise. Like a common stock, the value of a convertible security also tends to increase as the market value of the underlying stock rises, and it tends to decrease as the market value of the underlying stock declines. Because both interest rate and market movements can influence its value, a convertible security is not as sensitive to interest rates as a similar fixed-income security, nor is it as sensitive to changes in share price as its underlying stock.
COLLATERALIZED OBLIGATIONS
The Fund may invest in senior classes of collateralized bond obligations ("CBOs"), collateralized loan obligations ("CLOs") and other collateralized debt obligations ("CDOs"), which are debt instruments backed solely by a pool of other debt securities. The risks of an investment in a CBO, CLO or other CDO depend largely on the type of the collateral securities (which would have the risks described elsewhere in this document for that type of security) and the class of the CBO, CLO or other CDO in which the Fund invests. Some CBOs, CLOs and other CDOs have credit ratings, but are typically issued in various classes with various priorities. Normally, CBOs, CLOs and other CDOs are privately offered and sold (that is, not registered under the securities laws) and may be characterized by the Fund as illiquid securities, but an active dealer market may exist for CBOs, CLOs and other CDOs that qualify for Rule 144A transactions. In addition to the normal interest rate, default and other risks of fixed income securities discussed elsewhere in this document, CBOs, CLOs and other CDOs carry additional risks, including the possibility that distributions from collateral securities will not be adequate to make interest or other payments, the quality of the collateral may decline in value or default, volatility in values, and the complex structure of the security may not be fully understood at the time of investment and produce disputes with the issuer or unexpected investment results. The Fund will not invest in the equity classes of CBOs, CLOs or other CDOs or in their junior classes that are subordinate to their senior classes.
REPURCHASE AGREEMENTS
The Fund generally will have a portion of its assets in cash or cash equivalents for a variety of reasons, such as waiting for a suitable investment opportunity or taking a defensive position. To earn income on this portion of its assets, the Fund may enter into repurchase agreements. Under a repurchase agreement, the Fund agrees to buy securities guaranteed as to payment of principal and interest by the U.S. government or its agencies from a qualified bank or broker-dealer and then to sell the securities back to the bank or broker-dealer after a short period of time (generally, less than seven days) at a higher price. The bank or broker-dealer must transfer to the Fund's custodian securities with an initial market value of at least 102% of the dollar amount invested by the Fund in each repurchase agreement. The Manager will monitor the value of such securities daily to determine that the value equals or exceeds the repurchase price. Repurchase agreements maturing in more than seven days are considered to be illiquid securities.
Repurchase agreements may involve risks in the event of default or insolvency of the bank or broker-dealer, including possible delays or restrictions upon the Fund's ability to sell the underlying securities. The Fund will enter into repurchase agreements only with parties who meet certain creditworthiness standards, I.E., banks or broker-dealers that the Manager has determined present no serious risk of becoming involved in bankruptcy proceedings within the time frame contemplated by the repurchase transaction.
REVERSE REPURCHASE AGREEMENTS
As described under "Preferred Shares and Related Leverage," the Fund may utilize reverse repurchase agreements in order to add leverage to the portfolio. In a reverse repurchase agreement, the Fund sells securities to a bank or broker-dealer and agrees to repurchase the securities at a mutually agreed date and price. Generally, the effect of such a transaction is that the Fund can recover and reinvest all or most of the cash invested in the portfolio securities involved during the term of the reverse repurchase agreement and still be entitled to the returns associated with those portfolio securities. Such transactions are advantageous if the interest cost to the Fund of the reverse repurchase transaction is less than the returns it obtains on investments purchased with the cash.
Unless the Fund covers its positions in reverse repurchase agreements (by segregating liquid assets at least equal in amount to the forward purchase commitment), its obligations under the agreements will be subject to the Fund's limitations on borrowings. Reverse repurchase agreements involve leverage risk and also the market risk based on the value of the securities that the Fund is obligated to repurchase. In the event the buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, the Fund's use of the proceeds of the agreement may be restricted pending a determination by the other party, or its trustee or receiver, whether to enforce the Fund's obligation to repurchase the securities.
U.S. GOVERNMENT SECURITIES
The Fund may invest in U.S. Government securities, which are obligations of, or guaranteed by, the U.S. Government, its agencies or government-sponsored enterprises. U.S. Government securities include a variety of securities that differ in their interest rates, maturities and dates of issue. Securities issued or guaranteed by agencies or instrumentalities of the U.S. Government may or may not be supported by the full faith and credit of the United States or by the right of the issuer to borrow from the U.S. Treasury.
MUNICIPAL BONDS
Municipal bonds are generally issued by states, municipalities and other political subdivisions, agencies, authorities and instrumentalities of states and multi-state agencies or authorities. Like other debt obligations, municipal bonds are subject to interest rate, credit and market risk. The ability of a municipal issuer to make payments could be affected by litigation, legislation or other political events or the bankruptcy of the issuer. Municipal bonds are either general obligation or revenue bonds and typically are issued to finance public projects (such as roads or public buildings), to pay general operating expenses or to refinance outstanding debt. General obligation bonds are backed by the full faith and credit, or taxing authority, of the issuer and may be repaid from any revenue source; revenue bonds may be repaid only from the revenues of a specific facility or source. The Fund also may purchase municipal bonds that represent lease obligations. These carry special risks because the issuer of the bonds may not be obligated to appropriate money annually to make payments under the lease. The Fund also may invest in securities issued by entities whose underlying assets are municipal bonds.
WHEN ISSUED, DELAYED DELIVERY AND FORWARD COMMITMENT TRANSACTIONS
The Fund may buy debt securities on a "when-issued" or "delayed delivery" basis. These transactions are arrangements under which the Fund buys securities with payment and delivery scheduled for a future time.
Purchases of debt securities on a when-issued or delayed delivery basis are subject to market fluctuation and to the risk that the value or yields at delivery may be more or less than the purchase price or the yields available when the transaction was entered into. Although the Fund will generally buy debt securities on a when-issued basis with the intention of acquiring such securities, it may sell them before the settlement date if it deems the sale to be advisable. The Fund will not enter into these transactions for investment leverage. When the Fund is the buyer in such a transaction, it will maintain, in a segregated account with its custodian bank, cash or high-grade marketable securities having an aggregate value equal to the amount of its purchase commitments until payment is made.
In when-issued and delayed delivery transactions, the Fund relies on the seller to complete the transaction. The other party's failure may cause the Fund to miss a price or yield considered advantageous. Securities purchased on a when-issued or delayed delivery basis do not generally earn interest until their scheduled delivery date. The Fund is not subject to any percentage limit on the amount of its assets which may be invested in when-issued debt securities.
STRUCTURED NOTES AND RELATED INSTRUMENTS
The Fund may invest in "structured" notes and other related instruments, which are privately negotiated debt obligations where the principal and/or interest is determined by reference to the performance of a benchmark asset, market or interest rate (an "embedded index"), such as selected securities, an index of securities or specified interest rates, or the differential performance of two assets or markets, such as indexes reflecting bonds. Structured instruments may be issued by corporations, including banks, as well as by governmental agencies. Structured instruments frequently are assembled in the form of medium-term notes, but a variety of forms are available and may be used in particular circumstances. The terms of such structured instruments normally provide that their principal and/or interest payments are to be adjusted upwards or downwards (but ordinarily not below zero) to reflect changes in the embedded index while the structured instruments are outstanding. As a result, the interest and/or principal payments that may be made on a structured product may vary widely, depending on a variety of factors, including the volatility of the embedded index and the effect of changes in the embedded index on principal and/or interest payments. The rate of return on structured notes may be determined by applying a multiplier to the performance or differential performance of the referenced index(es) or other asset(s). Application of a multiplier involves leverage that will serve to magnify the potential for gain and the risk of loss.
The Manager may utilize structured instruments for investment purposes and also for risk management purposes, such as to reduce the duration and interest rate sensitivity of the Fund's portfolio. While structured instruments may offer the potential for a favorable rate of return from time to time, they also entail certain risks. Structured instruments may be less liquid than other debt securities, and the price of structured instruments may be more volatile. In some cases, depending on the terms of the embedded index, a structured instrument may provide that the principal and/or interest payments may be adjusted below zero. Structured instruments also may involve significant credit risk and risk of default by the counterparty. Certain issuers of structured instruments may be deemed to be "investment companies" as defined in the 1940 Act. As a result, the Fund's investment in these structured instruments may be limited by the restrictions contained in the 1940 Act. Although structured notes, bank loans and loan participations are not necessarily illiquid, to the extent such investments are deemed to be illiquid by the Manager, they will be subject to the Fund's restrictions on investments in illiquid securities. Like other sophisticated strategies, the Fund's use of structured instruments may not work as intended. If the value of the embedded index changes in a manner other than that expected by the Manager, principal and/or interest payments received on the structured instrument may be substantially less than expected. Also, if the Manager uses structured instruments to reduce the duration of the Fund's portfolio, this may limit the Fund's return when having a longer duration would be beneficial (for instance, when interest rates decline).
SHORT SALES
A short sale is a transaction in which the Fund sells an instrument that it does not own in anticipation that the market price will decline. The Fund may use short sales for investment and risk management purposes. When the Fund engages in a short sale, it must borrow the security sold short and deliver it to the counterparty. The Fund may have to pay a fee to borrow particular securities and would often be obligated to pay over any payments received on such borrowed securities. The Fund's obligation to replace the borrowed security will be secured by collateral deposited with the lender, which is usually a broker-dealer, and/or with the Fund's custodian. The Fund may not receive any payments (including interest) on its collateral. Short sales expose the Fund to the risk that it will be required to cover its short position at a time when the securities have appreciated in value, thus resulting in a loss to the Fund. The Fund may engage in so-called "naked" short sales where it does not own or have the immediate right to acquire the security sold short at no additional cost, in which case the Fund's losses could theoretically be unlimited, provided that the Fund will not engage in such naked short sales in excess of 5% of the Fund's total assets.
DOLLAR ROLL TRANSACTIONS
The Fund may enter into mortgage dollar roll transactions. In a mortgage dollar roll, the Fund sells mortgage-backed securities for delivery in the current month and simultaneously contracts to repurchase substantially similar (name, type, coupon, and maturity) securities on a specified future date. During the period between the sale and repurchase (the "roll period"), the Fund forgoes principal and interest paid on the mortgage-backed securities. The Fund is compensated by the difference between the current sales price and the lower forward price for the future purchase (often referred to as the "drop"), as well as by the interest earned on the cash proceeds of the initial sale.
For each mortgage dollar roll transaction, the Fund will segregate on its books an offsetting cash position or a position of liquid securities of equivalent value. The manager will monitor the value of such securities daily to determine that the value equals or exceeds the mortgage dollar roll contract price.
The Fund could suffer a loss if the contracting party fails to perform the future transaction and the Fund is therefore unable to buy back the mortgage-backed securities it initially sold.
The Fund intends to enter into mortgage dollar rolls only with high quality government securities dealers and member banks of the Federal Reserve System as approved by the Fund's board of trustees. As a matter of non-fundamental policy, the Fund does not consider the purchase and/or sale of a mortgage dollar roll to be a borrowing, for purposes of the Fund's fundamental restrictions.
REAL ESTATE INVESTMENT TRUSTS
The Fund may invest in the equity or debt securities of publicly traded and private real estate investment trusts ("REITs"). A REIT is an entity that concentrates its assets in investments related to equity real estate and/or interests in mortgages on real estate. The shares of publicly traded REITs are traded on a national securities exchange or in the OTC market. Shares of private REITs are not publicly traded, and will be treated as illiquid securities. The Fund will limit its investments in illiquid securities, including private REITs, to 15% of its total assets.
OTHER INVESTMENT COMPANIES
The Fund may invest in the securities of other investment companies to the
extent that such investments are consistent with the Fund's investment objective
and policies and permissible under the 1940 Act. Under the 1940 Act, the Fund
may not acquire the securities of other domestic or non-U.S. investment
companies if, as a result,
(i) more than 10% of the Fund's total assets would be invested in securities of
other investment companies, (ii) such purchase would result in more than 3% of
the total outstanding voting securities of any one investment company being held
by the Fund, or (iii) more than 5% of the Fund's total assets would be invested
in any one investment company. These limitations do not apply to the purchase of
shares of any investment company in connection with a merger, consolidation,
reorganization or acquisition of substantially all the assets of another
investment company. Notwithstanding the foregoing, to the extent permitted by
exemptive orders received from the SEC, the Fund may invest cash balances in
shares of other money market funds advised by the Manager or its affiliates in
amounts up to 25% of the Fund's total assets. The Fund, as a holder of the
securities of other investment companies, will bear its pro rata portion of the
other investment companies' expenses, including advisory fees. These expenses
are in addition to the direct expenses of the Fund's own operations.
Please see "Investment Objectives and Policies" in the Statement of Additional Information for additional information regarding the investments of the Fund and their related risks.
PREFERRED SHARES AND RELATED LEVERAGE
Subject to market conditions, approximately one to three months after the completion of the offering of the Common Shares, the Fund presently intends to offer Preferred Shares representing approximately 33% of the Fund's Managed Assets (calculated after their issuance), although the Fund is permitted to use leverage representing up to 38% of the Fund's Managed Assets. The Fund may also enter into transactions that may give rise to a form of leverage, including among others: loans of portfolio securities, swap contracts and other derivative instruments, reverse repurchase agreements, as well as when-issued, delayed delivery or forward commitment transactions. The Fund will segregate liquid assets against or otherwise cover its future obligations under such transactions, in order to provide that, immediately after entering into such a transaction, the Fund's future commitments that it has not segregated liquid assets against or otherwise covered, together with any outstanding Preferred Shares, will not exceed 38% of the Fund's Managed Assets. By using leverage, the Fund will seek to obtain a higher return for holders of Common Shares than if the Fund did not use leverage. Leveraging is a speculative technique and there are special risks involved. There can be no assurance that a leveraging strategy will be used or that it will be successful during any period in which it is employed.
The Preferred Shares will have complete priority upon distribution of assets over the Common Shares. The issuance of Preferred Shares will leverage the Common Shares. Although the timing and other terms of the offering of the Preferred Shares will be determined by the Fund's Board of Trustees, the Fund expects to invest the net proceeds of the Preferred Shares in debt obligations and other instruments in accordance with the Fund's investment objectives and policies. The Preferred Shares are expected to pay dividends based on short-term interest rates which would be reset periodically through an auction or remarketing procedure, although the terms of the Preferred Shares may also enable the Fund to lengthen such intervals.
So long as the Fund's portfolio is invested in securities that provide a higher rate of return than the dividend rate of the Preferred Shares (after taking expenses into consideration), the leverage will allow Common Shareholders to receive a higher current rate of return than if the Fund were not leveraged.
Changes in the value of the Fund's portfolio (including investments bought
with the proceeds of the Preferred Shares offering) will be borne entirely by
the Common Shareholders. If there is a net decrease (or increase) in the value
of the Fund's investment portfolio, the leverage will decrease (or increase) the
net asset value per Common Share to a greater extent than if the Fund were not
leveraged. During periods in which the Fund is using leverage, the fees paid to
the Manager will be higher than if the Fund did not use leverage because the
fees paid will be calculated on the basis of the Fund's Managed Assets,
including the proceeds from the issuance of Preferred Shares. Thus, the Manager
has a financial incentive for the Fund to issue Preferred Shares, which may
result in a conflict of interest between the Manager and the Common
Shareholders. Fees and expenses paid by the Fund are borne entirely by the
Common Shareholders (and not by Preferred Shareholders, if any).
These include costs associated with any offering of Preferred Shares by the Fund
(which costs are estimated to be approximately 1.20% of the total dollar amount
of a Preferred Share offering), which will be borne immediately by Common
Shareholders, as will the costs associated with any borrowings or other forms of
leverage utilized by the Fund.
The Fund presently anticipates that any Preferred Shares that it intends to issue would be initially given a rating of Aa/AA or better by Moody's, S&P and/or Fitch, but no assurance can be given that such ratings will be obtained. No minimum rating is required for the issuance of Preferred Shares by the Fund. Moody's, S&P and Fitch receive fees in connection with their ratings issuances. The Fund may be subject to certain restrictions imposed by guidelines of one or more rating agencies that may issue ratings for Preferred Shares issued by the Fund. These guidelines may impose asset coverage or portfolio composition requirements that are more stringent than those imposed on the Fund by the 1940 Act. It is not anticipated that these covenants or guidelines will impede the Manager from managing the Fund's portfolio in accordance with the Fund's investment objectives and policies.
Assuming that the Preferred Shares will represent approximately 33% of the Fund's Managed Assets and pay dividends at an annual average rate of 1.35%, the income generated by the Fund's portfolio (net of expenses) would have to exceed 0.45% in order to cover such dividend payments. Of course, these numbers are merely estimates, used for illustration purposes only. Actual Preferred Share dividend rates will vary frequently and may be significantly higher or lower than the rate identified above.
The following table is furnished in response to requirements of the SEC. It is designed to illustrate the effect of leverage on the total return of the Common Shares, assuming investment portfolio total returns (consisting of income and changes in the value of investments held in the Fund's portfolio) of -10%, -5%, 0%, 5% and 10%. These assumed investment portfolio returns are hypothetical figures and are not necessarily indicative of the investment portfolio returns expected to be experienced by the Fund. The table further assumes the issuance of Preferred Shares representing approximately 33% of the Fund's Managed Assets and the Fund's currently projected annual Preferred Share dividend rate of 1.35%. See "Risks."
Assumed Portfolio Total Return -10.00% -5.00% 0.00% 5.00% 10.00% Common Share Total Return -15.67% -8.17% -0.67% 6.82% 14.32% |
Common Share total return is composed of two elements: the Common Share dividends paid by the Fund (the amount of which is largely determined by the net investment income of the Fund after paying dividends on Preferred Shares) and gains or losses on the value of the securities the Fund owns. As required by SEC rules, the table assumes that the Fund is more likely to suffer capital losses than to enjoy capital appreciation. For example, to assume a total return of 0%, the Fund must assume that the interest it receives on its investments is entirely offset by losses in the value of those investments.
OTHER FORMS OF LEVERAGE AND BORROWINGS
The Fund may borrow money in order to repurchase its shares or as a temporary measure for extraordinary or emergency purposes, including for the payment of dividends or the settlement of securities transactions which otherwise might require untimely dispositions of Fund securities.
In addition to the issuance of Preferred Shares, the Fund may use a variety of additional strategies that may give rise to a form of leverage. These include lending portfolio securities, using swap contracts and other derivative instruments, reverse repurchase agreements, and when-issued, delayed delivery or forward commitment transactions. By adding additional leverage, these strategies have the potential to increase returns to Common Shareholders, but also involve additional risks. Additional leverage will increase the volatility of the Fund's investment portfolio and could result in larger losses than if the strategies were not used. The Fund may engage in additional transactions of the type described above and similar investment management techniques which provide leverage. However, the Fund will segregate liquid assets against or otherwise cover its future obligations under such transactions, in order to provide that, immediately after entering into such a transaction, the Fund's future commitments that it has not segregated liquid assets against or otherwise covered, together with any outstanding Preferred Shares, will not exceed 38% of the Fund's Managed Assets.
Although the Fund expects that the total liquidation value of Preferred Shares issued by the Fund will represent approximately 33% (and no more than 38%) of the Fund's Managed Assets, the 1940 Act imposes certain potentially broader asset coverage requirements which also apply to the Fund. The following is a summary of the applicable asset coverage requirements of the 1940 Act.
Under the 1940 Act, the Fund is not permitted to issue Preferred Shares unless immediately after such issuance the value of the Fund's total net assets is at least 200% of the liquidation value of the outstanding Preferred Shares plus the aggregate amount of any senior securities of the Fund representing indebtedness (I.E., such liquidation value plus the aggregate amount of senior securities representing indebtedness may not exceed 50% of the Fund's total net assets). In addition, the Fund is not permitted to declare any cash dividend or other distribution on its Common Shares unless, at the time of such declaration, the value of the Fund's total net assets satisfies the above-referenced 200% coverage requirement. If Preferred Shares are issued, the Fund intends, to the extent possible, to purchase or redeem Preferred Shares from time to time to the extent necessary in order to maintain net asset coverage of at least 200%. If the Fund has Preferred Shares outstanding, two of the Fund's Trustees will be elected by the holders of Preferred Shares, voting separately as a class. The remaining Trustees of the Fund will be elected by holders of Common Shares and Preferred Shares voting together as a single class. In the event the Fund were to fail to pay dividends on Preferred Shares for two years or other defaults, Preferred Shareholders would be entitled to elect a majority of the Trustees of the Fund.
Under the 1940 Act, the Fund generally is not permitted to engage in borrowings (including through the use of reverse repurchase agreements, swaps and other derivatives to the extent that these instruments constitute senior securities) unless immediately after a borrowing the value of the Fund's total assets less liabilities (other than the borrowing) is at least 300% of the principal amount of such borrowing (I.E., such principal amount may not exceed 33 1/3% of the Fund's total assets). In addition, the Fund is not permitted to declare any cash dividend or other distribution on Common Shares unless, at the time of such declaration, the value of the Fund's total assets, less liabilities other than borrowing, is at least 300% of such principal amount. If the Fund borrows, it intends, to the extent possible, to prepay all or a portion of the principal amount of the borrowing to the extent necessary in order to maintain the required asset coverage. Failure to maintain certain asset coverage requirements could result in an event of default and entitle Preferred Shareholders to elect a majority of the Trustees of the Fund. Derivative instruments used by the Fund will not constitute senior securities (and will not be subject to the Fund's limitations on borrowings) to the extent that the Fund segregates liquid assets at least equal in amount to its obligations under the instruments, or enters into offsetting transactions or owns positions covering its obligations. For instance, the Fund may cover its position in a reverse repurchase agreement by segregating liquid assets at least equal in amount to its forward purchase commitment.
RISKS
The net asset value of the Common Shares will fluctuate with and be affected by, among other things, the Fund's lack of operating history, market discount risk, credit risk, mortgage-related risk, loan risk, high yield risk, interest rate risk, inflation risk, leverage risk, portfolio security issuer risk, management risk, foreign (non-U.S.) investment risk, derivatives risk, counterparty risk, volatility risk, reinvestment risk, call risk, liquidity risk, income risk, zero-coupon securities risk, smaller company risk, real estate risk, and market disruption and geopolitical risk. An investment in Common Shares will also be subject to the risk associated with the fact that the Fund is newly organized. These risks are summarized below.
LACK OF OPERATING HISTORY
The Fund is a newly organized, diversified, closed-end management investment company and has no operating history.
MARKET DISCOUNT RISK
As with any stock, the price of the Fund's shares will fluctuate with market conditions and other factors. If shares are sold, the price received may be more or less than the original investment. Net asset value will be reduced immediately following the initial offering by a sales load and organizational and selling expenses paid by the Fund and immediately following any offering of Preferred Shares by the costs of that offering paid by the Fund. The Common Shares are designed for long-term investors and should not be treated as trading vehicles. Shares of closed-end management investment companies frequently trade at a discount from their net asset value. The Fund's shares may trade at a price that is less than the initial offering price. This risk may be greater for investors who sell their shares relatively shortly after completion of the initial offering.
CREDIT RISK
An issuer of a debt security, including a governmental issuer, may be unable to make interest payments and repay principal. The Fund could lose money if the issuer of a debt obligation, or the counterparty to a derivatives contract, repurchase agreement, loan of portfolio securities or other obligation, is, or is perceived to be, unable or unwilling to make timely principal and/or interest payments, or to otherwise honor its obligations. The downgrade of a security may further decrease its value. For mortgage-backed securities, factors contributing to these risks include the effects of general and local economic conditions on home values, the financial conditions of homeowners, and other market factors. This risk is mitigated by a U.S. government agency's or instrumentality's guarantee of the underlying debt obligation.
MORTGAGE-RELATED RISK
The Fund may invest in a variety of mortgage-related securities, including commercial mortgage securities and agency-issued securities and other mortgage-backed instruments. Rising interest rates tend to extend the duration of mortgage-related securities, which in turn could lengthen the average duration of the Fund's portfolio, making the portfolio more sensitive to changes in interest rates, and may reduce the market value of the portfolio's mortgage-related securities. This possibility is often referred to as extension risk. Extending the average life of a mortgage-related security increases the risk of depreciation due to future increases in market interest rates. In addition, mortgage-related securities are subject to prepayment risk -- the risk that borrowers may pay off their mortgages sooner than expected, particularly when interest rates decline. This can reduce the Fund's returns because the Fund may have to reinvest that money at lower prevailing interest rates. The Fund's investments in other asset-backed securities are subject to risks similar to those associated with mortgage-backed securities, as well as additional risks associated with the nature of the assets and the servicing of those assets.
Certain government agencies or instrumentalities, such as the Government National Mortgage Association ("GNMA"), the Federal National Mortgage Association ("FNMA"), and the Federal Home Loan Mortgage Corporation ("FHLMC"), provide a guarantee as to timely payment of principal and interest for mortgage-backed instruments each entity issues, backs or otherwise guarantees. Guarantees may or may not be backed by the full faith and credit of the U.S. government.
LOAN RISK
Bank loans, loan participations and assignments involve credit risk, interest rate risk, liquidity risk, and the risks of being a lender. Indebtedness of companies whose creditworthiness is poor involves substantially greater risks, and may be highly speculative. Some companies may never pay off their indebtedness, or may pay only a small fraction of the amount owed. Consequently, when investing in indebtedness of companies with poor credit, the Fund bears a substantial risk of losing the entire amount invested. If the Fund purchases a loan, it may only be able to enforce its rights through the lender, and may assume the credit risk of both the lender and the borrower.
Corporate loans in which the Fund may invest may be unrated and generally will not be registered with the SEC or listed on a securities exchange. In addition, the amount of public information available with respect to corporate loans generally will be less extensive than that available for more widely rated, registered and exchange-listed securities. As a result, corporate loans generally are more difficult to value than more widely rated, registered and exchange-listed securities.
HIGH YIELD RISK
In general, lower rated debt securities carry a greater degree of risk that the issuer will be unable to make interest and principal payments when due, which could have a negative impact on the Fund's net asset value or dividends. The Fund may invest in debt securities and other income-producing instruments that are rated below investment grade by each Rating Agency rating the security (below Baa by Moody's or below BBB by S&P or Fitch) or that are unrated but judged by the portfolio managers to be of comparable quality, including debt securities or other income-producing instruments that are in default or the issuers of which are in bankruptcy. The prices of these lower grade bonds and income-producing instruments are more sensitive to negative developments, such as a decline in the issuer's revenues or a general economic downturn, than are the prices of higher grade securities. In addition, the secondary market on which high yield securities or similar instruments are traded may be less liquid than the market for investment grade securities, meaning these holdings are subject to greater liquidity risk than investment grade securities. Because the Fund may invest a significant portion of its assets in below investment grade debt securities and income-producing instruments, the Manager's investment decisions and analytical capabilities in this area will be particularly important. The Fund will not invest more than 10% of its total assets in securities that are, at the time of purchase, rated CCC/Caa or lower by each Rating Agency rating the security or that are unrated but judged by the portfolio managers to be of comparable quality. The Fund may invest in debt securities or other obligations that are in default or the issuers of which are in bankruptcy. Under normal conditions, the Fund will not invest more than 5% of its total assets in debt securities or other obligations whose issuers are in default at the time of purchase.
INTEREST RATE RISK
Changes in interest rates may present risks to the Fund. When interest rates rise, debt security prices generally fall. The opposite is also true: debt security prices generally rise when interest rates fall. Because market interest rates are currently near their lowest levels in many years, there is a great risk that the Fund's portfolio will decline in value. Generally, debt securities will decrease in value when interest rates rise and increase in value when interest rates decline. This means that the net asset value of the Common Shares may fluctuate with interest rate changes and the corresponding changes in the value of the Fund's holdings. Because market interest rates are currently near their lowest levels in many years, there is a greater risk that the Fund's portfolio will decline in value. The prices of short-term debt obligations generally fluctuate less than the prices of long-term debt obligations as interest rates change.
The prices of fixed-rate securities with longer durations tend to be more sensitive to changes in interest rates than securities with shorter durations, usually making them more volatile. Because the Fund will normally have an estimated dollar-weighted average duration of between two and five years (including the effects of anticipated leverage), the Common Shares' net asset value and market price will tend to fluctuate more in response to changes in market interest rates than if the Fund invested mainly in short-term debt securities and less than if the Fund invested mainly in longer-term debt securities.
The Preferred Shares, if any are issued, are expected to pay dividends based on certain interest rates. If the Preferred Share dividend rate exceeds the rate of return on the debt obligations and other investments held by the Fund that were acquired during periods of generally lower interest rates, the returns to Common Shareholders may be reduced.
The Fund's use of leverage, as described above, will tend to increase Common Share interest rate risk. The Fund may utilize certain strategies, including investments in structured notes and interest rate swaps and caps, for the purposes of changing the duration of the overall portfolio, reducing the interest rate sensitivity of the portfolio or decreasing the Fund's exposure to interest rate risk, although there is no assurance that the Fund will do so or that such strategies will be successful. See "How the Fund Manages Risk -- Hedging and Related Strategies."
The Fund may utilize certain strategies, including but not limited to purchasing shorter duration or floating rate securities, or investing in structured notes or interest rate swap or cap transactions, for the purpose of reducing the interest rate sensitivity of the portfolio and decreasing the Fund's exposure to interest rate risk, although there is no assurance that it will do so or that such strategies will be successful. The Fund's use of leverage, as described below, will tend to increase Common Share interest rate risk.
INFLATION RISK
Inflation risk is the risk that the value of assets or income from the Fund's investments will be worth less in the future as inflation decreases the value of money. As inflation increases, the real value of the Common Shares and distributions thereon can decline. In addition, during any periods of rising inflation, dividend rates of Preferred Shares, if any are issued, would likely increase, which would tend to further reduce returns to Common Shareholders. This risk is mitigated to some degree by the Fund's investments in bank loans made to corporate and other business entities.
LEVERAGE RISK
Leverage risk includes the risk associated with the issuance of the Preferred Shares, if any, or lending of portfolio securities, the use of swaps, other derivatives, reverse repurchase agreements, and when-issued, delayed delivery or forward commitment transactions. There can be no assurance that the Fund's leveraging strategies involving Preferred Shares or other leverage vehicles will be successful. Once the Preferred Shares are issued or other forms of leverage are used, the net asset value and market value of Common Shares will be more volatile, and the yield and total return to Common Shareholders will tend to fluctuate more in response to changes in interest rates and with changes in the short-term dividend rates on the Preferred Shares. The Fund anticipates that the Preferred Shares, at least initially, would likely pay cumulative dividends at rates determined over relatively short-term periods (such as seven or 28 days), by providing for the periodic redetermination of the dividend rate through an auction or remarketing procedures. See "Description of Shares -- Preferred Shares." The rates of return on intermediate- and long-term debt obligations are typically, although not always, higher than the rates of return on short-term debt obligations. If the dividend rate on the Preferred Shares approaches the net rate of return on the Fund's investment portfolio, the benefit of leverage to Common Shareholders will be reduced. If the dividend rate on the Preferred Shares exceeds the net rate of return on the Fund's portfolio, the leverage will result in a lower rate of return to Common Shareholders than if the Fund were not leveraged. Because the longer-term bonds included in the Fund's portfolio will typically pay fixed rates of interest while the dividend rate on the Preferred Shares will be adjusted periodically, this could occur even when both long-term and short-term interest rates rise. In addition, the Fund will pay (and Common Shareholders will bear) any costs and expenses relating to the issuance and ongoing maintenance of the Preferred Shares. The Fund cannot assure you that it will issue Preferred Shares or use other forms of leverage or, if used, that these strategies will result in a higher yield or return to Common Shareholders.
Similarly, any decline in the net asset value of the Fund's investments will be borne entirely by Common Shareholders. Therefore, if the market value of the Fund's portfolio declines, any leverage will result in a greater decrease in net asset value to Common Shareholders than if the Fund were not leveraged. Such greater net asset value decrease will also tend to cause a greater decline in the market price for the Common Shares. The Fund might be in danger of failing to maintain the required 200% asset coverage or of losing its expected ratings of Aa/AA or better on the Preferred Shares or, in an extreme case, the Fund's current investment income might not be sufficient to meet the dividend requirements on the Preferred Shares (See "Preferred Shares and Related Leverage"). In order to counteract such an event, or in order to meet its other obligations, including obligations under swaps, the Fund might need to liquidate investments in order to fund a redemption of some or all of the Preferred Shares. Liquidation at times of low debt obligation prices may result in capital loss and may reduce returns to Common Shareholders. The Fund will seek to mitigate this risk by segregating assets in the form of cash and cash equivalents in an amount equal to the aggregate market value of the swaps of which it is the seller, marked to market on a daily basis.
While the Fund may from time to time consider reducing leverage in response to actual or anticipated changes in interest rates in an effort to mitigate the increased volatility of current income and net asset value associated with leverage, there can be no assurance that the Fund will actually reduce leverage in the future or that any reduction, if undertaken, will benefit the Common Shareholders. Changes in the future direction of interest rates are very difficult to predict accurately. If the Fund were to reduce leverage based on a prediction about future changes to interest rates, and that prediction turned out to be incorrect, the reduction in leverage would likely operate to reduce the income and/or total returns to Common Shareholders relative to the circumstance if the Fund had not reduced leverage. The Fund may decide that this risk outweighs the likelihood of achieving the desired reduction to volatility in income and Common Share price if the prediction were to turn out to be correct, and determine not to reduce leverage as described above.
Because the fees received by the Manager are based on the Managed Assets of the Fund (including assets attributable to any Preferred Shares that may be outstanding), the Manager has a financial incentive for the Fund to issue Preferred Shares, which may create a conflict of interest between the Manager and the holders of the Common Shares.
PORTFOLIO SECURITY ISSUER RISK
The value of the Fund's investments may decline for a number of reasons that directly relate to the issuer, such as management performance, financial leverage and performance and factors affecting the issuer's industry (such as reduced demand for the issuer's goods and services).
MANAGEMENT RISK
The Fund is subject to management risk because it is an actively managed investment portfolio. The Manager will apply investment techniques and risk analyses in making investment decisions for the Fund, but there can be no guarantee that these will produce the desired results.
FOREIGN (NON-U.S.) INVESTMENT RISK
Investing in securities or other income-producing instruments issued by companies and governments in foreign countries typically involves more risks than investing in U.S. securities. Certain of these risks also may apply to securities of U.S. companies with significant foreign operations. These risks can increase the potential for losses in the Fund and affect its share price. The political, economic and social structures of some foreign countries may be less stable and more volatile than those in the U.S. It is possible that a government may take over the assets or operations of a company or impose restrictions on the exchange or export of currency or other assets. Some countries also may have different legal systems that may make it difficult for the Fund to pursue legal remedies with respect to its foreign investments.
You should consider carefully the substantial risks involved in securities of companies of foreign nations, which are in addition to the usual risks inherent in domestic investments. The Fund may buy foreign securities that are traded in the U.S. or securities of U.S. issuers that are denominated in a foreign currency. The Fund may invest up to 15% of its total assets in securities or other income-producing instruments issued by companies and governments in any foreign country, including developed or developing countries. The Fund also may invest up to 5% of its total assets in securities or other income-producing instruments denominated in foreign currencies, including obligations of non-U.S. governments and their respective sub-divisions, agencies and government-sponsored enterprises.
There may be less publicly available information about foreign companies comparable to the reports and ratings published about companies in the U.S. Foreign companies are not generally subject to uniform accounting or financial reporting standards, and auditing practices and requirements may not be comparable to those applicable to U.S. companies. The Fund, therefore, may encounter difficulty in obtaining market quotations for purposes of valuing its portfolio and calculating its net asset value. Foreign markets have substantially less volume than the New York Stock Exchange (the "NYSE") and securities of some foreign companies are less liquid and more volatile than securities of comparable U.S. companies. Commission rates in foreign countries, which are generally fixed rather than subject to negotiation as in the U.S., are likely to be higher. In many foreign countries there is less government supervision and regulation of stock exchanges, brokers, and listed companies than in the U.S.
DEVELOPING COUNTRIES AND EMERGING MARKETS
Investments in companies domiciled in developing countries or based in
underdeveloped emerging markets may be subject to potentially higher risks than
investments in developed countries or mature markets. These risks include: (i)
greater risks of expropriation, confiscatory taxation, nationalization, and less
social, political, and economic stability; (ii) the small current size of the
markets for such securities and the currently low or nonexistent volume of
trading, which result in a lack of liquidity and in greater price volatility;
(iii) certain national policies which may restrict the Fund's investment
opportunities, including restrictions on investment in issuers or industries
deemed sensitive to national interests; (iv) foreign taxation; (v) the absence
of developed legal structures governing private or foreign investment or
allowing for judicial redress for injury to private property; and (vi) the
absence or early stage of development of a capital market structure or
market-oriented economy.
In addition, many countries in which the Fund may invest have experienced substantial, and in some periods extremely high, rates of inflation for many years. Inflation and rapid fluctuations in inflation rates have had and may continue to have negative effects on the economies and securities markets of certain countries. Moreover, the economies of some developing countries may differ favorably or unfavorably from the U.S. economy in such respects as growth of gross domestic product, rate of inflation, currency depreciation, capital reinvestment, resource self-sufficiency, and balance of payments position.
FOREIGN CURRENCY
The Fund's management endeavors to buy and sell foreign currencies on as favorable a basis as practicable. Some price spread on currency exchange (to cover service charges) may be incurred, particularly when the Fund changes investments from one country to another or when proceeds of the sale of shares in U.S. dollars are used for the purchase of securities in foreign countries. Also, some countries may adopt policies that would prevent the Fund from transferring cash out of the country or withhold portions of interest and dividends at the source. There is the possibility of cessation of trading on national exchanges, expropriation, nationalization, or confiscatory taxation, withholding, and other foreign taxes on income or other amounts, foreign exchange controls (which may include suspension of the ability to transfer currency from a given country), default in foreign government securities, political or social instability, or diplomatic developments that could affect investments in securities of issuers in foreign nations.
The Fund may be affected either favorably or unfavorably by fluctuations in the relative rates of exchange between the currencies of different nations, by exchange control regulations, and by indigenous economic and political developments. Some countries in which the Fund may invest may also have fixed or managed currencies that are not free-floating against the U.S. dollar. Further, certain currencies may not be internationally traded.
Certain of these currencies have experienced a steady devaluation relative to the U.S. dollar. Any devaluations in the currencies in which the Fund's portfolio securities are denominated may have a detrimental impact on the Fund. Through the Fund's flexible policy, management endeavors to avoid unfavorable consequences and to take advantage of favorable developments in particular nations where, from time to time, it places the Fund's investments.
The exercise of this flexible policy may include decisions to purchase securities with substantial risk characteristics and other decisions such as changing the emphasis on investments from one nation to another and from one type of security to another. Some of these decisions may later prove profitable and others may not. No assurance can be given that profits, if any, will exceed losses.
FORWARD CURRENCY EXCHANGE CONTRACTS
The Fund may enter into forward currency exchange contracts (forward contracts) to attempt to minimize the risk to the Fund from adverse changes in the relationship between currencies or to enhance income. A forward contract is an obligation to buy or sell a specific currency for an agreed price at a future date which is individually negotiated and is privately traded by currency traders and their customers. The Fund will either cover its position in such a transaction or maintain, in a segregated account with its custodian bank, cash or high-grade marketable securities having an aggregate value equal to the amount of any such commitment until payment is made.
SOVEREIGN ISSUERS
The Fund also may invest in sovereign debt issued by foreign governments, their agencies or instrumentalities, or other government-related entities, including debt of developing or "emerging market" issuers. As a holder of sovereign debt, the Fund may be requested to participate in the rescheduling of such debt and to extend further loans to governmental entities. In addition, there are generally no bankruptcy proceedings similar to those in the United States by which defaulted sovereign debt may be collected. Sovereign debt is subject to other risks, including: the possibility that a sovereign country might prevent capital, in the form of U.S. dollars, from flowing across its borders; 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.
DERIVATIVES RISK
Derivatives are financial contracts whose value depends on, or is derived from, the value of an underlying asset, reference rate or index (or relationship between two indexes). The Fund may invest in a variety of derivative instruments, such as options, futures contracts, swap agreements and short sales. The Fund may use derivatives as a substitute for taking a position in an underlying debt instrument or other asset and/or as part of a strategy designed to reduce exposure to other risks, such as interest rate or currency risk. The Fund also may use derivatives to add leverage to the portfolio or to manage the duration of the portfolio. The Fund's use of derivative instruments involves risks different from, and possibly greater than, the risks associated with investing directly in securities and other traditional investments. Derivatives are subject to a number of risks described elsewhere in this prospectus, such as liquidity risk, interest rate risk, credit risk, leverage risk, volatility risk, the risk of ambiguous documentation, and management risk. They also involve the risk of mispricing or improper valuation and the risk that changes in the value of the derivative may not correlate perfectly with the underlying asset, rate or index. If the Fund invests in a derivative instrument, it could lose more than the principal amount invested. Also, suitable derivative transactions may not be available in all circumstances and there can be no assurance that the Fund will engage in these transactions to reduce exposure to other risks when that would be beneficial. The use of derivatives also may increase the amount of taxes payable by shareholders. In addition to the risks applicable to derivatives generally, swaps involve special risks because they are difficult to value, are highly susceptible to liquidity and credit risk, and generally provide a return to the party that has paid the premium only in the event of an actual default by the issuer of the underlying obligation (as opposed to a credit downgrade or other indication of financial difficulty).
COUNTERPARTY RISK
The Fund will be subject to credit risk with respect to the counterparties to the derivative contracts purchased by the Fund. If a counterparty becomes bankrupt or otherwise fails to perform its obligations under a derivative contract due to financial difficulties, the Fund may experience significant delays in obtaining any recovery under the derivative contract in a bankruptcy or other reorganization proceeding. The Fund may obtain only a limited recovery or may obtain no recovery in such circumstances.
VOLATILITY RISK
The market values for some or all of the Fund's holdings may be volatile. The Fund's investment grade or long-term debt securities, will generally be more sensitive to changing interest rates and less sensitive to changes in the economic environment. The Fund's high yield investments will typically be less sensitive to changing interest rates than investment grade debt securities, but they may be more sensitive to a deteriorating economic environment. The Fund's investments may be subject to liquidity constraints and as a result, higher price volatility. The Fund's use of leverage may increase the volatility of the Fund's investment portfolio and could result in larger losses than if the strategies were not used.
REINVESTMENT RISK
The Fund may reinvest the proceeds from matured, traded or called debt obligations. If the Fund reinvests such proceeds at lower interest rates, the market price or the overall return of the Common Shares may decline. Reinvestment risk is the risk that income from the Fund's bond portfolio will decline if and when the Fund invests the proceeds from matured, traded or called bonds at market interest rates that are below the portfolio's current earnings rate. A decline in income could affect the Common Shares' market price or their overall returns.
CALL RISK
A debt security may be prepaid (called) before maturity. An issuer is more likely to call its securities when interest rates are falling, because the issuer can issue new securities with lower interest payments. If a debt security is called, the Fund may have to replace it with a lower-yielding security. High-yield bonds frequently have call features that allow the issuer to redeem the security at dates prior to its stated maturity at a specified price only if certain prescribed conditions are met ("call protection"). An issuer may redeem a high-yield bond if, for example, the issuer can refinance the debt at a lower cost due to declining interest rates or an improvement in the credit standing of the issuer. Corporate loans and mortgage-related securities typically have no such call protection. For premium bonds (bonds acquired at prices that exceed their par or principal value) purchased by the Fund, call risk may be enhanced. At any time, the Fund may have a large amount of its assets invested in securities subject to call risk. A call of some or all of these securities may lower the Fund's income and yield and its distributions to shareholders.
LIQUIDITY RISK
The Fund may invest up to 15% of its total assets in securities (excluding
swaps) which are illiquid at the time of investment. The term "illiquid
securities" for this purpose is determined using the SEC's standard applicable
to open-end investment companies, I.E., securities that cannot be disposed of
within seven days in the ordinary course of business at approximately the value
at which the Fund has valued the securities. Illiquid securities may be subject
to wide fluctuations in market value. The Fund may be subject to significant
delays in disposing of illiquid securities. Accordingly, the Fund may be forced
to sell these securities at less than fair market value or may not be able to
sell them when the Manager believes it is desirable to do so. Illiquid
securities also may entail registration expenses and other transaction costs
that are higher than those for liquid securities. Restricted securities, I.E.,
securities subject to legal or contractual restrictions on resale, may also be
illiquid. However, some restricted securities (such as securities issued
pursuant to Rule 144A under the Securities Act of 1933 and certain commercial
paper) may be treated as liquid for these purposes. To the extent the Manager
determines there is a liquid institutional or other market for these securities,
the Fund considers them to be liquid securities. The Board of Trustees will
review any determination by the Manager to treat a restricted security as a
liquid security on an ongoing basis, including the Manager's assessment of
current trading activity and the availability of reliable price information. In
determining whether a restricted security is properly considered a liquid
security, the Manager and the Fund's board of trustees will take into account
the following factors: (i) the frequency of trades and quotes for the security;
(ii) the number of dealers willing to buy or sell the security and the number of
other potential buyers; (iii) dealer undertakings to make a market in the
security; and (iv) the nature of the security and the nature of the marketplace
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers, and the mechanics of transfer). To the extent the Fund
invests in restricted securities that are deemed liquid, the general level of
illiquidity in the Fund may increase if qualified institutional buyers become
uninterested in buying these securities or the market for these securities
contracts.
The Fund may invest in securities that are not deemed "illiquid" but that are currently traded on a limited basis. The value of such securities may fluctuate more sharply than securities that are traded more widely. Although the Fund may be able to dispose of such securities in a short period of time, the Fund may lose money on such sales.
INCOME RISK
Because the Fund can distribute only what it earns, the Fund's distributions to shareholders may decline. The income investors receive from the Fund is based primarily on the interest it earns from its investments, which can vary widely over the short- and long-term. If prevailing market interest rates drop, investors' income from the Fund over time could drop as well. The Fund's income could also be affected already when prevailing short-term interest rates increase and the Fund is utilizing leverage, although this risk is mitigated by the Fund's investment in bank loans made to corporate and other business entities.
ZERO-COUPON SECURITIES RISK
Zero-coupon securities are especially sensitive to changes in interest rates, and their prices generally are more volatile than debt securities that pay interest periodically. Lower quality zero-coupon bonds are generally subject to the same risks as high yield debt securities. The Fund typically will not receive any interest payments on these securities until maturity. If the issuer defaults, the Fund may lose its entire investment, which will affect the Fund's share price.
SMALLER COMPANY RISK
Although under current market conditions the Fund does not presently intend to invest a significant portion of its assets in smaller companies, as market conditions change over time, the Fund may invest more of its assets
in such companies. The general risks associated with income-producing securities are particularly pronounced for securities issued by companies with smaller market capitalizations. These companies may have limited product lines, markets or financial resources or they may depend on a few key employees. As a result, they may be subject to greater levels of credit, market and issuer risk. Securities of smaller companies may trade less frequently and in lesser volume than more widely held securities and their values may fluctuate more sharply than other securities. Companies with medium-sized market capitalizations may have risks similar to those of smaller companies.
REAL ESTATE RISK
Since the Fund may invest in REITs and mortgage securities secured by real estate, the Fund may be subject to risks similar to those associated with the direct ownership of real estate (in addition to securities markets risks). These risks include declines in the value of real estate, risks related to general and local economic conditions, dependency on management skill, increases in interest rates, possible lack of availability of mortgage funds, overbuilding, extended vacancies of properties, increased competition, increases in property taxes and operating expenses, changes in zoning laws, losses due to costs resulting from the clean-up of environmental problems, casualty or condemnation losses, limitations on rents, and changes in neighborhood values and the appeal of properties to tenants.
Rising interest rates may cause investors in REITs to demand a higher annual yield from future distributions, which may in turn decrease market prices for equity securities issued by REITs. Rising interest rates also generally increase the costs of obtaining financing, which could cause the value of the Fund's investments to decline. During periods of declining interest rates, certain mortgage REITs may hold mortgages that the mortgagors elect to prepay, and such prepayment may diminish the yield on securities issued by such mortgage REITs. In addition, mortgage REITs may be affected by the borrowers' ability to repay when due the debt extended by the REIT, and equity REITs may be affected by the tenants' ability to pay rent.
MARKET DISRUPTION AND GEOPOLITICAL RISK
The war with Iraq, its aftermath and the continuing occupation of Iraq are likely to have a substantial impact on the U.S. and world economies and securities markets. The nature, scope and duration of the occupation cannot be predicted with any certainty. Terrorist attacks on the World Trade Center and the Pentagon on September 11, 2001 closed some of the U.S. securities markets for a four-day period and the occurrence of similar events in the future cannot be ruled out. The war and occupation, terrorism and related geopolitical risks have led, and may in the future lead to, increased short-term market volatility and may have adverse long-term effects on U.S. and world economies and markets generally. Those events could also have an acute effect on individual issuers or related groups of issuers. These risks could also adversely affect individual issuers and securities markets, interest rates, auctions, secondary trading, ratings, credit risk, inflation and other factors relating to the Common Shares.
HOW THE FUND MANAGES RISK
INVESTMENT LIMITATIONS
The Fund has adopted certain investment limitations designed to limit investment risk and maintain portfolio diversification. These limitations (two of which are listed below) are fundamental and may not be changed without the approval of the holders of a majority of the outstanding Common Shares and, if issued, Preferred Shares voting together as a single class, and the approval of the holders of a majority of the Preferred Shares voting as a separate class. The Fund may not:
- Concentrate its investments in a particular "industry," as that term is used in the 1940 Act and as interpreted, modified, or otherwise permitted by regulatory authority having jurisdiction, from time to time (this limitation does not apply to securities issued or guaranteed by the U.S. Government or any of its agencies or instrumentalities); and
- With respect to 75% of the Fund's total assets, purchase the securities of any issuer, except securities issued or guaranteed by the U.S. Government or any of its agencies or instrumentalities or securities of other investment companies, if, as a result, (i) more than 5% of the Fund's total assets would be invested in the securities of that issuer, or (ii) the Fund would hold more than 10% of the outstanding voting securities of that issuer. For the purpose of this restriction, each state and each separate political subdivision, agency, authority or instrumentality of such state, each multi-state agency or authority, and each obligor, if any, is treated as a separate issuer of municipal bonds.
The Fund would be deemed to "concentrate" its investments in a particular industry if it invested more than 25% of its total assets in that industry. The Fund's industry concentration policy does not preclude it from focusing investments in issuers in a group of related industrial sectors (such as different types of utilities).
The Fund may become subject to guidelines which are more limiting than the investment restrictions set forth above and other restrictions set forth in the Statement of Additional Information in order to obtain and maintain ratings from Moody's, S&P and/or Fitch on the Preferred Shares that it intends to issue. The Fund does not anticipate that such guidelines would have a material adverse effect on the Fund's Common Shareholders or the Fund's ability to achieve its investment objectives. See "Investment Objectives and Policies" and "Investment Restrictions" in the Statement of Additional Information for information about these guidelines and a complete list of the fundamental investment policies of the Fund.
LIMITED ISSUANCE OF PREFERRED SHARES
Under the 1940 Act, the Fund could issue Preferred Shares having a total liquidation value (original purchase price of the shares being liquidated plus any accrued and unpaid dividends) of up to one-half of the value of the total assets of the Fund, less liabilities. To the extent that the Fund has outstanding any senior securities representing indebtedness (such as through the use of reverse repurchase agreements, swaps and other derivative instruments that constitute senior securities), the aggregate amount of such senior securities will be added to the total liquidation value of any outstanding Preferred Shares for purposes of this asset coverage requirement. If the total liquidation value of the Preferred Shares plus the aggregate amount of such other senior securities were ever more than one-half of the value of the Fund's total net assets, the Fund would not be able to declare dividends on the Common Shares until such liquidation value and/or aggregate amount of other senior securities, as a percentage of the Fund's total assets, were reduced.
The Fund presently intends to issue Preferred Shares representing approximately 33% (but not more than 38%) of the Fund's Managed Assets (calculated after their issuance) approximately one to three months after the completion of the offering of Common Shares. This higher than required margin of net asset value provides a cushion against later fluctuations in the value of the Fund's portfolio and will subject Common Shareholders to less income and net asset value volatility than if the Fund were more highly leveraged through Preferred Shares. No assurance can be given that this cushion will not be reduced or eliminated. It also gives the Fund flexibility to utilize other forms of leverage in addition to Preferred Shares from time to time in accordance with the 1940 Act asset coverage requirements (such as reverse repurchase agreements, swaps and other derivatives) that may be more efficient or cost effective sources of leverage than Preferred Shares under the circumstances.
The Fund may engage in additional transactions of the type described above and similar investment management techniques which provide leverage. However, the Fund will segregate liquid assets against or otherwise cover its future obligations under such transactions, in order to provide that, immediately after entering into such a transaction, the Fund's future commitments that it has not segregated liquid assets against or otherwise covered, together with any outstanding Preferred Shares, will not exceed 38% of the Fund's Managed Assets.
The Fund intends to purchase or redeem Preferred Shares, if necessary, to keep the liquidation value of the Preferred Shares plus the aggregate amount of other senior securities representing indebtedness below one-half of the value of the Fund's total net assets.
MANAGEMENT OF INVESTMENT PORTFOLIO AND CAPITAL STRUCTURE TO LIMIT LEVERAGE RISK
The Fund may take certain actions if short-term interest rates increase or market conditions otherwise change (or the Fund anticipates such an increase or change) and the Fund's leverage begins (or is expected) to adversely affect Common Shareholders. In order to attempt to offset such a negative impact of leverage on Common Shareholders, the Fund may shorten the average maturity or duration of its investment portfolio (by investing in short-term, high quality securities or implementing certain hedging strategies) or may extend the maturity of outstanding Preferred Shares. The Fund also may attempt to reduce leverage by redeeming or otherwise purchasing Preferred Shares or by reducing any holdings in other instruments that create leverage. As explained above under "Risks -- Leverage Risk," the success of any such attempt to limit leverage risk depends on the Manager's ability to accurately predict interest rate or other market changes. Because of the difficulty of making such predictions, the Fund may not be successful in managing its interest rate exposure in the manner described above.
If market conditions suggest that additional leverage would be beneficial, the Fund may sell previously unissued Preferred Shares or Preferred Shares that the Fund previously issued but later repurchased, or utilize other forms of leverage, such as swaps and other derivative instruments. The Fund's investment in swaps will not be included as illiquid investments for purposes of determining compliance with the 15% limit on illiquid investments. Accordingly, the Fund may invest more than 15% of its total assets in swaps. However, the Fund's use of derivative instruments (other than swaps) will be limited by the Fund's 15% limit on illiquid investments to the extent such derivatives are determined to be illiquid. See "Portfolio Contents and Other Information" and "Risks -- Liquidity Risk."
HEDGING AND RELATED STRATEGIES
The Fund may use various investment strategies designed to limit the risk of price fluctuations of its portfolio securities and to preserve capital. For instance, the Fund may purchase credit default swap contracts for the purpose of hedging the Fund's exposure to certain issuers and, thereby, decreasing its exposure to credit risk, and it may invest in structured notes or interest rate swap or cap transactions for the purpose of reducing the interest rate sensitivity of the Fund's portfolio and, thereby, decreasing the Fund's exposure to interest rate risk. See "Investment Objectives and Strategies -- Swaps," and "Investment Objectives and Strategies -- Structured Notes and Related Instruments" in this prospectus. Other hedging strategies that the Fund may use include: financial futures contracts; short sales; other types of swap agreements or options thereon; options on financial futures; and options based on either an index or individual debt securities whose prices, the Manager believes, correlate with the prices of the Fund's investments. Income earned by the Fund from many hedging activities will be distributed to shareholders in taxable distributions. If effectively used, hedging strategies will offset in varying percentages losses incurred on the Fund's investments due to adverse interest rate changes. There is no assurance that these hedging strategies will be available at any time or that the Manager will determine to use them for the Fund or, if used, that the strategies will be successful. In addition, the Fund may be subject to certain restrictions on its use of hedging strategies imposed by guidelines of one or more rating agencies that may issue ratings for Preferred Shares issued by the Fund.
In order to reduce the interest rate risk inherent in the Fund's underlying investments and capital structure, the Fund may enter into interest rate swap or cap transactions. For example, the Fund may enter into interest rate swaps that are intended to approximate the Fund's variable rate payment obligation on Preferred Shares, if such Preferred Shares are issued. The Fund also may use an interest rate cap, which would require the Fund to pay a premium to the counterparty and would entitle the Fund, to the extent that a specified variable rate index exceeds a predetermined fixed rate, to receive from the counterparty payment of the difference based on the notional amount. The Fund may use interest rate swaps or caps with the intent to reduce or eliminate the risk that an increase in short-term interest rates could pose for the performance of the Common Shares as a result of leverage, and also may use these instruments for other hedging or investment purposes. The Fund may choose or be required to redeem some or all of the Preferred Shares. This redemption would likely result in the Fund seeking to terminate early all or a portion of any swap or cap transaction. Such early termination of a swap could result in a termination payment by or to the Fund. Any termination of a cap could result in a termination payment to the Fund.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The Board of Trustees is responsible for the management of the Fund, including supervision of the duties performed by the Manager. There are currently nine Trustees of the Fund, three of whom are currently treated by the Fund as an "interested person" (as defined in the 1940 Act). The names and business addresses of the Trustees and officers of the Fund and their principal occupations and other affiliations during the past five years are set forth under "Management of the Fund" in the Statement of Additional Information.
INVESTMENT ADVISER
Franklin Advisers, Inc. (the "Manager") serves as the investment adviser of the Fund. Subject to the supervision of the Board of Trustees, the Manager is responsible for managing the investment activities of the Fund and the Fund's business affairs and other administrative matters. The Manager is located at One Franklin Parkway, San Mateo, California 94403-1906. Franklin Resources, Inc. ("Franklin") is the parent company of the Manager and the Fund's administrator. Founded in 1947, Franklin is one of the oldest mutual fund organizations. In 1992, Franklin, a leader in managing fixed-income mutual funds and an innovator in creating domestic equity funds, joined forces with Templeton, a pioneer in international investing.
The Manager and its affiliates (collectively known as "Franklin Templeton Investments") provide investment management and advisory services to closed-end and open-end investment company clients, as well as private accounts. As of June 30, 2003, Franklin Templeton Investments had approximately $287 billion in assets under management for more than five million mutual fund shareholder and other accounts.
PORTFOLIO MANAGEMENT TEAM
Christopher Molumphy, CFA, Eric G. Takaha, CFA, Roger Bayston, CFA, and Richard C. D'Addario will serve as the portfolio management team responsible for managing the Fund's portfolio investments. They are sometimes referred to herein as the "portfolio managers." Each of them has experience managing Franklin mutual funds and private accounts.
Mr. Molumphy has been a portfolio manager of the Franklin Strategic Income Fund since 1994, the Franklin AGE High Income Fund since 1991, and the Franklin Total Return Fund since 1998. He has been an employee of the Manager since 1988.
Mr. Takaha has been a portfolio manager of the Franklin Strategic Income Fund since 1997, and an employee of the Manager since 1989.
Mr. Bayston has been a portfolio manager of the Franklin U.S. Government Fund and the Franklin Strategic Mortgage Portfolio since 1993, and the Franklin Total Return Fund since 1998. He has been an employee of the Manager since 1991.
Mr. D'Addario has been a portfolio manager of the Franklin Floating Rate Trust and the Franklin Floating Rate Daily Access Fund since 2000, and an employee of the Manager since 1996.
INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an investment management agreement between the Manager and the Fund (the "Investment Management Agreement"), the Fund has agreed to pay the Manager an annual fee, payable monthly, in an amount equal to 0.50% of the average daily value of the Fund's Managed Assets for the investment management services it provides.
In addition to the fees of the Manager, the Fund pays all other costs and expenses of its operations, including compensation of its Trustees (other than those affiliated with the Manager), custodial expenses, shareholder servicing expenses, transfer agency and dividend disbursing expenses, legal fees, expenses of independent auditors, expenses of repurchasing shares, expenses of issuing any Preferred Shares, expenses of preparing, printing and distributing prospectuses, shareholder reports, notices, proxy statements and reports to governmental agencies, and taxes, if any. The ordinary "Other Expenses" of the Fund, which are estimated above, may, and are likely to, vary from the Fund's actual expenses. See "Summary of Fund Expenses."
Because the fees received by the Manager are based on the Managed Assets of the Fund (including assets attributable to Preferred Shares and any leverage created thereby), the Manager has a financial incentive for the Fund to issue Preferred Shares, which may create a conflict of interest between the Manager and the holders of the Fund's Common Shares.
NET ASSET VALUE
The net asset value ("NAV") of the Fund equals the total value of the Fund's portfolio investments and other assets, less any liabilities. For purposes of calculating NAV, portfolio securities and other assets for which market quotes are available are stated at market value. Market value is generally determined on the basis of the last reported sales price (or the NASDAQ official closing price for NASDAQ-reported securities, if such price is provided by the Fund's accountant), or if no sales are reported, based on quotes obtained from a quotation reporting system, established market makers, or pricing services. Certain securities or investments for which market quotations are not readily available may be valued, pursuant to guidelines established by the Board of Trustees, with reference to other securities or indexes. For instance, a pricing service may recommend a fair market value based on prices of comparable securities. Short-term investments having a maturity of 60 days or less are generally valued at amortized cost. Exchange traded options, futures and options on futures are valued at the settlement price determined by the exchange. Other securities for which market quotes are not readily available are valued at fair value as determined in good faith by the Board of Trustees or persons acting at their direction.
The NAV of the Fund will be determined as of the close of regular trading on the NYSE (normally 4:00 p.m., Eastern time) (the "NYSE Close") on each day the NYSE is open. Domestic debt securities and foreign securities are normally priced using data reflecting the earlier closing of the principal markets for those securities. Information that becomes known to the Fund or its agent after the Fund's NAV has been calculated on a particular day will not be used to retroactively adjust the price of a security or the Fund's NAV determined earlier that day.
Investments initially valued in currencies other than the U.S. dollar are converted to U.S. dollars using exchange rates obtained from pricing services. As a result, the NAV of the Fund's shares may be affected by changes in the value of currencies in relation to the U.S. dollar. The value of securities traded in markets outside the United States or denominated in currencies other than the U.S. dollar may be affected significantly on a day that the NYSE is closed.
In unusual circumstances, instead of valuing securities in the usual manner, the Fund may value securities at fair value as determined in good faith by the Board of Trustees, generally based upon recommendations provided by the Manager. Fair valuation also may be required due to material events that occur after the close of the relevant market but prior to the NYSE Close.
Shares of closed-end investment companies may frequently trade on an exchange at prices lower than NAV; accordingly, the Fund may trade on an exchange at prices lower than its NAV.
DISTRIBUTIONS
Commencing with the Fund's first dividend, the Fund intends to make regular monthly cash distributions to Common Shareholders at a rate based upon the projected performance of the Fund. Distributions can only be made from net investment income after paying any accrued dividends to Preferred Shareholders. The dividend rate that the Fund pays on its Common Shares will depend on a number of factors, including dividends payable on the Preferred Shares, the income from portfolio securities and the expenses of any other leveraging transactions. As portfolio and market conditions change, the rate of dividends on the Common Shares and the Fund's dividend policy could change. The net income of the Fund consists of all income accrued on portfolio assets less all expenses of the Fund. Expenses of the Fund are accrued each day. Over time, substantially all the net investment income of the Fund will be distributed. At least annually, the Fund also intends to distribute to Common Shareholders their pro rata share of any available net capital gains. Initial distributions to Common Shareholders are expected to be declared within approximately 45 days, and paid within approximately 60 to 75 days, from the completion of this offering, depending on market conditions. The amount of any distributions will vary, and there is no guarantee the Fund will pay either income dividends or capital gain distributions.
Unless you elect to receive distributions in cash, all of your distributions will be automatically reinvested in additional Common Shares under the Fund's Dividend Reinvestment Plan. See "Distributions" and "Dividend Reinvestment Plan."
Although it does not now intend to do so, the Board of Trustees may change the Fund's dividend policy and the amount or timing of the distributions, based on a number of factors, including the amount of the Fund's undistributed net investment income and historical and projected investment income and the amount of the expenses and dividend rates on any outstanding Preferred Shares.
To permit the Fund to maintain a more stable monthly distribution, the Fund will initially distribute less than the entire amount of net investment income earned in a particular period. The undistributed net investment income would be available to supplement future distributions. As a result, the distributions paid by the Fund for any particular monthly period may be more or less than the amount of net investment income actually earned by the Fund during the period. Undistributed net investment income will be added to the Fund's net asset value and, correspondingly, distributions from undistributed net investment income will be deducted from the Fund's net asset value. Unless you elect to receive distributions in cash, all of your distributions will be automatically reinvested in additional Common Shares under the Fund's Dividend Reinvestment Plan. See "Dividend Reinvestment Plan."
DIVIDEND REINVESTMENT PLAN
Pursuant to the Fund's Dividend Reinvestment Plan (the "Plan"), all Common Shareholders whose shares are registered in their own names will have all dividends, including any capital gain dividends, reinvested automatically in additional Common Shares by PFPC, Inc., as agent for the Common Shareholders (the "Plan Agent"), unless the Common Shareholder "opts out" of the Plan and elects to receive cash. An election to receive cash may be revoked or reinstated at the option of the Common Shareholder. In the case of record Common Shareholders such as banks, brokers or other nominees that hold Common Shares for others who are the beneficial owners, the Plan Agent will administer the Plan on the basis of the number of Common Shares certified from time to time by the record Common Shareholder as representing the total amount registered in such Common Shareholder's name and held for the account of beneficial owners who are to participate in the Plan. Common Shareholders whose shares are held in the name of a bank, broker or nominee should contact the bank, broker or nominee for details. Such Common Shareholders may not be able to transfer their shares to another bank or broker and continue to participate in the Plan. All distributions to Common Shareholder who elect not to participate in the Plan (or whose broker or nominee elects not to participate on the Common Shareholder's behalf), will be paid in cash by check mailed, in the case of direct Common Shareholders, to the record holder by the Plan Agent, in its capacity as the Fund's dividend disbursement agent.
Unless you elect (or your broker or nominee elects) not to participate in the Plan, the number of Common Shares you will receive will be determined as follows:
(1) If Common Shares are trading at or above net asset value on the payment date, the Fund will issue new shares at the greater of (i) the net asset value per Common Share on the payment date or (ii) 95% of the market price per Common Share on the payment date; or
(2) If Common Shares are trading below net asset value (minus estimated brokerage commissions that would be incurred upon the purchase of Common Shares on the open market) on the payment date, the Plan Agent will receive the dividend or distribution in cash and will purchase Common Shares in the open market, on the AMEX or elsewhere, for the participants' accounts. It is possible that the market price for the Common Shares may increase before the Plan Agent has completed its purchases. Therefore, the average purchase price per share paid by the Plan Agent may exceed the market price on the payment date, resulting in the purchase of fewer shares than if the dividend or distribution had been paid in Common Shares issued by the Fund. The Plan Agent will use all dividends and distributions received in cash to purchase Common Shares in the open market on or shortly after the payment date, but in no event later than the ex-dividend date for the next distribution. Interest will not be paid on any uninvested cash payments.
You may withdraw from the Plan at any time by giving written notice to the Plan Agent. If you withdraw or the Plan is terminated, you will receive a certificate for each whole share in your account under the Plan and you will receive a cash payment for any fraction of a share in your account. If you wish, the Plan Agent will sell your shares and send you the proceeds, minus brokerage commissions.
The Plan Agent maintains all shareholders' accounts in the Plan and gives written confirmation of all transactions in the accounts, including information you may need for tax records. The Plan Agent will also furnish each person who buys Common Shares with written instructions detailing the procedures for electing not to participate in the Plan and to instead receive distributions in cash. Common Shares in your account will be held by the Plan Agent in non-certificated form. Any proxy you receive will include all Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or distributions in Common Shares. However, all participants will pay a pro rata share of brokerage commissions incurred by the Plan Agent when it makes open market purchases.
Automatically reinvested dividends and distributions are taxed in the same manner as cash dividends and distributions.
The Fund and the Plan Agent reserve the right to amend or terminate the Plan. There is no direct service charge to participants in the Plan; however, the Fund reserves the right to amend the Plan to include a service charge payable by the participants. Additional information about the Plan may be obtained from PFPC, Inc., P.O. Box 43027, Providence, RI 02940-3027.
DESCRIPTION OF SHARES
COMMON SHARES
The Declaration authorizes the issuance of an unlimited number of Common Shares. All Common Shares have equal rights to the payment of dividends and the distribution of assets upon liquidation. Common Shares will, when issued, be fully paid and, subject to matters discussed in "Anti-Takeover and Other Provisions in the Declaration of Trust," non-assessable, and will have no pre-emptive or conversion rights or rights to cumulative voting. Whenever Preferred Shares are outstanding, Common Shareholders will not be entitled to receive any distributions from the Fund unless all accrued dividends on Preferred Shares have been paid, and unless asset coverage (as defined in the 1940 Act) with respect to Preferred Shares would be at least 200% after giving effect to the distributions. See "-- Preferred Shares" below.
The Common Shares are expected to be listed on the AMEX. The Fund intends to hold annual meetings of shareholders so long as the Common Shares are listed on a national securities exchange and such meetings are required as a condition to such listing.
The Fund's net asset value per share generally increases when interest
rates decline, and generally decreases when interest rates rise, and these
changes are likely to be greater because the Fund intends to have a leveraged
capital structure. Net asset value will be reduced immediately following the
offering by the amount of the sales load and organization and offering expenses
paid by the Fund. The Manager has agreed to pay (i) the amount by which the
Fund's offering costs (other than the sales load) exceed $0.03 per share and
(ii) all of the Fund's organizational expenses, except that the Fund has agreed
to reimburse Franklin Advisers, Inc. for such organizational expenses to the
extent that the aggregate of such organizational expenses and offering costs
(other than the sales load) does not exceed $0.03 per share.
Unlike open-end funds, closed-end funds like the Fund do not continuously offer shares and do not provide daily redemptions. Rather, if a shareholder determines to buy additional Common Shares or sell shares already held, the shareholder may do so by trading on the exchange through a broker or otherwise. Shares of closed-end investment companies may frequently trade on an exchange at prices lower than net asset value. Shares of closed-end investment companies, like the Fund, that invest predominantly in debt obligations have during some periods traded at prices higher than net asset value and during other periods have traded at prices lower than net asset value. The Fund's Declaration limits the ability of the Fund to convert to open-end status. See "Anti-Takeover and Other Provisions in the Declaration of Trust."
Because the market value of the Common Shares may be influenced by such factors as dividend levels (which are in turn affected by expenses), call protection, dividend stability, portfolio credit quality, net asset value, relative demand for and supply of such shares in the market, general market and economic conditions, and other factors beyond the control of the Fund, the Fund cannot assure you that the Common Shares will trade at a price equal to or higher than net asset value in the future. The Common Shares are designed primarily for long-term investors, and investors in the Common Shares should not view the Fund as a vehicle for trading purposes. See "Preferred Shares and Related Leverage" and the Statement of Additional Information under "Repurchase of Common Shares; Conversion to Open-End Fund."
PREFERRED SHARES
The Declaration authorizes the issuance of an unlimited number of Preferred Shares. The Preferred Shares may be issued in one or more classes or series, with such par value and rights as determined by the Board of Trustees, by action of the Board of Trustees without the approval of the Common Shareholders.
The Fund's Board of Trustees has indicated its intention to authorize an offering of Preferred Shares (representing approximately 33%, but not more than 38%, of the Fund's Managed Assets calculated after the Preferred Shares are issued) approximately one to three months after completion of the offering of Common Shares. The terms of the Preferred Shares may provide that they are redeemable at certain times, in whole or in part, at the original purchase price per share plus accumulated dividends.
Any decision by the Board to authorize an offering of Preferred Shares is subject to market conditions and to the Board's continuing belief that leveraging the Fund's capital structure through the issuance of Preferred Shares is likely to achieve the benefits to the Common Shareholders described in this prospectus. Although the terms of the Preferred Shares will be determined by the Board of Trustees (subject to applicable law and the Fund's Declaration) if and when it authorizes a Preferred Shares offering, the Board has determined that the Preferred Shares, at least initially, would likely pay cumulative dividends at rates determined over relatively short-term periods (such as seven or 28 days), by providing for the periodic redetermination of the dividend rate through an auction or remarketing procedure. The Board of Trustees has indicated that the preference on distribution, liquidation preference, voting rights and redemption provisions of the Preferred Shares will likely be as stated below.
As used in this prospectus, unless otherwise noted, the Fund's "net assets" include assets of the Fund attributable to any outstanding Preferred Shares, with no deduction for the liquidation preference of the Preferred Shares. Solely for financial reporting purposes, however, the Fund is required to exclude the liquidation preference of Preferred Shares from "net assets," so long as the Preferred Shares have redemption features that are not solely within the control of the Fund. For all regulatory and tax purposes, the Fund's Preferred Shares will be treated as stock (rather than indebtedness).
LIMITED ISSUANCE OF PREFERRED SHARES
Under the 1940 Act, the Fund could issue Preferred Shares with an aggregate liquidation value of up to one-half of the value of the Fund's total net assets (total assets less all liabilities and indebtedness not represented by "senior securities," as defined in the 1940 Act), measured immediately after issuance of the Preferred Shares. "Liquidation value" means the original purchase price of the shares being liquidated plus any accrued and unpaid dividends. In addition, the Fund is not permitted to declare any cash dividend or other distribution on its Common Shares unless the liquidation value of the Preferred Shares is less than one-half of the value of the Fund's total net assets (determined after deducting the amount of such dividend or distribution) calculated immediately after the distribution. The liquidation value of the Preferred Shares is expected to be approximately 33% (but not more than 38%) of the value of the Fund's total net assets. The Fund intends to purchase or redeem Preferred Shares, if necessary, to keep that fraction below one-half.
DISTRIBUTION PREFERENCE
The Preferred Shares have complete priority over the Common Shares as to distribution of assets.
LIQUIDATION PREFERENCE
In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Fund, holders of Preferred Shares will be entitled to receive a preferential liquidating distribution (expected to equal the original purchase price per share plus accumulated and unpaid dividends thereon, whether or not earned or declared) before any distribution of assets is made to holders of Common Shares.
VOTING RIGHTS
Preferred Shares are required to be voting shares. Except as otherwise provided in the Declaration or the Fund's Bylaws or otherwise required by applicable law, holders of Preferred Shares will vote together with Common Shareholders as a single class.
Holders of Preferred Shares, voting as a separate class, will also be entitled to elect two of the Fund's Trustees. The remaining Trustees will be elected by Common Shareholders and holders of Preferred Shares, voting together as a single class. In the unlikely event that two full years of accrued dividends are unpaid on the Preferred Shares, the holders of all outstanding Preferred Shares, voting as a separate class, will be entitled to elect a majority of the Fund's Trustees until all dividends in arrears have been paid or declared and set apart for payment.
REDEMPTION, PURCHASE AND SALE OF PREFERRED SHARES
The terms of the Preferred Shares may provide that they are redeemable at certain times, in whole or in part, at the original purchase price per share plus accumulated dividends. The terms also may state that the Fund may tender for or purchase Preferred Shares and resell any shares so tendered. Any redemption or purchase of Preferred Shares by the Fund will reduce the leverage applicable to Common Shares, while any resale of Preferred Shares by the Fund will increase such leverage. See "Preferred Shares and Related Leverage."
The discussion above describes the Board of Trustees' present intention with respect to a possible offering of Preferred Shares. If the Board of Trustees determines to authorize such an offering, the terms of the Preferred Shares may be the same as, or different from, the terms described above, subject to applicable law and the Fund's Declaration and Bylaws.
ANTI-TAKEOVER AND OTHER PROVISIONS IN THE DECLARATION OF TRUST
The Declaration includes provisions that could limit the ability of other entities or persons to acquire control of the Fund or to convert the Fund to open-end status. The Fund's Trustees are divided into three classes. At each annual meeting of shareholders, the term of one class will expire and each Trustee elected to that class will hold office for a term of three years. The classification of the Board of Trustees in this manner could delay for an additional year the replacement of a majority of the Board of Trustees. In addition, the Declaration provides that a Trustee may be removed only for cause and only by action of at least seventy-five percent (75%) of the outstanding shares of the classes or series of shares entitled to vote for the election of such Trustee.
The Declaration requires the approval of the Board of Trustees and the affirmative vote of the holders of 75% of the Fund's shares (including Common and Preferred Shares) entitled to vote to approve, adopt or authorize certain Fund transactions not in the ordinary course of business, including (i) a merger or consolidation or sale or transfer of the Fund and (ii) conversion of the Fund from a closed-end to an open-end investment company, unless such action was previously approved, adopted or authorized by the affirmative vote of 66 2/3% of the Board of Trustees, in which case such action must be approved by the holders of a "majority of the outstanding" Common Shares and any Preferred Shares voting together as a single class, and of the holders of a "majority of the outstanding" Preferred Shares voting as a separate class. A "majority of the outstanding" shares (whether voting together as a single class or voting as a separate class) means (i) 67% or more of such shares present at a meeting, if the holders of more than 50% of those shares are present or represented by proxy, or (ii) more than 50% of such shares, whichever is less. See "Anti-Takeover and Other Provisions in the Declaration of Trust" in the Statement of Additional Information for a more detailed summary of these provisions.
The Trustees may from time to time grant other voting rights to shareholders with respect to these and other matters in the Fund's Bylaws.
The overall effect of these provisions is to render more difficult the accomplishment of a merger or the assumption of control by a third party. They provide, however, the advantage of potentially requiring persons seeking control of the Fund to negotiate with its management regarding the price to be paid and facilitating the continuity of the Fund's investment objective and policies. The provisions of the Declaration described above could have the effect of depriving the Common Shareholders of opportunities to sell their Common Shares at a premium over the then current market price of the Common Shares by discouraging a third party from seeking to obtain control of the Fund in a tender offer or similar transaction. The Board of Trustees of the Fund has considered the foregoing anti-takeover provisions and concluded that they are in the best interests of the Fund and its Common Shareholders.
The foregoing is intended only as a summary and is qualified in its entirety by reference to the full text of the Declaration and the Fund's Bylaws, both of which are on file with the SEC.
The Declaration contains an express disclaimer of shareholder liability for debts or obligations of the Fund and requires that notice of such limited liability be given in each agreement, obligation or instrument entered into or executed by the Fund or the Trustees. The Declaration further provides for indemnification out of the assets and property of the Fund for all loss and expense of 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 the Fund would be unable to meet its obligations. The Fund believes that the likelihood of such circumstances is remote.
REPURCHASE OF COMMON SHARES; CONVERSION TO OPEN-END FUND
The Fund is a closed-end investment company and as such its shareholders will not have the right to cause the Fund to redeem their shares. Instead, the Common Shares will trade in the open market at a price that will be a function of several factors, including dividend levels (which are in turn affected by expenses), net asset value, call protection, dividend stability, portfolio credit quality, relative demand for and supply of such shares in the market, general market and economic conditions and other factors. Shares of a closed-end investment company may frequently trade at prices lower than net asset value. The Fund's Board of Trustees will regularly monitor the relationship between the market price and net asset value of the Common Shares. If the Common Shares were to trade at a substantial discount to net asset value for an extended period of time, the Board may consider the repurchase of its Common Shares on the open market or in private transactions, the making of a tender offer for such shares, or the conversion of the Fund to an open-end investment company. The Fund cannot assure you that its Board of Trustees will decide to take or propose any of these actions, or that share repurchases or tender offers will actually reduce market discount.
The Declaration requires the affirmative vote or consent of a majority of the Board of Trustees and the affirmative vote or consent of the holders of at least seventy-five percent (75%) of the Fund's shares (including Common and Preferred Shares) entitled to vote to approve, unless the conversion has been authorized by a the affirmative vote or consent of two-thirds (66 2/3%) of the Board of Trustees, in which case shareholders would have only the minimum voting rights required by the 1940 Act with respect to the conversion.
If the Fund were to convert to an open-end company, it would be required to redeem all Preferred Shares then outstanding (requiring in turn that it liquidate a portion of its investment portfolio), and the Common Shares would no longer be listed on the AMEX. In contrast to a closed-end investment company, shareholders of an open-end investment company may require the company to redeem their shares at any time (except in certain circumstances as authorized by or under the 1940 Act) at their net asset value, less any redemption charge that is in effect at the time of redemption.
Before deciding whether to take any action to convert the Fund to an open-end investment company, the Board would consider all relevant factors, including the extent and duration of the discount, the liquidity of the Fund's portfolio, the impact of any action that might be taken on the Fund or its shareholders, and market considerations. Based on these considerations, even if the Fund's shares should trade at a discount, the Board of Trustees may determine that, in the interest of the Fund and its shareholders, no action should be taken. See the Statement of Additional Information under "Repurchase of Common Shares; Conversion to Open-End Fund" for a further discussion of possible action to reduce or eliminate such discount to net asset value.
TAX MATTERS
FEDERAL INCOME TAX MATTERS
The following federal income tax discussion is based on the advice of Paul, Hastings, Janofsky & Walker, counsel to the Fund, and reflects provisions of the Internal Revenue Code of 1986, as amended (the "Code"), existing Treasury regulations promulgated under the Code, rulings published by the Internal Revenue Service, and other applicable authority, as of the date of this prospectus. These authorities are subject to change by legislative or administrative action, possibly with retroactive effect. The following discussion is only a summary of some of the important tax considerations generally applicable to investments in the Fund. For more detailed information regarding tax considerations, see the Statement of Additional Information. There may be other tax considerations applicable to particular investors. In addition, income earned through an investment in the Fund may be subject to state, local and foreign taxes.
The Fund intends to qualify each year for taxation as a regulated investment company eligible for treatment under the provisions of Subchapter M of the Code. If the Fund so qualifies and satisfies certain distribution requirements, the Fund will not be subject to federal income tax on income distributed in a timely manner to its shareholders in the form of dividends or capital gain distributions.
To satisfy the distribution requirement applicable to regulated investment companies, amounts paid as dividends by the Fund to its shareholders, including holders of its Preferred Shares, must qualify for the dividends-paid deduction. In certain circumstances, the Internal Revenue Service could take the position that dividends paid on the Preferred Shares constitute preferential dividends under Section 562(c) of the Code, and thus do not qualify for the dividends-paid deduction. The Fund believes this position, if asserted, would be unlikely to prevail.
If at any time when Preferred Shares are outstanding the Fund does not meet applicable asset coverage requirements, it will be required to suspend distributions to Common Shareholders until the requisite asset coverage is restored. Any such suspension may cause the Fund to pay a 4% federal excise tax (imposed on regulated investment companies that fail to distribute for a given calendar year, generally, at least 98% of their net investment income and capital gain net income) and income tax on undistributed income or gains, and may, in certain circumstances, prevent the Fund from qualifying for treatment as a regulated investment company. The Fund may redeem Preferred Shares in an effort to comply with the distribution requirement applicable to regulated investment companies and to avoid income and excise taxes.
The Fund's investments in certain debt obligations may cause the Fund to recognize taxable income in excess of the cash generated by such obligations. Thus, the Fund could be required at times to liquidate other investments in order to satisfy its distribution requirements.
For federal income tax purposes, distributions of investment income generally are taxable as ordinary income to the extent of the Fund's earnings and profits. Taxes on distributions of capital gains are determined by how long the Fund owned the investments that generated such capital gains, rather than how long a shareholder has owned his or her shares. Distributions of gains from the sale of investments that the Fund owned for more than one year and that are properly designated by the Fund as capital gain distributions will be taxable as long-term capital gains. Distributions of gains from the sale of investments that the Fund owned for one year or less will be taxable as ordinary income; such distributions will not qualify for any reduced tax rates otherwise available to corporate dividends. A distribution of an amount in excess of the Fund's current and accumulated earnings and profits is treated as a non-taxable return of capital that reduces a shareholder's tax basis in his or her shares; any such distributions in excess of his or her basis are treated as gain from the sale of such shares. Distributions are taxable to shareholders even if they are paid from income or gains earned by the Fund before a shareholder's investment (and thus were included in the price paid by the shareholder). Distributions are taxable whether shareholders receive them in cash or reinvest them in additional shares through the Dividend
Reinvestment Plan. Any gain resulting from the sale or exchange of Fund shares generally will be taxable as a capital gain, either short-term or long-term, depending on the length of time the shareholder has held the shares.
For calendar years 2003 through 2008, distributions of investment income designated by the Fund as derived from "qualified dividend income" will be taxed in the hands of individuals at the rates applicable to long-term capital gain, provided holding period and other requirements are met. The Fund does not expect a significant portion of Fund distributions to be derived from qualified dividend income.
Long-term capital gain rates for individuals have been temporarily reduced to 15% (with lower rates for individuals in the 10% and 15% rate brackets) for capital gain distributions derived from sales of portfolio securities after May 5, 2003, and for sales of fund shares after that date and on or before December 31, 2008.
The Internal Revenue Service currently requires that a regulated investment company that has two or more classes of stock allocate to each such class proportionate amounts of each type of its income (such as ordinary income and capital gains) based upon the percentage of total dividends distributed to each class for the tax year. Accordingly, the Fund intends each year to allocate capital gain dividends between and among its Common Shares and any series of its Preferred Shares in proportion to the total dividends paid to each class with respect to such tax year. Dividends qualifying and not qualifying for (a) treatment as qualified dividend income and (b) the dividends received deduction, if any, will similarly be allocated between and among any such classes.
The Fund's investments in foreign securities may be subject to foreign withholding taxes. In that case, the Fund's yield on those securities would be decreased. In addition, the Fund's investments in foreign securities or foreign currencies may increase or accelerate the Fund's recognition of ordinary income and may affect the timing or amount of the Fund's distributions.
Under current law, the backup withholding tax rate is 28% for amounts paid through 2010 and will be 31% for amounts paid after December 31, 2010. The Fund may be required to apply backup withholding to taxable distributions payable to a shareholder. Please see "Tax Matters" in the Statement of Additional Information for additional information about backup withholding.
This section relates only to federal income tax consequences of investing in the Fund; the consequences under other tax laws may differ. You should consult your tax advisor as to the possible application of foreign, state and local income tax laws to Fund distributions. Please see "Tax Matters" in the Statement of Additional Information for additional information regarding the tax aspects of investing in the Fund.
UNDERWRITING
Citigroup Global Markets Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, UBS Securities LLC, Wachovia Securities, LLC, Advest, Inc., H&R Block Financial Advisors, Inc., Ferris, Baker Watts, Incorporated, J.J.B. Hilliard, W.L. Lyons, Inc., Janney Montgomery Scott LLC, Quick & Reilly, Inc. A FleetBoston Financial Company, RBC Dain Rauscher, Inc., Stifel, Nicolaus & Company, Incorporated and Wells Fargo Securities, LLC are acting as representatives of the Underwriters named below. Subject to the terms and conditions stated in the Fund's underwriting agreement dated , 2003 (the "Underwriting Agreement"), each Underwriter named below has severally agreed to purchase, and the Fund has agreed to sell to such Underwriter, the number of Common Shares set forth opposite the name of such Underwriter.
NUMBER OF
UNDERWRITER COMMON SHARES
----------- -------------
Citigroup Global Markets Inc.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
UBS Securities LLC
Wachovia Securities, LLC
Advest, Inc.
H&R Block Financial Advisors, Inc.
Ferris, Baker Watts, Incorporated
J.J.B. Hilliard, W.L. Lyons, Inc.
Janney Montgomery Scott LLC
Quick & Reilly, Inc. A FleetBoston Financial Company
RBC Dain Rauscher, Inc.
Stifel, Nicolaus & Company, Incorporated
Wells Fargo Securities, LLC
---------
Total
=========
|
The Underwriting Agreement provides that the obligations of the Underwriters to purchase the Common Shares included in this offering are subject to approval of legal matters by counsel and to other conditions. The Underwriters are obligated to purchase all the Common Shares (other than those covered by the over-allotment option described below) if they purchase any of the Common Shares.
The Underwriters propose to offer some of the Common Shares directly to the public at the public offering price set forth on the cover page of this prospectus and some of the Common Shares to dealers at the public offering price less a concession not to exceed $ per Common Share. The sales load the Fund will pay of $0.675 per Common Share is equal to 4.50% of the initial offering price. The Underwriters may allow, and such dealers may reallow, a concession not to exceed $ per Common Share on sales to certain other dealers. If all of the Common Shares are not sold at the initial offering price, the representatives may change the public offering price and other selling terms. Investors must pay for any Common Shares purchased on or before , 2003. The representatives have advised the Fund that the Underwriters do not intend to confirm any sales to any accounts over which they exercise discretionary authority.
The Fund has granted to the Underwriters an option, exercisable for 45 days from the date of this prospectus, to purchase up to additional Common Shares at the public offering price less the sales load. The Underwriters may exercise such option solely for the purpose of covering over-allotments, if any, in connection with this offering. To the extent such option is exercised, each Underwriter will be obligated, subject to certain conditions, to purchase a number of additional Common Shares approximately proportionate to such Underwriter's initial purchase commitment.
The Fund and the Manager have agreed that, for a period of 180 days from the date of this prospectus, they will not, without the prior written consent of Citigroup Global Markets Inc., on behalf of the Underwriters, dispose of or hedge any Common Shares or any securities convertible into or exchangeable for Common Shares. Citigroup Global Markets Inc., in its sole discretion, may release any of the securities subject to these agreements at any time without notice.
Prior to the offering, there has been no public market for the Common Shares. Consequently, the initial public offering price for the Common Shares was determined by negotiation among the Fund, the Manager and the representatives. There can be no assurance, however, that the price at which the Common Shares will sell in the public market after this offering will not be lower than the price at which they are sold by the Underwriters or that an active trading market in the Common Shares will develop and continue after this offering. The Common Shares are expected to be listed on the AMEX.
In the Underwriting Agreement, the Fund and the Manager have each agreed to indemnify the several Underwriters or contribute to losses arising out of certain liabilities, including liabilities under the Securities Act of 1933, as amended.
The Manager has agreed to pay (i) the amount by which the Fund's offering costs (other than the sales load) exceed $0.03 per share and (ii) all of the Fund's organizational expenses, except that the Fund has agreed to reimburse Franklin Advisers, Inc. for such organizational expenses to the extent that the aggregate of such organizational expenses and offering costs (other than the sales load) does not exceed $0.03 per share.
The Manager (and not the Fund) has agreed to pay to certain Underwriters a fee at an aggregate annual rate equal to 0.15% of the Fund's Managed Assets. This fee will be divided among such Underwriters based on the number of Common Shares each sells in this offering and will be payable in arrears at the end of each calendar quarter during the continuance of the Investment Management Agreement or other advisory agreement between the Manager and the Fund. The sum of this fee and the amounts paid by the Fund to reimburse certain Underwriter expenses will not exceed 4.50% of the total price to the public of the Common Shares offered hereby; provided, that in determining when the maximum amount has been paid, the value of each of the quarterly payments shall be discounted at the annual rate of 10% to the closing date of this offering. The Underwriters that will receive fees as per above have agreed to provide certain after-market services to the Manager designed to maintain the visibility of the Fund on an ongoing basis and to provide relevant information, studies or reports regarding the Fund and the closed-end investment company industry.
In addition, the Fund has agreed to reimburse the Underwriters for certain expenses incurred by the Underwriters in the offering.
In connection with the requirements for listing the Common Shares on the AMEX, the Underwriters have undertaken to sell lots of 100 or more Common Shares to a minimum of 400 beneficial owners in the United States. The minimum investment requirement is 100 Common Shares.
Certain Underwriters may make a market in the Common Shares after trading in the Common Shares has commenced on the AMEX. No Underwriter is, however, obligated to conduct market-making activities and any such activities may be discontinued at any time without notice, at the sole discretion of the Underwriter. No assurance can be given as to the liquidity of, or the trading market for, the Common Shares as a result of any market-making activities undertaken by any Underwriter. This prospectus is to be used by any Underwriter in connection with the offering and, during the period in which a prospectus must be delivered, with offers and sales of the Common Shares in market-making transactions in the over-the-counter market at negotiated prices related to prevailing market prices at the time of the sale.
The Underwriters have advised the Fund that, pursuant to Regulation M under the Securities Exchange Act of 1934, as amended, certain persons participating in the offering may engage in transactions, including stabilizing bids, covering transactions or the imposition of penalty bids, which may have the effect of stabilizing or maintaining the market price of the Common Shares at a level above that which might otherwise prevail in the open market. A "stabilizing bid" is a bid for or the purchase of the Common Shares on behalf of an Underwriter for the purpose of fixing or maintaining the price of the Common Shares. A "covering transaction" is a bid for or purchase of the Common Shares on behalf of an Underwriter to reduce a short position incurred by the Underwriters in connection with the offering. A "penalty bid" is a contractual arrangement whereby if, during a specified period after the issuance of the Common Shares, the Underwriters purchase Common Shares in the open market for the account of the underwriting syndicate and the Common Shares purchased can be traced to a particular Underwriter or member of the selling group, the underwriting syndicate may require the Underwriter or selling group member in question to purchase the Common Shares in question at the cost price to the syndicate or may recover from (or decline to pay to) the Underwriter or selling group member in question any or all compensation (including, with respect to a representative, the applicable syndicate management fee) applicable to the Common Shares in question. As a result, an Underwriter or selling group member and, in turn, brokers may lose the fees that they otherwise would have earned from a sale of the Common Shares if their customer resells the Common Shares while the penalty bid is in effect. The Underwriters are not required to engage in any of these activities, and any such activities, if commenced, may be discontinued at any time. These transactions may be effected on the AMEX or otherwise.
The Underwriting Agreement provides that it may be terminated in the absolute discretion of the representatives, without liability on the part of any Underwriter to the Fund or the Manager, by notice to the Fund or the Manager if, prior to the delivery of and payment for the Common Shares, (i) trading in the Common Shares shall have been suspended by the SEC or the AMEX or trading in securities generally on the NYSE or the AMEX shall have been suspended or limited or minimum prices shall have been established on either of the exchanges, (ii) a banking moratorium shall have been declared either by Federal or New York State authorities, or (iii) there shall have occurred any outbreak or escalation of hostilities, declaration by the United States of a national emergency or war, or other calamity or crisis the effect of which on financial markets is such as to make it, in the sole judgment of the Underwriters, impractical to proceed with the offering or delivery of the Common Shares as contemplated by this prospectus (exclusive of any supplement hereto).
The Fund anticipates that from time to time the representatives of the Underwriters and certain other Underwriters may act as brokers or dealers in connection with the execution of the Fund's portfolio transactions after they have ceased to be Underwriters and, subject to certain restrictions, may act as brokers while they are Underwriters.
Prior to the public offering of Common Shares, the Manager or Franklin will purchase Common Shares from the Fund in an amount satisfying the net worth requirements of Section 14(a) of the 1940 Act.
The principal business address of Citigroup Global Markets Inc. is 388 Greenwich Street, New York, NY 10013.
CUSTODIAN
The Bank of New York, Mutual Funds Division, 90 Washington Street, New York, NY 10286, acts as custodian of the Fund's securities and other assets.
SHAREHOLDER SERVICING AGENT AND TRANSFER AGENT
PFPC, Inc., is the Fund's shareholder servicing agent and acts as the Fund's transfer agent and dividend-paying agent. Please send all correspondence to PFPC, Inc., which is located at P.O. Box 43027, Providence, RI 02940-3027.
For its services, PFPC, Inc. receives a fixed fee per account. The Fund also will reimburse PFPC, Inc. for certain out-of-pocket expenses, which may include payments by PFPC, Inc. to entities, including affiliated entities, that provide sub-shareholder services, recordkeeping and/or transfer agency services to beneficial owners of the Fund. The amount of reimbursements for these services per benefit plan participant Fund account per year will not exceed the per account fee payable by the Fund to PFPC, Inc. in connection with maintaining shareholder accounts.
ADMINISTRATOR
Franklin Templeton Services, LLC ("FT Services") has an agreement with the Fund to provide certain administrative services and facilities for the Fund. FT Services is an affiliate of the Manager, both of which are subsidiaries of Franklin Resources. FT Services is located at One Franklin Parkway, San Mateo, CA 94403-1906.
The administrative services FT Services provides include but are not limited to preparing and maintaining books, records, and tax and financial reports, and monitoring compliance with regulatory requirements. The Fund will pay FT Services a monthly fee equal to an annual rate of 0.20% of the Fund's average daily Managed Assets.
LEGAL MATTERS
Certain legal matters in connection with the Common Shares will be passed upon for the Fund by Paul, Hastings, Janofsky & Walker LLP, and for the Underwriters by Simpson Thacher & Bartlett LLP.
TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION
Use of Proceeds 3
Investment Objectives and Policies 3
Investment Restrictions and Additional Investment Information 3
Management of the Fund 34
Investment Adviser 41
Portfolio Transactions 43
Code of Ethics 44
Proxy Voting Policy 45
Distributions 48
Description of Shares 48
Anti-Takeover and Other Provisions in the Declaration of Trust 51
Repurchase of Common Shares; Conversion to Open-End Fund 52
Tax Matters 55
Performance Related and Comparative Information 59
Custodian 60
Shareholder Servicing Agent and Transfer Agent 60
Independent Auditors 60
Registration Statement 60
Report of Independent Auditors 60
Financial Statements 61
Appendix A -- Description of Securities Ratings A-1
Appendix B -- Performance Related and Comparative and Other Information B-1
5,000,000 SHARES
FRANKLIN TEMPLETON LIMITED DURATION
INCOME TRUST
COMMON SHARES
[FRANKLIN(R) TEMPLETON(R) INVESTMENTS LOGO]
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PROSPECTUS
, 2003
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CITIGROUP
MERRILL LYNCH & CO.
UBS INVESTMENT BANK
WACHOVIA SECURITIES
ADVEST, INC.
H&R BLOCK FINANCIAL ADVISORS, INC.
FERRIS, BAKER WATTS
INCORPORATED
J.J.B. HILLIARD, W.L. LYONS, INC.
JANNEY MONTGOMERY SCOTT LLC
QUICK & REILLY, INC.
RBC CAPITAL MARKETS
STIFEL, NICOLAUS & COMPANY
INCORPORATED
WELLS FARGO SECURITIES, LLC
SEC File Nos.: 811-21357
333-105495
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Until , 2003 (25 days after the date of this prospectus), all dealers that buy, sell or trade the common shares, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
The information in this Statement of Additional Information is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This Statement of Additional Information is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION - DATED JULY 24, 2003
FRANKLIN TEMPLETON LIMITED DURATION INCOME TRUST
STATEMENT OF ADDITIONAL INFORMATION
, 2003
Franklin Templeton Limited Duration Income Trust (the "Fund") is a newly organized, diversified closed-end management investment company.
This Statement of Additional Information ("SAI") relating to common shares of the Fund ("Common Shares") is not a prospectus, and should be read in conjunction with the Fund's prospectus relating thereto dated , 2003, as it may be supplemented from time to time (the "Prospectus"). This SAI does not include all of the information that a prospective investor should consider before purchasing Common Shares, and investors should obtain and read the Prospectus prior to purchasing such shares. For a free copy of the current prospectus or annual report, contact your investment representative or call 1-800/DIAL BEN (1-800/342-5236). You may also obtain a copy of the Prospectus on the web site (http://www.sec.gov) of the Securities and Exchange Commission ("SEC"). Capitalized terms used but not defined in this SAI have the meanings ascribed to them in the Prospectus.
o ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK; AND
TABLE OF CONTENTS
USE OF PROCEEDS..............................................3 --------------- INVESTMENT OBJECTIVES AND POLICIES...........................3 ---------------------------------- |
MANAGEMENT OF THE FUND......................................34
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INVESTMENT ADVISER..........................................41
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PORTFOLIO TRANSACTIONS......................................43
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CODE OF ETHICS..............................................44
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PROXY VOTING POLICY.........................................45
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DISTRIBUTIONS...............................................48
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DESCRIPTION OF SHARES.......................................48
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ANTI-TAKEOVER AND OTHER PROVISIONS IN THE DECLARATION OF
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TRUST.................................................51
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REPURCHASE OF COMMON SHARES; CONVERSION TO OPEN-END FUND....52
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TAX MATTERS.................................................55
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PERFORMANCE RELATED AND COMPARATIVE INFORMATION.............59
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CUSTODIAN...................................................60
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SHAREHOLDER SERVICING AGENT AND TRANSFER AGENT..............60
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INDEPENDENT AUDITORS........................................60
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REGISTRATION STATEMENT......................................60
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REPORT OF INDEPENDENT AUDITORS..............................61
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FINANCIAL STATEMENTS........................................62
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APPENDIX A - Description of Ratings........................A-1
APPENDIX B - Performance Related and Comparative and Other
Information..........................................B-1
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THIS STATEMENT OF ADDITIONAL INFORMATION IS
DATED , 2003.
USE OF PROCEEDS
The net proceeds of the offering of Common Shares of the Fund will be approximately $ (or $ if the Underwriters exercise the over-allotment option in full) after payment of organization and offering costs.
On behalf of the Fund, Franklin Advisers, Inc., the Fund's investment adviser (the "Manager"), has agreed to pay (i) the amount by which the Fund's offering costs (other than the sales load) exceed $0.03 per share and (ii) all of the Fund's organizational expenses, except that the Fund has agreed to reimburse Franklin Advisers, Inc. for such organizational expenses to the extent that the aggregate of such organizational expenses and offering costs (other than the sales load) does not exceed $0.03 per share.
Pending investment in U.S. dollar-denominated debt obligations and other securities that meet the Fund's investment objectives and policies, it is anticipated that the net proceeds of the offering will be invested in high quality, short-term securities.
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and general investment policies of the Fund are described in the Prospectus. The risks of investing in the Fund are described in the Prospectus and in this SAI; in considering such risks, you should read both of these documents carefully.
The Fund's primary investment objective is to seek high current income. Its secondary objective is to seek capital appreciation to the extent it is possible and is consistent with the Fund's primary objective. See "Investment Objectives and Strategies" in the Prospectus.
INVESTMENT RESTRICTIONS AND ADDITIONAL INVESTMENT INFORMATION
FUNDAMENTAL INVESTMENT RESTRICTIONS
Generally, the policies and restrictions discussed in this SAI and in the Prospectus apply when the Fund makes an investment. In most cases, the Fund is not required to sell a security because circumstances change and the security no longer meets one or more of the Fund's policies or restrictions. If a percentage restriction or limitation is met at the time of investment, a later increase or decrease in the percentage due to a change in the value or liquidity of portfolio securities will not be considered a violation of the restriction or limitation.
If a bankruptcy or other extraordinary event occurs concerning a particular security the Fund owns, the Fund may receive stock, real estate, or other investments that the Fund would not, or could not, buy. If this happens, the Fund intends to sell such investments as soon as practicable while trying to maximize the return to shareholders.
The Fund has adopted certain investment restrictions as fundamental and non-fundamental policies. A fundamental policy may only be changed if the change is approved by (i) more than 50% of the Fund's outstanding shares or (ii) 67% or more of the Fund's shares present at a shareholder meeting if more than 50% of the Fund's outstanding shares are represented at the meeting in person or by proxy, whichever is less. A non-fundamental policy may be changed by the Board of Trustees without the approval of shareholders.
Except as described below, the Fund, as a fundamental policy, may not, without the approval of the holders of a majority of the outstanding Common Shares and, if issued, Preferred Shares voting together as a single class, and of the holders of a majority of the outstanding Preferred Shares voting as a separate class:
(1) Concentrate its investments in a particular "industry," as that term is used in the 1940 Act and as interpreted, modified, or otherwise permitted by regulatory authority having jurisdiction, from time to time (this limitation does not apply to securities issued or guaranteed by the U.S. Government or any of its agencies or instrumentalities).
(2) With respect to 75% of the Fund's total assets, purchase the securities of any issuer, except securities issued or guaranteed by the U.S. Government or any of its agencies or instrumentalities or securities issued by other investment companies, if, as a result, (i) more than 5% of the Fund's total assets would be invested in the securities of that issuer, or (ii) the Fund would hold more than 10% of the outstanding voting securities of that issuer. For the purpose of this restriction, each state and each separate political subdivision, agency, authority or instrumentality of such state, each multi-state agency or authority, and each obligor, if any, is treated as a separate issuer of municipal bonds.
(3) Purchase or sell real estate unless acquired as a result of ownership of securities or other instruments and provided that this restriction does not prevent the Fund from investing in issuers which invest, deal, or otherwise engage in transactions in real estate or interests therein, or investing in securities that are secured by real estate or interests therein.
(4) Purchase or sell commodities as defined in the Commodity Exchange Act, as amended, and the rules and regulations thereunder, unless acquired as a result of ownership of securities or other instruments and provided that this restriction does not prevent the Fund from engaging in transactions involving futures contracts and options thereon or investing in securities that are secured by physical commodities.
(5) Borrow money or issue senior securities, except to the extent permitted by the 1940 Act, or any rules, exemptions or interpretations thereunder that may be adopted, granted or issued by the SEC. See "Preferred Shares and Related Leverage" and "Risks--Leverage Risk" in the Prospectus.
(6) Make loans to other persons except (a) through the lending of its portfolio securities, (b) through the purchase of debt obligations, loan participations and/or engaging in direct corporate loans in accordance with its investment objectives and policies, and (c) to the extent the entry into a repurchase agreement is deemed to be a loan. The Fund may also make loans to other investment companies to the extent permitted by the 1940 Act or any exemptions therefrom which may be granted by the SEC.
(7) Act as an underwriter except to the extent that, in connection with the disposition of portfolio securities, it may be deemed to be an underwriter under applicable securities laws.
For purposes of the foregoing and "Description of Shares--Preferred Shares--Voting Rights" below, "majority of the outstanding," when used with respect to particular shares of the Fund (whether voting together as a single class or voting as separate classes), means (i) 67% or more of such shares present at a meeting, if the holders of more than 50% of such shares are present or represented by proxy, or (ii) more than 50% of such shares, whichever is less.
NON-FUNDAMENTAL INVESTMENT POLICIES
The Fund has adopted certain non-fundamental investment policies, including but not limited to the following:
(1) The Fund may invest up to 15% of its total assets in securities (excluding swaps) which are illiquid at the time of investment (as determined by the Manager) See "Illiquid Securities."
Unless otherwise indicated, all limitations applicable to the Fund's investments (as stated above and elsewhere in this SAI) apply only at the time a transaction is entered into. Any subsequent change in a rating assigned by any rating service to a security (or, if unrated, deemed by the Manager to be of comparable quality), or change in the percentage of the Fund's total assets invested in certain securities or other instruments, or change in the average maturity or estimated average duration of the Fund's investment portfolio, resulting from market fluctuations or other changes in the Fund's total assets, will not require the Fund to dispose of an investment until the Manager determines that it is practicable to sell or close out the investment without undue market or tax consequences to the Fund. In the event that rating agencies assign different ratings to the same security, the Manager will determine which rating it believes best reflects the security's quality and risk at that time, which may be the higher of the several assigned ratings.
Under the 1940 Act, a "senior security" does not include any promissory note or evidence of indebtedness where such loan is for temporary purposes only and in an amount not exceeding 5% of the value of the total assets of the issuer at the time the loan is made. A loan is presumed to be for temporary purposes if it is repaid within sixty days and is not extended or renewed.
The Fund would be deemed to "concentrate" in a particular industry if it invested more than 25% of its net assets in that industry. The Fund's industry concentration policy does not preclude it from focusing investments in issuers in a group of related industrial sectors (such as different types of utilities).
The Fund may not change its duration policy, which is, under normal market conditions,to maintain an estimated average portfolio duration of between two and five years (including the effect of anticipated leverage), unless it provides 60 days' prior notice to Common Shareholders .
To the extent the Fund covers its commitment under a reverse repurchase agreement, swap or other derivative instrument by the segregation of assets determined by the Manager to be liquid in accordance with procedures adopted by the Trustees, equal in value to the amount of the Fund's commitment, such instrument will not be considered a "senior security" for purposes of the asset coverage requirements otherwise applicable to borrowings by the Fund or the Fund's issuance of Preferred Shares.
The Fund interprets its policies with respect to borrowing and lending to permit such activities as may be lawful for the Fund, to the full extent permitted by the 1940 Act or by exemption from the provisions therefrom pursuant to exemptive order of the SEC.
The Fund intends to apply for ratings for its Preferred Shares from one of the nationally-recognized statistical rating organizations ("Rating Agencies") such as Standard & Poor's Ratings Services ("S&P"), Moody's Investors Service, Inc. ("Moody's"), or Fitch Ratings ("Fitch"). In order to obtain and maintain the required ratings, the Fund may be required to comply with investment quality, diversification and other guidelines established by Moody's, S&P and/or Fitch. Such guidelines will likely be more restrictive than the restrictions set forth above. The Fund does not anticipate that such guidelines would have a material adverse effect on Common Shareholders or its ability to achieve its investment objectives. The Fund presently anticipates that any Preferred Shares that it intends to issue would be initially given a rating of Aa/AA or better by Moody's, S&P and/or Fitch, but no assurance can be given that such ratings will be obtained. No minimum rating is required for the issuance of Preferred Shares by the Fund. Moody's, S&P and Fitch receive fees in connection with their ratings issuances.
Additional information concerning the characteristics of certain of the Fund's investments is set forth below.
DEBT SECURITIES AND OTHER INCOME-PRODUCING INSTRUMENTS
A debt security typically has a fixed payment schedule that obligates the issuer to pay interest to the lender and to return the lender's money over a certain time period. A company typically meets its payment obligations associated with its outstanding debt securities before it declares and pays any dividend to holders of its equity securities. Bonds, notes, debentures and commercial paper differ in the length of the issuer's payment schedule, with bonds carrying the longest repayment schedule and commercial paper the shortest.
The Fund may invest in senior and subordinated debt securities. Subordinated debt is more risky because its holder will be paid only after the holders of senior debt securities are paid. The Fund may invest in "zero-coupon securities," which are debt securities that typically pay interest only at maturity rather than periodically during the life of the security and are issued at a significant discount from their principal amount.
The Fund may buy both rated and unrated debt securities and other income-producing instruments. The Fund may invest a significant portion of its assets in investment grade debt securities. Investment grade debt securities are rated in one of the top four ratings categories by the Rating Agencies.
Under normal market conditions, the Fund will invest at least 25% of its total assets in debt securities and other income-producing instruments that are rated below investment grade. Debt securities that are rated below investment grade are sometimes called "high yield securities" or "junk bonds." A debt security rated below the top four ratings categories by each of the Rating Agencies that cover the security, or, if unrated, are determined to be of comparable quality by the Manager, will be considered below investment grade. See "High Yield Investments."
The market value of debt securities and other income-producing instruments generally varies in response to changes in interest rates and the financial condition of each issuer. During periods of declining interest rates, the value of these investments generally increases. Conversely, during periods of rising interest rates, the value of such investments generally declines. These changes in market value will be reflected in the Fund's net asset value per share. Because market interest rates are currently near their lowest levels in many years, there is a great risk that the Fund's portfolio will decline in value.
The Fund may invest in debt securities or other income-producing instruments on which the issuer is not currently making interest payments (defaulted debt securities) or where the issuer is in bankruptcy. The Fund may buy defaulted debt securities or other instruments if, in the opinion of the Manager, it appears likely that the issuer may resume interest payments or other advantageous developments appear likely in the near future. These securities may be illiquid. Under normal conditions, the Fund will not invest more than 5% of its total assets in debt securities or other obligations whose issuers are in default at the time of purchase.
An issuer of a debt security may be unable to make interest payments and repay principal. Changes in an issuer's financial strength or in a security's credit rating may affect a security's value and, thus, impact Fund performance.
MORTGAGE-RELATED AND OTHER ASSET-BACKED SECURITIES
Under normal market conditions, the Fund will invest at least 25% of its assets in mortgage-backed and other asset-backed securities (unrelated to mortgage loans) that are offered to investors currently or in the future. Mortgage-related securities are interests in pools of residential or commercial mortgage loans, including mortgage loans made by savings and loan institutions, mortgage bankers, commercial banks and others. Pools of mortgage loans are assembled as securities for sale to investors by various governmental, government-related and private organizations. The value of some mortgage-related or asset-backed securities in which the Fund may invest may be particularly sensitive to changes in prevailing interest rates, and, like other debt obligations, the ability of the Fund to successfully utilize these instruments may depend in part upon the ability of the Manager to forecast interest rates and other economic factors correctly. See "--Mortgage Pass-Through Securities" below. The Fund will not invest in interest-only or principal-only mortgage securities.
MORTGAGE PASS-THROUGH SECURITIES. Mortgage pass-through securities are securities representing interests in "pools" of mortgage loans secured by residential or commercial real property. Interests in pools of mortgage-related securities differ from other forms of debt obligations, which normally provide for periodic payment of interest in fixed amounts with principal payments at maturity or specified call dates. Instead, these securities provide a monthly payment which consists of both interest and principal payments. In effect, these payments are a "pass-through" of the monthly payments made by the individual borrowers on their residential or commercial mortgage loans, net of any fees paid to the issuer or guarantor of such securities. Additional payments are caused by repayments of principal resulting from the sale of the underlying property, refinancing or foreclosure, net of fees or costs which may be incurred. Some mortgage-related securities (such as securities issued by the Government National Mortgage Association (the "GNMA")) are described as "modified pass-through." These securities entitle the holder to receive all interest and principal payments owed on the mortgage pool, net of certain fees, at the scheduled payment dates regardless of whether or not the mortgagor actually makes the payment.
The rate of prepayments on underlying mortgages will affect the price and volatility of a mortgage-related security, and may have the effect of shortening or extending the effective maturity of the security beyond what was anticipated at the time of purchase. Early repayment of principal on some mortgage-related securities (arising from prepayments of principal due to the sale of the underlying property, refinancing, or foreclosure, net of fees and costs which may be incurred) may expose the Fund to a lower rate of return upon reinvestment of principal. Also, if a security subject to prepayment has been purchased at a premium, the value of the premium would be lost in the event of prepayment. Like other debt obligations, when interest rates rise, the value of a mortgage-related security generally will decline; however, when interest rates are declining, the value of mortgage-related securities with prepayment features may not increase as much as other debt obligations. To the extent that unanticipated rates of prepayment on underlying mortgages increase the effective maturity of a mortgage-related security, the volatility of such security can be expected to increase.
Payment of principal and interest on some mortgage pass-through securities (but not the market value of the securities themselves) may be guaranteed by the full faith and credit of the U.S. Government (in the case of securities guaranteed by the GNMA) or guaranteed by agencies or instrumentalities of the U.S. Government (in the case of securities guaranteed by the Federal National Mortgage Association (the "FNMA") or the Federal Home Loan Mortgage Corporation (the "FHLMC"). The principal governmental guarantor of mortgage-related securities is the GNMA. GNMA is a wholly-owned U.S. Government corporation within the Department of Housing and Urban Development. GNMA is authorized to guarantee, with the full faith and credit of the U.S. Government, the timely payment of principal and interest on securities issued by institutions approved by GNMA (such as savings and loan institutions, commercial banks and mortgage bankers) and backed by pools of mortgages insured by the Federal Housing Administration (the "FHA"), or guaranteed by the Department of Veterans Affairs (the "VA").
Government-related guarantors (I.E., guarantors not backed by the full faith and credit of the U.S. Government) include the FNMA and the FHLMC. FNMA is a government-sponsored corporation owned entirely by private stockholders. It is subject to general regulation by the Secretary of Housing and Urban Development. FNMA purchases conventional (I.E., not insured or guaranteed by any government agency) residential mortgages from a list of approved sellers/servicers which include state and federally chartered savings and loan associations, mutual savings banks, commercial banks, and credit unions and mortgage bankers. Pass-through securities issued by FNMA are guaranteed as to timely payment of principal and interest by FNMA but are not backed by the full faith and credit of the U.S. Government. Instead, they are supported only by the discretionary authority of the U.S. Government to purchase the agency's obligations.
FHLMC was created by Congress in 1970 for the purpose of increasing the availability of mortgage credit for residential housing. It is a government-sponsored corporation formerly owned by the twelve Federal Home Loan Banks and now owned entirely by private stockholders. FHLMC issues Participation Certificates ("PCs") which represent interests in conventional mortgages from FHLMC's national portfolio. FHLMC guarantees the timely payment of interest and ultimate collection of principal, but PCs are not backed by the full faith and credit of the U.S. Government. Instead, they are supported only by the discretionary authority of the U.S. Government to purchase the agency's obligations.
Commercial banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary market issuers also create pass-through pools of conventional residential mortgage loans. Such issuers may, in addition, be the originators and/or servicers of the underlying mortgage loans as well as the guarantors of the mortgage-related securities. Pools created by such non-governmental issuers generally offer a higher rate of interest than government and government-related pools because there are no direct or indirect government or agency guarantees of payments in such pools. However, timely payment of interest and principal of these pools may be supported by various forms of insurance or guarantees, including individual loan, title, pool and hazard insurance and letters of credit. The insurance and guarantees are issued by governmental entities, private insurers and the mortgage poolers. There can be no assurance that the private insurers or guarantors can meet their obligations under the insurance policies or guarantee arrangements. Although the market for such securities is becoming increasingly liquid, securities issued by certain private organizations may not be readily marketable. The Fund will not purchase mortgage-related securities or any other assets which in the Manager's opinion are illiquid (excluding swaps) if, as a result, more than 15% of the value of the Fund's total assets (taken at market value at the time of investment) will be invested in illiquid securities.
Mortgage-related securities that are issued or guaranteed by the U.S. Government, its agencies or instrumentalities, are not subject to the Fund's industry concentration restrictions (see "Investment Restrictions") by virtue of the exclusion from that test available to all U.S. Government securities. In the case of privately issued mortgage-related securities, the Fund takes the position that mortgage-related securities do not represent interests in any particular "industry" or group of industries. The assets underlying such securities may be represented by a portfolio of first lien residential mortgages (including both whole mortgage loans and mortgage participation interests) or portfolios of mortgage pass-through securities issued or guaranteed by GNMA, FNMA or FHLMC. Mortgage loans underlying a mortgage-related security may in turn be insured or guaranteed by the FHA or the VA. In the case of private issue mortgage-related securities whose underlying assets are neither U.S. Government securities nor U.S. Government-insured mortgages, to the extent that real properties securing such assets may be located in the same geographical region, the security may be subject to a greater risk of default than other comparable securities in the event of adverse economic, political or business developments that may affect such region and, ultimately, the ability of residential homeowners to make payments of principal and interest on the underlying mortgages.
COMMERCIAL MORTGAGE-RELATED SECURITIES. The Fund may invest
a significant portion of its assets in commercial mortgage-related securities issued by corporations. These are securities that represent an interest in, or are secured by, mortgage loans secured by commercial property, such as industrial and warehouse properties, office buildings, retail space and shopping malls, multifamily properties and cooperative apartments, hotels and motels, nursing homes, hospitals, and senior living centers. They may pay fixed or adjustable rates of interest. Many of the risks of investing in commercial mortgage-backed securities reflect the risks of investing in the real estate securing the underlying mortgage loans. These risks reflect the effects of local and other economic conditions on real estate markets, the ability of tenants to make loan payments, and the ability of a property to attract and retain tenants. Commercial mortgage-backed securities may be less liquid and exhibit greater price volatility than other types of mortgage- or asset-backed securities.
Commercial mortgage loans generally lack standardized terms, which may complicate their structure. Commercial properties themselves tend to be unique and difficult to value. Commercial mortgage loans tend to have shorter maturities than residential mortgage loans, and may not be fully amortizing, meaning that they may have a significant principal balance, or "balloon" payment, due on maturity. In addition, commercial properties, particularly industrial and warehouse properties, are subject to environmental risks and the burdens and costs of compliance with environmental laws and regulations.
OTHER MORTGAGE-RELATED OR ASSET-BACKED SECURITIES. Other mortgage-related securities in which the Fund may invest include mortgage pass-through securities, mortgage dollar rolls, and other securities that directly or indirectly represent a participation in, or are secured by and payable from, mortgage loans on real property.
The Fund may invest in securities issued by trusts and special purpose corporations with principal and interest payouts backed by, or supported by, any of various types of assets. These assets typically include receivables related to the purchase of manufactured housing, automobiles, credit card loans, and home equity loans. These securities generally take the form of a structured type of security, including pass-through, pay-through and senior subordinated payout structures.
The Fund may invest in other types of asset-backed securities that are offered in the marketplace, including Enhanced Equipment Trust Certificates ("EETCs"). Although any entity may issue EETCs, to date, U.S. airlines are the primary issuers. An airline EETC is an obligation secured directly by aircraft or aircraft engines as collateral. EETCs tend to be less liquid than bonds. Other asset-backed securities may be collateralized by the fees earned by service providers. The value of asset-backed securities may be substantially dependent on the servicing of the underlying asset pools and are therefore subject to risks associated with the negligence of, or defalcation by, their servicers. In certain circumstances, the mishandling of related documentation may also affect the rights of the security holders in and to the underlying collateral. The insolvency of entities that generate receivables or that utilize the assets may result in added costs and delays in addition to losses associated with a decline in the value of the underlying assets.
Consistent with the Fund's investment objectives and policies, the Manager also may invest in other types of asset-backed securities. Other asset-backed securities may be collateralized by the fees earned by service providers. The value of asset-backed securities may be substantially dependent on the servicing of the underlying asset pools and are therefore subject to risks associated with the negligence by, or defalcation of, their servicers. In certain circumstances, the mishandling of related documentation may also affect the rights of the security holders in and to the underlying collateral. The insolvency of entities that generate receivables or that utilize the assets may result in added costs and delays in addition to losses associated with a decline in the value of the underlying assets.
DOLLAR ROLL TRANSACTIONS. In a mortgage dollar roll transaction, the Fund sells mortgage-backed securities for delivery in the current month and simultaneously contracts to repurchase substantially similar (name, type, coupon, and maturity) securities on a specified future date. During the period between the sale and repurchase (the "roll period"), the Fund forgoes principal and interest paid on the mortgage-backed securities. The Fund is compensated by the difference between the current sales price and the lower forward price for the future purchase (often referred to as the "drop"), as well as by the interest earned on the cash proceeds of the initial sale.
For each mortgage dollar roll transaction, the Fund will segregate on its books an offsetting cash position or a position of liquid securities of equivalent value. The Manager will monitor the value of such securities daily to determine that the value equals or exceeds the mortgage dollar roll contract price.
The Fund could suffer a loss if the contracting party fails to perform the future transaction and the Fund is therefore unable to buy back the mortgage-backed securities it initially sold.
The Fund intends to enter into mortgage dollar rolls only with high quality government securities dealers and member banks of the Federal Reserve System as approved by the Fund's board of trustees. As a matter of non-fundamental policy, the Fund does not consider the purchase and/or sale of a mortgage dollar roll to be a borrowing, for purposes of the Fund's investment restrictions.
BANK LOANS AND LOAN PARTICIPATIONS
Under normal market conditions, the Fund will invest at least 25% of its total assets bank loans made to corporate and other business entities (corporate loans). To implement that strategy, the Fund may acquire loan participations and other related direct or indirect bank debt obligations (bank loans or loan participations), in which the Fund will buy from a lender a portion of a larger loan that the lender has made to a borrower.
The rate of interest payable on corporate loans or other income-producing instruments with floating interest rates is generally established as the sum of a base lending rate plus a specified margin. These base lending rates generally are LIBOR, the Prime Rate of a designated U.S. bank, the CD Rate, or another base lending rate used by lenders loaning money to companies, so-called commercial lenders. The interest rate on Prime Rate-based corporate loans floats daily as the Prime Rate changes, while the interest rate on LIBOR-based and CD-based corporate loans is reset periodically, typically at regular intervals ranging between 30 days and one year.
A significant portion of the corporate loans held by the
Fund may be issued in highly leveraged transactions. This means
that the borrower is assuming large amounts of debt in order to
have large amounts of financial resources to attempt to achieve
its business objectives. Such business objectives may include:
management's taking over control of a company (leveraged buyout);
reorganizing the assets and liabilities of a company (leveraged
recapitalization); or acquiring another company. Such corporate
loans and similar income-producing instruments present special
risks.
Corporate loans may be structured to include both term loans, which are generally fully funded at the time of the Fund's investment, and revolving credit facilities, which would require the Fund to make additional investments in the corporate loans as required under the terms of the credit facility at the borrower's demand. Such corporate loans also may include receivables purchase facilities, which are similar to revolving credit facilities secured by a borrower's receivables.
The Fund will generally invest in a corporate loan only if the Manager judges that the borrower can meet the scheduled payments on the obligation. The Fund may, however, acquire loans in default. In addition, the Manager will consider other factors it believes are appropriate to the analysis of the borrower and the corporate loan. Such factors may include, but are not limited to, financial ratios of the borrower, such as the interest coverage ratio and leverage ratio. The Manager also will consider the nature of the industry in which the borrower is engaged, the nature of the borrower's assets and the general quality of the borrower.
When the Manager selects corporate loans for investment by the Fund, it primarily considers the creditworthiness of the borrower. The Manager will not base its selection upon the quality ratings of other debt obligations of a borrower. These other debt obligations are often subordinated to the corporate loans. Instead, the Manager will perform its own independent credit analysis of the borrower, and of the collateral structure for the corporate loan. After the Fund invests in a corporate loan, the Manager will continue to evaluate the corporate loan on an ongoing basis.
Indebtedness of companies whose creditworthiness is poor involves substantially greater risks, and may be highly speculative. Some companies may never pay off their indebtedness, or may pay only a small fraction of the amount owed. Consequently, when investing in indebtedness of companies with poor credit, the Fund bears a substantial risk of losing the entire amount invested. If the Fund purchases a loan, it may only be able to enforce its rights through the lender, and may assume the credit risk of both the lender and the borrower.
The Fund will be subject to the risk that collateral securing a loan will decline in value or have no value. Such a decline, whether as a result of bankruptcy proceedings or otherwise, could cause the loan to be undercollateralized or unsecured. In most credit agreements there is no formal requirement to pledge additional collateral. In addition, the Fund may invest in loans guaranteed by, or secured by assets of, shareholders or owners, even if the loans are not otherwise collateralized by assets of the borrower; provided, however, that such guarantees are fully secured. There may be temporary periods when the principal asset held by a borrower is the stock of a related company, which may not legally be pledged to secure a loan. On occasions when such stock cannot be pledged, the loan will be temporarily unsecured until the stock can be pledged or is exchanged for or replaced by other assets, which will be pledged as security for the loan. However, the borrower's ability to dispose of such securities, other than in connection with such pledge or replacement, will be strictly limited for the protection of the holders of loans and, indirectly, loans themselves.
If a borrower becomes involved in bankruptcy proceedings, a court may invalidate the Fund's security interest in the loan collateral or subordinate the Fund's rights under the loan to the interests of the borrower's unsecured creditors or cause interest previously paid to be refunded to the borrower. If a court required interest to be refunded, it could negatively affect the Fund's performance. Such action by a court could be based, for example, on a "fraudulent conveyance" claim to the effect that the borrower did not receive fair consideration for granting the security interest in the loan collateral to the Fund. For loans made in connection with a highly leveraged transaction, consideration for granting a security interest may be deemed inadequate if the proceeds of the loan were not received or retained by the borrower, but were instead paid to other persons (such as shareholders of the borrower) in an amount which left the borrower insolvent or without sufficient working capital. There are also other events, such as the failure to perfect a security interest due to faulty documentation or faulty official filings, which could lead to the invalidation of the Fund's security interest in loan collateral. If the Fund's security interest in loan collateral is invalidated or the loan is subordinated to other debt of a borrower in bankruptcy or other proceedings, the Fund would have substantially lower recovery, and perhaps no recovery on the full amount of the principal and interest due on the loan.
The Manager generally considers loan participations to be liquid. To the extent loan participations are deemed to be liquid by the Manager, they will not be subject to the Fund's restrictions on investments in illiquid securities. Generally, loan participations are sold without guarantee or recourse to the lending institution and are subject to the credit risks of both the borrower and the lending institution. Loan participations, however, may enable the Fund to acquire an interest in a loan from a financially strong borrower which it could not do directly. While loan participations generally trade at par value, the Fund may be permitted to buy loan participations that sell at a discount because of the borrower's credit problems or other issues associated with the credit risk of the loan. To the extent the credit problems are resolved, loan participations may appreciate in value.
HIGH YIELD INVESTMENTS
Under normal market conditions, the Fund will invest at least 25% of its assets in debt securities and other income-producing instruments that are rated below investment grade by Moody's, S&P or Fitch (below Baa by Moody's, below BBB by S&P or Fitch) or that are unrated but judged by the portfolio managers to be of comparable quality. These debt securities are sometimes referred to as "high yield" securities or "junk bonds." Because the Fund will hold investments that are below investment grade, an investment in the Fund is subject to a higher degree of risk than an investment in a fund that invests primarily or solely in high-rated securities. You should consider the increased risk of loss to principal that is present with an investment in higher risk securities and other income-producing instruments, such as those in which the Fund invests. Accordingly, an investment in the Fund should not be considered a complete investment program and should be carefully evaluated for its appropriateness in light of your overall investment needs and goals.
The market value of high yield, lower-quality fixed-income securities and other income-producing instruments tends to reflect individual developments affecting the issuer to a greater degree than the market value of higher-quality securities, which react primarily to fluctuations in the general level of interest rates. Lower-rated or unrated investments also tend to be more sensitive to economic conditions than higher-quality securities.
Issuers of high yield, fixed-income securities and other income-producing instruments are often highly leveraged and may not have more traditional methods of financing available to them. Therefore, the risk associated with buying the securities or other instruments of these issuers is generally greater than the risk associated with higher-quality securities. For example, during an economic downturn or a sustained period of rising interest rates, issuers of lower-quality investments may experience financial stress and may not have sufficient cash flow to make interest payments. The issuer's ability to make timely interest and principal payments may also be adversely affected by specific developments affecting the issuer, including the issuer's inability to meet specific projected business forecasts or the unavailability of additional financing.
The risk of loss due to default may also be considerably greater with lower-quality investments because they are generally unsecured and are often subordinated to other creditors of the issuer. If the issuer of an instrument in the Fund's portfolio defaults, the Fund may have unrealized losses on the security, which may lower the Fund's net asset value per share. Defaulted instruments tend to lose much of their value before they default. Thus, the Fund's net asset value per share may be adversely affected before an issuer defaults. In addition, the Fund may incur additional expenses if it must try to recover principal or interest payments on a defaulted security. Notwithstanding the foregoing, the Fund may invest in securities and other instruments where the issuer is in default or bankruptcy.
High yield securities or other income-producing instruments frequently have call or buy-back features that allow an issuer to redeem the obligation from the Fund. Although these securities or other income-producing instruments are typically not callable for a period of time, usually for three to five years from the date of issue, if an issuer calls its obligations during periods of declining interest rates, the Manager may find it necessary to replace the investments with lower-yielding securities or other income-producing instruments, which could result in less net investment income for the Fund. The premature disposition of a high yield investment due to a call or buy-back feature, the deterioration of an issuer's creditworthiness, or a default by an issuer may make it more difficult for the Fund to manage the timing of its income.
High yield securities or other income-producing instruments may not be as liquid as higher-quality securities. Reduced liquidity in the secondary market may have an adverse impact on market price of a security or instrument and on the Fund's ability to sell a security or instrument in response to a specific economic event, such as a deterioration in the creditworthiness of the issuer, or if necessary to meet the Fund's liquidity needs. Reduced liquidity may also make it more difficult to obtain market quotations based on actual trades for purposes of valuing the Fund's portfolio.
The Fund may buy securities that are sold without registration under the federal securities laws and therefore carry restrictions on resale. While many securities have been sold with registration rights, covenants and penalty provisions for delayed registration, if the Fund is required to sell restricted securities before the securities have been registered, it may be deemed an underwriter of the securities under the Securities Act of 1933, as amended (the "1933 Act"), which entails special responsibilities and liabilities. The Fund may also incur special costs in disposing of restricted securities, although the Fund will generally not incur any costs when the issuer is responsible for registering the securities.
The Fund may buy high yield securities during an initial underwriting. These securities involve special risks because they are new issues. The Manager will carefully review their credit and other characteristics. The Fund has no arrangement with its underwriters or any other person concerning the acquisition of these securities.
The Fund will rely on the Manager's judgment, analysis and experience in evaluating the creditworthiness of an issuer. In this evaluation, the Manager will consider, among other things, the issuer's financial resources, its sensitivity to economic conditions and trends, its operating history, the quality of the issuer's management and regulatory matters.
The credit risk factors above also apply to lower-quality zero-coupon, deferred interest and pay-in-kind securities. These securities have an additional risk, however, because unlike securities that pay interest throughout the time until maturity, the Fund will not receive any cash until the cash payment date. If the issuer defaults, the Fund may not obtain any return on its investment.
The Fund may purchase certain high yield securities and other income-producing instruments at a discount to par value. These investments, when held to maturity or retired, may include an element of capital gain. The Fund does not generally intend to hold these investments solely for the purpose of achieving capital gain, but will generally hold them as long as expected returns on the investments remain attractive. The Fund may realize a capital loss when a security or other instrument is purchased at a premium (that is, in excess of its stated or par value) and is held to maturity, or is called or redeemed at a price lower than its purchase price. The Fund may also realize a capital gain or loss upon the sale of securities or instruments, whether purchased at par, a discount, or a premium.
RATINGS. Independent rating organizations rate debt investments based upon their assessment of the financial soundness of the issuer. Generally, a lower rating indicates higher risk. Ratings assigned by the rating agencies are based largely on the issuer's historical financial condition and the rating agencies' investment analysis at the time of the rating. Credit quality in the high yield debt market, however, can change suddenly and unexpectedly, and credit ratings may not reflect the issuer's current financial condition. For these reasons, the Manager does not rely principally on the ratings assigned by rating agencies, but performs its own independent investment analysis of securities and other income-producing instruments being considered for the Fund's portfolio.
In its analysis, the Manager considers a variety of factors, including:
o the experience and managerial strength of the issuer;
o responsiveness to changes in interest rates and business
conditions;
o debt maturity schedules and borrowing requirements;
o the issuer's changing financial condition and market
recognition of the change; and
o relative values based on such factors as anticipated cash
flow, interest or dividend coverage, asset coverage,
and earnings prospects.
COLLATERALIZED OBLIGATIONS
The Fund may invest in senior classes of collateralized bond obligations ("CBOs"), collateralized loan obligations ("CLOs") and other collateralized debt obligations ("CDOs"), which are debt instruments backed solely by a pool of other debt securities. The Fund will not invest in the equity classes of CBOs, CLOs or other CDOs or in their junior classes that are subordinate to their senior classes. The risks of an investment in a CBO, CLO or other CDO depend largely on the type of the collateral securities (which would have the risks described elsewhere in this document for that type of security) and the class of the CBO, CLO or other CDO in which the Fund invests. Some CBOs, CLOs and other CDOs have credit ratings, but are typically issued in various classes with various priorities. Normally, CBOs, CLOs and other CDOs are privately offered and sold (that is, not registered under the securities laws) and may be characterized by the Fund as illiquid securities, but an active dealer market may exist for CBOs, CLOs and other CDOs that qualify for Rule 144A transactions. In addition to the normal interest rate, default and other risks of fixed income securities discussed elsewhere in this document, CBOs, CLOs and other CDOs carry additional risks, including the possibility that distributions from collateral securities will not be adequate to make interest or other payments, the quality of the collateral may decline in value or default, volatility in values, and the complex structure of the security may not be fully understood at the time of investment and produce disputes with the issuer or unexpected investment results.
ZERO-COUPON SECURITIES
Zero-coupon or deferred interest securities are debt obligations that make no periodic interest payments before maturity or a specified date when the securities begin paying current interest (the cash payment date), and therefore are generally issued and traded at a discount from their face amount or par value. The discount varies depending on the time remaining until maturity or the cash payment date, as well as prevailing interest rates, liquidity of the security, and the perceived credit quality of the issuer. The discount, in the absence of financial difficulties of the issuer, typically decreases as the final maturity or cash payment date approaches. Lower quality zero-coupon securities are generally subject to the same risks as high yield debt securities. The Fund typically will not receive any interest payments on these securities until maturity. If the issuer defaults, the Fund may lose its entire investment, which will affect the Fund's share price.
COMMERCIAL PAPER
Commercial paper represents short-term unsecured promissory notes issued in bearer form by corporations such as banks or bank holding companies and finance companies. The Fund may invest in commercial paper of any credit quality consistent with the Fund's investment objectives and policies, including unrated commercial paper for which the Manager has made a credit quality assessment. See Appendix A for a description of the ratings assigned by the Rating Agencies to commercial paper. The rate of return on commercial paper may be linked or indexed to the level of exchange rates between the U.S. dollar and a foreign currency or currencies.
FOREIGN (NON-U.S.) INVESTMENTS AND CURRENCIES
The Fund may invest in securities or other income-producing instruments issued by companies and governments in any foreign country, developed or developing. Foreign investments held by the Fund generally will be traded on U.S. markets. The Fund may invest up to 15% of its total assets in securities or other income-producing instruments issued by companies and governments in any foreign country, developed or developing. The Fund also may invest up to 5% of its total assets in securities or other income-producing instruments denominated in foreign currencies, including obligations of non-U.S. governments and their respective sub-divisions, agencies and government-sponsored enterprises.
Investing in securities or other income-producing instruments issued by companies and governments in foreign countries typically involves special risks and considerations not typically associated with investing in U.S. securities. Certain of these risks also may apply to securities of U.S. companies with significant foreign operations. These risks can increase the potential for losses in the Fund and affect its share price. The political, economic and social structures of some foreign countries may be less stable and more volatile than those in the U.S. It is possible that a government may take over the assets or operations of a company or impose restrictions on the exchange or export of currency or other assets. Some countries also may have different legal systems that may make it difficult for the Fund to pursue legal remedies with respect to its foreign investments.
You should consider carefully the substantial risks involved in securities of companies of foreign nations, which are in addition to the usual risks inherent in domestic investments. The Fund may invest in securities of issuers in any foreign country, developed or developing, and may buy foreign securities that are traded in the U.S. or securities of U.S. issuers that are denominated in a foreign currency.
There may be less publicly available information about foreign companies comparable to the reports and ratings published about companies in the U.S. Foreign companies are not generally subject to uniform accounting or financial reporting standards, and auditing practices and requirements may not be comparable to those applicable to U.S. companies. The Fund, therefore, may encounter difficulty in obtaining market quotations for purposes of valuing its portfolio and calculating its net asset value. Foreign markets have substantially less volume than the New York Stock Exchange, and securities of some foreign companies are less liquid and more volatile than securities of comparable U.S. companies. Commission rates in foreign countries, which are generally fixed rather than subject to negotiation as in the U.S., are likely to be higher. In many foreign countries there is less government supervision and regulation of stock exchanges, brokers, and listed companies than in the U.S.
DEVELOPING COUNTRIES AND EMERGING MARKETS. The Fund may
invest in securities or other income-producing instruments issued
by companies and governments in "emerging market" countries.
Investments in companies domiciled in developing countries or
based in underdeveloped emerging markets may be subject to
potentially higher risks than investments in developed countries
or mature markets. These risks include: (i) greater risks of
expropriation, confiscatory taxation, nationalization, and less
social, political, and economic stability; (ii) the small current
size of the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of
liquidity and in greater price volatility; (iii) certain national
policies which may restrict the Fund's investment opportunities,
including restrictions on investment in issuers or industries
deemed sensitive to national interests; (iv) foreign taxation;
(v) the absence of developed legal structures governing private
or foreign investment or allowing for judicial redress for injury
to private property; and (vi) the absence or early stage of
development of a capital market structure or market-oriented
economy.
In addition, many countries in which the Fund may invest have experienced substantial, and in some periods extremely high, rates of inflation for many years. Inflation and rapid fluctuations in inflation rates have had and may continue to have negative effects on the economies and securities markets of certain countries. Moreover, the economies of some developing countries may differ favorably or unfavorably from the U.S. economy in such respects as growth of gross domestic product, rate of inflation, currency depreciation, capital reinvestment, resource self-sufficiency, and balance of payments position.
FOREIGN CURRENCY. The Fund's management endeavors to buy and sell foreign currencies on as favorable a basis as practicable. Some price spread on currency exchange (to cover service charges) may be incurred, particularly when the Fund changes investments from one country to another or when proceeds of the sale of shares in U.S. dollars are used for the purchase of securities in foreign countries. Also, some countries may adopt policies that would prevent the Fund from transferring cash out of the country or withhold portions of interest and dividends at the source. There is the possibility of cessation of trading on national exchanges, expropriation, nationalization, or confiscatory taxation, withholding, and other foreign taxes on income or other amounts, foreign exchange controls (which may include suspension of the ability to transfer currency from a given country), default in foreign government securities, political or social instability, or diplomatic developments that could affect investments in securities of issuers in foreign nations.
The Fund may be affected either favorably or unfavorably by fluctuations in the relative rates of exchange between the currencies of different nations, by exchange control regulations, and by indigenous economic and political developments. Some countries in which the Fund may invest may also have fixed or managed currencies that are not free-floating against the U.S. dollar. Further, certain currencies may not be internationally traded.
Certain of these currencies have experienced a steady devaluation relative to the U.S. dollar. Any devaluations in the currencies in which the Fund's portfolio securities are denominated may have a detrimental impact on the Fund. Through the Fund's flexible policy, management endeavors to avoid unfavorable consequences and to take advantage of favorable developments in particular nations where, from time to time, it places the Fund's investments.
The exercise of this flexible policy may include decisions to purchase securities with substantial risk characteristics and other decisions such as changing the emphasis on investments from one nation to another and from one type of security to another. Some of these decisions may later prove profitable and others may not. No assurance can be given that profits, if any, will exceed losses.
FORWARD CURRENCY EXCHANGE CONTRACTS. The Fund may enter into forward currency exchange contracts (forward contracts) to attempt to minimize the risk to the Fund from adverse changes in the relationship between currencies or to enhance income. A forward contract is an obligation to buy or sell a specific currency for an agreed price at a future date which is individually negotiated and is privately traded by currency traders and their customers. The Fund will either cover its position in such a transaction or maintain, in a segregated account with its custodian bank, cash or high-grade marketable securities having an aggregate value equal to the amount of any such commitment until payment is made.
SOVEREIGN DEBT
The Fund may invest in sovereign debt, which can involve a high degree of risk. The governmental entity that controls the repayment of sovereign debt may not be able or willing to repay the principal and/or interest when due in accordance with the terms of the debt. A governmental entity's willingness or ability to repay principal and interest due in a timely manner may be affected by, among other factors, its cash flow situation, the extent of its foreign reserves, the availability of sufficient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole, the governmental entity's policy toward the International Monetary Fund, and the political constraints to which a governmental entity may be subject. Governmental entities may also depend on expected disbursements from foreign governments, multilateral agencies and others to reduce principal and interest arrearages on their debt. The commitment on the part of these governments, agencies and others to make such disbursements may be conditioned on a governmental entity's implementation of economic reforms and/or economic performance and the timely service of such debtor's obligations. Failure to implement such reforms, achieve such levels of economic performance or repay principal or interest when due may result in the cancellation of such third parties' commitments to lend funds to the governmental entity, which may further impair such debtor's ability or willingness to service its debts in a timely manner. Consequently, governmental entities may default on their sovereign debt. Holders of sovereign debt (including the Fund) may be requested to participate in the rescheduling of such debt and to extend further loans to governmental entities. There is no bankruptcy proceeding by which sovereign debt on which governmental entities have defaulted may be collected in whole or in part. To the extent the Fund invests in foreign currency-denominated debt obligations and hedging activities, such investments may produce a difference between its book income and its taxable income. This difference may cause a portion of the Fund's income distributions to constitute returns of capital for tax purposes or require the Fund to make distributions exceeding book income to qualify as a regulated investment company for federal income tax purposes.
EQUITY SECURITIES
The Fund may invest in equity securities. The purchaser of an equity security typically receives an ownership interest in the company as well as certain voting rights. The owner of an equity security may participate in a company's success through the receipt of dividends which are distributions of earnings by the company to its owners; however, the Fund may hold equity securities that do not issue dividends. Equity security owners may also participate in a company's success or lack of success through increases or decreases in the value of the company's shares as traded in the public trading market for such shares. Equity securities generally take the form of common stock or preferred stock. Preferred stockholders typically receive greater dividends but may receive less appreciation than common stockholders and may have greater voting rights as well. Equity securities may also include convertible securities, warrants or rights. Warrants or rights give the holder the right to purchase a common stock at a given time for a specified price.
The Fund's equity investments generally will be limited to
convertible securities and dividend-paying common or preferred
stocks. The Fund may also acquire equity securities in connection
with the Fund's other investment activities, including through:
the restructuring of loans or other debt securities; the
resolution of a bankruptcy or a default; the entry of an issuer
into receivership, a corporate or securities transaction by the
issuer that affects securities held by the Fund; or the exercise
by the Fund of conversion or purchase rights associated with a
convertible or other fixed-income security purchased by the Fund.
These equity securities may have risk and other characteristics
of stocks or of both stocks and bonds. By holding and investing
in equity securities, the Fund may expose an investor to certain
risks that could cause the investor to lose money, particularly
if there is a sudden decline in a holding's share price or an
overall decline in the stock market. The value of an investment
in a Fund could decline because of equity securities held by the
Fund based on the day-to-day fluctuation or the decline in their
value related to movements in the stock market, as well as in
response to the activities of individual companies. In addition,
some of the equity securities that the Fund would obtain as a
result of the special circumstances described above could be
subject to restrictions on transfer or sale that may reduce their
market value compared to freely tradable securities.
PREFERRED STOCKS. Preferred stock represents an equity interest in a company that generally entitles the holder to receive, in preference to the holders of other stocks such as common stocks, dividends and a fixed share of the proceeds resulting from liquidation of the company. Some preferred stocks also entitle their holders to receive additional liquidation proceeds on the same basis as holders of a company's common stock, and thus also represent an ownership interest in the company. Some preferred stocks offer a fixed rate of return with no maturity date. Because they never mature, these preferred stocks act like long-term bonds and can be more volatile than other types of preferred stocks and may have heightened sensitivity to changes in interest rates. In addition, a company's preferred stock generally pays dividends only after the company makes required payments to holders of its bonds and other debt. For this reason, the value of the preferred stock will usually react more strongly than bonds and other debt to actual or perceived changes in the company's financial condition or prospects. Other preferred stocks have a variable dividend, generally determined on a quarterly or other periodic basis, either according to a formula based upon a specified premium or discount to the yield on particular U.S. Treasury securities or based on an auction process, involving bids submitted by holders and prospective purchasers of such stocks. Because preferred stocks represent an equity ownership interest in a company, their value usually will react more strongly than bonds and other debt instruments to actual or perceived changes in a company's financial condition or prospects, or to fluctuations in the equity markets. Preferred stocks of smaller companies may be more vulnerable to adverse developments than those of larger companies.
CONVERTIBLE SECURITIES AND SYNTHETIC CONVERTIBLE SECURITIES. The Fund may invest in convertible securities, which are generally a debt obligation or preferred stock that may be converted within a specified period of time into a certain amount of common stock of the same or a different issuer. A convertible security provides a fixed-income stream and the opportunity, through its conversion feature, to participate in the capital appreciation resulting from a market price advance in its underlying common stock. As with a straight fixed-income security, a convertible security tends to increase in market value when interest rates decline and decrease in value when interest rates rise. Like a common stock, the value of a convertible security also tends to increase as the market value of the underlying stock rises, and it tends to decrease as the market value of the underlying stock declines. Because both interest rate and market movements can influence its value, a convertible security is not as sensitive to interest rates as a similar fixed-income security, nor is it as sensitive to changes in share price as its underlying stock.
A convertible security may be subject to redemption at the option of the issuer at a predetermined price. If a convertible security held by the Fund is called for redemption, the Fund would be required to permit the issuer to redeem the security and convert it to underlying common stock, or would sell the convertible security to a third party, which may have an adverse effect on the Fund's ability to achieve its investment objectives.
The Fund may invest in so-called "synthetic convertible securities," which are composed of two or more different securities whose investment characteristics, taken together, resemble those of convertible securities. For example, the Fund may purchase a non-convertible debt security and a warrant or option. The synthetic convertible security differs from the true convertible security in several respects. Unlike a true convertible security, which is a single security having a unitary market value, a synthetic convertible security comprises two or more separate securities, each with its own market value. Therefore, the "market value" of a synthetic convertible security is the sum of the values of its debt component and its convertible component. For this reason, the values of a synthetic convertible security and a true convertible security may respond differently to market fluctuations.
BANK OBLIGATIONS
Bank obligations in which the Fund may invest include certificates of deposit, bankers' acceptances, and fixed time deposits. Certificates of deposit are negotiable certificates that are issued against funds deposited in a commercial bank for a definite period of time and that earn a specified return. Bankers' acceptances are negotiable drafts or bills of exchange, normally drawn by an importer or exporter to pay for specific merchandise, which are "accepted" by a bank, meaning, in effect, that the bank unconditionally agrees to pay the face value of the instrument on maturity. Fixed time deposits are bank obligations payable at a stated maturity date and bearing interest at a fixed rate. Fixed time deposits may be withdrawn on demand by the investor, but may be subject to early withdrawal penalties which vary depending upon market conditions and the remaining maturity of the obligation. There are generally no contractual restrictions on the right to transfer a beneficial interest in a fixed time deposit to a third party, although there is no market for such deposits. The Fund may also hold funds on deposit with its custodian bank in an interest-bearing account for temporary purposes.
Subject to the Fund's limitation on concentration of no more than 25% of its total assets in the securities of issuers in a particular industry, the Fund may invest without limit in U.S. dollar-denominated obligations of foreign banks and up to 5% of its total assets in foreign bank obligations denominated in foreign currencies. Obligations of foreign banks involve certain risks associated with investing in foreign securities described under "--Foreign (Non-U.S.) Investments and Currencies" above, including the possibilities that their liquidity could be impaired because of future political and economic developments, that their obligations may be less marketable than comparable obligations of U.S. banks, that a foreign jurisdiction might impose withholding taxes on interest income payable on those obligations, that foreign deposits may be seized or nationalized, that foreign governmental restrictions such as exchange controls may be adopted which might adversely affect the payment of principal and interest on those obligations and that the selection of those obligations may be more difficult because there may be less publicly available information concerning foreign banks or the accounting, auditing and financial reporting standards, practices and requirements applicable to foreign banks may differ from those applicable to U.S. banks. Foreign banks are not generally subject to examination by any U.S. Government agency or instrumentality.
CORPORATE BONDS
The Fund may invest in a wide variety of bonds and related debt obligations of varying maturities issued by U.S. and foreign corporations (including banks) and other business entities. Bonds are fixed or variable rate debt obligations, including bills, notes, debentures, money market instruments and similar instruments and securities. Bonds generally are used by corporations and other issuers to borrow money from investors. The issuer pays the investor a fixed or variable rate of interest and normally must repay the amount borrowed on or before maturity. Certain bonds are "perpetual" in that they have no maturity date. The Fund will invest in U.S. dollar-denominated corporate bonds and may also invest up to 5% of its total assets in bonds denominated in foreign currencies in accordance with the Fund's investment objectives and policies as described in the Prospectus.
The Fund's investments in corporate bonds are subject to a number of risks described in the Prospectus and elaborated upon elsewhere in this section of the SAI, including interest rate risk, credit risk, high yield risk, issuer risk, foreign (non-U.S.) investment risk, inflation risk, liquidity risk, and management risk.
DERIVATIVE INSTRUMENTS
In pursuing its investment objectives, the Fund may purchase and sell (write) both put options and call options on securities, swap agreements, and securities indexes, and enter into interest rate and index futures contracts and purchase and sell options on such futures contracts ("futures options") to add leverage to the portfolio, for hedging purposes or as part of its overall investment strategy. The Fund also may enter into swap agreements with respect to interest rates, currencies, securities indexes and other assets and measures of risk or return. If other types of financial instruments, including other types of options, futures contracts or futures options are traded in the future, the Fund may also use those instruments, provided that the Trustees determine that their use is consistent with the Fund's investment objectives. The Fund's use of derivative instruments (other than swaps) will be limited by the Fund's 15% limit on illiquid investments to the extent they are determined to be illiquid.
The value of some derivative instruments in which the Fund may invest may be particularly sensitive to changes in prevailing interest rates, and, like the other investments of the Fund, the ability of the Fund to successfully utilize these instruments may depend in part upon the ability of the Manager to forecast interest rates and other economic factors correctly. If the Manager incorrectly forecasts such factors and has taken positions in derivative instruments contrary to prevailing market trends, the Fund could be exposed to the risk of loss.
The Fund might not employ any of the strategies described below, and no assurance can be given that any strategy used will succeed. If the Manager incorrectly forecasts interest rates, market values or other economic factors in utilizing a derivatives strategy for the Fund, the Fund might have been in a better position if it had not entered into the transaction at all. Also, suitable derivative transactions may not be available in all circumstances. The use of these strategies involves certain special risks, including a possible imperfect correlation, or even no correlation, between price movements of derivative instruments and price movements of related investments. While some strategies involving derivative instruments can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting favorable price movements in related investments or otherwise, due to the possible inability of the Fund to purchase or sell a portfolio security at a time that otherwise would be favorable or the possible need to sell a portfolio security at a disadvantageous time because the Fund is required to maintain asset coverage or offsetting positions in connection with transactions in derivative instruments, and the possible inability of the Fund to close out or to liquidate its derivatives positions. Income earned by the Fund from many derivative strategies will be distributed to shareholders in taxable distributions.
OPTIONS ON SECURITIES, SWAP AGREEMENTS AND INDEXES. The Fund may purchase and sell both put and call options on securities, swap agreements or indexes in standardized contracts traded on domestic or other securities exchanges, boards of trade, or similar entities, or quoted on NASDAQ or on an over-the-counter market, and agreements, sometimes called cash puts, which may accompany the purchase of a new issue of debt obligations from a dealer.
An option on a security (or an index) is a contract that gives the holder of the option, in return for a premium, the right to buy from (in the case of a call) or sell to (in the case of a put) the writer of the option the security underlying the option (or the cash value of the index) at a specified exercise price at any time during the term of the option. The writer of an option on a security has the obligation upon exercise of the option to deliver the underlying security upon payment of the exercise price or to pay the exercise price upon delivery of the underlying security. Upon exercise, the writer of an option on an index is obligated to pay the difference between the cash value of the index and the exercise price multiplied by the specified multiplier for the index option. (An index is designed to reflect features of a particular securities market, a specific group of financial instruments or securities, or certain economic indicators.)
The Fund will write call options and put options only if they are "covered." In the case of a call option on a debt obligation or other security, the option is "covered" if the Fund owns the security underlying the call or has an absolute and immediate right to acquire that security without additional cash consideration (or, if additional cash consideration is required, cash or other assets determined to be liquid by the Manager in accordance with procedures established by the Board of Trustees, in such amount are segregated by its custodian) upon conversion or exchange of other securities held by the Fund. For a call option on an index, the option is covered if the Fund maintains with its custodian assets determined to be liquid by the Manager in accordance with procedures established by the Board of Trustees, in an amount equal to the contract value of the index. A call option is also covered if the Fund holds a call on the same security or index as the call written where the exercise price of the call held is (i) equal to or less than the exercise price of the call written, or (ii) greater than the exercise price of the call written, provided the difference is maintained by the Fund in segregated assets determined to be liquid by the Manager in accordance with procedures established by the Board of Trustees. A put option on a security or an index is "covered" if the Fund segregates assets determined to be liquid by the Manager in accordance with procedures established by the Board of Trustees equal to the exercise price. A put option is also covered if the Fund holds a put on the same security or index as the put written where the exercise price of the put held is (i) equal to or greater than the exercise price of the put written, or (ii) less than the exercise price of the put written, provided the difference is maintained by the Fund in segregated assets determined to be liquid by the Manager in accordance with procedures established by the Board of Trustees.
If an option written by the Fund expires unexercised, the Fund realizes a capital gain equal to the premium received at the time the option was written. If an option purchased by the Fund expires unexercised, the Fund realizes a capital loss equal to the premium paid. Prior to the earlier of exercise or expiration, an exchange-traded option may be closed out by an offsetting purchase or sale of an option of the same series (type, exchange, underlying security or index, exercise price, and expiration). There can be no assurance, however, that a closing purchase or sale transaction can be effected when the Fund desires.
The Fund may sell put or call options it has previously purchased, which could result in a net gain or loss depending on whether the amount realized on the sale is more or less than the premium and other transaction costs paid on the put or call option which is sold. Prior to exercise or expiration, an option may be closed out by an offsetting purchase or sale of an option of the same series. The Fund will realize a capital gain from a closing purchase transaction if the cost of the closing option is less than the premium received from writing the option, or, if it is more, the Fund will realize a capital loss. If the premium received from a closing sale transaction is more than the premium paid to purchase the option, the Fund will realize a capital gain or, if it is less, the Fund will realize a capital loss. The principal factors affecting the market value of a put or a call option include supply and demand, interest rates, the current market price of the underlying security or index in relation to the exercise price of the option, the volatility of the underlying security or index, and the time remaining until the expiration date.
The premium paid for a put or call option purchased by the Fund is an asset of the Fund. The premium received for an option written by the Fund is recorded as a deferred credit. The value of an option purchased or written is marked to market daily and is valued at the closing price on the exchange on which it is traded or, if not traded on an exchange or no closing price is available, at the mean between the last bid and asked prices.
The Fund may write covered straddles consisting of a combination of a call and a put written on the same underlying security. A straddle will be covered when sufficient assets are deposited to meet the Fund's immediate obligations. The Fund may use the same liquid assets to cover both the call and put options where the exercise price of the call and put are the same, or the exercise price of the call is higher than that of the put. In such cases, the Fund will also segregate liquid assets equivalent to the amount, if any, by which the put is "in the money."
RISKS ASSOCIATED WITH OPTIONS ON SECURITIES AND INDEXES. There are several risks associated with transactions in options on securities and on indexes. For example, there are significant differences between the securities and options markets that could result in an imperfect correlation between these markets, causing a given transaction not to achieve its objectives. A decision as to whether, when and how to use options involves the exercise of skill and judgment, and even a well-conceived transaction may be unsuccessful to some degree because of market behavior or unexpected events.
During the option period, the covered call writer has, in return for the premium on the option, given up the opportunity to profit from a price increase in the underlying security above the exercise price, but, as long as its obligation as a writer continues, has retained the risk of loss should the price of the underlying security decline. The writer of an option has no control over the time when it may be required to fulfill its obligation as a writer of the option. Once an option writer has received an exercise notice, it cannot effect a closing purchase transaction in order to terminate its obligation under the option and must deliver the underlying security at the exercise price. If a put or call option purchased by the Fund is not sold when it has remaining value, and if the market price of the underlying security remains equal to or greater than the exercise price (in the case of a put), or remains less than or equal to the exercise price (in the case of a call), the Fund will lose its entire investment in the option. Also, where a put or call option on a particular security is purchased to hedge against price movements in a related security, the price of the put or call option may move more or less than the price of the related security.
There can be no assurance that a liquid market will exist when the Fund seeks to close out an option position. If the Fund were unable to close out an option that it had purchased on a security, it would have to exercise the option in order to realize any profit or the option may expire worthless. If the Fund were unable to close out a covered call option that it had written on a security, it would not be able to sell the underlying security unless the option expired without exercise. As the writer of a covered call option, the Fund forgoes, during the option's life, the opportunity to profit from increases in the market value of the security covering the call option above the sum of the premium and the exercise price of the call.
If trading were suspended in an option purchased by the Fund, the Fund would not be able to close out the option. If restrictions on exercise were imposed, the Fund might be unable to exercise an option it has purchased. Except to the extent that a call option on an index written by the Fund is covered by an option on the same index purchased by the Fund, movements in the index may result in a loss to the Fund; however, such losses may be mitigated by changes in the value of the Fund's securities during the period the option was outstanding.
FOREIGN CURRENCY OPTIONS. The Fund may buy or sell put and call options on foreign currencies for investment purposes or as a hedge against changes in the value of the U.S. dollar (or another currency) in relation to a foreign currency in which the Fund's securities may be denominated. The Fund may buy or sell put and call options on foreign currencies either on exchanges or in the over-the-counter market. A put option on a foreign currency gives the purchaser of the option the right to sell a foreign currency at the exercise price until the option expires. A call option on a foreign currency gives the purchaser of the option the right to purchase the currency at the exercise price until the option expires. Currency options traded on U.S. or other exchanges may be subject to position limits which may limit the ability of the Fund to reduce foreign currency risk using such options.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Fund may invest in interest rate futures contracts and options thereon ("futures options"). The Fund may also purchase and sell futures contracts on debt obligations (to the extent they are available) and U.S. Government and agency securities, as well as purchase put and call options on such futures contracts.
A futures contract provides for the future sale by one party and purchase by another party of a specified quantity of the security or other financial instrument at a specified price and time. A futures contract on an index is an agreement pursuant to which two parties agree to take or make delivery of an amount of cash equal to the difference between the value of the index at the close of the last trading day of the contract and the price at which the index contract was originally written. Although the value of an index might be a function of the value of certain specified securities, physical delivery of these securities is not always made. A public market exists in futures contracts covering a number of indexes as well as financial instruments, including, without limitation: U.S. Treasury bonds; U.S. Treasury notes; GNMA Certificates; three-month U.S. Treasury bills; 90-day commercial paper; bank certificates of deposit; Eurodollar certificates of deposit; the Australian dollar; the Canadian dollar; the British pound; the German mark; the Japanese yen; the French franc; the Swiss franc; the Mexican peso; and certain multinational currencies, such as the euro. It is expected that other futures contracts will be developed and traded in the future.
The Fund may purchase and write call and put futures options. Futures options possess many of the same characteristics as options on securities and indexes (discussed above). A futures option gives the holder the right, in return for the premium paid, to assume a long position (call) or short position (put) in a futures contract at a specified exercise price at any time during the period of the option. Upon exercise of a call option, the holder acquires a long position in the futures contract and the writer is assigned the opposite short position. In the case of a put option, the opposite is true.
To comply with applicable rules of the Commodity Futures Trading Commission ("CFTC") under which the Fund avoids being deemed a "commodity pool" or a "commodity pool operator," the Fund intends generally to limit its use of futures contracts and futures options to "bona fide hedging" transactions, as such term is defined in applicable regulations, interpretations and practice. For example, the Fund might use futures contracts to hedge against anticipated changes in interest rates that might adversely affect either the value of the Fund's debt obligations or the price of the debt obligations that the Fund intends to purchase. The Fund's hedging activities may include sales of futures contracts as an offset against the effect of expected increases in interest rates, and purchases of futures contracts as an offset against the effect of expected declines in interest rates. Although other techniques could be used to reduce the Fund's exposure to interest rate fluctuations, the Fund may be able to hedge its exposure more effectively and perhaps at a lower cost by using futures contracts and futures options.
The Fund may enter into futures contracts and futures options that are standardized and traded on a U.S. or other exchange, board of trade, or similar entity, or quoted on an automated quotation system, and the Fund may also enter into OTC options on futures contracts.
When a purchase or sale of a futures contract is made by the Fund, the Fund is required to deposit with its custodian (or broker, if legally permitted) a specified amount of assets determined to be liquid by the Manager in accordance with procedures established by the Board of Trustees ("initial margin"). The margin required for a futures contract is set by the exchange on which the contract is traded and may be modified during the term of the contract. The initial margin is in the nature of a performance bond or good faith deposit on the futures contract that is returned to the Fund upon termination of the contract, assuming all contractual obligations have been satisfied. The Fund expects to earn taxable interest income on its initial margin deposits. A futures contract held by the Fund is valued daily at the official settlement price of the exchange on which it is traded. Each day the Fund pays or receives cash, called "variation margin," equal to the daily change in value of the futures contract. This process is known as "marking to market." Variation margin does not represent a borrowing or loan by the Fund but is instead a settlement between the Fund and the broker of the amount one would owe the other if the futures contract expired. In computing daily net asset value, the Fund will mark to market its open futures positions.
The Fund is also required to deposit and maintain margin with respect to put and call options on futures contracts written by it. Such margin deposits will vary depending on the nature of the underlying futures contract (and the related initial margin requirements), the current market value of the option, and other futures positions held by the Fund.
Although some futures contracts call for making or taking delivery of the underlying securities, generally these obligations are closed out prior to delivery by offsetting purchases or sales of matching futures contracts (involving the same exchange, underlying security or index, and delivery month). If an offsetting purchase price is less than the original sale price, the Fund realizes a capital gain, or if it is more, the Fund realizes a capital loss. Conversely, if an offsetting sale price is more than the original purchase price, the Fund realizes a capital gain, or if it is less, the Fund realizes a capital loss. The transaction costs must also be included in these calculations.
The Fund may write covered straddles consisting of a call and a put written on the same underlying futures contract. A straddle will be covered when sufficient assets are deposited to meet the Fund's immediate obligations. The Fund may use the same liquid assets to cover both the call and put options where the exercise price of the call and put are the same, or the exercise price of the call is higher than that of the put. In such cases, the Fund will also segregate liquid assets equivalent to the amount, if any, by which the put is "in the money."
LIMITATIONS ON USE OF FUTURES AND FUTURES OPTIONS. As noted
above, the Fund generally intends to enter into positions in
futures contracts and related options only for "bona fide
hedging" purposes. With respect to positions in futures and
related options that do not constitute bona fide hedging
positions, the Fund will comply with applicable CFTC
requirements, as amended. Under current CFTC requirements, with
respect to positions in futures and related options that do not
constitute bona fide hedging positions, the Fund will not enter
into a futures contract or futures option contract unless either
(1) immediately thereafter, the aggregate initial margin deposits
relating to such positions plus premiums paid by it for open
futures option positions, less the amount by which any such
options are "in the money," do not exceed 5% of the Fund's
liquidation value, after taking into account unrealized profits
and unrealized losses on any such contracts into which the Fund
has entered or (2) the aggregate notional value of all non-hedge
futures contracts including such contract (taken at market value
at the time of entering that contract) does not exceed the
liquidation value of that Fund's portfolio. Pending CFTC rule
amendments may eliminate the limitations set forth above, in
which case the Fund may no longer be subject to such limitations.
A call option is "in the money" if the value of the futures
contract that is the subject of the option exceeds the exercise
price. A put option is "in the money" if the exercise price
exceeds the value of the futures contract that is the subject of
the option.
When purchasing a futures contract, the Fund will maintain with its custodian (and mark to market on a daily basis) assets determined to be liquid by the Manager in accordance with procedures established by the Board of Trustees, that, when added to the amounts deposited with a futures commission merchant as margin, are equal to the market value of the futures contract. Alternatively, the Fund may "cover" its position by purchasing a put option on the same futures contract with a strike price as high as or higher than the price of the contract held by the Fund.
When selling a futures contract, the Fund will maintain with its custodian (and mark to market on a daily basis) assets determined to be liquid by the Manager in accordance with procedures established by the Board of Trustees, that are equal to the market value of the instruments underlying the contract. Alternatively, the Fund may "cover" its position by owning the instruments underlying the contract (or, in the case of an index futures contract, a portfolio with a volatility substantially similar to that of the index on which the futures contract is based), or by holding a call option permitting the Fund to purchase the same futures contract at a price no higher than the price of the contract written by the Fund (or at a higher price if the difference is maintained in liquid assets with the Fund's custodian).
When selling a call option on a futures contract, the Fund will maintain with its custodian (and mark to market on a daily basis) assets determined to be liquid by the Manager in accordance with procedures established by the Board of Trustees, that, when added to the amounts deposited with a futures commission merchant as margin, equal the total market value of the futures contract underlying the call option. Alternatively, the Fund may cover its position by entering into a long position in the same futures contract at a price no higher than the strike price of the call option, by owning the instruments underlying the futures contract, or by holding a separate call option permitting the Fund to purchase the same futures contract at a price not higher than the strike price of the call option sold by the Fund.
When selling a put option on a futures contract, the Fund will maintain with its custodian (and mark to market on a daily basis) assets determined to be liquid by the Manager in accordance with procedures established by the Board of Trustees, that equal the purchase price of the futures contract, less any margin on deposit. Alternatively, the Fund may cover the position either by entering into a short position in the same futures contract, or by owning a separate put option permitting it to sell the same futures contract so long as the strike price of the purchased put option is the same as or higher than the strike price of the put option sold by the Fund.
To the extent that securities with maturities greater than one year are used to segregate assets to cover the Fund's obligations under futures contracts and related options, such use will not eliminate the leverage risk arising from such use, which may tend to exaggerate the effect on net asset value of any increase or decrease in the market value of the Fund's portfolio, and may require liquidation of portfolio positions when it is not advantageous to do so.
The requirements for qualification as a regulated investment company also may limit the extent to which the Fund may enter into futures, futures options or forward contracts. See "Tax Matters."
RISKS ASSOCIATED WITH FUTURES AND FUTURES OPTIONS. There are several risks associated with the use of futures contracts and futures options as hedging techniques. A purchase or sale of a futures contract may result in losses in excess of the amount invested in the futures contract. There can be no guarantee that there will be a correlation between price movements in the hedging vehicle and in the Fund securities being hedged. In addition, there are significant differences between the securities and futures markets that could result in an imperfect correlation between the markets, causing a given hedge not to achieve its objectives. The degree of imperfection of correlation depends on circumstances such as variations in speculative market demand for futures and futures options on securities, including technical influences in futures trading and futures options, and differences between the financial instruments being hedged and the instruments underlying the standard contracts available for trading in such respects as interest rate levels, maturities, and creditworthiness of issuers. A decision as to whether, when and how to hedge involves the exercise of skill and judgment, and even a well-conceived hedge may be unsuccessful to some degree because of market behavior or unexpected interest rate trends.
Futures contracts on U.S. Government securities historically have reacted to an increase or decrease in interest rates in a manner similar to that in which the underlying U.S. Government securities reacted. To the extent, however, that the Fund enters into such futures contracts, the value of such futures will not vary in direct proportion to the value of the Fund's holdings of debt obligations. Thus, the anticipated spread between the price of the futures contract and the hedged security may be distorted due to differences in the nature of the markets. The spread also may be distorted by differences in initial and variation margin requirements, the liquidity of such markets and the participation of speculators in such markets.
Futures exchanges may limit the amount of fluctuation permitted in certain futures contract prices during a single trading day. The daily limit establishes the maximum amount that the price of a futures contract may vary either up or down from the previous day's settlement price at the end of the current trading session. Once the daily limit has been reached in a futures contract subject to the limit, no more trades may be made on that day at a price beyond that limit. The daily limit governs only price movements during a particular trading day and therefore does not limit potential losses because the limit may work to prevent the liquidation of unfavorable positions. For example, futures prices have occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of positions and subjecting some holders of futures contracts to substantial losses.
There can be no assurance that a liquid market will exist at a time when the Fund seeks to close out a futures contract or a futures option position, and the Fund would remain obligated to meet margin requirements until the position is closed. In addition, many of the contracts discussed above are relatively new instruments without a significant trading history. As a result, there can be no assurance that an active secondary market will develop or continue to exist.
ADDITIONAL RISKS OF OPTIONS ON SECURITIES, FUTURES CONTRACTS, OPTIONS ON FUTURES CONTRACTS AND FORWARD CURRENCY EXCHANGE CONTRACTS AND OPTIONS THEREON. Options on securities, futures contracts, options on futures contracts, and options on currencies may be traded on foreign exchanges. Such transactions may not be regulated as effectively as similar transactions in the United States, may not involve a clearing mechanism and related guarantees, and are subject to the risk of governmental actions affecting trading in, or the prices of, foreign securities. Some foreign exchanges may be principal markets so that no common clearing facility exists and a trader may look only to the broker for performance of the contract. The value of such positions also could be adversely affected by (i) other complex foreign political, legal and economic factors, (ii) lesser availability than in the United States of data on which to make trading decisions, (iii) delays in the Fund's ability to act upon economic events occurring in foreign markets during non-business hours in the United States, (iv) the imposition of different exercise and settlement terms and procedures and margin requirements than in the United States and (v) lesser trading volume. In addition, unless the Fund hedges against fluctuations in the exchange rate between the U.S. dollar and the currencies in which trading is done on foreign exchanges, any profits that the Fund might realize in trading could be eliminated by adverse changes in the exchange rate, or the Fund could incur losses as a result of those changes. The Fund's use of such instruments may cause the Fund to realize higher amounts of short-term capital gains (generally taxed to shareholders at ordinary income tax rates) than if the Fund had not used such instruments.
SWAP AGREEMENTS
The Fund may enter into swap contracts for hedging purposes or to add leverage to the portfolio; such swaps may include but are not limited to interest rate swaps, credit default swaps or currency swaps. When used for hedging purposes, the Fund would be the buyer of a swap contract. When the Fund is the seller of a swap contract, the Fund will segregate assets in the form of cash and cash equivalents in an amount equal to the aggregate market value of such swaps, marked to market on a daily basis.
Swap agreements are two-party contracts entered into primarily by institutional investors for periods ranging from a few weeks to more than one year. In a standard "swap" transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments, which may be adjusted for an interest factor. The gross returns to be exchanged or "swapped" between the parties are generally calculated with respect to a "notional amount," I.E., the return on or increase in value of a particular dollar amount invested at a particular interest rate or in a "basket" of securities representing a particular index.
The Fund's investment in swaps will not be included as illiquid investments for purposes of determining compliance with the 15% limit on illiquid investments. Accordingly, the Fund may invest more than 15% of its total assets in swaps. However, the Fund's use of derivative instruments (other than swaps) will be limited by the Fund's 15% limit on illiquid investments to the extent such derivatives are determined to be illiquid.
Most swap agreements entered into by the Fund would calculate the obligations of the parties to the agreement on a "net basis." Consequently, the Fund's current obligations (or rights) under a swap agreement will generally be equal only to the net amount to be paid or received under the agreement based on the relative values of the positions held by each party to the agreement (the "net amount"). The Fund's current obligations under a swap agreement will be accrued daily (offset against any amounts owed to the Fund).
Whether the Fund's use of swaps will be successful in furthering its investment objectives will depend on the Manager's ability to predict correctly whether certain types of investments are likely to produce greater returns than other investments. The Fund bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap agreement counterparty. The Fund will enter into swap agreements only with counterparties that meet certain standards of creditworthiness. The swaps market is a relatively new market and is largely unregulated. It is possible that developments in the swaps market, including potential government regulation, could adversely affect the Fund's ability to terminate existing swap agreements or to realize amounts to be received under such agreements. Certain swap agreements are exempt from most provisions of the Commodity Exchange Act ("CEA") and, therefore, are not regulated as futures or commodity option transactions under the CEA.
INTEREST RATE SWAPS. An interest rate swap is the transfer between two counterparties of interest rate obligations. One obligation has an interest rate fixed to maturity while the other has an interest rate that changes with changes in a designated benchmark, such as the London Interbank Offered Rate (LIBOR), prime, commercial paper, or other benchmarks. The obligations to make repayment of principal on the underlying securities are not transferred. These transactions generally require the participation of an intermediary, frequently a bank. The entity holding the fixed rate obligation will transfer the obligation to the intermediary, and the entity will then be obligated to pay to the intermediary a floating rate of interest, generally including a fractional percentage as a commission for the intermediary. The intermediary also makes arrangements with a second entity that has a floating-rate obligation that substantially mirrors the obligation desired by the first entity. In return for assuming a fixed obligation, the second entity will pay the intermediary all sums that the intermediary pays on behalf of the first entity, plus an arrangement fee and other agreed upon fees. To the extent the Fund does not own the underlying obligation, the Fund will maintain, in a segregated account with its custodian bank, cash or liquid debt securities with an aggregate value equal to the amount of the Fund's outstanding swap obligation.
Interest rate swaps permit the party seeking a floating rate obligation the opportunity to acquire the obligation at a lower rate than is directly available in the credit market, while permitting the party desiring a fixed rate obligation the opportunity to acquire a fixed rate obligation, also frequently at a price lower than is available in the capital markets. The success of the transaction depends in large part on the availability of fixed rate obligations at a low enough coupon rate to cover the cost involved.
CREDIT DEFAULT SWAPS. The Fund may purchase credit default swaps. In that case, the Fund would be entitled to receive the par (or other agreed-upon) value of a referenced debt obligation from the counterparty to the contract in the event of a default by a third party, such as a U.S. or foreign issuer, on the debt obligation. In return, the Fund would pay to the counterparty a periodic stream of payments over the term of the contract provided that no event of default has occurred. If no default occurs, the Fund would have spent the stream of payments and received no benefit from the contract. When the Fund is the seller of a swap contract, it receives the stream of payments but is obligated to pay upon default of the referenced debt obligation. As the seller, the Fund would effectively add leverage to its portfolio because, in addition to its total assets, the Fund would be subject to investment exposure on the notional amount of the swap.
STRUCTURED NOTES AND OTHER RELATED INSTRUMENTS
The Fund may invest in "structured" notes and other related instruments, which are privately negotiated debt obligations where the principal and/or interest is determined by reference to the performance of a benchmark asset, market or interest rate (an "embedded index"), such as selected securities, an index of securities or specified interest rates, or the differential performance of two assets or markets, such as indexes reflecting bonds. Structured instruments may be issued by corporations, including banks, as well as by governmental agencies. Structured instruments frequently are assembled in the form of medium-term notes, but a variety of forms are available and may be used in particular circumstances. The terms of such structured instruments normally provide that their principal and/or interest payments are to be adjusted upwards or downwards (but ordinarily not below zero) to reflect changes in the embedded index while the structured instruments are outstanding. As a result, the interest and/or principal payments that may be made on a structured product may vary widely, depending on a variety of factors, including the volatility of the embedded index and the effect of changes in the embedded index on principal and/or interest payments. The rate of return on structured notes may be determined by applying a multiplier to the performance or differential performance of the referenced index(es) or other asset(s). Application of a multiplier involves leverage that will serve to magnify the potential for gain and the risk of loss.
The Manager may utilize structured instruments for investment purposes and also for risk management purposes, such as to reduce the duration and interest rate sensitivity of the Fund's portfolio. While structured instruments may offer the potential for a favorable rate of return from time to time, they also entail certain risks. Structured instruments may be less liquid than other debt securities, and the price of structured instruments may be more volatile. In some cases, depending on the terms of the embedded index, a structured instrument may provide that the principal and/or interest payments may be adjusted below zero. Structured instruments also may involve significant credit risk and risk of default by the counterparty. Certain issuers of structured instruments may be deemed to be "investment companies" as defined in the 1940 Act. As a result, the Fund's investment in these structured instruments may be limited by the restrictions contained in the 1940 Act. Although structured notes, bank loans and loan participations are not necessarily illiquid, to the extent such investments are deemed to be illiquid by the Manager, they will be subject to the Fund's restrictions on investments in illiquid securities. Like other sophisticated strategies, the Fund's use of structured instruments may not work as intended. If the value of the embedded index changes in a manner other than that expected by the Manager, principal and/or interest payments received on the structured instrument may be substantially less than expected. Also, if the Manager uses structured instruments to reduce the duration of the Fund's portfolio, this may limit the Fund's return when having a longer duration would be beneficial (for instance, when interest rates decline).
U.S. GOVERNMENT SECURITIES
U.S. Government securities are obligations of, or guaranteed by, the U.S. Government, its agencies or instrumentalities. The U.S. Government does not guarantee the net asset value of the Fund's shares. Some U.S. Government securities, such as Treasury bills, notes and bonds, and securities guaranteed by the GNMA, are supported by the full faith and credit of the United States; others, such as those of the Federal Home Loan Banks, are supported by the right of the issuer to borrow from the U.S. Treasury; others, such as those of the FNMA, are supported by the discretionary authority of the U.S. Government to purchase the agency's obligations; and still others, such as those of the Student Loan Marketing Association, are supported only by the credit of the instrumentality. U.S. Government securities include securities that have no coupons, or have been stripped of their unmatured interest coupons, individual interest coupons from such securities that trade separately, and evidences of receipt of such securities. Such securities may pay no cash income, and are purchased at a deep discount from their value at maturity. See "--Zero-Coupon Securities" and "--Pay-In-Kind Securities." Custodial receipts issued in connection with so-called trademark zero-coupon securities, such as CATs and TIGRs, are not issued by the U.S. Treasury, and are therefore not U.S. Government securities, although the underlying bond represented by such receipt is a debt obligation of the U.S. Treasury. Other zero-coupon Treasury securities (E.G., STRIPs and CUBEs) are direct obligations of the U.S. Government.
MUNICIPAL BONDS
The Fund may invest in municipal bonds which pay interest that, in the opinion of bond counsel to the issuer (or on the basis of other authority believed by the Fund's portfolio managers to be reliable), is exempt from federal income taxes ("municipal bonds"), although dividends that the Fund pays that are attributable to such interest will not be tax-exempt to shareholders of the Fund.
Municipal bonds share the attributes of debt obligations in general, but are generally issued by states, municipalities and other political subdivisions, agencies, authorities and instrumentalities of states and multi-state agencies or authorities. The municipal bonds that the Fund may purchase include general obligation bonds and limited obligation bonds (or revenue bonds), including industrial development bonds issued pursuant to former federal tax law. General obligation bonds are obligations involving the credit of an issuer possessing taxing power and are payable from such issuer's general revenues and not from any particular source. Limited obligation bonds are payable only from the revenues derived from a particular facility or class of facilities or, in some cases, from the proceeds of a special excise or other specific revenue source. Tax-exempt private activity bonds and industrial development bonds generally are also revenue bonds and thus are not payable from the issuer's general revenues. The credit and quality of private activity bonds and industrial development bonds are usually related to the credit of the user of the facilities. Payment of interest on and repayment of principal of such bonds is the responsibility of the user (and/or any guarantor).
Municipal bonds are subject to credit and market risk. Generally, prices of higher quality issues tend to fluctuate less with changes in market interest rates than prices of lower quality issues and prices of longer maturity issues tend to fluctuate more than prices of shorter maturity issues. Prices and yields on municipal bonds are dependent on a variety of factors, including general money-market conditions, the financial condition of the issuer, general conditions of the municipal bond market, the size of a particular offering, the maturity of the obligation and the rating of the issue. A number of these factors, including the ratings of particular issues, are subject to change from time to time. Information about the financial condition of an issuer of municipal bonds may not be as extensive as that which is made available by corporations whose securities are publicly traded. Obligations of issuers of municipal bonds are subject to the provisions of bankruptcy, insolvency and other laws, such as the Federal Bankruptcy Reform Act of 1978, affecting the rights and remedies of creditors. Congress or state legislatures may seek to extend the time for payment of principal or interest, or both, or to impose other constraints upon enforcement of such obligations. There is also the possibility that as a result of litigation or other conditions, the power or ability of issuers to meet their obligations for the payment of interest and principal on their municipal bonds may be materially affected or their obligations may be found to be invalid or unenforceable.
WHEN-ISSUED, DELAYED DELIVERY AND FORWARD COMMITMENT TRANSACTIONS
The Fund may buy debt securities on a "when-issued" or "delayed delivery" basis. These transactions are arrangements under which the Fund buys securities with payment and delivery scheduled for a future time. Purchases of debt securities on a when-issued or delayed delivery basis are subject to market fluctuation and to the risk that the value or yields at delivery may be more or less than the purchase price or the yields available when the transaction was entered into. Although the Fund will generally buy debt securities on a when-issued basis with the intention of acquiring such securities, it may sell them before the settlement date if it deems the sale to be advisable. The Fund will not enter into these transactions for investment leverage. When the Fund is the buyer in such a transaction, it will maintain, in a segregated account with its custodian bank, cash or high-grade marketable securities having an aggregate value equal to the amount of its purchase commitments until payment is made.
In when-issued and delayed delivery transactions, the Fund relies on the seller to complete the transaction. The other party's failure may cause the Fund to miss a price or yield considered advantageous. Securities purchased on a when-issued or delayed delivery basis do not generally earn interest until their scheduled delivery date. The Fund is not subject to any percentage limit on the amount of its assets which may be invested in when-issued debt securities.
REPURCHASE AGREEMENTS
The Fund generally will have a portion of its assets in cash or cash equivalents for a variety of reasons, such as waiting for a suitable investment opportunity or taking a defensive position. To earn income on this portion of its assets, the Fund may enter into repurchase agreements. Under a repurchase agreement, the Fund agrees to buy securities guaranteed as to payment of principal and interest by the U.S. government or its agencies from a qualified bank or broker-dealer and then to sell the securities back to the bank or broker-dealer after a short period of time (generally, less than seven days) at a higher price. The bank or broker-dealer must transfer to the Fund's custodian securities with an initial market value of at least 102% of the dollar amount invested by the Fund in each repurchase agreement. The Manager will monitor the value of such securities daily to determine that the value equals or exceeds the repurchase price.
Repurchase agreements may involve risks in the event of default or insolvency of the bank or broker-dealer, including possible delays or restrictions upon the Fund's ability to sell the underlying securities. The Fund will enter into repurchase agreements only with parties who meet certain creditworthiness standards, I.E., banks or broker-dealers that the Manager has determined present no serious risk of becoming involved in bankruptcy proceedings within the time frame contemplated by the repurchase transaction.
BORROWING
The Fund may borrow money to the extent permitted under the 1940 Act as interpreted, modified or otherwise permitted by regulatory authority having jurisdiction, from time to time. The Fund may from time to time borrow money to add leverage to the portfolio. The Fund is permitted to use leverage representing up to 38% of the Fund's Managed Assets. "Managed Assets" means the total assets of the Fund (including any assets attributable to leverage) minus the sum of accrued liabilities (other than debt representing financial leverage). The Fund may also borrow money for temporary administrative purposes.
Under the 1940 Act, the Fund generally is not permitted to engage in borrowings unless immediately after a borrowing the value of the Fund's total assets less liabilities (other than the borrowing) is at least 300% of the principal amount of such borrowing (I.E., such principal amount may not exceed 33 1/3% of the Fund's total assets). In addition, the Fund is not permitted to declare any cash dividend or other distribution on Common Shares unless, at the time of such declaration, the value of the Fund's total assets, less liabilities other than borrowing, is at least 300% of such principal amount. If the Fund borrows it intends, to the extent possible, to prepay all or a portion of the principal amount of the borrowing to the extent necessary in order to maintain the required asset coverage. Failure to maintain certain asset coverage requirements could result in an event of default and entitle the holders of Preferred Shares ("Preferred Shareholders") to elect a majority of the Trustees of the Fund.
As described elsewhere in this SAI, the Fund also may enter into certain transactions, including swap contracts and other derivative instruments, reverse repurchase agreements, and when-issued, delayed delivery or forward commitment transactions, although the Fund's exposure to certain derivative instruments (other than swaps) will be limited by the Fund's 15% limit on illiquid investments to the extent they are determined to be illiquid. The Fund may enter into these transactions in order to add leverage to the portfolio. See "Investment Objectives and Strategies," "Risks - Liquidity Risk" and "Preferred Shares and Related Leverage" in the Prospectus. The Fund may (but is not required to) cover its commitment under these instruments by the segregation of assets determined to be liquid by the Manager in accordance with procedures adopted by the Trustees, equal in value to the amount of the Fund's commitment, or by entering into offsetting transactions or owning positions covering its obligations. In that case, the instruments will not be considered "senior securities" under the 1940 Act for purposes of the asset coverage requirements otherwise applicable to borrowings by the Fund or the Fund's issuance of Preferred Shares. Borrowing will tend to exaggerate the effect on net asset value of any increase or decrease in the market value of the Fund's portfolio. Money borrowed will be subject to interest costs which may or may not be recovered by appreciation of the securities purchased. The Fund also may be required to maintain minimum average balances in connection with such borrowing or to pay a commitment or other fee to maintain a line of credit; either of these requirements would increase the cost of borrowing over the stated interest rate.
REVERSE REPURCHASE AGREEMENTS
The Fund may enter into reverse repurchase agreements and economically similar transactions in order to add leverage to the portfolio or for hedging or cash management purposes. A reverse repurchase agreement involves the sale of a portfolio-eligible security by the Fund, coupled with its agreement to repurchase the instrument at a specified time and price. Under a reverse repurchase agreement, the Fund continues to receive any principal and interest payments on the underlying security during the term of the agreement. Reverse repurchase agreements involve leverage risk and the risk that the market value of securities retained by the Fund may decline below the repurchase price of the securities sold by the Fund which it is obligated to repurchase. The Fund may (but is not required to) segregate assets determined to be liquid by the Manager in accordance with procedures established by the Board of Trustees, equal (on a daily mark-to-market basis) to its obligations under reverse repurchase agreements. To the extent that positions in reverse repurchase agreements are not so covered, such transactions would be subject to the Fund's limitations on borrowings, which would, among other things, restrict the aggregate of such transactions (plus any other borrowings) to one-third of the Fund's Managed Assets.
The Fund also may effect simultaneous purchase and sale transactions that are known as "sale-buybacks." A sale-buyback is similar to a reverse repurchase agreement, except that in a sale-buyback, the counterparty who purchases the security is entitled to receive any principal or interest payments made on the underlying security pending settlement of the Fund's repurchase of the underlying security.
SHORT SALES
The Fund may use short sales for investment and risk management purposes. A short sale is a transaction in which the Fund sells a security it does not own in anticipation that the market price of that security will decline.
When the Fund makes a short sale on a security, it must borrow the security sold short and deliver it to the broker-dealer through which it made the short sale as collateral for its obligation to deliver the security upon conclusion of the sale. The Fund may have to pay a fee to borrow particular securities and is often obligated to pay over any accrued interest and dividends on such borrowed securities.
If the price of the security sold short increases between the time of the short sale and the time the Fund replaces the borrowed security, the Fund will incur a loss; conversely, if the price declines, the Fund will realize a capital gain. Any gain will be decreased, and any loss increased, by the transaction costs described above. The successful use of short selling may be adversely affected by imperfect correlation between movements in the price of the security sold short and the securities being hedged.
To the extent that the Fund engages in short sales, it will provide collateral to the broker-dealer. A short sale is "against the box" to the extent that the Fund contemporaneously owns, or has the right to obtain at no added cost, securities identical to those sold short. The Fund may also engage in so-called "naked" short sales (I.E., short sales that are not "against the box"), in which case the Fund's losses could theoretically be unlimited, in cases where the Fund is unable for whatever reason to close out its short position. The Fund has the flexibility to engage in short selling to the extent permitted by the 1940 Act and rules and interpretations thereunder.
ILLIQUID SECURITIES
The Fund may invest up to 15% of its total assets in securities (excluding swaps) which are illiquid at the time of investment. Generally, an illiquid security is any security that cannot be sold within seven days in the ordinary course of business at approximately the amount at which the Fund has valued it. The Fund's investment in swaps will not be included as illiquid investments for purposes of determining compliance with the 15% limit on illiquid investments. However, the Fund's use of derivative instruments (other than swaps) will be limited by the Fund's 15% limit on illiquid investments to the extent such derivatives are determined to be illiquid.
The Fund's Board of Trustees has authorized the Fund to invest in legally restricted securities (such as those issued pursuant to an exemption from the registration requirements of the federal securities laws). To the extent the Manager determines there is a liquid institutional or other market for these securities, the Fund considers them to be liquid securities. An example of these securities are restricted securities that may be freely transferred among qualified institutional buyers under Rule 144A of the 1933 Act, and for which a liquid institutional market has developed. The Fund's Board of Trustees will review any determination by the Manager to treat a restricted security as a liquid security on an ongoing basis, including the Manager's assessment of current trading activity and the availability of reliable price information. In determining whether a restricted security is properly considered a liquid security, the Manager and the Fund's Board of Trustees will take into account the following factors: (i) the frequency of trades and quotes for the security; (ii) the number of dealers willing to buy or sell the security and the number of other potential buyers; (iii) dealer undertakings to make a market in the security; and (iv) the nature of the security and the nature of the marketplace trades (E.G., the time needed to dispose of the security, the method of soliciting offers, and the mechanics of transfer). To the extent the Fund invests in restricted securities that are deemed liquid, the general level of illiquidity in the Fund may increase if qualified institutional buyers become uninterested in buying these securities or the market for these securities contracts.
REAL ESTATE INVESTMENT TRUSTS
The Fund may invest in the equity or debt securities of publicly traded and private real estate investment trusts ("REITs"). A REIT is an entity that concentrates its assets in investments related to equity real estate and/or interests in mortgages on real estate. The shares of publicly traded REITs are traded on a national securities exchange or in the OTC market. Shares of private REITs are not publicly traded, and will be treated as illiquid securities. The Fund will limit its investments in illiquid securities, including private REITs, to 15% of its net assets.
OTHER INVESTMENT COMPANIES
The Fund may invest in the securities of other investment
companies to the extent that such investments are consistent with
the Fund's investment objective and policies and permissible
under the 1940 Act. Under the 1940 Act, the Fund may not acquire
the securities of other domestic or non-U.S. investment companies
if, as a result, (i) more than 10% of the Fund's total assets
would be invested in securities of other investment companies,
(ii) such purchase would result in more than 3% of the total
outstanding voting securities of any one investment company being
held by the Fund, or (iii) more than 5% of the Fund's total
assets would be invested in any one investment company. These
limitations do not apply to the purchase of shares of any
investment company in connection with a merger, consolidation,
reorganization or acquisition of substantially all the assets of
another investment company. Notwithstanding the foregoing, to the
extent permitted by exemptive orders received from the Securities
and Exchange Commission, the Fund may invest cash balances in
shares of other money market funds advised by the Manager or its
affiliates in amounts up to 25% of the Fund's total assets. The
Fund, as a holder of the securities of other investment
companies, will bear its pro rata portion of the other investment
companies' expenses, including advisory fees. These expenses are
in addition to the direct expenses of the Fund's own operations.
PORTFOLIO TRADING AND TURNOVER RATE
Portfolio trading may be undertaken to accomplish the investment objectives of the Fund in relation to actual and anticipated movements in interest rates. In addition, an investment may be sold and another of comparable quality purchased at approximately the same time to take advantage of what the Manager believes to be a temporary price disparity between the two investments. Temporary price disparities between two comparable investments may result from supply and demand imbalances where, for example, a temporary oversupply of certain bonds may cause a temporarily low price for such bonds, as compared with other bonds of like quality and characteristics. The Fund may also engage in short-term trading consistent with its investment objectives. Investments may be sold in anticipation of a market decline (a rise in interest rates) or purchased in anticipation of a market rise (a decline in interest rates) and later sold, or to recognize a gain.
A change in the investments held by the Fund is known as "portfolio turnover." The Manager manages the Fund without regard generally to restrictions on portfolio turnover. The use of certain derivative instruments with relatively short maturities may tend to exaggerate the portfolio turnover rate for the Fund. Trading in debt obligations does not generally involve the payment of brokerage commissions, but does involve indirect transaction costs. The use of futures contracts may involve the payment of commissions to futures commission merchants. High portfolio turnover (E.G., greater than 100%) involves correspondingly greater expenses to the Fund, including brokerage commissions or dealer mark-ups and other transaction costs on the sale of securities and reinvestments in other securities. The higher the rate of portfolio turnover of the Fund, the higher these transaction costs borne by the Fund generally will be. Transactions in the Fund's portfolio securities may result in realization of taxable capital gains (including short-term capital gains which are generally taxed to shareholders at ordinary income tax rates). The trading costs and tax effects associated with portfolio turnover may adversely affect the Fund's performance.
The portfolio turnover rate of the Fund is calculated by dividing (a) the lesser of purchases or sales of portfolio investments for the particular fiscal year by (b) the monthly average of the value of the portfolio investments owned by the Fund during the particular fiscal year. In calculating the rate of portfolio turnover, there is excluded from both (a) and (b) all investments, including options, whose maturities or expiration dates at the time of acquisition were one year or less.
WARRANTS
The Fund may invest in warrants to purchase securities. Debt obligations with warrants attached to purchase equity securities have many characteristics of convertible bonds and their prices may, to some degree, reflect the performance of the underlying stock. Debt obligations also may be issued with warrants attached to purchase additional debt obligations at the same coupon rate. A decline in interest rates would permit the Fund to buy additional bonds at the favorable rate or to sell the warrants at a profit. If interest rates rise, the warrants would generally expire with no value.
LOANS OF PORTFOLIO SECURITIES
To generate additional income, the Fund may lend certain of its portfolio securities to qualified banks and broker-dealers. For each loan, the borrower must maintain with the Fund's custodian collateral (consisting of any combination of cash, securities issued by the U.S. government and its agencies and instrumentalities, or irrevocable letters of credit) with a value at least equal to 100% of the current market value of the loaned securities. The Fund retains all or a portion of the interest received on investment of the cash collateral or receives a fee from the borrower. The Fund also continues to receive any distributions paid on the loaned securities. The Fund may terminate a loan at any time and obtain the return of the securities loaned within the normal settlement period for the security involved.
Where voting rights with respect to the loaned securities pass with the lending of the securities, the Manager intends to call the loaned securities to vote proxies, or to use other practicable and legally enforceable means to obtain voting rights, when the Manager has knowledge that, in its opinion, a material event affecting the loaned securities will occur or the Manager otherwise believes it necessary to vote. As with other extensions of credit, there are risks of delay in recovery or even loss of rights in collateral in the event of default or insolvency of the borrower. The Fund will loan its securities only to parties who meet creditworthiness standards approved by the Fund's Board of Trustees, I.E., banks or broker-dealers that the Manager has determined present no serious risk of becoming involved in bankruptcy proceedings within the time frame contemplated by the loan.
PARTICIPATION ON CREDITORS COMMITTEES
The Fund may from time to time participate on committees formed by creditors to negotiate with the management of financially troubled issuers of securities held by the Fund. Such participation may subject the Fund to expenses such as legal fees and may make the Fund an "insider" of the issuer for purposes of the federal securities laws, and therefore may restrict the Fund's ability to trade in or acquire additional positions in a particular security when it might otherwise desire to do so. Participation by the Fund on such committees also may expose the Fund to potential liabilities under the federal bankruptcy laws or other laws governing the rights of creditors and debtors. The Fund would participate on such committees only when the Manager believes that such participation is necessary or desirable to enforce the Fund's rights as a creditor or to protect the value of securities held by the Fund.
SHORT-TERM INVESTMENTS / TEMPORARY DEFENSIVE STRATEGIES
When the Manager believes market or economic conditions are unfavorable for investors, the Manager may invest up to 100% of the Fund's assets in a temporary defensive manner by holding all or a substantial portion of its assets in cash, cash equivalents or other high quality short-term investments. Temporary defensive investments generally may include U.S. government securities, commercial paper, repurchase agreements and other money market securities. The Manager also may invest in these types of securities or hold cash while looking for suitable investment opportunities or to maintain liquidity. In these circumstances, the Fund may be unable to achieve its investment goals.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The business of the Fund is managed under the direction of the Fund's Board of Trustees. Subject to the provisions of the Fund's Agreement and Declaration of Trust (the "Declaration"), its Bylaws and Delaware law, the Trustees have all powers necessary and convenient to carry out this responsibility, including the election and removal of the Fund's officers.
The Trustees and officers of the Fund, their ages, the position they hold with the Fund, their term of office and length of time served, a description of their principal occupations during the past five years, the number of portfolios in the fund complex that the Trustee oversees and any other directorships held by the Trustee are listed in the two tables immediately following. Except as shown, each Trustee's and officer's principal occupation and business experience for the last five years have been with the employer(s) indicated, although in some cases the Trustee may have held different positions with such employer(s). Unless otherwise indicated, the business address of the persons listed below is c/o Franklin Advisers, Inc., One Franklin Parkway, San Mateo, California 94403-1906.
INDEPENDENT TRUSTEES
TERM OF NUMBER OF
OFFICE (1)/ PORTFOLIOS
LENGTH IN FUND
NAME, AGE AND OF TIME COMPLEX
ADDRESS POSITION SERVED OVERSEEN OTHER
HELD WITH BY DIRECTORSHIPS
WITH FUND THE TRUSTEE HELD
FUND (2) (3)
------------------------------------------------------------------
FRANK H. ABBOTT, III Trustee 1 year 105 Abbott
(82) / Since Corporation
One Franklin Parkway inception
San Mateo, CA
94403-1906
------------------------------------------------------------------
|
------------------------------------------------------------------ ROBERT F. CARLSON Trustee 2 years 46 None (75) / Since One Franklin Parkway inception San Mateo, CA 94403-1906 ------------------------------------------------------------------ |
------------------------------------------------------------------ HARRIS J. ASHTON (71) Trustee 1 years 132 RBC Holdings, One Franklin Parkway / Since Inc. and Bar-S San Mateo, CA inception Foods 94403-1906 ------------------------------------------------------------------ |
------------------------------------------------------------------ S. JOSEPH FORTUNATO Trustee 2 years 133 None (71) / Since One Franklin Parkway inception San Mateo, CA 94403-1906 |
------------------------------------------------------------------ FRANK W.T. LAHAYE Trustee 3 years 105 Director, The (74) / Since California One Franklin Parkway inception Center for San Mateo, CA Land Recycling 94403-1906 (redevelopment). ------------------------------------------------------------------ |
------------------------------------------------------------------
GORDON S. MACKLIN Trustee 3 years 132 Director,
(75) / Since White
One Franklin Parkway inception Mountains
San Mateo, CA Insurance
94403-1906 Group, Ltd.
(holding
company);
Martek
Biosciences
Corporation;
MedImmune,
Inc.
(biotechnology);
Overstock.com
(Internet
services);
Spacelab, Inc.
(aerospace
services); and
FORMERLY,
Director, MCI
Communication
Corporation
(subsequently
known as MCI
WorldCom, Inc.
and WorldCom,
Inc.)
(communications
services)
(1988-2002).
------------------------------------------------------------------
|
INTERESTED TRUSTEES AND OFFICERS
TERM OF NUMBER OF
OFFICE (1)/ PORTFOLIOS
LENGTH IN FUND
NAME, AGE AND OF TIME COMPLEX
ADDRESS POSITION SERVED OVERSEEN OTHER
HELD WITH BY DIRECTORSHIPS
WITH FUND THE TRUSTEE HELD
FUND (2) (3)
------------------------------------------------------------------
*CHARLES B. JOHNSON Trustee 3 years / 132 None
(70) and Since
One Franklin Parkway Chairman inception
San Mateo, CA of the
94403-1906 Board
------------------------------------------------------------------
|
------------------------------------------------------------------ *RUPERT H. JOHNSON, Trustee 2 years / 115 None JR. (62) and Since One Franklin Parkway Senior inception San Mateo, CA Vice 94403-1906 President ------------------------------------------------------------------ |
------------------------------------------------------------------
CHRISTOPHER MOLUMPHY, President Since Not None
CFA (41) & Chief inception Applicable
One Franklin Parkway Executive
San Mateo, CA Officer
94403-1906 -
Investment
Management
------------------------------------------------------------------
|
------------------------------------------------------------------
JIMMY D. GAMBILL (55) Senior Since Not SWIFT
One Franklin Parkway Vice inception Applicable Securities
San Mateo, CA President Committee
94403-1906 & Chief
Executive
Officer
-
Finance
and
|
------------------------------------------------------------------ MURRAY L. SIMPSON (65) Vice Since Not None One Franklin Parkway President inception Applicable San Mateo, CA and 94403-1906 Secretary ------------------------------------------------------------------ |
GREGORY E. JOHNSON (42) Vice Since Not Fiduciary
One Franklin Parkway President inception Applicable Trust
San Mateo, CA Company
94403-1906 International;
Command
Audio
Corporation
------------------------------------------------------------------
|
------------------------------------------------------------------
KIMBERLEY MONASTERIO Treasurer Treasurer Not None
(39) and and Chief Applicable
One Franklin Parkway Chief Financial
San Mateo, CA Financial Officer
94403-1906 Officer since
inception
------------------------------------------------------------------
|
(1) The Fund's Trustees normally are elected to a three-year term of office. However, the Fund has a staggered Board and its Trustees are divided into three classes (Class I, Class II and Class III), which have initial terms of one, two and three years, respectively (see "Anti-Takeover and Other Provisions in the Declaration of Trust"). Trustees may be reelected.
(2) All of the Independent Trustees have served on the Boards of Trustees of other Funds in the Franklin Templeton Investments fund complex. Their respective length of time served as Trustees in the fund complex are as follows: Frank H. Abbott, III (since 1965); Robert F. Carlson (since 1982); S. Joseph Fortunato (since 1981); Frank W.T. Lahaye (since 1968); Harris J. Ashton (since 1976) and Gordon S. Macklin (since 1982).
(3) We base the number of portfolios on each separate series of the registered investment companies comprising the Franklin Templeton Investments fund complex. These portfolios have a common investment adviser or affiliated investment advisers.
* Charles B. Johnson and Rupert H. Johnson, Jr. are both considered to be interested persons of the Fund under the federal securities laws because each of them is an officer and director and major shareholder of Franklin Resources, Inc. Martin L. Flanagan is considered to be an interested person of the Fund under the federal securities laws due to his position as an officer and director of Franklin Resources, Inc.
For the Trustees who are considered to be an "interested person" of the Fund, as defined in the 1940 Act (the "Interested Trustees"), and the Fund's officers, positions held with affiliated persons or principal underwriters of the Fund are listed in the table above.
COMPENSATION
The Fund has no employees. Its officers are compensated by the Manager. The Fund pays an annual retainer of $7,500 and $810 per meeting attended to each of the Trustees who are not "interested persons" of the Fund as defined in the 1940 Act (the "Independent Trustees"). Independent Trustees who serve on the audit committee of the Trust and other funds in Franklin Templeton Investments receive a flat fee of $2,000 per committee meeting attended, a portion of which is allocated to the Fund. Independent Trustees also may serve as directors or trustees of other funds in Franklin Templeton Investments and may receive fees from these funds for their services. The fees payable to the Independent Trustees by the Fund are subject to reductions resulting from fee caps limiting the amount of fees payable to Trustees who serve on other boards within Franklin Templeton Investments. The following table provides the total fees paid to the Independent Trustees by the Fund and by Franklin Templeton Investments.
NUMBER OF BOARDS
TOTAL FEES IN FRANKLIN
ESTIMATED RECEIVED FROM TEMPLETON
FEES TO BE FRANKLIN INVESTMENTS ON
RECEIVED TEMPLETON WHICH EACH
NAME FROM THE FUND(1) INVESTMENTS(2) SERVES(3)
-----------------------------------------------------------------------
Frank H. Abbott, $7,500 $164,214 28
III
Robert F. Carlson $7,500 $95,070 14
Harris J. Ashton $7,500 $372,100 45
S. Joseph Fortunato $7,500 $372,941 46
Frank W.T. LaHaye $7,500 $164,214 28
Gordon S. Macklin $7,500 $363,512 45
|
(1) Since the Fund has not completed its first full fiscal year, Trustee compensation is estimated based upon future payments to be made by the Fund during the current fiscal year ending March 31, 2004.
(2) For the calendar year ended December 31, 2002.
(3) We base the number of boards on the number of registered investment companies in Franklin Templeton Investments. This number does not include the total number of series or portfolios within each investment company for which the board members are responsible.
Independent board members are reimbursed for expenses incurred in connection with attending board meetings, paid pro rata by each fund in Franklin Templeton Investments for which they serve as director or trustee. No officer or Trustee received any other compensation, including pension or retirement benefits, directly or indirectly from the Fund or other funds in Franklin Templeton Investments. Certain officers or Trustees who are shareholders of Franklin Resources, Inc. may be deemed to receive indirect remuneration by virtue of their participation, if any, in the fees paid to its subsidiaries.
TRUSTEE ELECTION
In accordance with the Fund's staggered board (see "Anti-Takeover and Other Provisions in the Declaration of Trust"), the Common Shareholders of the Fund will elect Trustees to fill the vacancies of Trustees whose terms expire at each annual meeting of Common Shareholders, unless any Preferred Shares are outstanding, in which event Preferred Shareholders, voting as a separate class, will elect two Trustees and the remaining Trustee shall be elected by Common Shareholders and Preferred Shareholders, voting together as a single class. Preferred Shareholders will be entitled to elect a majority of the Fund's Trustees under certain circumstances.
COMMITTEES OF THE BOARD OF TRUSTEES
The Board maintains two standing committees: the Audit Committee and the Nominating Committee. The Audit Committee is generally responsible for recommending the selection of the Trust's independent auditors, including evaluating their independence and meeting with such accountants to consider and review matters relating to the Trust's financial reports and internal accounting. The Audit Committee is comprised of the following Independent Trustees of the Trust: Frank H. Abbott, III and Robert F. Carlson and Frank W. T. LaHaye, Chairman. The Nominating Committee is comprised of the following Independent Trustees of the Trust: Frank H. Abbott, III, Harris J. Ashton, Robert F. Carlson, S. Joseph Fortunato, Frank W. T. LaHaye, and Gordon S. Macklin, Chairman
The Trust's Nominating Committee sets Trustees' fees and is responsible for the nomination of Trustees to the Board. When vacancies arise or elections are held, the Committee considers qualified nominees, including those recommended by shareholders who provide a written request to the Board, care of the Trust's address at: Franklin Templeton Limited Duration Income Trust, P.O. Box 997151, Sacramento, CA 95899-9983.
Since the Fund is not yet operational, the Audit Committee and the Nominating Committee have not convened any meetings prior to the date of this SAI.
SECURITIES OWNERSHIP
Franklin trustees historically have followed a policy of having substantial investments in one or more of the funds in Franklin Templeton Investments, as is consistent with their individual financial goals. In February 1998, this policy was formalized through adoption of a requirement that each board member invest one-third of fees received for serving as a director or trustee of a Templeton fund in shares of one or more Templeton funds and one-third of fees received for serving as a director or trustee of a Franklin fund in shares of one or more Franklin funds until the value of such investments equals or exceeds five times the annual fees paid such board member. Investments in the name of family members or entities controlled by a board member constitute fund holdings of such board member for purposes of this policy, and a three-year phase-in period applies to such investment requirements for newly elected Trustees. In implementing such policy, a board member's fund holdings existing on February 27, 1998, are valued as of such date with subsequent investments valued at cost.
The following tables provide the dollar range of equity securities beneficially owned by the Trustees of the Trust on December 31, 2002.
INDEPENDENT BOARD MEMBERS
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AGGREGATE DOLLAR RANGE
OF EQUITY SECURITIES
DOLLAR RANGE OWNED IN ALL FUNDS
OF EQUITY OVERSEEN BY THE TRUSTEE
SECURITIES IN THE IN THE FRANKLIN
NAME OF TRUSTEE FUND* TEMPLETON FUND COMPLEX
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Frank H. Abbott, None Over $100,000
III
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Robert F. Carlson None Over $100,000
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Harris J. Ashton None Over $100,000
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S. Joseph None Over $100,000
Fortunato
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Frank W.T. LaHaye None Over $100,000
------------------------------------------------------------------
Gordon S. Macklin None Over $100,000
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*Since the Fund was not operational as of December 31, 2002, the Trustees did not own any securities in the Fund as of that date.
INTERESTED TRUSTEES
------------------------------------------------------------------
AGGREGATE DOLLAR RANGE
OF EQUITY SECURITIES
DOLLAR RANGE OWNED IN ALL FUNDS
OF EQUITY OVERSEEN BY THE TRUSTEE
SECURITIES IN THE IN THE FRANKLIN
NAME OF TRUSTEE FUND* TEMPLETON FUND COMPLEX
------------------------------------------------------------------
Charles B. Johnson None Over $100,000
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Rupert H. None Over $100,000
Johnson, Jr.
------------------------------------------------------------------
Martin L. Flanagan None Over $100,000
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*Since the Fund was not operational as of December 31, 2002, the Trustees did not own any securities in the Fund as of that date.
None of the Independent Trustees or their immediate family members had beneficial ownership of any class of securities in an investment adviser 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 adviser or principal underwriter of the Fund as of December 31, 2002.
As of July 21, 2003, the Fund's officers and Trustees as a group owned less than 1% of the outstanding Common Shares.
As of July 21, 2003, the following persons owned of record the number of Common Shares noted below, representing the indicated percentage of the Fund's outstanding shares as of such date.
PERCENTAGE OF THE
NAME OF NUMBER OF COMMON FUND'S OUTSTANDING SHARES
PERSON/ENTITY SHARES AS OF JULY 21, 2003
------------- ----------------- -------------------------
None Not Applicable Not Applicable
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INVESTMENT ADVISER
INVESTMENT ADVISER
The Fund's investment adviser is Franklin Advisers, Inc. (the "Manager"), a direct wholly-owned subsidiary of Franklin Resources, Inc., a publicly owned company engaged in the financial services industry through its subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr. are the principal shareholders of Franklin Resources, Inc. As of June 30, 2003, the Manager and its affiliates had approximately $287 billion in assets under management.
The Manager serves as investment adviser to the Fund pursuant to an investment management agreement (the "Investment Management Agreement") between it and the Fund. The Manager provides investment research and portfolio management services, and selects the securities for the Fund to buy, hold or sell. The Manager also selects the brokers who execute the Fund's portfolio transactions. The Manager provides periodic reports to the Board, which reviews and supervises the Manager's investment activities. To protect the Fund, the Manager and its officers, directors and employees are covered by fidelity insurance.
CERTAIN TERMS OF THE INVESTMENT MANAGEMENT AGREEMENT
Under the terms of the Investment Management Agreement, subject to such policies as the Trustees of the Fund may determine, the Manager, at its expense, will furnish continuously an investment program for the Fund and will make investment decisions on behalf of the Fund and place all orders for the purchase and sale of portfolio securities subject always to the Fund's investment objectives, policies and restrictions.
Subject to the control of the Trustees, the Manager also manages, supervises and conducts the other affairs and business of the Fund, furnishes office space and equipment, provides bookkeeping and certain clerical services (excluding determination of the net asset value of the Fund, shareholder accounting services and the accounting services for the Fund) and pays all salaries, fees and expenses of officers and Trustees of the Fund who are affiliated with the Manager.
Pursuant to the Investment Management Agreement, the Fund has agreed to pay the Manager an annual fee, payable monthly, in an amount equal to 0.50% of the average daily value of the Fund's Managed Assets (including net assets attributable to Preferred Shares), for the services and facilities it provides. All fees and expenses are accrued daily and deducted before payment of dividends to investors.
Except as otherwise described in the Prospectus, the Fund pays, in addition to the investment management fee described above, all expenses not assumed by the Manager, including, without limitation, fees and expenses of the Independent Trustees , interest charges, taxes, brokerage commissions, expenses of issue of shares, fees and expenses of registering and qualifying the Fund and its classes of shares for distribution under federal and state laws and regulations, charges of custodians, auditing and legal expenses, expenses of determining net asset value of the Fund, reports to shareholders, expenses of meetings of shareholders, expenses of printing and mailing prospectuses, proxy statements and proxies to existing shareholders, and its proportionate share of insurance premiums and professional association dues or assessments. The Fund is also responsible for such nonrecurring expenses as may arise, including litigation in which the Fund may be a party, and other expenses as determined by the Trustees. The Fund may have an obligation to indemnify its officers and Trustees with respect to such litigation.
The Investment Management Agreement will continue in force with respect to the Fund for two years from its initial effective date, and from year to year thereafter, but only so long as its continuance is approved at least annually by (i) vote, cast in person at a meeting called for that purpose, of a majority of those Trustees who are not "interested persons" of the Manager or the Fund, and (ii) the majority vote of either the full Board of Trustees or the vote of a majority of the outstanding shares of all classes of the Fund. The Investment Management Agreement automatically terminates on assignment. The Investment Management Agreement may be terminated on not less than 60 days' notice by the Manager to the Fund or by the Fund to the Manager.
The Investment Management Agreement provides that the Manager shall not be subject to any liability in connection with the performance of its services thereunder in the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of its obligations and duties.
BASIS FOR APPROVAL OF THE INVESTMENT MANAGEMENT AGREEMENT
At a meeting on July 17, 2003, the Board, including a majority of the Independent Trustees, approved the Fund's Investment Management Agreement. In reaching this decision, the Board took into account information specifically furnished for the Board meeting and information furnished at a prior meeting. Information furnished included reports on the Manager's investment performance using similar investment strategies, expected expenses of the Fund, expected portfolio composition,, information about the scope and quality of services provided by the Manager and its affiliates, as well as periodic reporting procedures relating to compliance with the Fund's investment policies and restrictions. In considering such material, the Independent Trustees received assistance and advice from and met separately with independent counsel.
The Trustees met with the relevant investment advisory personnel from the Manager and considered information relating to the education, experience and number of investment professionals and other personnel who would provide services under the Investment Management Agreement. See "Management of the Fund" in the Prospectus and this SAI. The Trustees also took into account the time and attention to be devoted by senior management to the Fund and the other funds in the complex. The Trustees evaluated the level of skill required to manage the Fund and concluded that the human resources to be available at the Manager were appropriate to fulfill effectively the duties of the Manager on behalf of the Fund under the Investment Management Agreement. The Trustees also considered the business reputation of the Manager, its financial resources and professional liability insurance coverage and concluded that the Manager would be able to meet any reasonably foreseeable obligations under the Investment Management Agreement.
The Trustees received information concerning the investment philosophy and investment process to be applied by the Manager in managing the Fund. In this regard, the Trustees considered the Manager's in-house research capabilities as well as other resources available to the Manager's personnel, including research services available to the Manager as a result of securities transactions effected for the Fund and other investment advisory clients. The Trustees concluded that the Manager's investment process, research capabilities and philosophy were well suited to the Fund, given the Fund's investment objectives and policies.
The Trustees noted that the Manager's standard of care was comparable to that found in most investment company advisory agreements. See "--Certain Terms of the Investment Management Agreement" above. The Trustees concluded that the scope of the Manager's services to be provided to the Fund was consistent with the Fund's operational requirements, including, in addition to its investment objectives, compliance with the Fund's investment restrictions, tax and reporting requirements and related shareholder services.
The Trustees considered the quality of the services to be provided by the Manager to the Fund. The Trustees also evaluated the procedures of the Manager designed to fulfill its fiduciary duty to the Fund with respect to possible conflicts of interest, including its codes of ethics (regulating the personal trading of its officers and employees) (see "Code of Ethics" below), the procedures by which the Manager allocates trades among its various investment advisory clients, the integrity of the systems in place to ensure compliance with the foregoing and the record of the Manager in these matters. The Trustees also received information concerning standards of the Manager with respect to the execution of portfolio transactions. See "Portfolio Transactions" below.
The Trustees also gave substantial consideration to the fees payable under the Investment Management Agreement. The Trustees reviewed information concerning fees paid to investment advisers of similar funds. The Trustees evaluated the Manager's profitability with respect to the Fund, concluding that such profitability was not inconsistent with levels of profitability that had been determined by courts not to be "excessive." In evaluating the Fund's advisory fees, the Trustees also took into account the complexity of investment management for the Fund relative to other types of funds.
Based upon its review of such material and information together with such other information as it deemed relevant, the Board, including a majority of Independent Trustees, concluded that the initial approval of the Investment Management Agreement was appropriate and in the best interests of the Fund.
PORTFOLIO TRANSACTIONS
The Manager selects brokers and dealers to execute the Fund's portfolio transactions in accordance with criteria set forth in the management agreement and any directions that the Board may give.
When placing a portfolio transaction, the Manager seeks to obtain prompt execution of orders at the most favorable net price. For portfolio transactions on a securities exchange, the amount of commission paid is negotiated between the Manager and the broker executing the transaction. The determination and evaluation of the reasonableness of the brokerage commissions paid are based to a large degree on the professional opinions of the persons responsible for placement and review of the transactions. These opinions are based on the experience of these individuals in the securities industry and information available to them about the level of commissions being paid by other institutional investors of comparable size. The Manager will ordinarily place orders to buy and sell over-the-counter securities on a principal rather than agency basis with a principal market maker unless the Manager believes that trading on a principal basis will not provide best execution. Purchases of portfolio securities from underwriters will include a commission or concession paid by the issuer to the underwriter, and purchases from dealers will include a spread between the bid and ask price.
The Manager may pay certain brokers commissions that are higher than those another broker may charge, if the Manager determines in good faith that the amount paid is reasonable in relation to the value of the brokerage and research services it receives. This may be viewed in terms of either the particular transaction or the Manager's overall responsibilities to client accounts over which it exercises investment discretion. The services that brokers may provide to the Manager include, among others, supplying information about particular companies, markets, countries, or local, regional, national or transnational economies, statistical data, quotations and other securities pricing information, and other information that provides lawful and appropriate assistance to the Manager in carrying out its investment advisory responsibilities. These services may not always directly benefit the Fund. They must, however, be of value to the Manager in carrying out its overall responsibilities to its clients.
It is not possible to place a dollar value on the special executions or on the research services the Manager receives from dealers effecting transactions in portfolio securities. The allocation of transactions to obtain additional research services allows the Manager to supplement its own research and analysis activities and to receive the views and information of individuals and research staffs of other securities firms. As long as it is lawful and appropriate to do so, the Manager and its affiliates may use this research and data in their investment advisory capacities with other clients. If the Fund's officers are satisfied that the best execution is obtained, the sale of Fund shares, as well as shares of other funds in Franklin Templeton Investments, also may be considered a factor in the selection of broker-dealers to execute the Fund's portfolio transactions.
Because Franklin Templeton Distributors, Inc. ("Distributors") is a member of the National Association of Securities Dealers, Inc., it may sometimes receive certain fees when the Fund tenders portfolio securities pursuant to a tender-offer solicitation. To recapture brokerage for the benefit of the Fund, any portfolio securities tendered by the Fund may be tendered through Distributors if it is legally permissible to do so. In turn, the next management fee payable to the Manager will be reduced by the amount of any fees received by Distributors in cash, less any costs and expenses incurred in connection with the tender.
If purchases or sales of securities of the Fund and one or more other investment companies or clients supervised by the Manager are considered at or about the same time, transactions in these securities will be allocated among the several investment companies and clients in a manner deemed equitable to all by the Manager, taking into account the respective sizes of the funds and the amount of securities to be purchased or sold. In some cases this procedure could have a detrimental effect on the price or volume of the security so far as the Fund is concerned. In other cases it is possible that the ability to participate in volume transactions may improve execution and reduce transaction costs to the Fund.
Since the Fund was not operational prior to the date of this SAI, the Fund did not pay any brokerage commissions prior to that date. As of the date of this SAI, the Fund did not own securities of its regular broker-dealers.
CODE OF ETHICS
The Fund and the Manager have each adopted a code of ethics, as required by federal securities laws. Under the code of ethics, employees who are designated as access persons may engage in personal securities transactions, including transactions involving securities that are being considered for the Fund or that are currently held by the Fund, subject to certain general restrictions and procedures. The personal securities transactions of access persons of the Fund and its Manager will be governed by the code of ethics.
The Manager and its affiliates manage numerous other investment companies and accounts. The Manager may give advice and take action with respect to any of the other funds it manages, or for its own account, that may differ from action taken by the Manager on behalf of the Fund. Similarly, with respect to the Fund, the Manager is not obligated to recommend, buy or sell, or to refrain from recommending, buying or selling any security that the Manager and access persons, as defined by applicable federal securities laws, may buy or sell for its or their own account or for the accounts of any other fund. The Manager is not obligated to refrain from investing in securities held by the Fund or other funds it manages. The Fund and the Manager have text-only versions of the codes of ethics that can be viewed online or downloaded from the EDGAR Database on the SEC's internet web site at www.sec.gov. You may also review and copy those documents by visiting the SEC's Public Reference Room in Washington, DC. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 202-942-8090. In addition, copies of the codes of ethics may be obtained, after mailing the appropriate duplicating fee, by writing to the SEC's Public Reference Section, 450 5th Street, N.W., Washington, DC 20549-0102 or by e-mail request at publicinfo@sec.gov.
PROXY VOTING POLICY
The Board of Trustees of the Fund has delegated the authority to develop policies and procedures relating to proxy voting to the Manager. The Manager has adopted Proxy Voting Policies and Procedures, in which its administrative duties with respect to voting proxies has been assigned to the Proxy Group within Franklin Templeton Companies, LLC (the "Proxy Group"), an affiliate and wholly owned subsidiary of Franklin Resources, Inc.
All proxies received by the Proxy Group will be voted based upon the Manager's instructions and/or policies. To assist it in analyzing proxies, the Manager subscribes to Institutional Shareholder Services ("ISS"), an unaffiliated third party corporate governance research service that provides in-depth analyses of shareholder meeting agendas, vote recommendations, recordkeeping and vote disclosure services. Although ISS' analyses are thoroughly reviewed and considered in making a final voting decision, the Manager does not consider recommendations from ISS or any other third party to be determinative of the Manager's ultimate decision. The Manager votes proxies solely in the interests of the Fund and its shareholders. As a matter of policy, the officers, directors and employees of the Fund, the Manager and the Proxy Group will not be influenced by outside sources whose interests conflict with the interests of the Fund and its shareholders. In situations where the Manager perceives a material conflict of interest, the Manager may: disclose the conflict to the Fund's Board of Trustees; defer to the voting recommendation of the Fund's Board of Trustees, ISS or those of another independent third party provider of proxy services; or take such other action in good faith (in consultation with counsel) which would protect the interests of the Fund and its shareholders.
As a matter of practice, the votes with respect to most issues are cast in accordance with the position of the company's management. Each issue, however, is considered on its own merits, and the Manager will not support the position of the company's management in any situation where it deems that the ratification of company management's position would adversely affect the investment merits of owning that company's shares.
The Proxy Group is part of the Franklin Templeton Companies, LLC Corporate Legal Department and is overseen by legal counsel. For each shareholder meeting, a member of the Proxy Group will consult with the research analyst that follows the security and will provide the analyst with the meeting notice, agenda, ISS analyses, recommendations, and any other available information. The Manager's research analyst and relevant portfolio manager(s) are responsible for making the final voting decision based on their review of the agenda, ISS analysis, their knowledge of the company and any other information readily available. The Proxy Group must obtain voting instructions from the Manager's research analyst, relevant portfolio manager(s) and/or legal counsel prior to submitting the vote.
The Manager has adopted general proxy voting guidelines that are reviewed periodically by various members of the Manager's organization, including portfolio management, legal counsel and the Manager's officers, and are subject to change. These guidelines cannot provide an exhaustive list of all the issues that may arise nor can the Manager anticipate all future situations.
MANAGER'S PROXY VOTING POLICIES AND PRINCIPLES
The following is a summary of the proxy voting positions that the Manager has developed based on years of experience with proxy voting and corporate governance issues and reflects what the Manager believes to be good corporate governance and responsible behavior:
BOARD OF DIRECTORS. Directors are expected to be competent, accountable and responsive to shareholders. The Manager supports an independent board of directors, and prefers that key committees such as audit, nominating, and compensation committees be comprised of independent directors. The Manager will generally vote against company management efforts to classify a board and will generally support proposals to declassify the board of directors. The Manager may withhold votes from directors who have attended less than 75% of meetings without a valid reason. While generally in favor of separating Chairman and CEO positions, the Manager will review this issue as well as proposals to restore or provide for cumulative voting on a case-by-case basis taking into consideration other factors including the company's corporate governance guidelines and performance.
RATIFICATION OF AUDITORS. In light of several high profile accounting scandals, the Manager will closely scrutinize the role and performance of auditors. On a case-by-case basis, the Manager will examine proposals relating to non-audit relationships and non-audit fees. The Manager will also consider, on a case-by-case basis, proposals to rotate auditors, and will vote against the ratification of auditors when there is clear and compelling evidence of accounting irregularities or negligence.
MANAGEMENT AND DIRECTOR COMPENSATION. A company's equity-based compensation plan should be in alignment with its shareholders' long-term interests. The Manager evaluates plans on a case-by-case basis by considering several factors to determine whether the plan is fair and reasonable. Among other things, the Manager considers the ISS quantitative model utilized to assess such plans. The Manager will generally oppose plans that have the potential to be excessively dilutive, and will almost always oppose plans that are structured to allow the repricing of underwater options, or plans that have an automatic share replenishment "evergreen" feature. The Manager will generally support employee stock option plans in which the purchase price is at least 85% of fair market value, and when potential dilution is 10% or less.
Severance compensation arrangements will be reviewed on a case-by-case basis, although the Manager will generally oppose excessive "golden parachutes." The Manager will normally support proposals that require a percentage of directors' compensation to be in the form of common stock, as it aligns their interests with those of shareholders. The Manager will review on a case-by-case basis any shareholder proposals to adopt policies on expensing stock option plans, and will continue to closely monitor future developments in this area.
ANTI-TAKEOVER MECHANISMS AND RELATED ISSUES. The Manager generally opposes anti-takeover measures since they tend to reduce shareholder rights. However, as with all proxy issues, a research analyst will conduct an independent review of each anti-takeover proposal. On occasion, the Manager may vote with management when the research analyst has concluded that the proposal is not onerous and would not harm the Fund or its shareholders' interests. The Manager generally supports proposals that require shareholder rights' plans (poison pills) to be subject to a shareholder vote. The Manager will closely evaluate shareholder rights plans on a case-by-case basis to determine whether or not they warrant support. The Manager will generally vote against any proposal to issue stock that has unequal or subordinate voting rights. In addition, the Manager generally opposes any supermajority voting requirements as well as the payment of "greenmail." The Manager generally supports "fair price" provisions and confidential voting.
CHANGES TO CAPITAL STRUCTURE. The Manager realizes that a company's financing decisions have a significant impact on its shareholders, particularly when they involve the issuance of additional shares in the form of common or preferred stock or the assumption of additional debt. The Manager will carefully review, on a case-by-case basis, proposals by companies to increase authorized shares and the purpose for the increase. The Manager will generally not vote in favor of dual-class capital structures to increase the number of authorized shares where that class of stock would have superior voting rights. The Manager will generally vote in favor of the issuance of preferred stock in cases where the company specifies the voting, dividend, conversion and other rights of such stock and the terms of the preferred stock issuance are deemed reasonable. The Manager will review proposals seeking preemptive rights on a case-by-case basis.
MERGERS AND CORPORATE RESTRUCTURING. Mergers and acquisitions will be subject to careful review by the research analyst to determine whether each will be beneficial to shareholders. The Manager will analyze various economic and strategic factors in making the final decision on a merger or acquisition. Corporate restructuring and reincorporation proposals are also subject to a thorough examination on a case-by-case basis.
SOCIAL AND CORPORATE POLICY ISSUES. As a fiduciary, the Manager is primarily concerned about the financial interests of the Fund and its shareholders. The Manager will generally give management discretion with regard to social, environmental and ethical issues, although the Manager may vote in favor of those that are believed to have significant economic benefits or implications for the Fund and its shareholders.
GLOBAL CORPORATE GOVERNANCE. The Manager is a global manager of investments in countries worldwide. Many of the tenets discussed above are applied to proxy voting decisions for international companies. However, the Manager must be more flexible in these instances and must be mindful of the varied market practices of each region. As experienced global money managers, the Manager's analysts are skilled in understanding the complexities of the regions in which they specialize and are trained to analyze proxy issues germane to their regions.
The Proxy Group is fully cognizant of its responsibility to process proxies and maintain proxy records pursuant to SEC rules and regulations. In addition, the Manager understands its fiduciary duty to vote Fund proxies and that proxy voting decisions may affect the value of shareholdings. Therefore, the Manager will attempt to process every vote it receives for all domestic and foreign proxies. However, there may be situations in which the Manager cannot process proxies, for example, where a meeting notice was received too late, or sell orders preclude the ability to vote. In addition, the Manager may abstain from voting under certain circumstances or vote against items such as "Other Business" when the Manager is not given adequate information from the company.
The Proxy Group is responsible for maintaining the documentation that supports the Manager's voting position. The Proxy Group is also responsible for maintaining appropriate proxy voting supporting documentation and records. Such records may include, but are not limited to, a copy of all materials returned to the issuer and/or its agent, the documentation described above, listings of proxies voted by issuer and by client, and any other relevant information. The Proxy Group may use an outside service such as ISS to support this function. All files will be retained for at least five years, the first two of which will be on-site. Shareholders may view the Manager's complete proxy voting policies and procedures on-line at www.franklintempleton.com. Alternatively, shareholders may request copies of the Fund's complete proxy voting policies and procedures free of charge by calling the Proxy Group collect at 1-954/847-2268 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Fund's proxy voting records will also be made available on-line at www.franklintempleton.com and posted on the SEC website at http://www.sec.gov no later than August 31, 2004 and will reflect the prior 12 months' voting record. In addition, the Proxy Group is responsible for ensuring that the proxy voting policies, procedures and records of the Manager are made available as required by law and is responsible for overseeing the filing of such policies, procedures and Fund voting records with the SEC.
DISTRIBUTIONS
As described in the Prospectus, initial distributions to Common Shareholders are expected to be declared within approximately 45 days, and paid within approximately 60 to 75 days, from the completion of the offering of the Common Shares, depending on market conditions. To permit the Fund to maintain a more stable monthly distribution, the Fund will initially, and may from time to time thereafter, distribute less than the entire amount of net investment income earned in a particular period. Such undistributed net investment income would be available to supplement future distributions, including distributions that might otherwise have been reduced by a decrease in the Fund's monthly net income due to fluctuations in investment income or expenses, or due to an increase in the dividend rate on the Fund's outstanding Preferred Shares. As a result, the distributions paid by the Fund for any particular period may be more or less than the amount of net investment income actually earned by the Fund during such period. Undistributed net investment income will be added to the Fund's net asset value and, correspondingly, distributions from undistributed net investment income will be deducted from the Fund's net asset value.
For tax purposes, the Fund is currently required to allocate net capital gain and other taxable income, if any, between and among Common Shares and any series of Preferred Shares in proportion to total dividends paid to each class for the year in which such net capital gain or other taxable income is realized. For information relating to the impact of the issuance of Preferred Shares on the distributions made by the Fund to Common Shareholders, see the Prospectus under "Preferred Shares and Related Leverage."
While any Preferred Shares are outstanding, the Fund may not declare any cash dividend or other distribution on its Common Shares unless at the time of such declaration (1) all accumulated dividends on the Preferred Shares have been paid and (2) the net asset value of the Fund's portfolio (determined after deducting the amount of such dividend or other distribution) is at least 200% of the liquidation value of any outstanding Preferred Shares. This latter limitation on the Fund's ability to make distributions on its Common Shares could cause the Fund to incur income and excise tax and, under certain circumstances, impair the ability of the Fund to maintain its qualification for taxation as a regulated investment company. See "Tax Matters."
DESCRIPTION OF SHARES
COMMON SHARES
The Fund's Declaration authorizes the issuance of an unlimited number of Common Shares. All Common Shares of the Fund have equal rights as to the payment of dividends and the distribution of assets upon liquidation of the Fund. Common Shares will, when issued, be fully paid and, subject to matters discussed in "Anti-Takeover and Other Provisions in the Declaration of Trust--Shareholder Liability" below, non-assessable, and will have no pre-emptive or conversion rights or rights to cumulative voting. At any time when the Fund's Preferred Shares are outstanding, Common Shareholders will not be entitled to receive any distributions from the Fund unless all accrued dividends on Preferred Shares have been paid, and unless asset coverage (as defined in the 1940 Act) with respect to Preferred Shares would be at least 200% after giving effect to such distributions. See "--Preferred Shares" below.
The Common Shares are expected to be listed on the American Stock Exchange. The Fund intends to hold annual meetings of shareholders so long as the Common Shares are listed on a national securities exchange and such meetings are required as a condition to such listing.
Shares of closed-end investment companies may frequently trade at prices lower than net asset value. Shares of closed-end investment companies like the Fund that may invest a significant portion of their assets in below investment-grade debt obligations have during some periods traded at prices higher than net asset value and during other periods traded at prices lower than net asset value. There can be no assurance that Common Shares or shares of other similar funds will trade at a price higher than net asset value in the future. Net asset value will be reduced immediately following the offering of Common Shares after payment of the sales load and organization and offering expenses and immediately following any offering of Preferred Shares by the costs of that offering paid by the Fund. Net asset value generally increases when interest rates decline, and decreases when interest rates rise, and these changes are likely to be greater in the case of a fund, such as the Fund, having a leveraged capital structure. Whether investors will realize gains or losses upon the sale of Common Shares will not depend upon the Fund's net asset value but will depend entirely upon whether the market price of the Common Shares at the time of sale is above or below the original purchase price for the shares. Since the market price of the Fund's Common Shares will be determined by factors beyond the control of the Fund, the Fund cannot predict whether the Common Shares will trade at, below, or above net asset value or at, below or above the initial public offering price. Accordingly, the Common Shares are designed primarily for long-term investors, and investors in the Common Shares should not view the Fund as a vehicle for trading purposes. See "Repurchase of Common Shares; Conversion to Open-End Fund" and the Prospectus under "Preferred Shares and Related Leverage" and "Description of Shares--Common Shares."
PREFERRED SHARES
The Declaration authorizes the issuance of an unlimited number of Preferred Shares. The Preferred Shares may be issued in one or more classes or series, with such par value and rights as determined by the Board of Trustees of the Fund, by action of the Board of Trustees without the approval of the Common Shareholders.
The Fund's Board of Trustees has indicated its intention to authorize an offering of Preferred Shares (representing approximately 33%, but not more than 38%, of the Fund's Managed Assets immediately after the time the Preferred Shares are issued) within approximately one to three months after completion of the offering of Common Shares, subject to market conditions and to the Board's continuing belief that leveraging the Fund's capital structure through the issuance of Preferred Shares is likely to achieve the benefits to the Common Shareholders described in the Prospectus and this SAI. Although the terms of the Preferred Shares, including their dividend rate, voting rights, liquidation preference and redemption provisions, will be determined by the Board of Trustees (subject to applicable law and the Declaration) if and when it authorizes a Preferred Shares offering, the Board has stated that the initial series of Preferred Shares would likely pay cumulative dividends at relatively short-term periods (such as seven days), by providing for the periodic redetermination of the dividend rate through an auction or remarketing procedure. The liquidation preference, preference on distribution, voting rights and redemption provisions of the Preferred Shares are expected to be as stated below.
As used in this SAI, unless otherwise noted, the Fund's "net assets" include assets of the Fund attributable to any outstanding Preferred Shares, with no deduction for the liquidation preference of the Preferred Shares. Solely for financial reporting purposes, however, the Fund is required to exclude the liquidation preference of Preferred Shares from "net assets," so long as the Preferred Shares have redemption features that are not solely within the control of the Fund. For all regulatory and tax purposes, the Fund's Preferred Shares will be treated as stock (rather than indebtedness).
LIMITED ISSUANCE OF PREFERRED SHARES. Under the 1940 Act, the Fund could issue Preferred Shares having a total liquidation value (original purchase price of the shares being liquidated plus any accrued and unpaid dividends) of up to one-half of the value of the total assets of the Fund, less liabilities. "Liquidation value" means the original purchase price of the shares being liquidated plus any accrued and unpaid dividends. To the extent that the Fund has outstanding any senior securities representing indebtedness (such as through the use of reverse repurchase agreements, swaps and other derivative instruments that constitute senior securities), the aggregate amount of such senior securities will be added to the total liquidation value of any outstanding Preferred Shares for purposes of this asset coverage requirement. If the total liquidation value of the Preferred Shares plus the aggregate amount of such other senior securities were ever more than one-half of the value of the Fund's total net assets, the Fund would not be able to declare dividends on the Common Shares until such liquidation value and/or aggregate amount of other senior securities, as a percentage of the Fund's total assets, were reduced.
The Fund presently intends to issue Preferred Shares representing approximately 33% (but not more than 38%) of the Fund's Managed Assets (calculated after their issuance) approximately one to three months after the completion of the offering of Common Shares. This higher than required margin of net asset value provides a cushion against later fluctuations in the value of the Fund's portfolio and will subject Common Shareholders to less income and net asset value volatility than if the Fund were more highly leveraged through Preferred Shares. No assurance can be given that this cushion will not be reduced or eliminated. It also gives the Fund flexibility to utilize other forms of leverage in addition to Preferred Shares from time to time in accordance with the 1940 Act asset coverage requirements (such as reverse repurchase agreements, swaps and other derivatives) that may be more efficient or cost effective sources of leverage than Preferred Shares under the circumstances. The Fund will segregate liquid assets against or otherwise cover its future obligations under such other forms of leverage, to the extent that, immediately after entering into such a transaction, the Fund's future commitments that it has not segregated liquid assets against or otherwise covered, together with any outstanding Preferred Shares, would exceed 38% of the Fund's Managed Assets. The Fund intends to purchase or redeem Preferred Shares, if necessary, to keep the liquidation value of the Preferred Shares plus the aggregate amount of other senior securities representing indebtedness below one-half of the value of the Fund's total net assets.
DISTRIBUTION PREFERENCE. The Preferred Shares will have complete priority over the Common Shares as to distribution of assets.
LIQUIDATION PREFERENCE. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Fund, Preferred Shareholders will be entitled to receive a preferential liquidating distribution (expected to equal the original purchase price per share plus accumulated and unpaid dividends thereon, whether or not earned or declared) before any distribution of assets is made to holders of Common Shares. After payment of the full amount of the liquidating distribution to which they are entitled, Preferred Shareholders will not be entitled to any further participation in any distribution of assets by the Fund. A consolidation or merger of the Fund with or into any Delaware statutory trust or corporation or a sale of all or substantially all of the assets of the Fund shall not be deemed to be a liquidation, dissolution or winding up of the Fund.
VOTING RIGHTS. In connection with any issuance of Preferred Shares, the Fund must comply with Section 18(i) of the 1940 Act which requires, among other things, that Preferred Shares be voting shares. Except as otherwise provided in the Declaration or the Fund's Bylaws or otherwise required by applicable law, Preferred Shareholders will vote together with Common Shareholders as a single class.
In connection with the election of the Fund's Trustees, Preferred Shareholders, voting as a separate class, will also be entitled to elect two of the Fund's Trustees, and the remaining Trustees shall be elected by Common Shareholders and Preferred Shareholders, voting together as a single class. In addition, if at any time dividends on the Fund's outstanding Preferred Shares shall be unpaid in an amount equal to two full years' dividends thereon, the holders of all outstanding Preferred Shares, voting as a separate class, will be entitled to elect a majority of the Fund's Trustees until all dividends in arrears have been paid or declared and set apart for payment.
The affirmative vote of the holders of a majority of the outstanding Preferred Shares, voting as a separate class, shall be required to approve any action requiring a vote of security holders under Section 13(a) of the 1940 Act including, among other things, changes in the Fund's investment objectives, the conversion of the Fund from a closed-end to an open-end company, or changes in the investment restrictions described as fundamental policies under "Investment Restrictions." The class or series vote of Preferred Shareholders described above shall in each case be in addition to any separate vote of the requisite percentage of Common Shares and Preferred Shares necessary to authorize the action in question.
The foregoing voting provisions will not apply with respect to the Fund's Preferred Shares if, at or prior to the time when a vote is required, such shares shall have been (1) redeemed or (2) called for redemption and sufficient funds shall have been deposited in trust to effect such redemption.
REDEMPTION, PURCHASE AND SALE OF PREFERRED SHARES BY THE FUND. The terms of the Preferred Shares may provide that they are redeemable at certain times, in whole or in part, at the original purchase price per share plus accumulated dividends, that the Fund may tender for or purchase Preferred Shares and that the Fund may subsequently resell any shares so tendered for or purchased. Any redemption or purchase of Preferred Shares by the Fund will reduce the leverage applicable to Common Shares, while any resale of shares by the Fund will increase such leverage.
The discussion above describes the present intention of the Board of Trustees of the Fund with respect to a possible offering of Preferred Shares. If the Board of Trustees determines to authorize such an offering, the terms of the Preferred Shares may be the same as, or different from, the terms described above, subject to applicable law and the Declaration.
ANTI-TAKEOVER AND OTHER PROVISIONS IN THE DECLARATION OF TRUST
SHAREHOLDER LIABILITY
The Declaration contains an express disclaimer of shareholder liability for acts or obligations of the Fund and requires that notice of such disclaimer be given in each agreement, obligation or instrument entered into or executed by the Fund or the Trustees. The Declaration also provides for indemnification out of the Fund's property for all loss and expense of any shareholder held personally liable on account of being or having been a shareholder. Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which such disclaimer is inoperative or the Fund is unable to meet its obligations, and thus should be considered remote.
ANTI-TAKEOVER PROVISIONS
As described below, the Declaration includes provisions that could have the effect of limiting the ability of other entities or persons to acquire control of the Fund or to change the composition of its Board of Trustees, and could have the effect of depriving shareholders of opportunities to sell their shares at a premium over prevailing market prices by discouraging a third party from seeking to obtain control of the Fund.
The Fund's Trustees are divided into three classes (Class I, Class II and Class III), having initial terms of one, two and three years, respectively. At each annual meeting of shareholders, the term of one class will expire and each Trustee elected to that class will hold office for a term of three years. The classification of the Board of Trustees in this manner could delay for an additional year the replacement of a majority of the Board of Trustees. In addition, the Declaration provides that a Trustee may be removed only for cause upon the vote of at least seventy-five percent (75%) of the outstanding shares of the classes or series of shares entitled to vote for the election of such Trustee.
The Declaration requires the approval of the Board of Trustees and the affirmative vote of the holders of 75% of the Fund's shares (including Common and Preferred Shares) entitled to vote to approve, adopt or authorize certain Fund transactions not in the ordinary course of business, including (i) a merger or consolidation or sale or transfer of the fund expenses, (ii) conversion of the Fund from a closed-end to an open-end investment company, and (iii) termination of the Fund, unless such action was previously approved, adopted or authorized by the affirmative vote of 66 2/3% of the Board of Trustees, in which case such action must be approved by the holders of a "majority of the outstanding" Common Shares and any Preferred Shares voting together as a single class, and of the holders of a "majority of the outstanding" Preferred Shares voting as a separate class. A "majority of the outstanding" shares (whether voting together as a single class or voting as a separate class) means (i) 67% or more of such shares present at a meeting, if the holders of more than 50% of those shares are present or represented by proxy, or (ii) more than 50% of such shares, whichever is less. See "Anti-Takeover and Other Provisions in the Declaration of Trust" in the SAI for a more detailed summary of these provisions.
As described above, in certain circumstances, the Declaration also imposes shareholder voting requirements that are more demanding than those required under the 1940 Act in order to authorize a conversion of the Fund from a closed-end to an open-end investment company. See "Repurchase of Common Shares; Conversion to Open-End Fund" below.
As noted, the voting provisions described above could have the effect of depriving Common Shareholders of an opportunity to sell their Common Shares at a premium over prevailing market prices by discouraging a third party from seeking to obtain control of the Fund in a tender offer or similar transaction. In the view of the Fund's Board of Trustees, however, these provisions offer several possible advantages, including: (1) requiring persons seeking control of the Fund to negotiate with its management regarding the price to be paid for the amount of Common Shares required to obtain control; (2) promoting continuity and stability; and (3) enhancing the Fund's ability to pursue long-term strategies that are consistent with its investment objectives and management policies. The Board of Trustees has determined that the voting requirements described above, which are generally greater than the minimum requirements under the 1940 Act, are in the best interests of the Fund's Common Shareholders generally.
The foregoing is intended only as a summary and is qualified in its entirety by reference to the full text of the Declaration and the Fund's Bylaws, both of which have been filed as exhibits to the Fund's registration statement on file with the SEC.
LIABILITY OF TRUSTEES
The Declaration provides that the obligations of the Fund are not binding upon the Trustees of the Fund individually, but only upon the assets and property of the Fund, and that the Trustees shall not be liable for errors of judgment or mistakes of fact or law. Nothing in the Declaration, however, protects a Trustee against any liability to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office.
REPURCHASE OF COMMON SHARES; CONVERSION TO OPEN-END FUND
The Fund is a closed-end investment company and as such its shareholders will not have the right to cause the Fund to redeem their shares. Instead, the Fund's Common Shares will trade in the open market at a price that will be a function of several factors, including dividend levels (which are in turn affected by expenses), net asset value, call protection, price, dividend stability, relative demand for and supply of such shares in the market, general market and economic conditions and other factors. Shares of a closed-end investment company may frequently trade at prices lower than net asset value. The Fund's Board of Trustees regularly monitors the relationship between the market price and net asset value of the Common Shares. If the Common Shares were to trade at a substantial discount to net asset value for an extended period of time, the Board may consider the repurchase of its Common Shares on the open market or in private transactions, or the making of a tender offer for such shares. There can be no assurance, however, that the Board of Trustees will decide to take or propose any of these actions, or that share repurchases or tender offers, if undertaken, will reduce market discount. The Fund has no present intention to repurchase its Common Shares and would do so only in the circumstances described in this section.
Notwithstanding the foregoing, at any time when the Fund's Preferred Shares are outstanding, the Fund may not purchase, redeem or otherwise acquire any of its Common Shares unless (1) all accrued dividends on Preferred Shares have been paid and (2) at the time of such purchase, redemption or acquisition, the net asset value of the Fund's portfolio (determined after deducting the acquisition price of the Common Shares) is at least 200% of the liquidation value of the outstanding Preferred Shares (expected to equal the original purchase price per share plus any accrued and unpaid dividends thereon).
Subject to its investment limitations, the Fund may borrow to finance the repurchase of shares or to make a tender offer. Interest on any borrowings to finance share repurchase transactions or the accumulation of cash by the Fund in anticipation of share repurchases or tenders will reduce the Fund's net income. Any share repurchase, tender offer or borrowing that might be approved by the Board of Trustees would have to comply with the Securities Exchange Act of 1934, as amended, and the 1940 Act and the rules and regulations thereunder.
The Fund's Board of Trustees may also from time to time consider submitting to the holders of the shares of beneficial interest of the Fund a proposal to convert the Fund to an open-end investment company. In determining whether to exercise its sole discretion to submit this issue to shareholders, the Board of Trustees would consider all factors then relevant, including the relationship of the market price of the Common Shares to net asset value, the extent to which the Fund's capital structure is leveraged and the possibility of re-leveraging, the spread, if any, between the yields on securities in the Fund's portfolio and interest and dividend charges on Preferred Shares issued by the Fund and general market and economic conditions.
The Declaration requires the affirmative vote or consent of a majority of the Board of Trustees and the affirmative vote or consent of the holders of at least seventy-five percent (75%) of the Fund's shares (including Common and Preferred Shares) entitled to vote to approve, unless the conversion has been authorized by a the affirmative vote or consent of two-thirds (66 2/3%) of the Board of Trustees, in which case shareholders would have only the minimum voting rights required by the 1940 Act with respect to the conversion.
This seventy-five percent (75%) shareholder approval requirement is higher than is required under the 1940 Act. In the event that a conversion is approved by two-thirds (66 2/3%) of the Trustees as described above, the minimum shareholder vote required under the 1940 Act would be necessary to authorize the conversion. Currently, the 1940 Act would require approval of the holders of a "majority of the outstanding" Common Shares and, if issued, Preferred Shares voting together as a single class, and the holders of a "majority of the outstanding" Preferred Shares voting as a separate class, in order to authorize a conversion.
If the Fund converted to an open-end company, it would be required to redeem all Preferred Shares then outstanding (requiring in turn that it liquidate a portion of its investment portfolio), and the Fund's Common Shares likely would no longer be listed on the American Stock Exchange. Shareholders of an open-end investment company may require the company to redeem their shares on any business day (except in certain circumstances as authorized by or under the 1940 Act) at their net asset value, less such redemption charge, if any, as might be in effect at the time of redemption. In order to avoid maintaining large cash positions or liquidating favorable investments to meet redemptions, open-end companies typically engage in a continuous offering of their shares. Open-end companies are thus subject to periodic asset in-flows and out-flows that can complicate portfolio management.
The repurchase by the Fund of its shares at prices below net asset value will result in an increase in the net asset value of those shares that remain outstanding. However, there can be no assurance that share repurchases or tenders at or below net asset value will result in the Fund's shares trading at a price equal to their net asset value. Nevertheless, the fact that the Fund's shares may be the subject of repurchase or tender offers at net asset value from time to time, or that the Fund may be converted to an open-end company, may reduce any spread between market price and net asset value that might otherwise exist.
In addition, a purchase by the Fund of its Common Shares will decrease the Fund's total assets. This would likely have the effect of increasing the Fund's expense ratio. Any purchase by the Fund of its Common Shares at a time when Preferred Shares are outstanding will increase the leverage applicable to the outstanding Common Shares then remaining. See the Prospectus under "Risks--Leverage Risk."
Before deciding whether to take any action if the Fund's Common Shares trade below net asset value, the Board of Trustees would consider all relevant factors, including the extent and duration of the discount, the liquidity of the Fund's portfolio, the impact of any action that might be taken on the Fund or its shareholders and market considerations. Based on these considerations, even if the Fund's shares should trade at a discount, the Board of Trustees may determine that, in the interest of the Fund and its shareholders, no action should be taken.
TAX MATTERS
TAXATION OF THE FUND. The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). In order to qualify for the special tax treatment accorded regulated investment companies and their shareholders, the Fund must, among other things:
(a) derive at least 90% of its gross income from dividends, interest, payments with respect to certain securities loans, and gains from the sale of stock, securities or foreign currencies, or other income (including but not limited to gains from options, futures, or forward contracts) derived with respect to its business of investing in such stock, securities, or currencies;
(b) distribute with respect to each taxable year at least 90% of the sum of its investment company taxable income (as that term is defined in the Code without regard to the deduction for dividends paid - generally taxable ordinary income and the excess, if any, of net short-term capital gains over net long-term capital losses) and net tax-exempt interest income for such year; and
(c) diversify its holdings so that, at the end of each quarter
of the Fund's taxable year, (i) at least 50% of the market
value of the Fund's total assets is represented by cash and
cash items, U.S. Government securities, securities of other
regulated investment companies, and other securities limited
in respect of any one issuer to a value not greater than 5%
of the value of the Fund's total assets and not more than
10% of the outstanding voting securities of such issuer, and
(ii) not more than 25% of the value of the Fund's total
assets is invested in the securities (other than those of
the U.S. Government or other regulated investment companies)
of any one issuer or of two or more issuers which the Fund
controls and which are engaged in the same, similar, or
related trades or businesses. If the Fund qualifies as a
regulated investment company that is accorded special tax
treatment, the Fund will not be subject to federal income
tax on income distributed in a timely manner to its
shareholders in the form of dividends (including Capital
Gain Dividends, as defined below).
If the Fund failed to qualify as a regulated investment company accorded special tax treatment in any taxable year, the Fund would be subject to tax on its taxable income at corporate rates, and all distributions from earnings and profits, including any distributions of net tax-exempt income and net long-term capital gains, generally would be taxable to shareholders as corporate dividends. Such distributions generally would be eligible (i) to be treated as qualified dividend income in the case of individual shareholders and (ii) for the dividends received deduction in the case of corporate shareholders. In addition, the Fund could be required to recognize unrealized gains, pay substantial taxes and interest and make substantial distributions before requalifying as a regulated investment company that is accorded special tax treatment.
The Fund intends to distribute at least annually to its shareholders all or substantially all of its investment company taxable income and any net tax-exempt interest, and may distribute its net capital gain. The Fund may also retain for investment its net capital gain. If the Fund does retain any net capital gain or any investment company taxable income, it will be subject to tax at regular corporate rates on the amount retained. If the Fund retains any net capital gain, it may designate the retained amount as undistributed capital gains in a notice to its shareholders who, if subject to federal income tax on long-term capital gains, (i) will be required to include in income for federal income tax purposes, as long-term capital gain, their shares of such undistributed amount, and (ii) will be entitled to credit their proportionate shares of the tax paid by the Fund on such undistributed amount against their federal income tax liabilities, if any, and to claim refunds to the extent the credit exceeds such liabilities. For federal income tax purposes, the tax basis of shares owned by a shareholder of the Fund will be increased by an amount equal under current law to the difference between the amount of undistributed capital gains included in the shareholder's gross income and the tax deemed paid by the shareholder under clause (ii) of the preceding sentence.
Certain investment strategies of the Fund, such as hedging, the acquisition of securities with original issue discount, the acquisition of higher risk securities and certain other acquisitions may generate more taxable income than book income and may affect the timing and amount of income that must be distributed to the Fund's shareholders. In order to generate sufficient cash to make the requisite distributions, the Fund may be required to sell securities in its portfolio that it otherwise would have continued to hold.
If the Fund fails to distribute in a calendar year at least an amount equal to the sum of 98% of its ordinary income for such year and 98% of its capital gain net income for the one-year period ending October 31 of such year, plus any retained amount from the prior year, the Fund will be subject to a 4% excise tax on the undistributed amounts. For these purposes, the Fund will be treated as having distributed any amount for which it is subject to income tax. A dividend paid to shareholders in January of a year generally is deemed to have been paid by the Fund on December 31 of the preceding year, if the dividend was declared and payable to shareholders of record on a date in October, November or December of that preceding year. The Fund intends generally to make distributions sufficient to avoid imposition of the 4% excise tax.
FUND DISTRIBUTIONS. Distributions from the Fund other than distributions of net capital gains and qualified dividend income generally will be taxable to shareholders as ordinary income to the extent of the Fund's earnings and profits. Distributions of net capital gains (I.E., the excess of net gains from the sale of capital assets held more than one year over net losses from the sale of capital assets held for not more than one year) properly designated as capital gain dividends ("Capital Gain Dividends") will be taxable to shareholders as long-term capital gain, regardless of how long a shareholder has held the shares in the Fund. Long-term capital gain rates for individuals have been temporarily reduced to 15% (with lower rates for individuals in the 10% and 15% rate brackets) for taxable years beginning on or before December 31, 2008.
Dividends (including Capital Gain Dividends and
distributions of qualified dividend income) will be taxable as
described above whether received in cash or in shares. A
shareholder whose distributions are reinvested in shares will be
treated as having received a dividend equal to either (i) the
fair market value of the new shares issued to the shareholder, or
(ii) if the shares are trading below net asset value, the amount
of cash allocated to the shareholder for the purchase of shares
on its behalf in the open market.
For taxable years beginning on or before December 31, 2008, distributions of investment income designated by the Fund as derived from qualified dividend income will be taxed in the hands of individuals at the rates applicable to long-term capital gain, provided holding period and other requirements are met. Such distributions, however, even though taxed to individuals at the same rate as long-term capital gains, are not the equivalent of long-term capital gains, which can potentially be fully offset by the capital losses of a taxpayer, whereas qualified dividend income may be offset by a maximum of $3000 in capital losses in any taxable year. The Fund does not expect a significant portion of Fund distributions to be derived from qualified dividend income.
Dividends of net investment income received by corporate shareholders of the Fund will qualify for the 70% dividends received deduction generally available to corporations to the extent of the amount of qualifying dividends received by the Fund from domestic corporations for the taxable year. It is not expected that any significant percentage of the Fund's distributions will so qualify.
The Internal Revenue Service currently requires that a regulated investment company that has two or more classes of stock allocate to each such class proportionate amounts of each type of its income (such as ordinary income and capital gains) based upon the percentage of total dividends distributed to each class for the tax year. Accordingly, the Fund intends each year to allocate Capital Gain Dividends between and among its Common Shares and any series of its Preferred Shares in proportion to the total dividends paid to each class with respect to such tax year. Dividends qualifying and not qualifying for (a) treatment as qualified dividend income and (b) the dividends received deduction will similarly be allocated between and among such classes.
RETURN OF CAPITAL DISTRIBUTIONS. If the Fund makes a distribution to a shareholder in excess of the Fund's current and accumulated earnings and profits in any taxable year, the excess distribution will be treated as a return of capital to the extent of such shareholder's tax basis in his or her shares, and thereafter as capital gain. A return of capital is not taxable, but it reduces a shareholder's tax basis in his or her shares, thus reducing any loss or increasing any gain on a subsequent taxable disposition by the shareholder of his or her shares. Where one or more such distributions occur in any taxable year of the Fund, the available earnings and profits will be allocated, first, to the distributions made to the holders of Preferred Shares, and only thereafter to distributions made to holders of Common Shares. As a result, the holders of Preferred Shares will receive a disproportionate share of the distributions treated as dividends, and the holders of the Common Shares will receive a disproportionate share of the distributions treated as a return of capital.
Dividends and distributions on the Fund's shares are generally subject to federal income tax as described herein to the extent they do not exceed the Fund's realized income and gains, even though such dividends and distributions may economically represent a return of a particular shareholder's investment. Such distributions are likely to occur in respect of shares purchased at a time when the Fund's net asset value reflects gains that are either unrealized, or realized but not distributed. Such realized gains may be required to be distributed even when the Fund's net asset value also reflects unrealized losses. Distributions are taxable to a shareholder even if they are paid from income or gains earned by the Fund prior to the shareholder's investment (and thus included in the price paid by the shareholders). Each January, you will receive a statement that shows the tax status of distributions you received for the previous year.
SALE OF SHARES. The sale of Fund shares by a shareholder may give rise to a gain or loss. For tax purposes, an exchange of your Fund shares for shares of a different Franklin Templeton fund is the same as a sale. In general, any gain or loss realized upon a taxable disposition of shares will be treated as long-term capital gain or loss if the shares have been held for more than 12 months. Otherwise, the gain or loss on the taxable disposition of Fund shares will be treated as short-term capital gain or loss. However, any loss realized upon a taxable disposition of shares held for six months or less will be treated as long-term, rather than short-term, to the extent of any long-term capital gain distributions received (or deemed received) by the shareholder with respect to the shares. All or a portion of any loss realized upon a taxable disposition of Fund shares will be disallowed if other substantially identical shares of the Fund are purchased within 30 days before or after the disposition. In such a case, the basis of the newly purchased shares will be adjusted to reflect the disallowed loss.
From time to time the Fund may make a tender offer for its Common Shares. It is expected that the terms of any such offer will require a tendering shareholder to tender all Common Shares and dispose of all Preferred Shares held, or considered under certain attribution rules of the Code to be held, by such shareholder. Shareholders who tender all Common Shares and dispose of all Preferred Shares held, or considered to be held, by them will be treated as having sold their shares and generally will realize a capital gain or loss. If a shareholder tenders fewer than all of its Common Shares, or retains a substantial portion of its Preferred Shares, such shareholder may be treated as having received a taxable dividend upon the tender of its Common Shares. In such a case, there is a remote risk that non-tendering shareholders will be treated as having received taxable distributions from the Fund. Likewise, if the Fund redeems some but not all of the Preferred Shares held by a Preferred Shareholder and such shareholder is treated as having received a taxable dividend upon such redemption, there is a remote risk that Common Shareholders and non-redeeming Preferred Shareholders will be treated as having received taxable distributions from the Fund. To the extent that the Fund recognizes net gains on the liquidation of portfolio securities to meet such tenders of Common Shares, the Fund will be required to make additional distributions to its Common Shareholders.
OPTIONS, FUTURES, FORWARD CONTRACTS AND SWAP AGREEMENTS. The Fund's transactions in options, futures contracts, hedging transactions, forward contracts, swap agreements, straddles and foreign currencies will be subject to special tax rules (including mark-to-market, constructive sale, straddle, wash sale and short sale rules), the effect of which may be to accelerate income to the Fund, defer losses to the Fund, cause adjustments in the holding periods of the Fund's securities, convert long-term capital gains into short-term capital gains and convert short-term capital losses into long-term capital losses. These rules could therefore affect the amount, timing and character of distributions to shareholders. The Fund will monitor its transactions, will make appropriate tax elections and will make appropriate entries in its books and records in order to mitigate the effect of these rules.
FOREIGN TAXATION. Income received by the Fund from sources within foreign countries may be subject to withholding and other taxes imposed by such countries. Tax conventions between certain countries and the U.S. may reduce or eliminate such taxes. Although the Fund may be able to claim a credit or deduction with respect to such taxes, shareholders generally will not be entitled to claim a credit or deduction with respect to foreign taxes.
SHARES PURCHASED THROUGH TAX-QUALIFIED PLANS. Special tax rules apply to investments through defined contribution plans and other tax-qualified plans. Shareholders should consult their tax advisers to determine the suitability of shares of the Fund as an investment through such plans and the precise effect of an investment on their particular tax situation.
BACKUP WITHHOLDING. The Fund must withhold a portion of your taxable distributions and sales proceeds unless you:
o provide your correct social security or taxpayer identification number,
o certify that this number is correct,
o certify that you are not subject to backup withholding, and
o certify that you are a U.S. person (including a U.S. resident alien).
The Fund also must withhold if the Internal Revenue Service instructs it to do so. The backup withholding tax rate is currently 28% for amounts paid through 2010.
In order for a foreign investor to qualify for exemption from the backup withholding tax rates under income tax treaties, the foreign investor must comply with special certification and filing requirements. Foreign investors in the Fund should consult their tax advisers in this regard.
Backup withholding is not an additional tax. Any amounts withheld may be refunded or credited against the shareholder's U.S. federal income tax liability, provided the appropriate information is furnished to the Internal Revenue Service.
NON-U.S. SHAREHOLDERS. Under U.S. federal tax law, dividends other than Capital Gain Dividends paid on shares beneficially held by a person who is not a "U.S. person" within the meaning of the Code (or a "foreign person"), are, in general, subject to withholding of U.S. federal income tax at a rate of 30% of the gross dividend, which rate may, in some cases, be reduced by an applicable tax treaty. Dividends are subject to withholding even if they are funded by income or gains (such as portfolio interest, short-term capital gains, or foreign-source dividend and interest income) that, if paid to a foreign person directly, would not be subject to withholding. However, Capital Gain Dividends will not be subject to withholding of U.S. federal income tax. If a beneficial holder who is a foreign person has a trade or business in the United States, and the dividends are effectively connected with the conduct by the beneficial holder of a trade or business in the United States, the dividend will be subject to U.S. federal net income taxation at regular income tax rates.
Under U.S. federal tax law, a beneficial holder of shares who is a foreign person is not, in general, subject to U.S. federal income tax on gains (and is not allowed a deduction for losses) realized on the sale of shares of the Fund or Capital Gain Dividends unless (i) such gain or Capital Gain Dividend is effectively connected with the conduct of a trade or business carried on by such holder within the United States or (ii) in the case of an individual holder, the holder is present in the United States for a period or periods aggregating 183 days or more during the year of the sale or Capital Gain Dividend and certain other conditions are met.
If you are eligible for the benefits of a tax treaty, any effectively connected income or gain will generally be subject to U.S. federal income tax on a net basis only if it is also attributable to a permanent establishment maintained by you in the United States. A beneficial holder of shares who is a foreign person may be subject to state and local tax and to the U.S. federal estate tax in addition to the federal tax on income referred to above.
RECENT TAX SHELTER REPORTING REGULATIONS. Under recently promulgated Treasury regulations, if a shareholder recognizes a loss with respect to the Fund's share of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder in any single taxable year (or a greater loss over a combination of years), the shareholder must file with the Internal Revenue Service a disclosure statement on Form 8886. The fact that a loss is reportable under these regulations does not affect the legal determination of whether the taxpayer's treatment of the loss is proper. Shareholders should consult their tax adviser to determine the applicability of these regulations in light of their individual circumstances.
GENERAL. The federal income tax discussion set forth above is for general information only. Prospective investors should consult their tax advisers regarding the specific federal tax consequences of purchasing, holding, and disposing of shares of the Fund, as well as the effects of state, local and foreign tax law and any proposed tax law changes.
PERFORMANCE RELATED AND COMPARATIVE INFORMATION
The Fund may quote certain performance-related information and may compare certain aspects of its portfolio and structure to other substantially similar closed-end funds as categorized by Lipper, Inc. ("Lipper"), Morningstar Inc. or other independent services. Comparison of the Fund to an alternative investment should be made with consideration of differences in features and expected performance. The Fund may obtain data from sources or reporting services, such as Bloomberg Financial ("Bloomberg") and Lipper, that the Fund believes to be generally accurate.
The Fund, in its advertisements, may refer to pending legislation from time to time and the possible impact of such legislation on investors, investment strategy and related matters. At any time in the future, yields and total return may be higher or lower than past yields and there can be no assurance that any historical results will continue.
Past performance is not indicative of future results. At the time Common Shareholders sell their shares, they may be worth more or less than their original investment.
See Appendix A for additional performance related and comparative and other information.
CUSTODIAN
The Bank of New York, Mutual Funds Division, 90 Washington Street, New York, NY 10286, acts as custodian of the Fund's securities and other assets.
SHAREHOLDER SERVICING AGENT AND TRANSFER AGENT
PFPC, Inc. ("Servicing Agent") is the Fund's shareholder servicing agent and acts as the Fund's transfer agent and dividend-paying agent. The Servicing Agent is located at P.O. Box 43027, Providence, RI 02940-3027. Please send all correspondence to PFPC, Inc. at P.O. Box 43027, Providence, RI 02940-3027.
For its services, Servicing Agent receives a fixed fee per account. The Fund also will reimburse Servicing Agent for certain out-of-pocket expenses, which may include payments by Servicing Agent to entities, including affiliated entities, that provide sub-shareholder services, recordkeeping and/or transfer agency services to beneficial owners of the Fund. The amount of reimbursements for these services per benefit plan participant Fund account per year will not exceed the per account fee payable by the Fund to Servicing Agent in connection with maintaining shareholder accounts.
INDEPENDENT AUDITORS
PricewaterhouseCoopers LLP, 333 Market Street, San Francisco, California 94105, serves as independent auditors for the Fund. PricewaterhouseCoopers LLP provides audit services, tax return preparation and assistance and consultation in connection with review of SEC filings to the Fund.
REGISTRATION STATEMENT
A Registration Statement on Form N-2, including any amendments thereto (a "Registration Statement"), relating to the shares of the Fund offered hereby, has been filed by the Fund with the SEC, Washington, D.C. The Prospectus and this SAI do not contain all of the information set forth in the Registration Statement, including any exhibits and schedules thereto. For further information with respect to the Fund and the shares offered or to be offered hereby, reference is made to the Fund's Registration Statement. Statements contained in the Prospectus and this SAI as to the contents of any contract or other document referred to are not necessarily complete and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. Copies of the Registration Statement may be inspected without charge at the SEC's principal office in Washington, D.C., and copies of all or any part thereof may be obtained from the SEC upon the payment of certain fees prescribed by the SEC.
REPORT OF INDEPENDENT AUDITORS
[TO BE PROVIDED]
FINANCIAL STATEMENTS
FRANKLIN TEMPLETON LIMITED DURATION INCOME TRUST
STATEMENT OF ASSETS AND LIABILITIES
, 2003
[TO BE PROVIDED]
STATEMENT OF OPERATIONS
ONE DAY ENDED , 2003
[TO BE PROVIDED]
APPENDIX A
DESCRIPTION OF RATINGS
The Fund's investments may range in quality from securities rated in the lowest category to securities rated in the highest category (as rated by Moody's, S&P, or Fitch, or, if unrated, determined by the Manager to be of comparable quality). The percentage of a Fund's assets invested in securities in a particular rating category will vary. The following terms are generally used to describe the credit quality of debt securities:
High Quality Debt Securities are those rated in one of the two highest rating categories (the highest category for commercial paper) or, if unrated, deemed comparable by the Manager.
Investment Grade Debt Securities are those rated in one of the four highest rating categories or, if unrated, deemed comparable by the Manager.
Below Investment Grade, High Yield Securities ("Junk Bonds") are those rated lower than Baa by Moody's, BBB by S&P or Fitch, and comparable securities. They are deemed predominantly speculative with respect to the issuer's ability to repay principal and interest.
Following is a description of Moody's, S&P's, and Fitch's rating categories applicable to debt securities.
MOODY'S INVESTORS SERVICE, INC.
CORPORATE AND MUNICIPAL BOND RATINGS
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present that make the long-term risks appear somewhat larger than with Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are to be considered as upper-medium-grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present that suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations (I.E., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of a desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing.
Moody's bond ratings, where specified, are applicable to financial contracts, senior bank obligations and insurance company senior policyholder and claims obligations with an original maturity in excess of one year. Obligations relying upon support mechanisms such as letter-of-credit and bonds of indemnity are excluded unless explicitly rated. Obligations of a branch of a bank are considered to be domiciled in the country in which the branch is located.
Unless noted as an exception, Moody's rating on a bank's ability to repay senior obligations extends only to branches located in countries which carry a Moody's Sovereign Rating for Bank Deposits. Such branch obligations are rated at the lower of the bank's rating or Moody's Sovereign Rating for the Bank Deposits for the country in which the branch is located. When the currency in which an obligation is denominated is not the same as the currency of the country in which the obligation is domiciled, Moody's ratings do not incorporate an opinion as to whether payment of the obligation will be affected by the actions of the government controlling the currency of denomination. In addition, risk associated with bilateral conflicts between an investor's home country and either the issuer's home country or the country where an issuer branch is located are not incorporated into Moody's ratings.
Moody's makes no representation that rated bank obligations or insurance company obligations are exempt from registration under the U.S. Securities Act of 1933 or issued in conformity with any other applicable law or regulation. Nor does Moody's represent any specific bank or insurance company obligation is legally enforceable or a valid senior obligation of a rated issuer.
Moody's applies numerical modifiers, 1, 2, and 3, in each generic rating classified from Aa through Caa 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.
Corporate Short-Term Debt Ratings
Moody's short-term debt ratings are opinions of the ability of issuers to repay punctually senior debt obligations. These obligations have an original maturity not exceeding one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be investment grade, to indicate the relative repayment ability of rated issuers:
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a superior ability for repayment of senior short-term debt obligations. Prime-1 repayment ability will often be evidenced by many of the following characteristics: leading market positions in well-established industries; high rates of return on funds employed; conservative capitalization structure with moderate reliance on debt and ample asset protection; broad margins in earnings coverage of fixed financial charges and high internal cash generation; and well-established access to a range of financial markets and assured sources of alternate liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong ability for repayment of senior short-term debt obligations. This will normally be evidenced by many of the characteristics cited above but to a lesser degree. Earnings trends and coverage ratios, while sound, may be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained.
PRIME-3: Issuers rated Prime-3 (or supporting institutions) have an acceptable ability for repayment of senior short-term obligations. The effect of industry characteristics and market compositions may be more pronounced. Variability in earnings and profitability may result in changes in the level of debt protection measurements and may require relatively high financial leverage. Adequate alternate liquidity is maintained.
NOT PRIME: Issuers rated Not Prime do not fall within any of the Prime rating categories.
STANDARD & POOR'S
ISSUE CREDIT RATING DEFINITIONS
A Standard & Poor's issue credit rating is a current opinion of the creditworthiness of an obligor with respect to a specific financial obligation, a specific class of financial obligations, or a specific financial program (including ratings on medium term note programs and commercial paper programs). It takes into consideration the creditworthiness of guarantors, insurers, or other forms of credit enhancement on the obligation and takes into account the currency in which the obligation is denominated. The issue credit rating is not a recommendation to purchase, sell, or hold a financial obligation, inasmuch as it does not comment as to market price or suitability for a particular investor.
Issue credit ratings are based on current information furnished by the obligors or obtained by Standard & Poor's from other sources it considers reliable. Standard & Poor's does not perform an audit in connection with any credit rating and may, on occasion, rely on unaudited financial information. Credit ratings may be changed, suspended, or withdrawn as a result of changes in, or unavailability of, such information, or based on other circumstances.
Issue credit ratings can be either long-term or short-term. Short-term ratings are generally assigned to those obligations considered short-term in the relevant market. In the U.S., for example, that means obligations with an original maturity of no more than 365 days - including commercial paper. Short-term ratings are also used to indicate the creditworthiness of an obligor with respect to put features on long-term obligations. The result is a dual rating, in which the short-term rating addresses the put feature, in addition to the usual long-term rating. Medium-term notes are assigned long-term ratings.
Issue credit ratings are based, in varying degrees, on the following considerations: likelihood of payment - capacity and willingness of the obligor to meet its financial commitment on an obligation in accordance with the terms of the obligation; nature of and provisions of the obligation; protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors' rights.
The issue rating definitions are expressed in terms of default risk. As such, they pertain to senior obligations of an entity. Junior obligations are typically rated lower than senior obligations, to reflect the lower priority in bankruptcy, as noted above. (Such differentiation applies when an entity has both senior and subordinated obligations, secured and unsecured obligations, or operating company and holding company obligations.) Accordingly, in the case of junior debt, the rating may not conform exactly with the category definition.
CORPORATE AND MUNICIPAL BOND RATINGS
INVESTMENT GRADE
AAA: An obligation rated AAA has the highest rating assigned by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is extremely strong.
AA: An obligation rated AA differs from the highest rated obligations only in small degree. The obligor's capacity to meet its financial commitment on the obligation is very strong.
A: An obligation rated A is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rated categories. However, the obligor's capacity to meet its financial commitment on the obligation is still strong.
BBB: An obligation rated BBB exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
SPECULATIVE GRADE
Obligations rated BB, B, CCC, CC, and C are regarded as having predominantly speculative characteristics with respect to capacity to pay interest and repay principal. BB indicates the least degree of speculation and C the highest. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major exposures to adverse conditions.
BB: An obligation rated BB is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation.
B: An obligation rated B is more vulnerable to nonpayment than obligations rated BB, but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation.
CCC: An obligation rated CCC is currently vulnerable to nonpayment, and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.
CC: An obligation rated CC is currently highly vulnerable to nonpayment.
C: A subordinated debt or preferred stock obligation rated C is CURRENTLY HIGHLY VULNERABLE to nonpayment. The C rating may be used to cover a situation where a bankruptcy petition has been filed or similar action taken, but payments on this obligation are being continued. A C also will be assigned to a preferred stock issue in arrears on dividends or sinking fund payments, but that is currently paying.
CI: The rating CI is reserved for income bonds on which no interest is being paid.
D: An obligation rated D is in payment default. The D rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor'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 or the taking of a similar action if payments on an obligation are jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories.
Provisional ratings: The letter "p" indicates that the rating is provisional. A provisional rating assumes the successful completion of the project being financed by the debt being rated and indicates that payment of debt service requirements is largely or entirely dependent upon the successful and timely completion of the project. This rating, however, while addressing credit quality subsequent to completion of the project, makes no comment on the likelihood of, or the risk of default upon failure of, such completion. The investor should exercise his own judgment with respect to such likelihood and risk.
r: This symbol is attached to the ratings of instruments with significant noncredit risks. It highlights risks to principal or volatility of expected returns which are not addressed in the credit rating. Examples include: obligations linked or indexed to equities, currencies, or commodities; obligations exposed to severe prepayment risk - such as interest-only or principal-only mortgage securities; and obligations with unusually risky interest terms, such as inverse floaters.
The absence of an "r" symbol should not be taken as an indication that an obligation will exhibit no volatility or variability in total return.
N.R.: This indicates that no rating has been requested, that there is insufficient information on which to base a rating, or that Standard & Poor's does not rate a particular obligation as a matter of policy.
Debt obligations of issuers outside the United States and its territories are rated on the same basis as domestic corporate and municipal issues. The ratings measure the creditworthiness of the obligor but do not take into account currency exchange and related uncertainties.
COMMERCIAL PAPER RATING DEFINITIONS
A Standard & Poor's commercial paper rating is a current assessment of the likelihood of timely payment of debt having an original maturity of no more than 365 days. Ratings are graded into several categories, ranging from A for the highest quality obligations to D for the lowest. These categories are as follows:
A-1: A short-term obligation rated A-1 is rated in the highest category by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is strong. Within this category, certain obligations are designated with a plus sign (+). This indicates that the obligor's capacity to meet its financial commitment on these obligations is extremely strong.
A-2: A short-term obligation rated A-2 is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligor's capacity to meet its financial commitment on the obligation is satisfactory.
A-3: A short-term obligation rated A-3 exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
B: A short-term obligation rated B is regarded as having significant speculative characteristics. The obligor currently has the capacity to meet its financial commitment on the obligation; however, it faces major ongoing uncertainties which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation.
C: A short-term obligation rated C is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation.
D: A short-term obligation rated D is in payment default. The D rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor'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 or the taking of a similar action if payments on an obligation are jeopardized.
A commercial paper rating is not a recommendation to purchase, sell or hold a security inasmuch as it does not comment as to market price or suitability for a particular investor. The ratings are based on current information furnished to Standard & Poor's by the issuer or obtained from other sources it considers reliable. Standard & Poor's does not perform an audit in connection with any rating and may, on occasion, rely on unaudited financial information. The ratings may be changed, suspended, or withdrawn as a result of changes in or unavailability of such information.
FITCH RATINGS
BOND RATINGS
The ratings represent Fitch's assessment of the issuer's ability to meet the obligations of a specific debt issue or class of debt. The ratings take into consideration special features of the issue, its relationship to other obligations of the issuer, the current financial condition and operative performance of the issuer and of any guarantor, as well as the political and economic environment that might affect the issuer's future financial strength and credit quality.
AAA: Bonds rated AAA are 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 rated AA are considered to be investment grade and of very high credit quality. The obligor's ability to pay interest and repay principal is very strong, although not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA categories are not significantly vulnerable to foreseeable future developments, short-term debt of these issuers is generally rated F-1+.
A: Bonds rated A are considered to be investment grade and of high credit quality. The obligor's ability to pay interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings.
BBB: Bonds rated BBB are considered to be investment grade and of satisfactory credit quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have an adverse impact on these bonds and, therefore, impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings.
BB: Bonds rated BB 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 rated B 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 rated CCC 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 rated CC are minimally protected. Default in payment of interest and/or principal seems probable over time.
C: Bonds rated C are in imminent default in payment of interest or principal.
DDD, DD and D: Bonds rated DDD, DD and D are in actual default of 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 these bonds and D represents the lowest potential for recovery.
Plus (+) and minus (-) signs are used with a rating symbol to indicate the relative position of a credit within the rating category. Plus and minus signs, however, are not used in the AAA category covering 12-36 months.
SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on demand or have original maturities of up to three years, including commercial paper, certificates of deposit, medium-term notes, and municipal and investment notes.
Although the credit analysis is similar to Fitch's bond rating analysis, the short-term rating places greater emphasis than bond ratings on the existence of liquidity necessary to meet the issuer's obligations in a timely manner.
F-1+: Exceptionally strong credit quality. Issues assigned this rating are regarded as having the strongest degree of assurance for timely payment.
F-1: Very strong credit quality. Issues assigned this rating reflect an assurance of timely payment only slightly less in degree than issues rated F-1+.
F-2: Good credit quality. Issues carrying this rating have a satisfactory degree of assurance for timely payments, but the margin of safety is not as great as the F-l+ and F-1 categories.
F-3: Fair credit quality. Issues assigned this rating have characteristics suggesting that the degree of assurance for timely payment is adequate; however, near-term adverse changes could cause these securities to be rated below investment grade.
F-S: Weak credit quality. Issues assigned this rating have characteristics suggesting a minimal degree of assurance for timely payment and are vulnerable to near-term adverse changes in financial and economic conditions.
D: Default. Issues assigned this rating are in actual or imminent payment default.
APPENDIX B
PERFORMANCE RELATED AND
COMPARATIVE AND OTHER INFORMATION
From time to time, the Fund, the Manager may report to shareholders or to the public in advertisements concerning the performance of the Manager as adviser to clients other than the Fund, or on the comparative performance or standing of the Manager in relation to other money managers. The Manager also may provide current or prospective private account clients, in connection with standardized performance information for the Fund, performance information for the Fund gross of fees and expenses for the purpose of assisting such clients in evaluating similar performance information provided by other investment advisers or institutions. Comparative information may be complied or provided by independent ratings services or by news organizations. Any performance information, whether related to the Fund, the Manager, should be considered in light of the Fund's investment objectives and policies, characteristics and quality of the Fund, and the market conditions during the time period indicated, and should not be considered to be representative of what may be achieved in the future. Performance information for the Fund may be compared to various unmanaged indexes.
[BROCHURE]
[Page 1--Cover]
o Portfolio managed for limited duration
o High current income potential
o Investment-grade weighted average portfolio credit quality
o Investments in asset classes with a record of low
correlation of returns
o Professional management by Franklin Templeton, a leader in
fixed income investing
Offering Period:
July 29-August 26, 2003
Franklin Templeton
Limited Duration Income Trust
Income
FUND SYMBOL
FTF
Application with the American
Stock Exchange (AMEX) pending.
The information in this document and in the preliminary prospectus is not complete and may be amended or changed. A registration statement relating to these securities has been filed with the Securities and Exchange Commission (SEC), but has not yet become effective. We may not sell these securities until the registration statement filed with the SEC is effective. This document is not an offer to sell these securities and is not a solicitation to buy these securities in any state where the offer or sale is not permitted. This brochure is accompanied by a preliminary prospectus, which includes more complete information about the Fund, including its risks, fees and expenses. Additional copies of the preliminary prospectus may be obtained by calling Franklin Templeton Investments at 1-800/DIAL-BEN(R) (1-800/342-5236). Please read the preliminary prospectus carefully before making any decision to invest in the Fund.
Experienced Portfolio
Management Team
Christopher Molumphy, CFA
Chief Investment Officer of
Franklin Templeton's Fixed Income Group
Executive Vice President and
Portfolio Manager
16 years of industry experience
Roger Bayston, CFA
Senior Vice President and
Portfolio Manager
15 years of industry experience
Richard D'Addario
Chief Investment Officer of
Franklin's Floating Rate Debt Group
Senior Vice President and
Portfolio Manager
25 years of industry experience
Eric Takaha, CFA
Director of High-Yield Research
Vice President and
Portfolio Manager
12 years of industry experience
Franklin Templeton:
A Leader In Fixed Income Investing
Franklin Advisers, Inc. is the Fund's investment manager. Founded in 1947, Franklin Advisers, Inc. and its affiliates are known collectively as Franklin Templeton Investments and have grown to be one of the largest investment organizations in the United States with $287 billion in assets under management. (1)
Franklin Templeton has been managing fixed income mutual funds since 1970. In that time, the firm has become one of the most respected names in the industry as well as one of the largest fixed income managers in the country. Franklin Templeton's approach is research intensive--portfolio managers and analysts conduct in-depth proprietary research to determine optimal portfolio allocations. Individual securities are subject to stringent fundamental analysis and are closely monitored by a team of dedicated analysts. Additionally, Franklin Templeton focuses on risk management, using state-of the-art tools to help manage the risk of the firm's fixed income investments.
Highlights:
Over $110 billion in fixed income assets under management,
including: (2)
o $16 billion in mortgage-backed securities
o $3 billion in floating rate bank loans
o $10 billion in high-yield debt
Over 100 portfolio managers, research analysts and traders in the fixed income group, including: (1)
o 9 in the mortgage-backed securities group
o 10 in the floating rate bank loan group
o 15 in the high-yield debt group
Manage 5 of the 21 largest non-proprietary U.S. fixed income mutual funds (3)
1. As of 6/30/03.
2. As of 6/30/03. Includes fixed income, money funds and fixed
income portion of hybrid/balanced assets under management.
3. Source: Strategic Insight. Based on open- and closed-end
assets under management (AUM) as of 5/31/03. Most recent data
available.
Introducing
Franklin Templeton Limited Duration Income Trust
Franklin Templeton Limited Duration Income Trust may be a timely solution for investors searching for the potential for lower return volatility and attractive yields. The Fund will generally have an estimated average duration of between two and five years in an effort to reduce sensitivity to interest rates. Additionally, the Fund will invest primarily in three fixed income asset classes that have historically shown low correlation with one another, which may help to reduce overall portfolio volatility.
Investment Objective
The Fund's primary investment objective is to seek high current
income. Capital appreciation is a secondary objective to the
extent it is possible and is consistent with the Fund's primary
objective.
Primary Investments:
Mortgage-backed securities
Floating rate bank loans
High-yield corporate bonds
Under normal market conditions, the Fund will invest at least 25% of its total assets in each asset class.(4)
Use of Leverage May Help to Boost Yield
The Fund presently intends to use leverage by issuing shares of preferred stock representing up to 38% of the Fund's total capital (calculated after their issuance). By using leverage, the Fund will seek to obtain a higher return for shareholders. Special risks are involved with the use of leverage. Please see the "What Are the Risks?" section for a discussion of risks associated with this strategy.
The Advantages of a Closed-End Fund
A closed-end fund is not subject to the unpredictable daily cash
flows of open-end funds, which can make managing open-end fund
assets more
difficult. Also, closed-end funds can take advantage of financial
leverage, potentially offering investors enhanced income and
total return compared to other fixed income alternatives.
However, unlike open-end funds, shares of closed-end funds
frequently trade at a discount from their net asset value.
It should be noted that special risks are associated with the use of financial leverage. However, the Fund's structure, which includes investments in floating rate bank loans, may help to limit volatility generally associated with leveraged strategies in a rising rate environment. Because floating rate bank loan rates reset periodically, any increase in leveraging costs due to a rise in interest rates could potentially be offset by a corresponding increase in the yield of the Fund's floating rate bank loan assets.
o Benefits To You: o Limited duration. The Fund intends to maintain an estimated average duration within a range of two to five years, with the intent of reducing interest rate risk. Initially, the Fund is expected to have an estimated average duration of approximately three years (including the effect of anticipated leverage).
o High current income potential. The Fund's investments in the three primary fixed income asset classes, combined with the utilization of financial leverage, offer the potential for higher current income than other fixed income alternatives.
o Investment-grade weighted average portfolio credit quality. The Fund expects to maintain a weighted average portfolio credit quality of at least BBB-/Baa3.
o Historically low correlation. The three primary asset classes have shown low correlations with one another, offering different risk/return characteristics in varying market conditions, which may help to reduce overall portfolio volatility.
o Investments in asset classes with relatively lower volatility of returns. Historically, both mortgage-backed securities and floating rate bank loans have shown less total return volatility than other fixed income investments, while high-yield bonds have shown less total return volatility than the broad equity markets.
o Active sector allocation strategy. The Fund's portfolio managers proactively allocate investments across various fixed income sectors in an effort to best position the portfolio to achieve its investment goals.
o Experienced, professional management. Franklin Templeton is recognized as a leader in fixed income investing. The Fund's portfolio management team has 68 years of combined industry experience.(1)
Investment in the Fund involves a number of risks, including the risk of leverage, trading discount and default. The Fund may differ from other investment companies in terms of credit risk, liquidity, charges and expenses, and other important issues. See "What Are the Risks?" on the back of this brochure.
4. The Fund may also invest in asset-backed securities other than mortgage-backed securities. Such investments will be included for purposes of applying the 25% threshold to mortgage-backed securities.
Not FDIC Insured | May Lose Value | No Bank Guarantee
Reasons to Invest
Low Average Duration May Help to Reduce Volatility in a Rising Rate Environment
Bond prices and interest rates tend to have an inverse relationship. Generally, the longer the duration of a bond--a measure of price sensitivity relative to changes in interest rates--the higher the interest rate risk, or the more sensitive its price will be to interest rate changes. The rule of thumb is that for every 1% change in interest rates, the price of a bond will be affected according to the duration. For example, if interest rates go up 1% and the duration of a bond is 9 years, the price of the bond will decrease by approximately 9%, as you can see in the hypothetical example below. The shorter the duration, the less the price of a bond should be affected by a change in interest rates.
Change in Bond Prices(5)
Duration Interest Rates Decline 1%Interest Rates Increase 1%
3 Years +3% -3%
9 Years +9% -9%
By generally maintaining an estimated average duration of between two and five years (including the effect of leverage), the Fund is positioned to be potentially less affected solely by a rise in interest rates than a portfolio with a longer duration.
High Current Income Potential
Investing in three complementary fixed income asset
classes--mortgage-backed securities, floating rate bank loans and
high-yield bonds--coupled with the utilization of financial
leverage offers the potential for higher current income than many
other fixed income alternatives.
Investment-Grade Weighted Average Portfolio Credit Quality The Fund generally expects to maintain a weighted average portfolio credit quality of investment-grade by taking into consideration the Fund's holdings of high-yield bonds and floating rate bank loans, which are considered below investment-grade credit quality, and averaging them with the Fund's higher credit quality mortgage-backed securities holdings.
Low Correlation of Returns Among Asset Classes May Reduce the
Impact of Market Volatility
The returns of the three primary asset classes--mortgage-backed
securities, floating rate bank loans and high-yield bonds--have
historically shown low correlation with one another. Correlation
is an indication of the degree of correspondence in movement
among different asset classes, and is an important consideration
in constructing a well-diversified portfolio. By investing in
asset classes with low correlations, the Fund has the potential
to offer a well-diversified portfolio designed to reduce overall
volatility.
Low Correlation of Returns(6)
For the 10-Year Period Ended June 30, 2003
-----------------------------------------------------------------------------
Mortgage-Backed Floating Rate
Asset Category(7) Securities Bank Loans High-Yield Bonds
------------------------------------------------------------------------------
Mortgage-Backed Securities 1.00 -0.13 0.14
Floating Rate Bank Loans -0.13 1.00 0.52
High-Yield Bonds 0.14 0.52 1.00
|
Correlation: 1 = perfect positive correlation 0 = no correlation -1 = perfect negative correlation
5. This example is intended to show the approximate effect of a
change in general interest rates on the price of a hypothetical
fixed income security based on its duration. Significant
assumptions include that interest rates move in parallel across
all maturities, the credit standing and likelihood of prepayment
of the hypothetical bond are unchanged, and sufficient buyers and
sellers are available for the security to be efficiently priced.
For a particular fixed income security, the relationship between
duration and interest rate-related price change may differ from
the example due to call features, credit considerations or other
factors. Because a fixed income security's own duration will
change over time, so too will its price sensitivity to changes in
interest rates.
6. Correlation is the statistical measure of the degree to which
the movements of two variables are related. Correlation figures
are based on calculations for the 10-year period ended 6/30/03.
7. Sources: Lehman Brothers, Credit Suisse First Boston (CSFB).
Mortgage-backed securities are represented by the Lehman Brothers
Mortgage Index; high-yield bonds are represented by the CSFB High
Yield Index; floating rate bank loans are represented by the CSFB
Leveraged Loan Index. Indexes are unmanaged and one cannot invest
directly in an index.
The Benefits of Investing in Three Distinct Fixed Income Asset Classes
MORTGAGE-BACKED SECURITIES Mortgage-backed securities (MBS) are comprised of pools of home mortgages, which pass through principal and interest to the investor. Historically, mortgage-backed securities have shown relatively lower volatility of returns than other investment-grade, fixed income investments, as shown in the chart below.
Lower Volatility(10)
For the 10-Year Period Ended June 30, 2003
[Graphic omitted]
This point chart displays lower volatility(10) comparing returns and volatility for mortgage-backed securities, agencies, Treasuries and investment-grade corporate bonds for the 10-year period ended June 30, 2003.
High credit quality.
Credit risk is considered minimal for mortgages backed by federal
agencies or federally sponsored agencies.
Low current duration.
The estimated effective duration of mortgage-backed securities as
of June 30, 2003, was 1.29 years. Historically, the estimated
effective duration has ranged between 0.93 and 4.83 years.(8)
High current income potential.
Mortgage-backed securities have typically offered higher yields
than Treasuries. As of June 30, 2003, mortgage-backed securities
provided a yield of 3.28% versus 1.32% for comparable
Treasuries.(9)
8. Source: Salomon Brothers Mortgage Index, as of 6/30/03. The
historical range of duration is for the 10-year period ended
6/30/03. Please be aware that as interest rates rise, the
duration of mortgage-backed securities will also increase.
9. Sources: Salomon Brothers Mortgage Index, Standard & Poor's
Micropal (Federal Reserve H15 Report, 2-Year Constant Maturity
Treasury Yield).
10. Source: Standard & Poor's Micropal. Mortgage-backed
securities are represented by the Lehman Brothers Mortgage Index;
agency bonds are represented by the Lehman Brothers Agency Index;
Treasuries are represented by the Lehman Brothers Treasury Index;
investment-grade corporate bonds are represented by the Lehman
Brothers Credit Index. Indexes are unmanaged and one cannot
invest directly in an index. Past performance does not guarantee
future results.
FLOATING RATE BANK LOANS Banks and other financial institutions typically arrange floating rate bank loans for companies for a variety of purposes to finance their business. Unlike fixed income securities, floating rate bank loans are generally less sensitive to interest rate risk because of their rate reset feature, allowing floating rate bank loans to generally maintain a spread over benchmark rates as well as potentially provide solid returns in a rising rate environment, as shown below.
A Hedge Against Rising Interest Rates
1994 and 1999 Annual Total Returns
[Graphic omitted]
This horizontal bar chart illustrates the hedge against rising interest retes for floating rate bank loans(11), investment grade corporate bonds(12) and Treasury bonds(13) based on 1994 and 1999 annual total returns.
Relative price stability.
Bank loan rates reset periodically, so their prices are generally
less affected by interest rate changes than comparable fixed-rate
securities.
Senior and secured.
Because floating rate bank loans are near the top of the capital
structure, they are usually first in line for repayment and thus
have relatively greater protection from default than comparable
fixed-rate securities. They also are generally secured by
collateral.
High current income potential.
Bank loan yields float at margins above a benchmark lending rate,
such as the London Interbank Offered Rate (LIBOR). Therefore, in
a rising rate environment, they may offer higher yields than
comparable fixed-rate securities. Potential to offset financing
risk. In a rising rate environment, investments in floating rate
bank loans can help to manage the operating risk associated with
investment vehicles using floating rate leverage.
12. Source: Standard & Poor's Micropal (Lehman Brothers Credit
Index).
13. Source: Standard & Poor's Micropal (Payden & Rygel, 10-Year
Treasury Index).
HIGH-YIELD BONDS High-yield bonds are issued by companies with lower credit ratings and tend to carry some of the highest yields amongst all fixed income asset classes. High-yield bonds have recently appeared attractively valued relative to long-term averages. In fact, the yield spread over comparable Treasuries was approximately 6.76% as of June 30, 2003, whereas the ten-year average was approximately 5.86%.14
High-Yield Bond Valuations Recently Have Appeared Relatively
Attractive
For the 10-Year Period Ended June 30, 2003
[Graphic omitted]
This line graph shows how high-yield bond valuations recently have appeared relatively attractive for the 10-year period ended June 30, 2003, illustrated by the CSFB High Yield Index yield (yield-to-worst)(14) and the 7-year Constant Maturity Treasury Yield(14).
High current income potential.
Because of their lower credit ratings, high-yield bonds generally
offer higher yields than investment-grade bonds in order to
compensate investors for higher credit risk.
Portfolio diversification.
Historically, high-yield bonds have shown a low correlation to
other fixed income and equity asset classes.
Total return potential.
In a growing economy, high-yield bonds may benefit as the
corporate outlook improves and the risk of defaults starts to
diminish.
Low interest rate risk.
High-yield bonds tend to react more to changes in the underlying
company fundamentals rather than to changes in interest rates.
14. Sources: Standard & Poor's Micropal (Federal Reserve H15 Report), Credit Suisse First Boston (CSFB). As of 6/30/03.
Indexes are unmanaged and one cannot invest directly in an index. Treasuries, if held to maturity, offer a fixed rate of return and fixed principal value; interest payments and principal are guaranteed.
franklintempleton.com
Franklin Templeton Limited Duration Income Trust
Income
One Franklin Parkway, San Mateo, CA 94403-1906
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
franklintempleton.com
Before investing, please talk to your financial advisor about how the Fund differs from other funds regarding credit risk, liquidity, charges and expenses, and other issues of importance. Please read the prospectus carefully before investing or sending money.
What Are the Risks?
Lack of Operating History. The Fund is a newly organized,
diversified, closed-end management investment company with no
history of operations. High Yield Risk. The Fund's investments in
securities that are rated below investment grade or unrated
generally have more credit risk than higher-rated securities. Due
to the risks involved in investing in high yield securities, an
investment in the Fund should be considered speculative. The
prices of high yield, fixed-income securities tend to fluctuate
more than higher-quality debt securities. Market Discount Risk.
Common shares of closed-end management investment companies
frequently trade at a discount from their net asset value. The
Fund's shares may fluctuate with market conditions and may trade
at a price that is less than the initial offering price. Credit
Risk. An issuer of a debt security, including a governmental
issuer, may be unable to make interest payments and repay
principal. Changes in an issuer's financial strength or in a
security's credit rating may affect a security's value, and thus,
impact Fund performance. Interest Rate Risk. Changes in interest
rates may present risks to the Fund. Because market interest
rates are currently near their lowest levels in many years, there
is a risk that the Fund's portfolio will decline in value. Shares
of preferred stock ("Preferred Shares"), if issued, may pay a
dividend rate that exceeds the rate of return on the investments
held by the Fund, in which case the returns to shareholders of
shares of common stock ("Common Shares") may be reduced. The
Fund's use of leverage will tend to increase Common Share interest
rate risk. Inflation Risk. The value of assets or income from the
Fund's investments may be worth less as inflation decreases the
value of money. Leverage Risk. The Fund's use of leverage through
the issuance of Preferred Shares or other similar transactions
creates special risks for Common Shareholders. The Fund's use of
leverage may, during periods of rising interest rates, adversely
affect the Fund's income, distributions and total returns to
Common Shareholders. Leverage creates two major types of risks
for Common Shareholders: (1) the likelihood of greater volatility
of net asset value and market price of Common Shares (2) the
possibility either that Common Share income will fall if the
Preferred Share dividend rate rises, or that Common Share income
will fluctuate because the Preferred Share dividend rate varies.
By using leverage, the Fund will seek to obtain a higher return
for holders of Common Shares than if the Fund did not use
leverage. Leveraging is a speculative technique and there are
special risks involved. There can be no assurance that a
leveraging strategy will be used or that it will be successful
during any period in which it is employed. Loan Risk. Bank loans
involve credit risk, interest rate risk, liquidity risk, and
other risks. Corporate loans in which the Fund may invest may be
unrated and generally will not be registered with the Securities
and Exchange Commission or listed on a securities exchange.
Portfolio Security Issuer Risk. The value of portfolio securities
may decline for a number of reasons that directly relate to the
issuer, such as management performance, financial leverage and
performance and factors affecting the issuer's industry.
Management Risk. The Fund is subject to management risk because
it is an actively managed portfolio. The Manager will apply
investment techniques and risk analysis in making investment
decisions for the Fund, but there can be no guarantee that these
will produce the desired results. Foreign (Non-U.S.) Investment
Risk. Investing in foreign securities, including securities of
foreign governments, typically involves more risks than investing
in U.S. securities. These risks can increase the potential for
losses in the Fund and may include, among others, currency risks,
country risks, different trading practices, less government
supervision, less publicly available information, limited trading
markets and greater volatility. Developing Markets Risk. Foreign
investment risk may be particularly high to the extent that the
Fund invests in securities of issuers based in or securities
denominated in the currencies of developing or emerging market
countries. Derivatives Risk. The Fund may utilize a variety of
derivative instruments for hedging, investment or risk management
purposes. Derivatives are subject to a number of risks, such as
liquidity risk, interest rate risk, credit risk, leverage risk,
volatility risk and management risk. Counterparty Risk. If a
counterparty fails to perform its obligations under a derivative
contract due to financial difficulties, the Fund may obtain only
a limited recovery or may obtain no recovery in such circumstances.
Volatility Risk. The market values for some or all of the Fund's
holdings may be volatile. The Fund's use of leverage may increase
the volatility of the Fund's investment portfolio and could
result in larger losses than if the strategies were not used.
Mortgage-Related Risk. The Fund may invest in a variety of
mortgage-related securities. Rising interest rates tend to extend
the duration of mortgage-related securities, making them more
sensitive to changes in interest rates, and may reduce the market
value of the securities. In addition, mortgage-related securities
are subject to the risk that borrowers may pay off their
mortgages sooner than expected, which can reduce the Fund's
returns because the Fund may have to reinvest that money at lower
prevailing interest rates. Reinvestment Risk. If the Fund
reinvests the proceeds from matured, traded or called debt
obligations at lower interest rates, the market price or the
overall return of the Common Shares may decline. Call Risk. A
debt security may be prepaid (called) before maturity. If a debt
security is called, the Fund may have to replace it with a
lower-yielding security. A call of some or all of these
securities may lower the Fund's income and yield and its
distributions to shareholders. Liquidity Risk. The Fund may
invest in securities which are illiquid at the time of
investment. Illiquid securities may trade at a discount from
comparable, more liquid investments, and may be subject to wide
fluctuations in market value. Also, the Fund may not be able to
dispose of illiquid securities when that would be beneficial at a
favorable time or price. Income Risk. Because the Fund can
distribute only what it earns, the Fund's distributions to
shareholders may decline. Zero Coupon Securities Risk. Zero
coupon securities are especially sensitive to changes in interest
rates, and their prices generally are more volatile than debt
securities that pay interest periodically. Sovereign Issuer Risk.
Sovereign debt issued by foreign governments or other
government-related entities, including debt of developing or
"emerging market" issuers, is subject to several risks, such as,
the possibility that a sovereign country might prevent capital
from flowing across its borders; adverse political and economic
developments; the extent and quality of government regulation of
financial markets and institutions; different standards for
bankruptcy proceedings; the imposition of foreign withholding
taxes; and the expropriation or nationalization of foreign
issuers. Smaller Company Risk. Companies with smaller market
capitalizations may be subject to greater levels of credit,
market and issuer risk. Securities of smaller companies may trade
less frequently and in lesser volume than more widely held
securities, and their values may fluctuate more sharply than
other securities. Real Estate Risk. The Fund may be subject to
risks similar to those associated with the direct ownership of
real estate (in addition to securities markets risks), including
declines in the value of real estate, risks related to general
and local economic conditions, dependency on management skill,
increases in interest rates, and other general real estate risks.
Market Disruption and Geopolitical Risk. The war with Iraq, its
aftermath and the continuing occupation of Iraq are likely to
have a substantial impact on the U.S. and world economies and
securities markets. These events could also adversely affect
individual issuers and securities markets, interest rates,
auctions, secondary trading, ratings, credit risk, inflation and
other factors relating to the Common Shares. Anti-Takeover
Provisions. Certain provisions in the Fund's Declaration of Trust
could limit the ability of other entities or persons to acquire
control of the Fund or convert the Fund to open-end status, which
could have the effect of depriving the Common Shareholders of
opportunities to sell their Common Shares at a premium over the
then-current market price of the Common Shares.
The information in this document is not complete and may be changed. A registration statement relating to these securities has been filed with the Securities and Exchange Commission but has not yet become effective. These securities may not be sold, nor may offers to buy be accepted, until the registration statement is effective. This document is not an offer to sell these securities and is not soliciting an offer to buy these securities, nor shall there be any sale of these securities in any state where the offer or sale is not permitted. This is not an offering, which may be made only by a final prospectus. The final prospectus should be read carefully before investing. Please consult the preliminary prospectus for information regarding the Fund, including investment objectives and strategies, risks, charges and expenses and other information. Upon effectiveness of the registration statement, these securities will be offered and sold only by the Fund's underwriters and their selected dealers as described in the prospectus. For a final prospectus, please call your financial advisor or 1-800/DIAL BEN(R) (1-800/342-5236).
Citigroup Global Markets Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and UBS Securities, LLC are acting as the lead underwriters in connection with this offering.
FTF B 07/03
TABLE OF CONTENTS
(continued)
PAGE
TABLE OF CONTENTS
PAGE
Part C - Other Information
Item 24. Financial Statements and Exhibits
(1) Financial Statements: Registrant has not conducted any business as of the date of this filing, other than in connection with its organization.
(2) Exhibits
(a) Charter
(1) Amended Certificate of Trust dated June 19, 2003 - filed herewith.
(2) Amended and Restated Agreement and Declaration of Trust dated June 19, 2003 - filed herewith.
(b) Amended and Restated By-Laws of Registrant dated June 19, 2003 - filed herewith.
(c) Voting Trust Agreement - none.
(d) (1) Article III (Shares) and Article V (Shareholders' Voting Powers and Meetings) of the Agreement and Declaration of Trust - filed herewith.
(2) Article II (Meetings of Shareholders) of the Bylaws - filed herewith.
(e) Form of Dividend Reinvestment Plan - filed herewith.
(f) Long-Term Debt Instruments - none.
(g) Form of Investment Advisory Agreement between Registrant and Franklin Advisers, Inc. - filed herewith.
(h) (1) Form of Underwriting Agreement - to be filed.
(2) Form of Master Selected Dealer Agreement - to be filed.
(3) Form of Master Agreement Among Underwriters - to be filed.
(4) Form of Additional Compensation Agreement - to be filed.
(i) Bonus, Profit Sharing, Pension Plans - not applicable.
(j) Form of Custody Agreement - filed herewith.
(k) Other Material Contracts
(1) Form of Fund Administration Agreement between the Registrant and Franklin Templeton Services, LLC -- filed herewith.
(2) Form of Organizational and Offering Expenses Reimbursement Agreement between Registrant and Franklin Advisers, Inc. - to be filed.
(l) Opinion and Consent of Paul, Hastings, Janofsky & Walker LLP - to be filed.
(m) Non-Resident Officers/Directors - none.
(n) Other Opinions and Consents - Consent of Registrant's independent accounts - to be filed.
(o) Omitted Financial Statements - none.
(p) Subscription Agreement - to be filed.
(q) Model Retirement Plans - none.
(r) Code of Ethics - filed herewith.
(s) Power of Attorney - filed herewith.
Item 25. Marketing Arrangements - to be filed.
Item 26. Other Expenses of Issuance and Distribution - to be completed by
amendment.
The following table sets forth the expenses to be incurred in connection with the offering described in this Registration Statement:
Securities and Exchange Commission Fees $ Blue Sky Fees $ Printing and Engraving Expenses $ Legal Fees $ Listing Fees $ Audit Fees $ Accounting Expenses $ Transfer Agent Fees $ Miscellaneous Expenses $ Total $
Item 27. Persons Controlled by or Under Common Control with Registrant -
none.
Item 28. Number of Holders of Securities as of July 23, 2003
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Common Shares None
Item 29. Indemnification.
Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, 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 1933 Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a Trustee, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such Trustee, officer or controlling person in connection with securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification is against public policy as expressed in the 1933 Act and will be governed by the final adjudication of such issue.
Reference is made to Article VII of the Registrant's Agreement and Declaration of Trust, which is incorporated by reference herein.
Item 30. Business and Other Connections of Investment Adviser.
Franklin Advisers, Inc. (the "Adviser"), an indirect, wholly owned subsidiary of Franklin Resources, Inc., serves as the Registrant's investment adviser. The officers of the Adviser also serve as officers and/or directors/trustees for the Adviser's corporate parent, Franklin Resources, Inc. and/or other investment companies in Franklin Templeton Investments.
Part B and Schedules A and D of Form ADV of the Adviser (SEC File
No. 801-26292), incorporated herein by reference, sets forth the officers of the Adviser and information as to any business, profession, vocation or employment of a substantial nature engaged in by those officers during the past two years.
Item 31. Location of Accounts and Records.
The accounts, books or other documents required to be maintained by Section 31(a) of the Investment Company Act of 1940, as amended, and the rules promulgated thereunder, are kept by the Registrant or its shareholder services agent, PFPC, Inc., at P.O. Box 43027, Providence, RI 02940-3027.
Item 32. Management Services - not applicable.
Item 33. Undertakings.
(1) Registrant undertakes to suspend the offering of its Common Shares until it amends the prospectus filed herewith if (1) subsequent to the effective date of its registration statement, the net asset value declines more than 10 percent from its net asset value as of the effective date of the registration statement, or (2) the net asset value increases to an amount greater than its net proceeds as stated in the prospectus.
(2) Not Applicable.
(3) Not Applicable.
(4) Not Applicable.
(5) Registrant undertakes that:
(a) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant under Rule 497(h) under the Securities Act of 1933 shall be deemed to be part of this registration statement as of the time it was declared effective; and
(b) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of the securities at that time shall be deemed to be the initial bona fide offering thereof.
(6) The Registrant undertakes to send by first class mail or other means designed to ensure equally prompt delivery, within two business days of receipt of a written or oral request, any Statement of Additional Information.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and the Investment Company Act of 1940, as amended, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Mateo, and the State of California, on the 24th day of July, 2003.
FRANKLIN TEMPLETON LIMITED DURATION INCOME TRUST
By: /S/ MURRAY L. SIMPSON
-----------------------------------
Murray L. Simpson
Vice President and Secretary
|
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
CHRISTOPHER MOLUMPHY President & Chief July 24, 2003
-------------------- Executive Officer
Christopher Molumphy* - Investment
Management
JIMMY D. GAMBILL Senior Vice July 24, 2003
---------------- President & Chief
Jimmy D. Gambill* Executive Officer
- Finance and
Administration
KIMBERLEY MONASTERIO Treasurer and July 24, 2003
-------------------- Chief Financial
Kimberley Monasterio* Officer
CHARLES B. JOHNSON Chairman of the July 24, 2003
------------------ Board of Trustees
Charles B. Johnson
ROBERT F. CARLSON Trustee July 24, 2003
-----------------
Robert F. Carlson
HARRIS J. ASHTON Trustee July 24, 2003
----------------
Harris J. Ashton
S. JOSEPH FORTUNATO Trustee July 24, 2003
------------------
S. Joseph Fortunato
FRANK W.T. LAHAYE Trustee July 24, 2003
-----------------
Frank W.T. LaHaye
GORDON S. MACKLIN Trustee July 24, 2003
-----------------
Gordon S. Macklin
FRANK H. ABBOTT, III Trustee July 24, 2003
--------------------
Frank H. Abbott, III
RUPERT H. JOHNSON, JR. Trustee July 24, 2003
----------------------
Rupert H. Johnson, Jr.
MARTIN L. FLANAGAN Trustee July 24, 2003
------------------
Martin L. Flanagan
*By: /S/ MURRAY L. SIMPSON
Murray L. Simpson, Attorney-in-Fact
(Pursuant to Power of Attorney filed herewith)
|
INDEX TO EXHIBITS
EXHIBIT EXHIBIT NAME
(a)(1) Amended Certificate of Trust
(a)(2) Amended and Restated Agreement and Declaration of
Trust
(b) Amended and Restated Bylaws
(g) Form of Investment Advisory Agreement between
Registrant and Franklin Advisers, Inc.
(j) Form of Custody Agreement
(k)(1) Form of Fund Administration Agreement between the
Registrant and Franklin Templeton Services, LLC
(r) Code of Ethics
(s) Power of Attorney
|
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF TRUST
OF
FRANKLIN TEMPLETON STRATEGIC INCOME TRUST
The undersigned certifies that:
1. The name of the statutory trust is Franklin Templeton Strategic Income Trust (the "Statutory Trust").
2. The amendment to the Certificate of Trust of the Statutory Trust set forth below (the "Amendment") has been duly authorized by the Board of Trustees of the Statutory Trust pursuant to the authority granted to the Trustees of the Statutory Trust under ss.3810(b) of the Delaware Statutory Trust Act (12 Del.C. ss.3801 et seq.) (the "Act") and pursuant to the authority set forth in the governing instrument of the Statutory Trust.
3. The first Article of the Certificate of Trust is hereby amended to read as follows:
FIRST: The name of the statutory trust is "Franklin Templeton Limited Duration Income Trust".
4. Pursuant to ss.3810(b) of the Act this Certificate of Amendment to the Certificate of Trust of the Statutory Trust shall become effective immediately upon filing with the Office of the Secretary of State of the State of Delaware.
IN WITNESS WHEREOF, the undersigned, being a Trustee of the Statutory Trust, has duly executed this Certificate of Amendment this 12th day of June, 2003.
/s/ CHRISTOPHER MOLUMPHY
Name: Christopher Molumphy
Trustee
|
AMENDED AND RESTATED
AGREEMENT AND DECLARATION OF TRUST
OF
FRANKLIN TEMPLETON LIMITED DURATION INCOME TRUST
A DELAWARE STATUTORY TRUST
TABLE OF CONTENTS
PAGE
ARTICLE I. NAME; OFFICES; REGISTERED AGENT; DEFINITIONS......2
SECTION 1. NAME..............................................2
SECTION 2. OFFICES OF THE TRUST..............................2
SECTION 3. REGISTERED AGENT AND REGISTERED OFFICE............2
SECTION 4. DEFINITIONS.......................................2
ARTICLE II. PURPOSE OF TRUST..................................4
ARTICLE III. SHARES............................................6
SECTION 1. DIVISION OF BENEFICIAL INTEREST...................6
SECTION 2. SALE OF SHARES....................................6
SECTION 3. STATUS OF SHARES AND LIMITATION OF PERSONAL
LIABILITY........................................7
SECTION 4. POWER OF BOARD OF TRUSTEES TO MAKE TAX STATUS
ELECTION.........................................7
SECTION 5. SERIES AND CLASSES................................7
SECTION 6. INDEMNIFICATION OF SHAREHOLDERS...................8
ARTICLE IV. THE BOARD OF TRUSTEES.............................8
SECTION 1. NUMBER, CLASSES AND ELECTION, TERM, REMOVAL AND
RESIGNATION.......................................8
SECTION 2. TRUSTEE ACTION BY WRITTEN CONSENT WITHOUT A
MEETING..........................................9
SECTION 3. POWERS; OTHER BUSINESS INTERESTS; QUORUM AND
REQUIRED VOTE...................................10
SECTION 4. PAYMENT OF EXPENSES BY THE TRUST.................11
SECTION 5. PAYMENT OF EXPENSES BY SHAREHOLDERS..............11
SECTION 6. OWNERSHIP OF TRUST PROPERTY......................11
SECTION 7. SERVICE CONTRACTS................................12
ARTICLE V. SHAREHOLDERS' VOTING POWERS AND MEETINGS.........13
SECTION 1. VOTING POWERS....................................13
SECTION 2. QUORUM AND REQUIRED VOTE.........................13
SECTION 3. SHAREHOLDER ACTION BY WRITTEN CONSENT
WITHOUT A MEETING ..............................14
SECTION 4. RECORD DATES.....................................14
SECTION 5. ADDITIONAL PROVISIONS............................15
ARTICLE VI. NET ASSET VALUE; DISTRIBUTIONS; REPURCHASES;
TRANSFERS ......................................15
SECTION 1. DETERMINATION OF NET ASSET VALUE, NET INCOME AND
DISTRIBUTIONS....................................15
SECTION 2. REPURCHASE OF SHARES WITH SHAREHOLDER CONSENT....15
SECTION 3. REPURCHASE OF SHARES WITHOUT SHAREHOLDER CONSENT.16
SECTION 4. TRANSFER OF SHARES...............................16
ARTICLE VII. LIMITATION OF LIABILITY AND INDEMNIFICATION
OF AGENT........................................16
SECTION 1. LIMITATION OF LIABILITY..........................16
SECTION 2. INDEMNIFICATION..................................17
SECTION 3. INSURANCE........................................18
SECTION 4. DERIVATIVE ACTIONS...............................19
ARTICLE VIII. APPROVAL OF CERTAIN TRANSACTIONS.................19
SECTION 1. VOTE REQUIRED....................................19
SECTION 2. DISSOLUTION......................................19
SECTION 3. MERGER OR CONSOLIDATION; CONVERSION;
REORGANIZATION..................................20
SECTION 4. RECLASSIFICATION OF THE TRUST....................21
SECTION 5. PRINCIPAL HOLDER TRANSACTIONS....................21
ARTICLE IX. AMENDMENTS.......................................22
SECTION 1. AMENDMENTS GENERALLY.............................22
SECTION 2. SPECIAL AMENDMENTS...............................23
ARTICLE X. MISCELLANEOUS....................................23
SECTION 1. REFERENCES; HEADINGS; COUNTERPARTS...............23
SECTION 2. APPLICABLE LAW...................................23
SECTION 3. PROVISIONS IN CONFLICT WITH LAW OR REGULATIONS...23
SECTION 4. STATUTORY TRUST ONLY.............................24
SECTION 5. USE OF THE NAMES "FRANKLIN" OR "TEMPLETON".......24
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AMENDED AND RESTATED
AGREEMENT AND DECLARATION OF TRUST
OF
FRANKLIN TEMPLETON LIMITED DURATION INCOME TRUST
AMENDED AND RESTATED AGREEMENT AND DECLARATION OF TRUST ("Declaration of Trust") made as of this __ day of June, 2003, by the Trustees hereunder, and by the holders of Shares to be issued by the Trust hereunder as hereinafter provided.
WITNESSETH:
WHEREAS the Trust was formed on May __, 2003 by its sole Trustee by the filing of a Certificate of Trust with the office of the Secretary of State of the State of Delaware pursuant to an Agreement and Declaration of Trust, dated as of May__, 2003 (the "Original Declaration");
WHEREAS the Trust has been formed to carry on the business of a closed-end management investment company as defined in the 1940 Act;
WHEREAS the Trustees have agreed to manage all property coming into their hands as trustees of a Delaware statutory trust in accordance with the provisions of the Delaware Statutory Trust Act, as amended from time to time, and the provisions hereinafter set forth; and
WHEREAS pursuant to the provisions of the Original Declaration, the Board of Trustees desires to amend and restate the Original Declaration in the manner hereinafter set forth, including amendments to provide for preferred Shares and to change the dissolution provisions.
NOW, THEREFORE, the Trustees hereby declare that:
(i)..the Original Declaration is amended and restated in its entirety in the manner hereinafter set forth;
(ii).they will hold all cash, securities and other assets that they may from time to time acquire in any manner as Trustees hereunder IN TRUST to manage and dispose of the same upon the following terms and conditions for the benefit of the holders from time to time of Shares as hereinafter set forth;
(iii).this Declaration of Trust and the By-Laws shall be binding in accordance with their terms on every Trustee, by virtue of having become a Trustee of the Trust, and on every Shareholder, by virtue of having become a Shareholder of the Trust, pursuant to the terms of the Original Declaration and/or this Declaration of Trust and the By-Laws.
ARTICLE I.
NAME; OFFICES; REGISTERED AGENT; DEFINITIONS
Section 1. NAME. The Trust shall be known as "Franklin Templeton Limited Duration Income Trust" and the Board of Trustees shall conduct the business of the Trust under that name, or any other name as it may from time to time designate.
Section 2. OFFICES OF THE TRUST. The Board may at any time establish offices of the Trust at any place or places where the Trust intends to do business.
Section 3. REGISTERED AGENT AND REGISTERED OFFICE. The name of the registered agent of the Trust and the address of the registered office of the Trust are as set forth in the Trust's Certificate of Trust.
Section 4. DEFINITIONS. Whenever used herein, unless otherwise required by the context or specifically provided:
(a) "1940 ACT" shall mean the Investment Company Act of 1940 and the rules and regulations thereunder, all as adopted or amended from time to time;
(b) "AFFILIATE" shall have the same meaning as "affiliated person" as such term is defined in the 1940 Act when used with reference to a specified Person, as defined below.
(c) "BOARD OF TRUSTEES" or "BOARD" shall mean the governing body of the Trust, that is comprised of the number of Trustees of the Trust fixed from time to time pursuant to Article IV hereof, having the powers and duties set forth herein;
(d) "BY-LAWS" shall mean By-Laws of the Trust, as amended or restated from time to time in accordance with Article VIII therein. Such By-Laws may contain any provision not inconsistent with applicable law or this Declaration of Trust, relating to the governance of the Trust;
(e) "CERTIFICATE OF TRUST" shall mean the certificate of trust of the Trust filed with the office of the Secretary of State of the State of Delaware as required under the DSTA to form the Trust, as such certificate shall be amended or restated from time to time and filed with such office;
(f) "CODE" shall mean the Internal Revenue Code of 1986 and the rules and regulations thereunder, all as adopted or amended from time to time;
(g) "COMMISSION" shall have the meaning given that term in the 1940 Act;
(h) "DSTA" shall mean the Delaware Statutory Trust Act (12 DEL. C. ss. 3801, et SEQ.), as amended from time to time;
(i) "DECLARATION OF TRUST" shall mean this Amended and Restated Agreement and Declaration of Trust, as amended or restated from time to time;
(j) "INTERESTED PERSON" shall have the meaning given that term in the 1940 Act;
(k) "INVESTMENT ADVISER" or "ADVISER" shall mean a Person, as defined below, furnishing services to the Trust pursuant to any investment advisory or investment management contract described in Article IV, Section 7(a) hereof;
(l) "NATIONAL FINANCIAL EMERGENCY" shall mean the whole or any part of any period during (i) which an emergency exists as a result of which disposal by the Trust of securities or other assets owned by the Trust is not reasonably practicable; (ii) which it is not reasonably practicable for the Trust fairly to determine the net asset value of its assets; or (iii) such other period as the Commission may by order permit for the protection of investors;
(m) "PERSON" shall mean a natural person, partnership, limited partnership, limited liability company, trust, estate, association, corporation, organization, custodian, nominee or any other individual or entity in its own or any representative capacity, in each case, whether domestic or foreign, and a statutory trust or a foreign statutory trust;
(n) "PRINCIPAL UNDERWRITER" shall have the meaning given that term in the 1940 Act;
(o) "SHARES" shall mean the outstanding shares of beneficial interest into which the beneficial interest in the Trust shall be divided from time to time, and shall include fractional and whole shares;
(p) "SHAREHOLDER" shall mean a record owner of Shares pursuant to the By-Laws;
(q) "TRUST" shall mean the Delaware statutory trust formed pursuant to the Original Declaration and the filing of the Certificate of Trust with the office of the Secretary of State of the State of Delaware;
(r) "TRUST PROPERTY" shall mean any and all property, real or personal,
tangible or intangible, which is owned or held by or for the account of the
Trust, including, without limitation, the rights referenced in Article X,
Section 5 hereof;
(s) "TRUSTEE" or "TRUSTEES" shall mean each Person that signed the Original Declaration or that signs this Declaration of Trust as a trustee, so long as such signatory continues in office in accordance with the terms hereof, and all other Persons who may, from time to time, be duly elected or appointed, qualified and serving on the Board of Trustees in accordance with the provisions hereof and the By-Laws. Reference herein to a Trustee or the Trustees shall refer to such Person or Persons in such Person's or Persons' capacity as a trustee or trustees hereunder and under the By-Laws; and
(t) "VOTE OF A MAJORITY OF THE OUTSTANDING VOTING SECURITIES" shall have the
meaning provided under Subsection 2(a)(42) of the 1940 Act or any successor
provision thereof, which Subsection, as of the date hereof, is as follows:
the vote, at a meeting of the Shareholders, (i) of sixty-seven percent (67%)
or more of the voting securities present in person or represented by proxy at
such meeting, if the holders of more than fifty percent (50%) of the
outstanding voting securities of the Trust are present or represented by
proxy; or (ii) of more than fifty percent (50%) of the outstanding voting
securities of the Trust, whichever is the less.
ARTICLE II.
PURPOSE OF TRUST
The purpose of the Trust is to conduct, operate and carry on the business of a management investment company registered under the 1940 Act, investing primarily in securities and other financial instruments or property, and to exercise all of the powers granted to a statutory trust formed under the DSTA, including, without limitation, the following powers:
(a) To hold, invest and reinvest its funds, and in connection therewith to hold part or all of its funds in cash, and to purchase, subscribe for or otherwise acquire, hold for investment or otherwise, to trade and deal in, write, sell, assign, negotiate, transfer, exchange, lend, pledge or otherwise dispose of, turn to account for, or realize upon, securities (which term "securities" shall for the purposes of this Declaration of Trust, without limitation of the generality thereof, be deemed to include any stocks, shares, bonds, debentures, bills, notes, mortgages, other obligations or evidences of indebtedness, or financial instruments of any kind or nature, and any options, certificates, receipts, warrants, futures contracts or other instruments representing rights to receive, purchase or subscribe for the same, or evidencing or representing any other rights or interests therein or in any property or assets, and any negotiable or non-negotiable instruments and money market instruments, including bank certificates of deposit, finance paper, commercial paper, bankers' acceptances and all kinds of repurchase or reverse repurchase agreements) created or issued by any United States or foreign issuer (which term "issuer" shall, for the purposes of this Declaration of Trust, without limiting the generality thereof, be deemed to include any persons, firms, associations, partnerships, corporations, trusts, syndicates, combinations, organizations, governments or subdivisions, agencies or instrumentalities of any government); and to exercise, as owner or holder of any securities, all rights, powers and privileges in respect thereof; and to do any and all acts and things for the preservation, protection, improvement and enhancement in value of any and all such securities, financial instruments or other assets.
(b) To acquire all or any part of the goodwill, rights, property, real estate, interests in real estate and business of any person, firm, association or corporation heretofore or hereafter engaged in any business similar to any business which the Trust has the power to conduct, and to hold, utilize, enjoy and in any manner dispose of the whole or any part of the rights, property, real estate, interests in real estate and business so acquired, and to assume in connection therewith any liabilities of any such person, firm, association or corporation.
(c) To apply for, obtain, purchase or otherwise acquire, any patents, copyrights, licenses, trademarks, trade names and the like, which may seem capable of being used for any of the purposes of the Trust; and to use, exercise, develop, grant licenses in respect of, sell and otherwise turn to account, the same.
(d) To issue and sell shares of beneficial interest, securities convertible into such shares of beneficial interest, or other security or evidence of indebtedness, in such amounts and on such terms and conditions, for such purposes and for such amount or kind of consideration (including, without limitation thereto, securities) now or hereafter permitted by the laws of the State of Delaware, by the 1940 Act, and by this Declaration of Trust, as the Board of Trustees may determine.
(e) To purchase or otherwise acquire, hold, dispose of, resell, transfer, reissue or cancel (all without the vote of the Shareholders) shares of beneficial interest in any manner and to the extent now or hereafter permitted by the laws of the State of Delaware, by the 1940 Act and by this Declaration of Trust.
(f) To conduct its business in all its branches at one or more offices in Delaware and elsewhere in any part of the world, without restriction, or limit as to extent.
(g) To exercise and enjoy, in Delaware and in any other states, territories, districts and United States dependencies and in foreign countries, all of the powers, rights and privileges granted to, or conferred upon, statutory trusts by the DSTA now or hereafter in force, and the enumeration of the foregoing powers shall not be deemed to exclude any powers, rights or privileges so granted or conferred.
(h) In general, to carry on any other business in connection with or incidental to its trust purposes, to do everything necessary, suitable or proper for the accomplishment of such purposes or for the attainment of any object or the furtherance of any power hereinbefore set forth, either alone or in association with others, to do every other act or thing incidental or appurtenant to, or growing out of, or connected with, its business or purposes, objects or powers, and, subject to the foregoing, to have and exercise all the powers, rights and privileges conferred upon statutory trusts by the laws of the State of Delaware as in force from time to time.
(i) The Trust shall not be limited to investing in obligations maturing before the possible dissolution of the Trust. Neither the Trust nor the Board of Trustees shall be required to obtain any court order to deal with any Trust Property or take any other action hereunder.
(j) The foregoing objects and purposes shall, except as otherwise expressly provided, be in no way limited or restricted by reference to, or inference from, the terms of any other clause of this or any other Article of this Declaration of Trust, and shall each be regarded as independent and construed as a power as well as an object and a purpose, and the enumeration of specific purposes, objects and powers shall not be construed to limit or restrict in any manner the meaning of general terms or the general powers of the Trust now or hereafter conferred by the laws of the State of Delaware, nor shall the expression of one thing be deemed to exclude another, though it be of like nature, not expressed.
ARTICLE III.
SHARES
(a) The beneficial interest in the Trust shall at all times be divided into outstanding shares of the Trust, all without par value. The number of shares of beneficial interest in the Trust authorized hereunder is unlimited.
(b) Subject to the 1940 Act and applicable law, the Board of Trustees shall have the power to issue authorized but unissued shares of beneficial interest in the Trust from time to time on such terms and for such consideration as provided in Article III, Section 2. The Board of Trustees, on behalf of the Trust, may acquire and hold as treasury shares, reissue for such consideration and on such terms as it may determine, or cancel, at its discretion from time to time, any Shares reacquired by the Trust.
(c) Each Share shall entitle the holder to the voting rights as provided in Article V hereof.
(d) Subject to the preferences of any class of Shares then existing, Shareholders shall be entitled to receive dividends and distributions, when, if and as declared by the Board of Trustees. Dividends may be paid in cash or in kind. All dividends and distributions from the Trust Property shall be made ratably among all Shareholders of a class according to the number of Shares of such class held of record by such Shareholders on the record date for any dividend or distribution.
(e) Subject to any Board resolution establishing and designating a class of Shares, Shareholders shall have no preemptive or other right to subscribe for new or additional authorized, but unissued shares or other securities issued by the Trust. The Board of Trustees may from time to time divide or combine the Shares of any class into a greater or lesser number of Shares of such class. Any such division or combination shall not materially change the proportionate beneficial interest in Trust Property of Shareholders of such class at the time of such division or combination or materially affect the rights of Shareholders.
(f) Any Trustee, officer or other agent of the Trust, and any organization in which any such Person has an economic or other interest, may acquire, own, hold and dispose of shares of beneficial interest in the Trust, whether such shares are authorized but unissued, or already outstanding, to the same extent as if such Person were not a Trustee, officer or other agent of the Trust; and the Trust may issue and sell and may purchase such Shares from any such Person or any such organization, subject to the limitations, restrictions or other provisions applicable to the sale or purchase of such shares herein and the 1940 Act.
Section 2. SALE OF SHARES. The Trust may sell its authorized but unissued shares of beneficial interest to such Persons, at such times, on such terms, and for such consideration paid wholly or partly in cash or securities as the Board of Trustees may from time to time authorize; provided, that (i) each such sale shall be credited to the individual purchaser's account in the form of full or fractional Shares, at the net asset value per Share, subject to the 1940 Act, including, but not limited to, Section 23 of the 1940 Act, and the rules and regulations adopted thereunder and (ii) the Board of Trustees may, in its sole discretion, permit the Principal Underwriter to impose a sales charge upon any such sale; and further provided, that each such sale shall be subject to the 1940 Act, the rules and regulations adopted thereunder and applicable law. Every Shareholder by virtue of having become a Shareholder shall be deemed to have expressly assented and agreed to the terms of this Declaration of Trust and to have become bound as a party hereto.
Section 3. STATUS OF SHARES AND LIMITATION OF PERSONAL LIABILITY. Shares shall be deemed to be personal property giving to Shareholders only the rights provided in this Declaration of Trust, the By-Laws and under applicable law. Ownership of Shares shall not entitle the Shareholder to any title in or to the whole or any part of the Trust Property or right to call for a partition or division of the same or for an accounting, nor shall the ownership of Shares constitute the Shareholders as partners. The death, incapacity, dissolution, termination, or bankruptcy of a Shareholder during the existence of the Trust shall not operate to dissolve the Trust, nor entitle the representative of any deceased, incapacitated, dissolved, terminated or bankrupt Shareholder to an accounting or to take any action in court or elsewhere against the Trust or the Trustees, but shall entitle such representative only to the rights, as a Shareholder under this Declaration of Trust and the By-Laws, of said deceased, incapacitated, dissolved, terminated or bankrupt Shareholder. Neither the Trust nor the Trustees, nor any officer, employee or agent of the Trust shall have any power to bind personally any Shareholder, nor, except as specifically provided herein, to call upon any Shareholder for the payment of any sum of money other than such as the Shareholder may at any time personally agree to pay. Each Share, when issued on the terms determined by the Board of Trustees, shall be fully paid and nonassessable. As provided in the DSTA, Shareholders shall be entitled to the same limitation of personal liability as that extended to stockholders of a private corporation organized for profit under the General Corporation Law of the State of Delaware.
Section 4. POWER OF BOARD OF TRUSTEES TO MAKE TAX STATUS ELECTION. The Board of Trustees shall have the power, in its discretion, to make such elections as to the tax status of the Trust as may be permitted or required under the Code, without the vote of any Shareholder.
Section 5. SERIES AND CLASSES. The Board of Trustees may authorize the division of Shares into separate and distinct series and classes of Shares. The establishment and designation of any series or class thereof shall be effective, without the requirement of Shareholder approval, upon the adoption of a resolution by not less than a majority of the Board of Trustees, which resolution shall set forth such establishment and designation and may provide, to the extent permitted by the DST and subject to the rights of any class of preferred Shares hereafter created, for rights, powers, preferences, terms and duties of such series or class thereof otherwise than as provided herein. Each such resolution shall be incorporated herein by reference upon adoption. Any such resolution may be amended by a further resolution of a majority of the Board of Trustees, and if Shareholder approval would be required to make such an amendment to the language set forth in this Declaration of Trust, such further resolution shall require the same Shareholder approval that would be necessary to make such amendment to the language set forth in this Declaration of Trust. Each such further resolution shall be incorporated herein by reference upon adoption.
Section 6. INDEMNIFICATION OF SHAREHOLDERS. If any Shareholder or former Shareholder shall be exposed to liability by reason of a claim or demand relating exclusively to his or her being or having been a Shareholder and not because of such Shareholder's actions or omissions, such Shareholder or former Shareholder (or, in the case of a natural person, his or her heirs, executors, administrators, or other legal representatives or, in the case of a corporation or other entity, its corporate or other general successor) shall be entitled to be held harmless from and indemnified out of the assets of the Trust against all loss and expense arising from such claim or demand; provided, however, such indemnity shall not cover (i) any taxes due or paid by reason of such Shareholder's ownership of any Shares and (ii) expenses charged to a Shareholder pursuant to Article IV, Section 5 hereof.
ARTICLE IV.
THE BOARD OF TRUSTEES
(a) The initial Board of Trustees shall be comprised of the Trustee who first entered into the Original Declaration. The initial Trustee shall execute and file or cause to be filed the Certificate of Trust with the office of the Secretary of State of the State of Delaware and shall execute a consent in writing to adopt the By-Laws of the Trust. Such initial Trustee shall thereafter approve and adopt a resolution, prior to the election of a Board of Trustees by the initial Shareholder pursuant to paragraph (c) of this Section 1: (i) fixing the number of Trustees constituting the entire Board of Trustees and dividing such Board of Trustees into three (3) classes, with the term of office of each class expiring upon the earlier of: (1) the end of its term set forth in paragraph (c) of this Section 1, as though the appointment set forth in (ii) below by the initial Trustee were the election by written consent of the initial Shareholder described in paragraph (c) of this Section 1; or (2) the election of a successor Board of Trustees by the initial Shareholder pursuant to paragraph (c) of this Section 1; and (ii) appointing Trustees to fill any vacancies. If the initial Trustee determines to resign upon the appointment by the initial Trustee of the Trustees to fill the vacancies described in this paragraph, such resignation shall be effective upon the appointment of such Trustees.
(b) The number of Trustees constituting the entire Board of Trustees may be fixed from time to time by the vote of a majority of the then Board of Trustees; PROVIDED, HOWEVER, that the number of Trustees shall in no event be less than three (3) nor more than fifteen (15) and the percentage of Trustees who are not Interested Persons of the Trust shall be no less than that permitted by the 1940 Act. The number of Trustees shall not be reduced so as to shorten the term of any Trustee then in office. Upon a person's election or appointment as Trustee, such person shall execute a counterpart to this Declaration of Trust.
(c) The Board of Trustees shall be divided into three (3) classes, with the term of office of one class expiring each year. Upon the written consent of the initial Shareholder, Trustees of the first class shall be elected to hold office for a term expiring at the next succeeding annual meeting at the time such Trustees' successors are elected and qualified; Trustees of the second class shall be elected to hold office for a term expiring at the second succeeding annual meeting at the time such Trustees' successors are elected and qualified; and Trustees of the third class shall be elected to hold office for a term expiring at the third succeeding annual meeting at the time such Trustees' successors are elected and qualified.
(d) Thereafter, at each annual meeting of Shareholders, the successors to the class of Trustees whose term shall then expire shall be elected to hold office for a term expiring at the third succeeding annual meeting at the time such Trustees' successors are elected and qualified; provided that the Trustees may also determine by resolution those Trustees in each class that shall be nominated and elected by Shareholders of a particular class of Shares (e.g., by a class of preferred Shares issued by the Fund) prior to the initial public offering of such class of Shares. Only persons who are nominated in accordance with the procedures set forth in the By-Laws shall be eligible for election as Trustees and no proposal to nominate Trustees shall be brought before a meeting of Shareholders or otherwise transacted unless in accordance with the procedures set forth in the By-Laws, except as may be otherwise provided in any Board resolution establishing and designating a class of preferred Shares.
(e) Each Trustee shall hold office for the term set forth in the applicable paragraph of this Section 1 or until such Trustee's earlier death, resignation, removal or inability otherwise to serve.
(f) Except as may be otherwise provided in any Board resolution establishing and designating a class of Shares, any Trustee may be removed for cause by the Shareholders, upon the vote of the holders of 75% of the Shares entitled to vote. "Cause" for these purposes shall require willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such Trustee.
(g) Any Trustee may resign at any time by giving written notice to the secretary of the Trust or to a meeting of the Board of Trustees. Except as set forth in paragraph (a) of this Section 1 with respect to the initial Trustee, such resignation shall be effective upon receipt, unless specified to be effective at some later time, but no later than the next succeeding annual meeting of Shareholders.
Section 2. TRUSTEE ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Except as otherwise required by applicable law, any action that may be taken at any meeting of the Board of Trustees or any committee thereof may be taken without a meeting and without prior written notice if a consent or consents in writing setting forth the action so taken is signed by the Trustees having not less than the minimum number of votes that would be necessary to authorize or take that action at a meeting at which all Trustees on the Board of Trustees or any committee thereof, as the case may be, were present and voted. A consent transmitted by electronic transmission (as defined in the DSTA) by a Trustee shall be deemed to be written and signed for purposes of this Section. All such consents shall be filed with the secretary of the Trust and shall be maintained in the Trust's records.
Section 3. POWERS; OTHER BUSINESS INTERESTS; QUORUM AND REQUIRED VOTE.
(a) POWERS. Subject to the provisions of this Declaration of Trust, the business of the Trust shall be managed by or under the direction of the Board of Trustees, and such Board of Trustees shall have all powers necessary or convenient to carry out that responsibility. The Board of Trustees shall have full power and authority to do any and all acts and to make and execute any and all contracts and instruments that it may consider necessary or appropriate in connection with the operation and administration of the Trust. The Board of Trustees shall not be bound or limited by present or future laws or customs with regard to investments by trustees or fiduciaries, but, subject to the other provisions of this Declaration of Trust and the By-Laws, shall have full authority and absolute power and control over the assets and the business of the Trust to the same extent as if the Board of Trustees was the sole owner of such assets and business in its own right, including such authority, power and control to do all acts and things as it, in its sole discretion, shall deem proper to accomplish the purposes of this Trust. Without limiting the foregoing, the Board of Trustees may, subject to the requisite vote for such actions as set forth in this Declaration of Trust and the By-Laws: (1) adopt By-Laws not inconsistent with applicable law or this Declaration of Trust; (2) amend, restate and repeal such By-Laws, subject to and in accordance with the provisions of such By-Laws; (3) fill vacancies on the Board of Trustees in accordance with this Declaration of Trust and the By-Laws; (4) elect and remove such officers and appoint and terminate such agents as it considers appropriate, in accordance with this Declaration of Trust and the By-Laws; (5) establish and terminate one or more committees of the Board of Trustees pursuant to the By-Laws; (6) place Trust Property in custody as required by the 1940 Act, employ one or more custodians of the Trust Property and authorize such custodians to employ sub-custodians and to place all or any part of such Trust property with a custodian or a custodial system meeting the requirements of the 1940 Act; (7) retain a transfer agent, dividend disbursing agent, a shareholder servicing agent or administrative services agent, or any number thereof or any other service provider as deemed appropriate; (8) provide for the issuance and distribution of shares of beneficial interest in the Trust or other securities or financial instruments directly or through one or more Principal Underwriters or otherwise; (9) retain one or more Investment Adviser(s); (10) repurchase Shares on behalf of the Trust and transfer Shares pursuant to applicable law; (11) set record dates for the determination of Shareholders with respect to various matters, in the manner provided in Article V, Section 4 of this Declaration of Trust; (12) declare and pay dividends and distributions to Shareholders from the Trust Property, in accordance with this Declaration of Trust and the By-Laws; (13) to the extent necessary to give effect to the rights, powers and preferences of any series or class established and designated, allocate assets and liabilities of the Trust to a particular series or class or apportion the same among two or more series or classes; and (14) in general delegate such authority as it considers desirable to any officer of the Trust, to any committee of the Trust and to any agent or employee of the Trust or to any such custodian, transfer, dividend disbursing, shareholder servicing agent, Principal Underwriter, Investment Adviser, or other service provider, to the extent authorized and in accordance with this Declaration of Trust, the By-Laws and applicable law. The powers of the Board of Trustees set forth in this Section 3(a) are without prejudice to the other powers of the Board of Trustees set forth in this Declaration of Trust and the By-Laws. Any determination as to what is in the best interests of the Trust and its Shareholders made by the Board of Trustees in good faith shall be conclusive. In construing the provisions of this Declaration of Trust, the presumption shall be in favor of a grant of power to the Board of Trustees.
(b) OTHER BUSINESS INTERESTS. The Trustees shall devote to the affairs of the Trust such time as may be necessary for the proper performance of their duties hereunder, but neither the Trustees nor the officers, directors, shareholders, partners or employees of the Trustees, if any, shall be expected to devote their full time to the performance of such duties. The Trustees, or any Affiliate, shareholder, officer, director, partner or employee thereof, or any Person owning a legal or beneficial interest therein, may engage in, or possess an interest in, any business or venture other than the Trust, of any nature and description, independently or with or for the account of others. Neither the Trust nor any Shareholder shall have the right to participate or share in such other business or venture or any profit or compensation derived therefrom.
(c) QUORUM AND REQUIRED VOTE. At all meetings of the Board of Trustees, a majority of the Board of Trustees shall be present in person in order to constitute a quorum for the transaction of business. A meeting at which a quorum is initially present may continue to transact business notwithstanding the departure of Trustees from the meeting, if any action taken is approved by at least a majority of the required quorum for that meeting. Subject to Article III, Sections 1 and 6 of the By-Laws and except as otherwise provided herein or required by applicable law, the vote of not less than a majority of the Trustees present at a meeting at which a quorum is present shall be the act of the Board of Trustees.
Section 4. PAYMENT OF EXPENSES BY THE TRUST. An authorized officer of the Trust shall pay or cause to be paid out of the principal or income of the Trust, or partly out of the principal and partly out of the income of the Trust, all expenses, fees, charges, taxes and liabilities incurred by or arising in connection with the maintenance or operation of the Trust, or in connection with the management thereof, including, but not limited to, the Trustees' compensation and such expenses, fees, charges, taxes and liabilities associated with the services of the Trust's officers, employees, Investment Adviser(s), Principal Underwriter, auditors, counsel, custodian, sub-custodian, transfer agent, dividend disbursing agent, shareholder servicing agent, and such other agents or independent contractors and such other expenses, fees, charges, taxes and liabilities as the Board of Trustees may deem necessary or proper to incur.
Section 5. PAYMENT OF EXPENSES BY SHAREHOLDERS. The Board of Trustees shall have the power, as frequently as it may determine, to cause any Shareholder to pay directly, in advance or arrears, for charges of the Trust's custodian or transfer, dividend disbursing, shareholder servicing or similar agent for services provided to such Shareholder, an amount fixed from time to time by the Board of Trustees, by setting off such amount due from such Shareholder from the amount of (i) declared but unpaid dividends or distributions owed such Shareholder, or (ii) proceeds from the repurchase by the Trust of Shares from such Shareholder pursuant to Article VI hereof.
Section 6. OWNERSHIP OF TRUST PROPERTY. Legal title to all of the Trust Property shall at all times be vested in the Trust, except that the Board of Trustees shall have the power to cause legal title to any Trust Property to be held by or in the name of any Person as nominee, on such terms as the Board of Trustees may determine, in accordance with applicable law.
(a) Subject to this Declaration of Trust, the By-Laws and the 1940 Act, the Board of Trustees may, at any time and from time to time, contract for exclusive or nonexclusive investment advisory or investment management services for the Trust with any corporation, trust, association or other organization, including any Affiliate; and any such contract may contain such other terms as the Board of Trustees may determine, including without limitation, delegation of authority to the Investment Adviser to determine from time to time without prior consultation with the Board of Trustees what securities and other instruments or property shall be purchased or otherwise acquired, owned, held, invested or reinvested in, sold, exchanged, transferred, mortgaged, pledged, assigned, negotiated, or otherwise dealt with or disposed of, and what portion, if any, of the Trust Property shall be held uninvested and to make changes in the Trust's investments, or to engage in such other activities, including administrative services, as may specifically be delegated to such party.
(b) Subject to this Declaration of Trust, the By-Laws and the 1940 Act, the Board of Trustees may also, at any time and from time to time, contract with any Person, including any Affiliate, appointing it or them as the exclusive or nonexclusive placement agent, distributor or Principal Underwriter for the Trust's shares of beneficial ownership or for other securities or financial instruments to be issued by the Trust, or appointing it or them to act as the administrator, custodian, transfer agent, dividend disbursing agent and/or shareholder servicing agent for the Trust.
(c) Subject to this Declaration of Trust, the By-Laws and the 1940 Act, the Board of Trustees is further empowered, at any time and from time to time, to contract with any Persons to provide such other services to the Trust as the Board of Trustees determines to be in the best interests of the Trust and its Shareholders.
(d) None of the following facts or circumstances shall affect the validity of any of the following contracts or disqualify any Shareholder, Trustee, employee or officer of the Trust from voting upon or executing the same, or create any liability or accountability to the Trust or the Shareholders, provided that the establishment of and performance of each such contract is permissible under the 1940 Act, and provided further that such Person is authorized to vote upon such contract under the 1940 Act:
(i) the fact that any of the Shareholders, Trustees, employees or officers of the Trust is a shareholder, director, officer, partner, trustee, employee, manager, Adviser, placement agent, Principal Underwriter, distributor, or Affiliate or agent of or for any Person, or for any parent or Affiliate of any Person, with which any type of service contract provided for in this Article IV, Section 7 may have been or may hereafter be made, or that any such Person, or any parent or Affiliate thereof, is a Shareholder or has an interest in the Trust, or
(ii) the fact that any Person with which any type of service contract provided for in this Article IV, Section 7 may have been or may hereafter be made also has such a service contract with one or more other Persons, or has other business or interests.
(e) Every contract referred to in this Section 7 is required to comply with this Declaration of Trust, the By-Laws, the 1940 Act, other applicable law and any stipulation by resolution of the Board of Trustees.
ARTICLE V.
SHAREHOLDERS' VOTING POWERS AND MEETINGS
Section 1..VOTING POWERS. The Shareholders shall have the power to vote only
(i) for the election of Trustees and the filling of any vacancies on the
Board of Trustees as set forth herein and in the By-Laws; (ii) for the
removal of Trustees as set forth herein; (iii) on such additional matters as
may be required by this Declaration of Trust, the By-Laws, the 1940 Act,
other applicable law and any registration statement of the Trust filed with
the Commission, the registration of which is effective; and (iv) on such
other matters as the Board of Trustees may consider necessary or desirable.
The Shareholder of record (as of the record date established pursuant to
Section 4 of this Article V) of each Share shall be entitled to one vote for
each full Share, and a fractional vote for each fractional Share.
Shareholders shall not be entitled to cumulative voting in the election of
Trustees or on any other matter.
(a) Subject to any Board resolution establishing and designating a class of Shares, a majority of the Shares entitled to vote at a Shareholders' meeting, which are present in person or represented by proxy, shall constitute a quorum at the Shareholders' meeting, except when a larger quorum is required by applicable law or the requirements of any securities exchange on which Shares are listed for trading, in which case such quorum shall comply with such requirements. Abstentions and broker non-votes will be included for purposes of determining whether a quorum is present. Subject to any provision of this Declaration of Trust, the By-Laws, any Board resolution establishing and designating a class of Shares or applicable law that requires a different vote: (1) in all matters other than the election of Trustees, the affirmative "vote of a majority of the outstanding voting securities" (as defined herein) of the Trust entitled to vote at a Shareholders' meeting at which a quorum is present, shall be the act of the Shareholders; and (2) Trustees shall be elected by not less than a plurality of the votes cast of the holders of Shares entitled to vote present in person or represented by proxy at a Shareholders' meeting at which a quorum is present. If any matter affects only the interests of some but not all classes then existing, then only the Shareholders of such affected classes shall be entitled to vote on the matter, in which case this paragraph shall apply to a vote at a meeting of such class with such changes in the context hereof as are necessary to substitute the class and its Shares or Shareholders for the Trust and its Shares or Shareholders.
(b) Abstentions and broker non-votes will be treated as votes present at a Shareholders' meeting, but will not be treated as votes cast. Abstentions and broker non-votes, therefore, will have no effect on proposals which require a plurality or majority of votes cast for approval, but will have the same effect as a vote "against" on proposals requiring any percentage of the outstanding voting securities of the Trust for approval.
Section 3. SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any action which may be taken at any meeting of Shareholders may be taken without a meeting and without prior notice if a consent or consents in writing setting forth the action so taken is signed by the holders of all Shares entitled to vote on that action and is received by the secretary of the Trust. A consent transmitted by electronic transmission (as defined in the DSTA) by a Shareholder or by a person or persons authorized to act for a Shareholder shall be deemed to be written and signed for purposes of this Section. All such consents shall be filed with the secretary of the Trust and shall be maintained in the Trust's records. Any Shareholder that has given a written consent or the Shareholder's proxyholder or a personal representative of the Shareholder or its respective proxyholder may revoke the consent by a writing received by the secretary of the Trust before the written consents of all Shares entitled to vote have been received by the secretary of the Trust. If any matter affects only the interests of some but not all classes then existing, then only the Shareholders of such affected classes shall be entitled to vote on the matter, in which case this paragraph shall apply to a consent in writing of such class with such changes in the context hereof as are necessary to substitute the class and its Shares or Shareholders for the Trust and its Shares or Shareholders.
(a) For purposes of determining the Shareholders entitled to notice of, and to vote at, any meeting of Shareholders, the Board of Trustees may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Trustees, and which record date shall not be more than one hundred twenty (120) days nor less than ten (10) days before the date of any such meeting. For purposes of determining the Shareholders entitled to vote on any action without a meeting, the Board of Trustees may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Trustees, and which record date shall not be more than thirty (30) days after the date upon which the resolution fixing the record date is adopted by the Board of Trustees.
(b) If the Board of Trustees does not so fix a record date:
(i) the record date for determining Shareholders entitled to notice of, and to vote at, a meeting of Shareholders shall be at the close of business on the day next preceding the day on which notice is given or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held.
(ii) the record date for determining Shareholders entitled to vote on any action by consent in writing without a meeting of Shareholders, (1) when no prior action by the Board of Trustees has been taken, shall be the day on which the first signed written consent setting forth the action taken is delivered to the Trust, or (2) when prior action of the Board of Trustees has been taken, shall be at the close of business on the day on which the Board of Trustees adopts the resolution taking such prior action.
(c) For the purpose of determining the Shareholders who are entitled to
receive payment of any dividend or of any other distribution of assets of the
Trust, the Board of Trustees may from time to time fix a record date, which
record date shall not precede the date upon which the resolution fixing the
record date is adopted, and which record date shall not be more than sixty
(60) days before the date for the payment of such dividend or such other
distribution.
Section 5. ADDITIONAL PROVISIONS. The By-Laws may include further provisions for Shareholders' votes, meetings and related matters.
ARTICLE VI.
NET ASSET VALUE; DISTRIBUTIONS; REPURCHASES; TRANSFERS
(a) The Board of Trustees shall have the power to determine from time to time the offering price for authorized, but unissued, shares of beneficial interest of the Trust, subject to any requirements or limitations of the 1940 Act.
(b) The Board of Trustees may, subject to the 1940 Act, prescribe and shall set forth in the By-Laws, this Declaration of Trust or in a resolution of the Board of Trustees such bases and time for determining the net asset value per Share, or net income attributable to the Shares or, after providing for actual and accrued expenses and liabilities (including such reserves as the Board of Trustees may establish) determined in accordance with good accounting practices and subject to the preferences of any class of Shares then existing, the declaration and payment of dividends and distributions on the Shares, as it may deem necessary or desirable.
(c) Before payment of any dividend there may be set aside out of any funds of the Trust available for dividends such sum or sums as the Board of Trustees may from time to time, in its absolute discretion, think proper as a reserve fund to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Trust or for such other lawful purpose as the Board of Trustees shall deem to be in the best interests of the Trust and its Shareholders, and the Board of Trustees may abolish any such reserve in the manner in which it was created.
(a) The Trust may repurchase Shares on the open market or such Shares as are tendered by any Shareholder for repurchase pursuant to a repurchase offer or tender offer, if any, made by the Trust periodically or from time to time, upon the presentation by the Shareholder of a proper instrument of transfer together with a request directed to the Trust, its transfer agent or other duly authorized agent, that the Trust repurchase such Shares, or in accordance with such other procedures for repurchase as the Board of Trustees may from time to time authorize; and the Trust will pay therefore a price that meets the requirements of Section 23 of the 1940 Act, and the rules and regulations adopted thereunder, and that is in accordance with the terms of such repurchase offer, tender offer, this Declaration of Trust, the By-Laws and other applicable law. The obligations set forth in this Section 2 are subject to the provision that such obligations may be suspended or postponed by the Board of Trustees (1) during any time the New York Stock Exchange (the "Exchange") is closed for other than weekends or holidays; (2) if permitted by the rules of the Commission, during periods when trading on the Exchange is restricted; or (3) during any National Financial Emergency. The Board of Trustees may, in its discretion, declare that the suspension relating to a National Financial Emergency shall terminate, as the case may be, on the first business day on which the Exchange shall have reopened or the period specified above shall have expired (as to which, in the absence of an official ruling by the Commission, the determination of the Board of Trustees shall be conclusive.)
(b) The repurchase price may in any case or cases be paid wholly or partly in kind if the Board of Trustees determines that such payment is advisable in the interest of the remaining Shareholders. Subject to the foregoing, the fair value, selection and quantity of securities or other property so paid or delivered as all or part of the repurchase price shall be determined by or under authority of the Board of Trustees. In no case shall the Trust be liable for any delay of any corporation or other Person in transferring securities or other property selected for delivery as all or part of any payment in kind.
Section 3. REPURCHASE OF SHARES WITHOUT SHAREHOLDER CONSENT. The Trust shall have the right at its option and at any time, subject to the 1940 Act and other applicable law, to repurchase Shares of any Shareholder at a price that meets the requirements of Section 23 of the 1940 Act, and the rules and regulations adopted thereunder, and that is in accordance with the terms of this Declaration of Trust, the By-Laws and other applicable law: (a) if at such time, such Shareholder owns Shares having an aggregate net asset value of less than an amount determined from time to time by the Trustees; or (b) to the extent that such Shareholder owns Shares equal to or in excess of a percentage of the Shares determined from time to time by the Trustees.
Section 4. TRANSFER OF SHARES. Shares shall be transferable in accordance with the provisions of the By-Laws.
ARTICLE VII.
LIMITATION OF LIABILITY
AND INDEMNIFICATION OF AGENT
(a) For the purpose of this Article, "Agent" means any Person who is or was a Trustee, officer, employee or other agent of the Trust or is or was serving at the request of the Trust as a trustee, director, officer, employee or other agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise; "Proceeding" means any threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative; and "Expenses" include without limitation attorneys' fees and any expenses of establishing a right to indemnification under this Article.
(b) An Agent shall be liable to the Trust and to any Shareholder solely for such Agent's own willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such Agent (such conduct referred to herein as "Disqualifying Conduct"), and for nothing else.
(c) Subject to subsection (b) of this Section 1 and to the fullest extent that limitations on the liability of Agents are permitted by the DSTA, the Agents shall not be responsible or liable in any event for any act or omission of any other Agent of the Trust or any Investment Adviser or Principal Underwriter of the Trust.
(d) No Agent, when acting in its respective capacity as such, shall be personally liable to any Person, other than the Trust or a Shareholder to the extent provided in subsections (b) and (c) of this Section 1, for any act, omission or obligation of the Trust or any Trustee thereof.
(e) The officers and Trustees may obtain the advice of counsel or other experts with respect to the meaning and operation of this Declaration of Trust, the By-Laws, applicable law and their respective duties as officers or Trustees. No such officer or Trustee shall be liable for any act or omission in accordance with such advice and no inference concerning liability shall arise from a failure to follow such advice. The officers and Trustees shall not be required to give any bond hereunder, nor any surety if a bond is required by applicable law.
(f) The failure to make timely collection of dividends or interest, or to take timely action with respect to entitlements, on the Trust's securities issued in emerging countries, shall not be deemed to be negligence or other fault on the part of any Agent, and no Agent shall have any liability for such failure or for any loss or damage resulting from the imposition by any government of exchange control restrictions which might affect the liquidity of the Trust's assets or from any war or political act of any foreign government to which such assets might be exposed, except, in the case of a Trustee or officer, for liability resulting from such Trustee's or officer's Disqualifying Conduct.
(g) The limitation on liability contained in this Article applies to events occurring at the time a Person serves as an Agent whether or not such Person is an Agent at the time of any Proceeding in which liability is asserted.
(h) No amendment or repeal of this Article shall adversely affect any right or protection of an Agent that exists at the time of such amendment or repeal.
(a) INDEMNIFICATION BY TRUST. The Trust shall indemnify, out of Trust Property, to the fullest extent permitted under applicable law, any Person who was or is a party or is threatened to be made a party to any Proceeding by reason of the fact that such Person is or was an Agent of the Trust, against Expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with such Proceeding if such Person acted in good faith or in the case of a criminal proceeding, had no reasonable cause to believe the conduct of such Person was unlawful. The termination of any Proceeding by judgment, order, settlement, conviction or plea of nolo contendere or its equivalent shall not of itself create a presumption that the Person did not act in good faith or that the Person had reasonable cause to believe that the Person's conduct was unlawful.
(b) EXCLUSION OF INDEMNIFICATION. Notwithstanding any provision to the contrary contained herein, there shall be no right to indemnification for any liability arising by reason of the Agent's Disqualifying Conduct. In respect of any claim, issue or matter as to which that Person shall have been adjudged to be liable in the performance of that Person's duty to the Trust or the Shareholders indemnification shall be made only to the extent that the court in which that action was brought shall determine, upon application or otherwise, that in view of all the circumstances of the case, that Person was not liable by reason of that Person's Disqualifying Conduct.
(c) REQUIRED APPROVAL. Any indemnification under this Article shall be made by the Trust if authorized in the specific case on a determination that indemnification of the Agent is proper in the circumstances by a majority vote of Trustees, even though such number of Trustees shall be less than a quorum, who are not parties to the Proceeding and have no economic or other interest in connection with such specific case; a committee of such Trustees designated by majority vote of such Trustees even though such number of Trustees shall be less than a quorum; or by independent legal counsel in a written opinion.
(d) ADVANCEMENT OF EXPENSES. Expenses incurred by an Agent in defending any Proceeding may be advanced by the Trust before the final disposition of the Proceeding on receipt of an undertaking by or on behalf of the Agent to repay the amount of the advance if it shall be determined ultimately that the Agent is not entitled to be indemnified as authorized in this Article.
(e) OTHER CONTRACTUAL RIGHTS. Nothing contained in this Article shall affect any right to indemnification to which Persons other than Trustees and officers of the Trust or any subsidiary thereof may be entitled by contract or otherwise.
(f) FIDUCIARIES OF EMPLOYEE BENEFIT PLAN. This Article does not apply to any Proceeding against any trustee, investment manager or other fiduciary of an employee benefit plan in that Person's capacity as such, even though that Person may also be an Agent of the Trust as defined in Section 1 of this Article. Nothing contained in this Article shall limit any right to indemnification to which such a trustee, investment manager, or other fiduciary may be entitled by contract or otherwise which shall be enforceable to the extent permitted by applicable law other than this Article.
Section 3. INSURANCE. To the fullest extent permitted by applicable law, the Board of Trustees shall have the authority to purchase with Trust Property, insurance for liability and for all Expenses reasonably incurred or paid or expected to be paid by an Agent in connection with any Proceeding in which such Agent becomes involved by virtue of such Agent's actions, or omissions to act, in its capacity or former capacity with the Trust, whether or not the Trust would have the power to indemnify such Agent against such liability.
Section 4. DERIVATIVE ACTIONS. Subject to the requirements set forth in
Section 3816 of the DSTA, a Shareholder or Shareholders may bring a
derivative action on behalf of the Trust only if (i) the Shareholder or
Shareholders first make a pre-suit demand upon the Board of Trustees to bring
the subject action unless an effort to cause the Board of Trustees to bring
such action is excused; and (ii) holders of a majority of the Shares join in
the bringing of such action. A demand on the Board of Trustees shall only be
excused if a majority of the Board of Trustees, or a majority of any
committee established to consider the merits of such action, has a material
personal financial interest in the action at issue. A Trustee shall not be
deemed to have a material personal financial interest in an action or
otherwise be disqualified from ruling on a Shareholder demand by virtue of
the fact that such Trustee receives remuneration from his service on the
Board of Trustees of the Trust or on the boards of one or more investment
companies with the same or an affiliated investment advisor or underwriter.
ARTICLE VIII.
APPROVAL OF CERTAIN TRANSACTIONS
Section 1. VOTE REQUIRED. Notwithstanding any other provision of this Declaration of Trust to the contrary and subject to the exceptions provided in this Article VIII, each of the transactions described in this Article VIII (other than Section 2 of this Article VIII with respect to dissolution and termination) shall require the approval of the Board of Trustees and the affirmative vote of the holders of 75% of the Shares entitled to vote to approve, adopt or authorize such transaction unless such action has been previously approved, adopted or authorized by the affirmative vote of two-thirds (66 2/3%) of the Board of Trustees, in which case the Shareholder vote set forth in Article V, Section 2(a)(1) shall be required. If any matter affects only the interests of some but not all classes then existing, then only the Shareholders of such affected classes shall be entitled to vote on the matter, in which case this paragraph shall apply to a vote at a meeting of such class with such changes in the context hereof as are necessary to substitute the class and its Shares or Shareholders for the Trust and its Shares or Shareholders.
Section 2..DISSOLUTION AND TERMINATION.
---------------------------
(a) The Trust shall have perpetual existence unless dissolved upon:
(i) The vote of the Board of Trustees; or
(ii) The occurrence of a dissolution or termination event pursuant
to anyother provision of this Declaration of Trust or the
DSTA.
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(b) Each class hereafter created shall have perpetual existence unless terminated upon:
(i) The vote of the Board of Trustees;
(ii) The occurrence of a termination event pursuant to any other provision of this Declaration of Trust, the DSTA or the occurrence of a termination event pursuant to any Board resolution establishing and designating such class; or
(iii) Any event that causes the dissolution of the Trust.
(c) Upon dissolution of the Trust, the Board of Trustees shall (in accordance with Section 3808 of the DSTA) pay or make reasonable provision to pay all claims and obligations of the Trust, including all contingent, conditional or unmatured claims and obligations known to the Trust, and all claims and obligations which are known to the Trust, but for which the identity of the claimant is unknown. If the Trust has sufficient assets, such claims and obligations shall be paid in full and any such provisions for payment shall be made in full. If the Trust has insufficient assets, such claims and obligations shall be paid or provided for according to their priority and, among claims and obligations of equal priority, ratably to the extent of assets available therefore. Any remaining assets (including, without limitation, cash, securities or any combination thereof) shall be distributed to the Shareholders ratably according to the number of Shares held of record by the several Shareholders on the record date for such dissolution distribution, subject to any then existing preferential rights of Shares. Upon the winding up of the Trust in accordance with Section 3808 of the DSTA and its termination, any one (1) Trustee shall execute, and cause to be filed, a certificate of cancellation, with the office of the Secretary of State of the State of Delaware in accordance with the provisions of Section 3810 of the DSTA.
(a) MERGER OR CONSOLIDATION. Pursuant to an agreement of merger or consolidation, the Board of Trustees may cause the Trust to merge or consolidate with or into one or more statutory trusts or "other business entities" (as defined in Section 3801 of the DSTA) formed or organized or existing under the laws of the State of Delaware or any other state or the United States or any foreign country or other foreign jurisdiction. Any such merger or consolidation shall require approval by vote of the Board of Trustees and Shareholders as set forth in Section 1 of this Article VIII. By reference to Section 3815(f) of the DSTA, any agreement of merger or consolidation approved in accordance with this Section 3(a) may, without a Shareholder vote, unless required by the 1940 Act or the requirements of any securities exchange on which Shares are listed for trading, effect any amendment to this Declaration of Trust or the By-Laws or effect the adoption of a new governing instrument if the Trust is the surviving or resulting statutory trust in the merger or consolidation, which amendment or new governing instrument shall be effective at the effective time or date of the merger or consolidation. In all respects not governed by the DSTA, the 1940 Act or other applicable law, the Board of Trustees shall have the power to prescribe additional procedures necessary or appropriate to accomplish a merger or consolidation, including the power to create one or more separate statutory trusts to which all or any part of the assets, liabilities, profits or losses of the Trust may be transferred and to provide for the conversion of Shares into beneficial interests in such separate statutory trust or trusts. Upon completion of the merger or consolidation, if the Trust is the surviving or resulting statutory trust, any one (1) Trustee shall execute, and cause to be filed, a certificate of merger or consolidation in accordance with Section 3815 of the DSTA.
(b) CONVERSION. The Board of Trustees may cause (i) the Trust to convert
to an "other business entity" (as defined in Section 3801 of the DSTA) formed
or organized under the laws of the State of Delaware as permitted pursuant to
Section 3821 of the DSTA; (ii) the Shares to be converted into beneficial
interests in another statutory trust created pursuant to this Section 3 of
this Article VIII, or (iii) the Shares to be exchanged under or pursuant to
any state or federal statute to the extent permitted by law. Any such
statutory conversion, Share conversion or Share exchange shall require
approval by vote of the Board of Trustees and Shareholders as set forth in
Section 1 of this Article VIII; PROVIDED, HOWEVER, that in all respects not
governed by the DSTA, the 1940 Act, other applicable law or the requirements
of any securities exchange on which Shares are listed for trading, the Board
of Trustees shall have the power to prescribe additional procedures necessary
or appropriate to accomplish a statutory conversion, Share conversion or
Share exchange, including the power to create one or more separate statutory
trusts to which all or any part of the assets, liabilities, profits or losses
of the Trust may be transferred and to provide for the conversion of Shares
into beneficial interests in such separate statutory trust or trusts.
(c) REORGANIZATION. The Board of Trustees may cause the Trust to sell, convey and transfer all or substantially all of the assets of the Trust to another trust, statutory trust, partnership, limited partnership, limited liability company, corporation or other association organized under the laws of any state in exchange for cash, shares or other securities with such sale, conveyance and transfer either (a) being made subject to, or with the assumption by the transferee of, the liabilities of the Trust, or (b) not being made subject to, or not with the assumption of, such liabilities. Such sale, conveyance and transfer shall require approval by vote of the Board of Trustees and Shareholders as set forth in Section 1 of this Article VIII. Following such sale, conveyance and transfer, the Board of Trustees shall distribute such cash, shares or other securities ratably among the Shareholders; and if all of the assets of the Trust have been so sold, conveyed and transferred, the Trust shall be dissolved. In all respects not governed by the DSTA, the 1940 Act or other applicable law, the Board of Trustees shall have the power to prescribe additional procedures necessary or appropriate to accomplish a sale of assets including the power to create one or more separate statutory trusts to which all or any part of the assets, liabilities, profits or losses of the Trust may be transferred and to provide for the conversion of Shares into beneficial interests in such separate statutory trust or trusts.
Section 4. RECLASSIFICATION OF THE TRUST. The Board of Trustees may cause the Trust to be converted from a "closed-end company" to an "open-end company" (as those terms are defined, respectively, in Sections 5(a)(2) and 5(a)(1) of the 1940 Act). Such reclassification of the Trust shall require approval by vote of the Board of Trustees and Shareholders as set forth in Section 1 of this Article VIII.
(a) The following transactions shall require approval by vote of the Board of Trustees and Shareholders as set forth in Section 1 of this Article VIII:
(i) Issuance of any securities of the Trust to any Principal Holder for cash; or
(ii) Sale, lease, or exchange to the Trust, in exchange for securities of the Trust, of any assets of any Principal Holder (except assets having an aggregate fair market value of less than $1,000,000, aggregating for the purpose of such aggregate amount, all assets sold, leased or exchanged in any series of similar transactions within a twelve-month period).
(b) For purposes of this Section 5, the term "Principal Holder" shall mean any Person or group (within the meaning of Rule 13d-5 under the Securities Exchange Act of 1934, as amended (the "1934 Act")), that is the beneficial owner, directly or indirectly, of more than ten percent (10%) of the Shares of the Trust and shall include any affiliate or associate, as such terms are defined in clause (2) below, of a Principal Holder, but shall not include FRI or any affiliated person of FRI. For the purposes of this Section 5, in addition to the Shares which a Principal Holder beneficially owns directly, a Principal Holder shall be deemed to be the beneficial owner of any Shares (1) which the Principal Holder has the right to acquire pursuant to any agreement or upon exercise of conversion rights or warrants, or otherwise or (2) which are beneficially owned, directly or indirectly (including Shares deemed owned through application of clause (1) above), by any other Person or group with which the Principal Holder or its "affiliate" or "associate," as those terms are defined in Rule 12b-2 under the 1934 Act, has any agreement, arrangement, or understanding for the purpose of acquiring, holding, voting, or disposing of Shares, or which is its "affiliate" or "associate" as so defined. For purposes of this Section 5, calculation of the total Shares of the Trust shall not include Shares deemed owned through application of clause (1) above.
(c) The Board of Trustees shall have the power and duty to determine for the purposes of this Section 5, on the basis of information known to the Trust whether (i) a Person or group beneficially owns more than ten percent (10%) of the Shares, (ii) a corporation, person or entity is an "affiliate" or "associate" (as defined above) of another, and (iii) the assets being acquired or leased by or to the Trust have an aggregate fair market value of less than $1,000,000 (as defined above). Any such determination shall be conclusive and binding for all purposes of this Section 5 in the absence of manifest error.
ARTICLE IX.
AMENDMENTS
Section 1..AMENDMENTS GENERALLY. Subject to the provisions of Section 3(a) of
Article VIII and Section 2 of this Article IX, this Declaration of Trust may
be restated and/or amended at any time by the Board of Trustees, without
approval of the Shareholders. The Certificate of Trust shall be restated
and/or amended at any time by the Board of Trustees, without Shareholder
approval, to correct any inaccuracy contained therein. Any such restatement
and/or amendment of the Certificate of Trust shall be executed by at least
one (1) Trustee and shall be effective immediately upon its filing with the
office of the Secretary of State of the State of Delaware or upon such future
date as may be stated therein.
Section 2..SPECIAL AMENDMENTS. Notwithstanding any other provision of this
Declaration of Trust or the By-Laws, the amendment or repeal of Article IV,
Sections 1, 2 and 3, Article V, Article VII, Article VIII and this Article IX
of this Declaration of Trust shall require the approval of the Board of
Trustees and the affirmative vote of holders of at least two-thirds (66 2/3%)
of the Shares entitled to vote, unless such action has previously been
approved, adopted or authorized by the affirmative vote of two-thirds (66
2/3%) of the Board of Trustees, in which case the Shareholder vote set forth
in Article V, Section 2(a)(1) shall be required.
ARTICLE X.
MISCELLANEOUS
Section 1. REFERENCES; HEADINGS; COUNTERPARTS. In this Declaration of Trust and in any such restatements and/or amendments, references to this instrument, and all expressions of similar effect to "herein," "hereof' and "hereunder," shall be deemed to refer to this instrument as amended or affected by any such restatements and/or amendments. Headings are placed herein for convenience of reference only and shall not be taken as a part hereof or control or affect the meaning, construction or effect of this instrument. Whenever the singular number is used herein, the same shall include the plural; and the neuter, masculine and feminine genders shall include each other, as applicable. Any references herein to specific sections of the DSTA, the Code or the 1940 Act shall refer to such sections as amended from time to time or any successor sections thereof. This instrument may be executed in any number of counterparts, each of which shall be deemed an original.
Section 2. APPLICABLE LAW. This Declaration of Trust is created under and is to be governed by and construed and administered according to the laws of the State of Delaware and the applicable provisions of the 1940 Act and the Code. The Trust shall be a Delaware statutory trust pursuant to the DSTA, and without limiting the provisions hereof, the Trust may exercise all powers which are ordinarily exercised by such a statutory trust.
Section 3. PROVISIONS IN CONFLICT WITH LAW OR REGULATIONS.
(a) The provisions of this Declaration of Trust are severable, and if the Board of Trustees shall determine, with the advice of counsel, that any of such provisions is in conflict with the 1940 Act, the Code, the DSTA, or with other applicable laws and regulations, the conflicting provision shall be deemed not to have constituted a part of this Declaration of Trust from the time when such provisions became inconsistent with such laws or regulations; PROVIDED, HOWEVER, that such determination shall not affect any of the remaining provisions of this Declaration of Trust or render invalid or improper any action taken or omitted prior to such determination.
(b) If any provision of this Declaration of Trust shall be held invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall attach only to such provision in such jurisdiction and shall not in any manner affect such provision in any other jurisdiction or any other provision of this Declaration of Trust in any jurisdiction.
Section 4. STATUTORY TRUST ONLY. It is the intention of the Trustees to create a statutory trust pursuant to the DSTA, and thereby to create the relationship of trustees and beneficial owner within the meaning of the DSTA between, respectively, the Trustees and each Shareholder. It is not the intention of the Trustees to create a general or limited partnership, limited liability company, joint stock association, corporation, bailment, or any form of legal relationship other than a statutory trust pursuant to the DSTA. Nothing in this Declaration of Trust shall be construed to make the Shareholders, either by themselves or with the Trustees, partners or members of a joint stock association.
Section 5..USE OF THE NAMES "FRANKLIN" OR "TEMPLETON".(a)The Board of Trustees expressly agrees and acknowledges that the names "Franklin" and "Templeton" are the sole property of Franklin Resources, Inc. ("FRI"). FRI has granted to the Trust a non-exclusive license to use such names as part of the name of the Trust now and in the future. The Board of Trustees further expressly agrees and acknowledges that the non-exclusive license granted herein may be terminated by FRI if the Trust ceases to use FRI or one of its Affiliates as Investment Adviser or to use other Affiliates or successors of FRI for such purposes. In such event, the nonexclusive license may be revoked by FRI and the Trust shall cease using the names "Franklin" and "Templeton," or any name misleadingly implying a continuing relationship between the Trust and FRI or any of its Affiliates, as part of its name unless otherwise consented to by FRI or any successor to its interests in such names.
The Board of Trustees further understands and agrees that so long as FRI and/or any future advisory Affiliate of FRI shall continue to serve as the Trust's Investment Adviser, other registered closed- or open-end investment companies ("funds") as may be sponsored or advised by FRI or its Affiliates shall have the right permanently to adopt and to use the names "Franklin" and "Templeton" in their names and in the names of any series or class of shares of such funds.
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IN WITNESS WHEREOF, the Trustees named below do hereby make and enter into this Amended and Restated Agreement and Declaration of Trust as of the date first written above.
/s/ FRANK H. ABBOTT, III /s/ CHARLES B. JOHNSON Frank H. Abbott, III Charles B. Johnson /s/ HARRIS J. ASHTON /s/ RUPERT H. JOHNSON, JR. Harris J. Ashton Rupert H. Johnson, Jr. /s/ ROBERT F. CARLSON /s/ FRANK W.T. LAHAYE Robert F. Carlson Frank W. T. LaHaye /s/ MARTIN L. FLANAGAN /s/ GORDON S. MACKLIN Martin L. Flanagan Gordon S. Macklin /s/ S. JOSEPH FORTUNATO S. Joseph Fortunato |
AMENDED AND RESTATED BY-LAWS
of
FRANKLIN TEMPLETON LIMITED DURATION INCOME TRUST
A Delaware Statutory Trust
(Effective as of ____ June, 2003)
These By-Laws may contain any provision not inconsistent with applicable law or the Declaration of Trust, relating to the governance of the Trust. Unless otherwise specified in these By-Laws, capitalized terms used in these By-Laws shall have the meanings assigned to them in the Declaration of Trust.
ARTICLE I
DEFINITIONS
Section 1. Whenever used herein the following terms shall have the following meanings:
(a) "1940 ACT" shall mean the Investment Company Act of 1940 and the rules and regulations thereunder, all as adopted or amended from time to time;
(b) "BOARD OF TRUSTEES" OR "BOARD" shall mean the governing body of the Trust, that is comprised of the number of Trustees of the Trust fixed from time to time pursuant to Article IV of the Declaration of Trust, having the powers and duties set forth therein;
(c) "BY-LAWS" shall mean these Amended and Restated By-Laws of the Trust, as amended or restated from time to time in accordance with Article VIII hereof;
(d) "CERTIFICATE OF TRUST" shall mean the certificate of trust filed with the office of the Secretary of State of the State of Delaware as required under the DSTA to form the Trust, as amended or restated from time to time and filed with such office;
(e) "CODE" shall mean the Internal Revenue Code of 1986 and the rules and regulations thereunder, all as adopted or amended from time to time;
(f) "COMMISSION" shall have the meaning given that term in the 1940 Act;
(g) "DSTA" shall mean the Delaware Statutory Trust Act (12 DEL. C. ss.3801, ET SEQ.), as amended from time to time;
(h) "DECLARATION OF TRUST" shall mean the Amended and Restated Agreement and Declaration of Trust of the Trust, as amended or restated from time to time;
(i) "INVESTMENT ADVISER" or "ADVISER" shall mean a Person, as defined below, furnishing services to the Trust pursuant to any investment advisory or investment management contract described in Article IV, Section 7(a) of the Declaration of Trust;
(j) "PERSON" shall mean a natural person, partnership, limited partnership, limited liability company, trust, estate, association, corporation, organization, custodian, nominee or any other individual or entity in its own or any representative capacity, in each case, whether domestic or foreign, and a statutory trust or a foreign statutory trust;
(k) "SHARES" shall mean the outstanding shares of beneficial interest into which the beneficial interest in the Trust shall be divided from time to time, and shall include fractional and whole shares;
(l) "SHAREHOLDER" shall mean a record owner of Shares;
(m) "TRUST" shall mean the Delaware statutory trust formed pursuant to the Original Declaration and the filing of the Certificate of Trust with the office of the Secretary of State of the State of Delaware;
(n) "TRUSTEE" or "TRUSTEES" shall refer to each signatory to the Declaration of Trust as a trustee, so long as such signatory continues in office in accordance with the terms of the Declaration of Trust, and all other Persons who may, from time to time, be duly elected or appointed, qualified and serving on the Board of Trustees in accordance with the provisions hereof and the Declaration of Trust. Reference herein to a Trustee or the Trustees shall refer to such Person or Persons in such Person's or Persons' capacity as a trustee or trustees hereunder and under the Declaration of Trust; and
"VOTE OF A MAJORITY OF THE OUTSTANDING VOTING SECURITIES" shall have the meaning provided under Subsection 2(a)(42) of the 1940 Act or any successor provision thereof, which Subsection, as of the date hereof, is as follows: the vote, at a meeting of the Shareholders, (i) of sixty-seven percent (67%) or more of the voting securities present in person or represented by proxy at such meeting, if the holders of more than fifty percent (50%) of the outstanding voting securities of the Trust are present or represented by proxy; or (ii) of more than fifty percent (50%) of the outstanding voting securities of the Trust, whichever is the less.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 1. PLACE OF MEETINGS. Meetings of Shareholders shall be held at any place within or outside the State of Delaware designated by the Board. In the absence of any such designation by the Board, Shareholders' meetings shall be held at the offices of the Trust.
(a) ANNUAL MEETINGS. The annual meeting of the Shareholders shall be held on such date and at such time as the Board of Trustees shall designate. At such annual meeting, the Shareholders entitled to vote shall elect Trustees and transact such other business as may be properly brought before the meeting.
(b) SPECIAL MEETINGS. Special meetings of Shareholders may be called at any time by the Board, by the chairperson of the Board or by the president of the Trust for the purpose of taking action upon any matter deemed by the Board to be necessary or desirable. To the extent permitted by the 1940 Act, a special meeting of the Shareholders for the purpose of electing Trustees or filling vacancies on the Board may also be called by the chairperson of the Board, or shall be called by the president or any vice-president of the Trust at the request of the Shareholders holding not less than ten (10) percent of the Shares, provided that the Shareholders requesting such meeting shall have paid the Trust the reasonably estimated cost of preparing and mailing the notice thereof, which an authorized officer of the Trust shall determine and specify to such Shareholders. No special meeting shall be called upon the request of Shareholders to consider any matter which is substantially the same as a matter voted upon at any meeting of the Shareholders held during the preceding twelve (12) months, unless requested by the holders of a majority of all Shares entitled to be voted at such meeting.
(c) The nominations of persons for election to the Board of
Trustees and other lawfully permissible proposals of business to
be considered by Shareholders may be presented at an annual
meeting of the Shareholders by properly being brought before the
meeting by a Shareholder who (i) is entitled to vote at the
meeting, (ii) complies with the notice procedures set forth in
this subparagraph (c) and subparagraphs (d) and (e) of this
Section 2, and (iii) was a Shareholder of record at the time such
notice is received by the secretary of the Trust. For business
to be properly brought before an annual meeting by a Shareholder,
the Shareholder must have given timely notice thereof in writing
to the secretary of the Trust. To be timely, a Shareholder's
notice must be made in writing and received by the secretary of
the Trust not more than 150 days and not less than 120 days in
advance of the annual meeting.
(d) Each such notice given by a Shareholder to the secretary of the Trust with respect to nominations for the election of Trustees shall set forth (i) the name, age, business address and, if known, residence address of each nominee proposed in such notice, (ii) the principal occupation or employment of each such nominee, (iii) the number of Shares which are beneficially owned by each such nominee, (iv) whether such Shareholder believes each such nominee is or will be an "interested person" of the Trust (as defined in the 1940 Act), (v) the written and signed consent of each such person to be nominated, to be named as a nominee and to serve as a Trustee if elected, and (vi) all such other information regarding each such nominee as would have been required to be included in a proxy statement filed pursuant to the proxy rules of the Commission had each such nominee been nominated by the Board of Trustees of the Trust. In addition, the Shareholder making such nomination shall promptly provide any other information reasonably requested by the Trust.
(e) Each such notice given by a Shareholder to the secretary of
the Trust with respect to business proposals to be brought before
an annual meeting shall set forth in writing as to each matter:
(i) a brief description of the business desired to be brought
before the meeting and the reasons for conducting such business
at the meeting; (ii) the name and address, as they appear on the
Trust's books, of the Shareholder proposing such business; (iii)
the number of Shares which are beneficially owned by the
Shareholder; (iv) any material interest of the Shareholder in
such business; and (v) all such other information regarding each
such matter as would have been required to be included in a proxy
statement filed pursuant to the proxy rules of the Commission had
each such matter been proposed by the Board of Trustees of the
Trust.
(f) At such annual meeting, the chairperson of the Board, the president of the Trust, in the absence of the chairperson of the Board, or any vice president or other authorized officer of the Trust, in the absence of the president, may, if the facts warrant, determine and declare to such meeting that a nomination or proposal was not made in accordance with the foregoing procedure, and, if he should so determine, he shall so declare to the meeting, and the defective nomination or proposal shall be disregarded and laid over for action at the next succeeding annual meeting of the Shareholders taking place thirty days or more thereafter. This provision shall not require the holding of any adjourned meeting of Shareholders for the purpose of considering such defective nomination or proposal.
Section 3. NOTICE OF SHAREHOLDERS' MEETING. Notice of any meeting
of Shareholders shall be given to each Shareholder entitled to
vote at such meeting in accordance with Section 4 of this Article
II not less than ten (10) nor more than one hundred twenty (120)
days before the date of the meeting. The notice shall specify
(i) the place, date and hour of the meeting, and (ii) in the case
of a special meeting or to the extent required by the 1940 Act,
in the case of an annual meeting, the purpose or purposes
thereof. The notice of any meeting at which Trustees are to be
elected also shall include the name of any nominee or nominees
who are intended to be presented for election.
Section 4. MANNER OF GIVING NOTICE. Notice of any meeting of Shareholders shall be given either personally or by United States mail, courier, cablegram, telegram, facsimile or electronic mail, or other form of communication permitted by then current law, charges prepaid, addressed to the Shareholder or to the group of shareholders at the same address as may be permitted pursuant to applicable laws, or as Shareholders may otherwise consent, at the address of that Shareholder appearing on the books of the Trust or its transfer or similar agent or provided in writing by the Shareholder to the Trust for the purpose of notice. Notice shall be deemed to have been duly given when delivered personally, deposited in the United States mail or with a courier, or sent by cablegram, telegram, facsimile or electronic mail. If no address of a Shareholder appears on the Trust's books or has been provided in writing by a Shareholder, notice shall be deemed to have been duly given without a mailing, or substantial equivalent thereof, if such notice shall be available to the Shareholder on written demand of the Shareholder at the offices of the Trust.
If any notice addressed to a Shareholder at the address of that Shareholder appearing on the books of the Trust or that has been provided in writing by that Shareholder to the Trust for the purpose of notice, is returned to the Trust marked to indicate that the notice to the Shareholder cannot be delivered at that address, all future notices or reports shall be deemed to have been duly given without further mailing, or substantial equivalent thereof, if such notices shall be available to the Shareholder on written demand of the Shareholder at the offices of the Trust.
Section 5. ADJOURNED MEETING; NOTICE. Any Shareholders' meeting, whether or not a quorum is present, may be adjourned from time to time for any reason whatsoever by vote of the holders of Shares entitled to vote holding not less than a majority of the Shares present in person or by proxy at the meeting, or by the chairperson of the Board, the president of the Trust, in the absence of the chairperson of the Board, or any vice president or other authorized officer of the Trust, in the absence of the president. Any adjournment may be made with respect to any business which might have been transacted at such meeting and any adjournment will not delay or otherwise affect the effectiveness and validity of any business transacted at the Shareholders' meeting prior to adjournment.
When any Shareholders' meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken, unless after the adjournment, a new record date is fixed for the adjourned meeting, or unless the adjournment is for more than thirty (30) days after the date of the original meeting, in which case, notice shall be given to each Shareholder of record entitled to vote at the adjourned meeting in accordance with the provisions of Sections 3 and 4 of this Article II. At any adjourned meeting, any business may be transacted that might have been transacted at the original meeting.
(a) The Shareholders entitled to vote at any meeting of Shareholders and the Shareholder vote required to take action shall be determined in accordance with the provisions of the Declaration of Trust. Unless determined by the inspector of the meeting to be advisable, the vote on any question need not be by written ballot.
(b) Unless otherwise determined by the Board at the time it approves an action to be submitted to the Shareholders for approval, Shareholder approval of an action shall remain in effect until such time as the approved action is implemented or the Shareholders vote to the contrary. Notwithstanding the foregoing, an agreement of merger or consolidation may be terminated or amended notwithstanding prior approval if so authorized by such agreement of merger or consolidation pursuant to Section 3815 of the DSTA.
Section 7. WAIVER OF NOTICE BY CONSENT OF ABSENT SHAREHOLDERS. Attendance by a Shareholder, in person or by proxy, at a meeting shall constitute a waiver of notice of that meeting with respect to that Shareholder, except when the Shareholder attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Whenever notice of a Shareholders' meeting is required to be given to a Shareholder under the Declaration of Trust or these By-Laws, a written waiver thereof, executed before or after the time notice is required to be given, by such Shareholder or his or her attorney thereunto authorized, shall be deemed equivalent to such notice. The waiver of notice need not specify the purpose of, or the business to be transacted at, the meeting.
Section 8. PROXIES. Every Shareholder entitled to vote for Trustees or on any other matter that may properly come before the meeting shall have the right to do so either in person or by one or more agents authorized by a written proxy executed by the Shareholder and filed with the secretary of the Trust; PROVIDED, that an alternative to the execution of a written proxy may be permitted as described in the next paragraph of this Section 8. A proxy shall be deemed executed if the Shareholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the Shareholder or the Shareholder's attorney-in-fact. A valid proxy that does not state that it is irrevocable shall continue in full force and effect unless revoked by the Shareholder executing it, or using one of the permitted alternatives to execution, described in the next paragraph, by a written notice delivered to the secretary of the Trust prior to the exercise of the proxy or by the Shareholder's attendance and vote in person at the meeting; PROVIDED, HOWEVER, that no proxy shall be valid after the expiration of eleven (11) months from the date of the proxy unless otherwise expressly provided in the proxy. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of the General Corporation Law of the State of Delaware.
With respect to any Shareholders' meeting, the Board, or, in case the Board does not act, the president, any vice president or the secretary, may permit proxies by electronic transmission (as defined in the DSTA), telephonic, computerized, telecommunications or other reasonable alternative to the execution of a written instrument authorizing the holder of the proxy to act. A proxy with respect to Shares held in the name of two or more Persons shall be valid if executed, or a permitted alternative to execution is used, by any one of them unless, at or prior to the exercise of the proxy, the secretary of the Trust receives a specific written notice to the contrary from any one of them. A proxy purporting to be by or on behalf of a Shareholder shall be deemed valid unless challenged at or prior to its exercise and the burden of proving invalidity shall rest with the challenger.
Section 9. INSPECTORS. Before any meeting of Shareholders, the chairperson of the Board, or in the absence of the chairperson of the Board, the president of the Trust, or in the absence of the president, any vice president or other authorized officer of the Trust, may appoint any person other than nominees for office to act as inspector at the meeting or any adjournment. If any person appointed as inspector fails to appear or fails or refuses to act, the chairperson of the Board, or in the absence of the chairperson of the Board, the president of the Trust, or in the absence of the president, any vice president or other authorized officer of the Trust, shall appoint a person to fill the vacancy. Such appointments may be made by such officers in person or by telephone.
The inspector shall:
(a) determine the number of Shares and the voting power of each, the Shares represented at the meeting, the existence of a quorum and the authenticity, validity and effect of proxies;
(b) receive votes or ballots;
(c) hear and determine all challenges and questions in any way arising in connection with the right to vote;
(d) count and tabulate all votes;
(e) determine when the polls shall close;
(f) determine the result of voting; and
(g) do any other acts that may be proper to conduct the election or vote with fairness to all Shareholders.
ARTICLE III
TRUSTEES
Section 1. VACANCIES. Whenever a vacancy in the Board shall occur
(by reason of death, resignation, removal, an increase in the
authorized number of Trustees or other cause), until such vacancy
is filled as provided herein or the number of authorized Trustees
constituting the Board of Trustees is decreased pursuant to
Article IV, Section 1 of the Declaration of Trust, the Trustee(s)
then in office, regardless of the number and even if less than a
quorum, shall have all the powers granted to the Board and shall
discharge all the duties imposed upon the Board by the
Declaration of Trust and these By-Laws as though such number
constitutes the entire Board. Vacancies in any class of Trustees
may be filled by not less than a majority vote of the Trustee(s)
then in office, regardless of the number and even if less than a
quorum, unless a special meeting of Shareholders is called for
the purpose of filling such vacancies, in which case, such
vacancies shall be filled in the same manner as an election of
Trustees. A Trustee chosen to fill a vacancy shall hold office
until the next election of the relevant class for which such
Trustee shall have been chosen when such Trustee's successor is
duly elected and qualified, unless prior thereto such Trustee for
any reason ceases to serve as Trustee. In the event that all
Trustee offices become vacant, an authorized officer of the
Investment Adviser shall serve as the sole remaining Trustee
effective upon the vacancy in the office of the last Trustee,
subject to the provisions of the 1940 Act. In such case, the
Investment Adviser, as the sole remaining Trustee, shall, as soon
as practicable, fill all of the vacancies on the Board; provided,
however, that the percentage of Trustees who are not Interested
Persons of the Trust shall be no less than that permitted by the
1940 Act. Thereupon, the Investment Adviser shall resign as
Trustee and a special meeting of the Shareholders shall be
called, as required by the 1940 Act, for the election of three
(3) classes of Trustees as though such meeting were the first
annual meeting of the Shareholders.
Section 2. PLACE OF MEETINGS AND MEETINGS BY TELEPHONE. All meetings of the Board may be held at any place within or outside the State of Delaware that is designated from time to time by the Board, the chairperson of the Board, or in the absence of the chairperson of the Board, the president of the Trust, or in the absence of the president, any vice president or other authorized officer of the Trust. In the absence of such a designation, regular meetings shall be held at the offices of the Trust. Any meeting, regular or special, may be held, with respect to one or more participating Trustees, by conference telephone or similar communication equipment, so long as all Trustees participating in the meeting can hear one another, and all such Trustees shall be deemed to be present in person at such meeting.
Section 3. REGULAR MEETINGS. Regular meetings of the Board shall be held at such time and place as shall from time to time be fixed by the Board, the chairperson of the Board, or in the absence of the chairperson of the Board, the president of the Trust, or in the absence of the president, any vice president or other authorized officer of the Trust. Regular meetings may be held without notice.
Section 4. SPECIAL MEETINGS. Special meetings of the Board for any purpose or purposes may be called at any time by any Trustee, the chairperson of the Board, or in the absence of the chairperson of the Board, the president of the Trust, or in the absence of the president, any vice president or other authorized officer of the Trust.
Notice of the purpose, time and place of special meetings (or of the time and place for each regular meeting for which notice is given) shall be given personally, sent by first-class mail, courier, cablegram or telegram, charges prepaid, or by facsimile or electronic mail, addressed to each Trustee at that Trustee's address as has been provided to the Trust for purposes of notice. In case the notice is mailed, it shall be deemed to be duly given if deposited in the United States mail at least seven (7) days before the time the meeting is to be held. In case the notice is given personally or is given by courier, cablegram, telegram, facsimile or electronic mail, it shall be deemed to be duly given if delivered at least twenty-four (24) hours before the time of the holding of the meeting. The notice need not specify the place of the meeting if the meeting is to be held at the offices of the Trust.
Section 5. WAIVER OF NOTICE. Whenever notice is required to be given to a Trustee under this Article, a written waiver of notice signed by the Trustee, whether before or after the time notice is required to be given, shall be deemed equivalent to notice. The waiver of notice need not specify the purpose of, or the business to be transacted at, the meeting. All such waivers shall be filed with the records of the Trust or made a part of the minutes of the meeting. Attendance of a Trustee at a meeting shall constitute a waiver of notice of such meeting, except when the Trustee attends the meeting for the express purpose of objecting at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened.
Section 6. ADJOURNMENT. A majority of the Trustees present at a meeting of the Board, whether or not a quorum is present, may adjourn such meeting to another time and place. Any adjournment will not delay or otherwise affect the effectiveness and validity of any business transacted at the meeting prior to adjournment. At any adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally called.
Section 7. NOTICE OF ADJOURNMENT. Notice of the time and place of an adjourned meeting need not be given if the time and place thereof are announced at the meeting at which the adjournment is taken. If the adjournment is for more than thirty (30) days after the date of the original meeting, notice of the adjourned meeting shall be given to each Trustee.
Section 8. COMPENSATION OF TRUSTEES. Trustees may receive from the Trust reasonable compensation for their services and reimbursement of reasonable expenses as may be determined by the Board. This Section 8 shall not be construed to preclude any Trustee from serving the Trust in any other capacity as an officer, agent, employee, or otherwise and receiving compensation and reimbursement of expenses for those services.
ARTICLE IV
COMMITTEES
Section 1. COMMITTEES OF TRUSTEES. The Board may, by majority vote, designate one or more committees of the Board, each consisting of two (2) or more Trustees, to serve at the pleasure of the Board. The Board may, by majority vote, designate one or more Trustees as alternate members of any such committee who may replace any absent member at any meeting of the committee. Any such committee, to the extent provided by the Board, shall have the authority of the Board, except with respect to:
(a) the approval of any action which under the Declaration of Trust, these By-Laws or applicable law also requires Shareholder approval or requires approval by a majority of the entire Board or certain members of the Board;
(b) the filling of vacancies on the Board or on any committee thereof;
provided however, that such committee may nominate Trustees to fill such
vacancies, subject to the Trust's compliance with the rules under the 1940
Act upon which the Trust relies that require that: (i) a majority of
the Trustees not be "interested persons" ("disinterested Trustees");
(ii) Trustees that are disinterested Trustees be selected and nominated
by disinterested Trustees then in office; and (iii) legal counsel, if any,
of the disinterested Trustees be independent.
(c) the amendment, restatement or repeal of the Declaration of Trust or these By-Laws or the adoption of a new Declaration of Trust or new By-Laws;
(d) the amendment or repeal of any resolution of the Board; or
(e) the designation of any other committee of the Board or the members of such committee.
Section 2. MEETINGS AND ACTION OF BOARD COMMITTEES. Meetings and actions of any committee of the Board shall, to the extent applicable, be held and taken in the manner provided in Article IV of the Declaration of Trust and Article III of these By-Laws, with such changes in the context thereof as are necessary to substitute the committee and its members for the Board and its members, except that the time of regular meetings of any committee may be determined either by the Board or by the committee. Special meetings of any committee may also be called by resolution of the Board or such committee, and notice of special meetings of any committee shall also be given to all alternate members who shall have the right to attend all meetings of the committee. The Board may from time to time adopt other rules for the governance of any committee.
Section 3. ADVISORY COMMITTEES. The Board may appoint one or more advisory committees comprised of such number of individuals appointed by the Board who may meet at such time, place and upon such notice, if any, as determined by the Board. Such advisory committees shall have no power to require the Trust to take any specific action.
ARTICLE V
OFFICERS
Section 1. OFFICERS. The officers of the Trust shall be a Chief Executive Officer - Investment Management, a Chief Executive Officer - Finance and Administration, a President, a Secretary and a Treasurer. The Trust may also have, at the discretion of the Board, a chairperson of the Board, one or more vice presidents, one or more assistant vice presidents, one or more assistant secretaries, one or more assistant treasurers and such other officers, who shall have such authority and perform such duties as are provided in the Declaration of Trust, these By-Laws or as the Board, or to the extent permitted by the Board, as the president, may from time to time determine. Any number of offices may be held by the same person, except the offices of president and vice president.
Section 2. APPOINTMENT OF OFFICERS. The officers of the Trust shall be appointed by the Board, or to the extent permitted by the Board, by the president, and each shall serve at the pleasure of the Board, or to the extent permitted by the Board, at the pleasure of the president, subject to the rights, if any, of an officer under any contract of employment.
Section 3. REMOVAL AND RESIGNATION OF OFFICERS. Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by the Board at any regular or special meeting of the Board, or, to the extent permitted by the Board, by the president.
Any officer may resign at any time by giving written notice to the Trust. Such resignation shall take effect upon receipt unless specified to be effective at some later time and unless otherwise specified in such notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the Trust under any contract to which the officer is a party.
Section 4. VACANCIES IN OFFICES. A vacancy in any office because of death, resignation, removal, incapacity or other cause shall be filled in the manner prescribed in these By-Laws for regular appointment to that office.
Section 5. CHAIRPERSON OF THE BOARD. The chairperson of the Board shall preside at all meetings of the Shareholders and at all meetings of the Board and shall have such other powers and duties as may be prescribed by the Board, as provided in the Declaration of Trust or these By-Laws. In the absence of the chairperson of the Board, the president of the Trust, or in the absence of the president, any vice president or other authorized officer of the Trust designated by the president, shall preside at all meetings of the Shareholders and at all meetings of the Board.
Section 6. PRESIDENT. The president shall, subject to the control of the Board, have the general powers and duties of management usually vested in the office of president of a corporation and shall have such other powers and duties as may be prescribed by the Board, as provided in the Declaration of Trust or these By-Laws.
Section 7. VICE PRESIDENTS. In the absence, resignation, removal, incapacity or death of the president, the vice presidents, if any, in order of their rank as fixed by the Board or if not ranked, a vice president designated by the Board, shall exercise all the powers and perform all the duties of, and be subject to all the restrictions upon, the president until the president's return, his incapacity ceases or a new president is appointed. Each vice president shall have such other powers and perform such other duties as from time to time may be prescribed by the Board or the president, or as provided in the Declaration of Trust or these By-Laws.
Section 8. SECRETARY. The secretary shall keep or cause to be kept at the offices of the Trust or such other place as the Board may direct a book of minutes of all meetings and actions (including consents) of the Board, committees of the Board and Shareholders. The secretary shall keep a record of the time and place of such meetings, whether annual or special, and if special, how such meeting was authorized, the notice given, the names of those present at Board meetings or committee meetings, the number of Shares present or represented by proxy at Shareholders' meetings, and the proceedings.
The secretary shall cause to be kept at the offices of the Trust or at the office of the Trust's transfer or similar agent, a share register or a duplicate share register showing the names of all Shareholders and their addresses, the number and classes (if any) of Shares held by each, the number and date of certificates, if any, issued for such Shares and the number and date of cancellation of every certificate surrendered for cancellation.
The secretary shall give or cause to be given notice of all meetings of the Shareholders and of the Board required by the Declaration of Trust, these By-Laws or by applicable law to be given and shall have such other powers and perform such other duties as may be prescribed by the Board or the president of the Trust, or as provided in the Declaration of Trust or these By-Laws.
Section 9. TREASURER. The treasurer shall be the chief financial officer of the Trust and shall keep and maintain or cause to be kept and maintained adequate and correct books and records of accounts of the properties and business transactions of the Trust (and every class thereof), including accounts of assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings and Shares. All books shall be kept in accordance with the Declaration of Trust and these By-Laws.
The treasurer shall deposit all monies and other valuables in the name and to the credit of the Trust with such depositories as may be designated by the Board. He shall disburse the funds of the Trust (and any class thereof) as may be ordered by the Board, shall render to the president of the Trust and the Board, whenever either requests it, an account of all of his transactions as chief financial officer and of the financial condition of the Trust (and any class thereof), and shall have such other powers and perform such other duties as may be prescribed by the Board and as provided in the Declaration of Trust or these By-Laws.
Section 10. CHIEF EXECUTIVE OFFICER - INVESTMENT MANAGEMENT. The Chief Executive Officer - Investment Management shall be the principal executive officer with respect to the portfolio investments of the Trust, and shall have such other powers and duties as may be prescribed by the Board of Trustees or these By-Laws.
Section 11. CHIEF EXECUTIVE OFFICER - FINANCE AND ADMINISTRATION. The Chief Executive Officer - Finance and Administration shall be the principal executive officer with respect to the financial accounting and administration of the Trust, and shall have such other powers and duties as may be prescribed by the Board of Trustees or these By-Laws.
ARTICLE VI
RECORDS AND REPORTS
Section 1. MAINTENANCE AND INSPECTION OF SHARE REGISTER. The Trust shall keep at its offices or at the office of its transfer or similar agent, records of its Shareholders, that provide the names and addresses of all Shareholders and the number, and classes, if any, of Shares held by each Shareholder. Such records may be inspected during the Trust's regular business hours by any Shareholder, or its duly authorized representative, upon reasonable written demand to the Trust, for any purpose reasonably related to such Shareholder's interest as a Shareholder.
Section 2. MAINTENANCE AND INSPECTION OF DECLARATION OF TRUST AND BY-LAWS. The Trust shall keep at its offices the original or a copy of the Declaration of Trust and these By-Laws, as amended or restated from time to time, where they may be inspected during the Trust's regular business hours by any Shareholder, or its duly authorized representative, upon reasonable written demand to the Trust, for any purpose reasonably related to such Shareholder's interest as a Shareholder.
Section 3. MAINTENANCE AND INSPECTION OF OTHER RECORDS. The accounting books and records and minutes of proceedings of the Shareholders, the Board, any committee of the Board or any advisory committee shall be kept at such place or places designated by the Board or, in the absence of such designation, at the offices of the Trust. The minutes shall be kept in written form and the accounting books and records shall be kept either in written form or in any other form capable of being converted into written form.
If information is requested by a Shareholder, the Board, or, in case the Board does not act, the president, any vice president or the secretary, shall establish reasonable standards governing, without limitation, the information and documents to be furnished and the time and the location, if appropriate, of furnishing such information and documents. Costs of providing such information and documents shall be borne by the requesting Shareholder. The Trust shall be entitled to reimbursement for its direct, out-of-pocket expenses incurred in declining unreasonable requests (in whole or in part) for information or documents.
The Board, or, in case the Board does not act, the president, any vice president or the secretary, may keep confidential from Shareholders for such period of time as the Board or such officer, as applicable, deems reasonable any information that the Board or such officer, as applicable, reasonably believes to be in the nature of trade secrets or other information that the Board or such officer, as the case may be, in good faith believes would not be in the best interests of the Trust to disclose or that could damage the Trust or its business or that the Trust is required by law or by agreement with a third party to keep confidential.
Section 4. INSPECTION BY TRUSTEES. Every Trustee shall have the absolute right during the Trust's regular business hours to inspect all books, records, and documents of every kind and the physical properties of the Trust. This inspection by a Trustee may be made in person or by an agent or attorney and the right of inspection includes the right to copy and make extracts of documents.
ARTICLE VII
GENERAL MATTERS
Section 1. CHECKS, DRAFTS, EVIDENCE OF INDEBTEDNESS. All checks, drafts, or other orders for payment of money, notes or other evidences of indebtedness issued in the name of or payable to the Trust shall be signed or endorsed by such person or persons and in such manner as the Board from time to time shall determine.
Section 2. CONTRACTS AND INSTRUMENTS; HOW EXECUTED. The Board, except as otherwise provided in the Declaration of Trust and these By-Laws, may authorize any officer or officers or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the Trust and this authority may be general or confined to specific instances.
Section 3. CERTIFICATES FOR SHARES. A certificate or certificates for Shares may be issued to Shareholders at the discretion of the Board. All certificates shall be signed in the name of the Trust by the chairperson of the Board or the Trust's president or vice president, and by the Trust's treasurer or an assistant treasurer or the secretary or any assistant secretary, certifying the number of Shares, and the class thereof, if any, owned by the Shareholder. Any or all of the signatures on the certificate may be facsimile. In case any officer or transfer or similar agent who has signed or whose facsimile signature has been placed on a certificate shall have ceased to be such officer or transfer or similar agent before such certificate is issued, it may be issued by the Trust with the same effect as if such person were an officer or transfer or similar agent at the date of issue. Notwithstanding the foregoing, the Trust may adopt and use a system of issuance, recordation and transfer of its shares by electronic or other means.
Section 4. LOST CERTIFICATES. Except as provided in this Section 4, no new certificates for Shares shall be issued to replace an old certificate unless the latter is surrendered to the Trust and cancelled at the same time. The Board may, in case any Share certificate or certificate for any other security is lost, stolen, or destroyed, authorize the issuance of a replacement certificate on such terms and conditions as the Board may require, including a provision for indemnification of the Board and the Trust secured by a bond or other adequate security sufficient to protect the Trust and the Board against any claim that may be made against either, including any expense or liability on account of the alleged loss, theft, or destruction of the certificate or the issuance of the replacement certificate.
Section 5. REPRESENTATION OF SHARES OF OTHER ENTITIES HELD BY TRUST. The chairperson of the Board, the Trust's president or any vice president or any other person authorized by the Board or by any of the foregoing designated officers, is authorized to vote or represent on behalf of the Trust any and all shares of any corporation, partnership, trust, or other entity, foreign or domestic, standing in the name of the Trust. The authority granted may be exercised in person or by a proxy duly executed by such authorized person.
Section 6. TRANSFERS OF SHARES. Shares are transferable, if authorized by the Declaration of Trust, only on the record books of the Trust by the Person in whose name such Shares are registered, or by his or her duly authorized attorney-in-fact or representative. Shares represented by certificates shall be transferred on the books of the Trust upon surrender for cancellation of certificates for the same number of Shares, with an assignment and power of transfer endorsed thereon or attached thereto, duly executed, with such proof of the authenticity of the signature as the Trust or its agents may reasonably require. Upon receipt of proper transfer instructions from the registered owner of uncertificated Shares such uncertificated Shares shall be cancelled and issuance of new equivalent uncertificated Shares or certificated Shares shall be made to the Person entitled thereto and the transaction shall be recorded upon the books of the Trust. The Trust, its transfer agent or other duly authorized agents may refuse any requested transfer of Shares, or request additional evidence of authority to safeguard the assets or interests of the Trust or of its Shareholders, in their sole discretion. In all cases of transfer by an attorney-in-fact, the original power of attorney, or an official copy thereof duly certified, shall be deposited and remain with the Trust, its transfer agent or other duly authorized agent. In case of transfers by executors, administrators, guardians or other legal representatives, duly authenticated evidence of their authority shall be presented to the Trust, its transfer agent or other duly authorized agent, and may be required to be deposited and remain with the Trust, its transfer agent or other duly authorized agent.
Section 7. HOLDERS OF RECORD. The record books of the Trust as kept by the Trust, its transfer agent or other duly authorized agent, as the case may be, shall be conclusive as to the identity of the Shareholders of the Trust and as to the number and classes, if any, of Shares held from time to time by each such Shareholder. The Trust shall be entitled to treat the holder of record of any Share as the owner thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such Share on the part of any other Person, whether or not the Trust shall have express or other notice thereof.
Section 8. FISCAL YEAR. The fiscal year of the Trust shall be determined by the Board.
Section 9. HEADINGS; REFERENCES. Headings are placed herein for convenience of reference only and shall not be taken as a part hereof or control or affect the meaning, construction or effect of this instrument. Whenever the singular number is used herein, the same shall include the plural; and the neuter, masculine and feminine genders shall include each other, as applicable. Any references herein to specific sections of the DSTA, the Code or the 1940 Act shall refer to such sections as amended from time to time or any successor sections thereof.
(a) The provisions of these By-Laws are severable, and if the Board of Trustees shall determine, with the advice of counsel, that any of such provisions is in conflict with the Declaration of Trust, the 1940 Act, the Code, the DSTA, or with other applicable laws and regulations, the conflicting provision shall be deemed not to have constituted a part of these By-Laws from the time when such provisions became inconsistent with such laws or regulations; PROVIDED, HOWEVER, that such determination shall not affect any of the remaining provisions of these By-Laws or render invalid or improper any action taken or omitted prior to such determination.
(b) If any provision of these By-Laws shall be held invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall attach only to such provision in such jurisdiction and shall not in any manner affect such provision in any other jurisdiction or any other provision of these By-Laws in any jurisdiction.
ARTICLE VIII
AMENDMENTS
Section 1. AMENDMENT BY SHAREHOLDERS. These By-Laws may be amended, restated or repealed or new By-Laws may be adopted by the affirmative "vote of a majority of the outstanding voting securities" (as defined herein) of the Trust.
Section 2. AMENDMENT BY TRUSTEES. These By-Laws may also be
amended, restated or repealed or new By-Laws may be adopted by
the Board, by a vote of the Board as set forth in Article IV,
Section 3(c) of the Declaration of Trust.
Section 3. OTHER AMENDMENT. Subject to the 1940 Act, these By-Laws may also be amended pursuant to Article VIII, Section 3(a) of the Declaration of Trust and Section 3815(f) of the DSTA.
INVESTMENT MANAGEMENT AGREEMENT
FRANKLIN TEMPLETON LIMITED DURATION INCOME TRUST
THIS INVESTMENT MANAGEMENT AGREEMENT made between FRANKLIN TEMPLETON LIMITED DURATION INCOME TRUST, a Delaware statutory trust (the "Trust"), and FRANKLIN ADVISERS, INC., a California corporation (the "Manager").
WHEREAS, the Trust has been organized and intends to operate as an investment company registered under the Investment Company Act of 1940 (the "1940 Act") for the purpose of investing and reinvesting its assets in securities, as set forth in its Agreement and Declaration of Trust, its By-Laws and its Registration Statement under the 1940 Act and the Securities Act of 1933, all as heretofore and hereafter amended and supplemented; and the Trust desires to avail itself of the services, information, advice, assistance and facilities of an investment adviser and to have an investment adviser perform various management, statistical, research, investment advisory and other services for the Trust; and,
WHEREAS, the Manager is registered as an investment adviser under the Investment Advisers Act of 1940, is engaged in the business of rendering investment advisory, counseling and supervisory services to investment companies and other investment counseling clients, and desires to provide these services to the Trust.
NOW THEREFORE, in consideration of the terms and conditions hereinafter set forth, it is mutually agreed as follows:
1. EMPLOYMENT OF THE MANAGER. The Trust hereby employs the Manager to manage the investment and reinvestment of the Trust's assets and to administer its affairs, subject to the direction of the Board of Trustees and the officers of the Trust, for the period and on the terms hereinafter set forth. The Manager hereby accepts such employment and agrees during such period to render the services and to assume the obligations herein set forth for the compensation herein provided. The Manager shall for all purposes herein be deemed to be an independent contractor and shall, except as expressly provided or authorized (whether herein or otherwise), have no authority to act for or represent the Trust in any way or otherwise be deemed an agent of the Trust.
2. OBLIGATIONS OF AND SERVICES TO BE PROVIDED BY THE MANAGER. The Manager undertakes to provide the services hereinafter set forth and to assume the following obligations:
A. INVESTMENT ADVISORY SERVICES.
(a) The Manager shall manage the Trust's assets subject to and in accordance with the investment objectives and policies of the Trust and any directions which the Trust's Board of Trustees may issue from time to time. In pursuance of the foregoing, the Manager shall make all determinations with respect to the investment of the Trust's assets and the purchase and sale of its investment securities, and shall take such steps as may be necessary to implement the same. Such determinations and services shall include determining the manner in which any voting rights, rights to consent to corporate action and any other rights pertaining to the Trust's investment securities shall be exercised. The Manager shall render or cause to be rendered regular reports to the Trust, at regular meetings of its Board of Trustees and at such other times as may be reasonably requested by the Trust's Board of Trustees, of (i) the decisions made with respect to the investment of the Trust's assets and the purchase and sale of its investment securities, (ii) the reasons for such decisions, and (iii) the extent to which those decisions have been implemented.
(b) The Manager, subject to and in accordance with any directions which the Trust's Board of Trustees may issue from time to time, shall place, in the name of the Trust, orders for the execution of the Trust's securities transactions. When placing such orders, the Manager shall seek to obtain the best net price and execution for the Trust, but this requirement shall not be deemed to obligate the Manager to place any order solely on the basis of obtaining the lowest commission rate if the other standards set forth in this section have been satisfied. The parties recognize that there are likely to be many cases in which different brokers are equally able to provide such best price and execution and that, in selecting among such brokers with respect to particular trades, it is desirable to choose those brokers who furnish research, statistical, quotations and other information to the Trust and the Manager in accordance with the standards set forth below. Moreover, to the extent that it continues to be lawful to do so and so long as the Board of Trustees determines that the Trust will benefit, directly or indirectly, by doing so, the Manager may place orders with a broker who charges a commission for that transaction which is in excess of the amount of commission that another broker would have charged for effecting that transaction, provided that the excess commission is reasonable in relation to the value of "brokerage and research services" (as defined in Section 28(e)(3) of the Securities Exchange Act of 1934) provided by that broker.
Accordingly, the Trust and the Manager agree that the Manager shall select brokers for the execution of the Trust's transactions from among:
(i) Those brokers and dealers who provide quotations and other services to the Trust, specifically including the quotations necessary to determine the Trust's net assets, in such amount of total brokerage as may reasonably be required in light of such services; and
(ii) Those brokers and dealers who supply research, statistical and other data to the Manager or its affiliates which the Manager or its affiliates may lawfully and appropriately use in their investment advisory capacities, which relate directly to securities, actual or potential, of the Trust, or which place the Manager in a better position to make decisions in connection with the management of the Trust's assets and securities, whether or not such data may also be useful to the Manager and its affiliates in managing other portfolios or advising other clients, in such amount of total brokerage as may reasonably be required. Provided that the Trust's officers are satisfied that the best execution is obtained, the sale of shares of the Trust may also be considered as a factor in the selection of broker-dealers to execute the Trust's portfolio transactions.
(c) When the Manager has determined that the Trust should tender securities pursuant to a "tender offer solicitation," Franklin/Templeton Distributors, Inc. ("Distributors") shall be designated as the "tendering dealer" so long as it is legally permitted to act in such capacity under the federal securities laws and rules thereunder and the rules of any securities exchange or association of which Distributors may be a member. Neither the Manager nor Distributors shall be obligated to make any additional commitments of capital, expense or personnel beyond that already committed (other than normal periodic fees or payments necessary to maintain its corporate existence and membership in the National Association of Securities Dealers, Inc.) as of the date of this Agreement. This Agreement shall not obligate the Manager or Distributors (i) to act pursuant to the foregoing requirement under any circumstances in which they might reasonably believe that liability might be imposed upon them as a result of so acting, or (ii) to institute legal or other proceedings to collect fees which may be considered to be due from others to it as a result of such a tender, unless the Trust shall enter into an agreement with the Manager and/or Distributors to reimburse them for all such expenses connected with attempting to collect such fees, including legal fees and expenses and that portion of the compensation due to their employees which is attributable to the time involved in attempting to collect such fees.
(d) The Manager shall render regular reports to the Trust, not more frequently than quarterly, of how much total brokerage business has been placed by the Manager, on behalf of the Trust, with brokers falling into each of the categories referred to above and the manner in which the allocation has been accomplished.
(e) The Manager agrees that no investment decision will be made or influenced by a desire to provide brokerage for allocation in accordance with the foregoing, and that the right to make such allocation of brokerage shall not interfere with the Manager's paramount duty to obtain the best net price and execution for the Trust.
(f) Decisions on proxy voting shall be made by the Manager unless the Board of Trustees determines otherwise. Pursuant to its authority, Manager shall have the power to vote, either in person or by proxy, all securities in which the Trust may be invested from time to time, and shall not be required to seek or take instructions from the Trust with respect thereto. Manager shall not be expected or required to take any action other than the rendering of investment-related advice with respect to lawsuits involving securities presently or formerly held in the Trust, or the issuers thereof, including actions involving bankruptcy. Should Manager undertake litigation against an issuer on behalf of the Trust, the Trust agrees to pay its portion of any applicable legal fees associated with the action or to forfeit any claim to any assets Manager may recover and, in such case, agrees to hold Manager harmless for excluding the Trust from such action. In the case of class action suits involving issuers held in the Trust, Manager may include information about the Trust for purposes of participating in any settlements.
B. PROVISION OF INFORMATION NECESSARY FOR PREPARATION OF SECURITIES REGISTRATION STATEMENTS, AMENDMENTS AND OTHER MATERIALS. The Manager, its officers and employees will make available and provide accounting and statistical information required by the Trust in the preparation of registration statements, reports and other documents required by federal and state securities laws and with such information as the Trust may reasonably request for use in the preparation of such documents or of other materials necessary or helpful for the underwriting and distribution of the Trust's shares.
C. OTHER OBLIGATIONS AND SERVICES. The Manager shall make its officers and employees available to the Board of Trustees and officers of the Trust for consultation and discussions regarding the administration and management of the Trust and its investment activities.
D. DELEGATION OF SERVICES. The Manager may, at its expense, select and contract with one or more investment advisers registered under the Investment Advisers Act of 1940 ("Sub-Advisers") to perform some or all of the services for the Trust for which it is responsible under this Agreement. The Manager will compensate any Sub-Adviser for its services to the Trust. The Manager may terminate the services of any Sub-Adviser at any time in its sole discretion, and shall at such time assume the responsibilities of such Sub-Adviser unless and until a successor Sub-Adviser is selected and the requisite approval of the Trust's shareholders is obtained. The Manager will continue to have responsibility for all advisory services furnished by any Sub-Adviser.
3. EXPENSES OF THE TRUST. It is understood that the Trust will pay all of its own expenses other than those expressly assumed by the Manager herein, which expenses payable by the Trust shall include:
A. Fees and expenses paid to the Manager as provided herein;
B. Expenses of all audits by independent public accountants;
C. Expenses of transfer agent, registrar, custodian, dividend disbursing agent and shareholder record-keeping services, including the expenses of issue, repurchase or redemption of its shares;
D. Expenses of obtaining quotations for calculating the value of the Trust's net assets;
E. Salaries and other compensations of executive officers of the Trust who are not officers, directors, stockholders or employees of the Manager or its affiliates;
F. Taxes levied against the Trust;
G. Brokerage fees and commissions in connection with the purchase and sale of securities for the Trust;
H. Costs, including the interest expense, of borrowing money;
I. Costs incident to meetings of the Board of Trustees and shareholders of the Trust, reports to the Trust's shareholders, the filing of reports with regulatory bodies and the maintenance of the Trust's and the Trust's legal existence;
J. Legal fees, including the legal fees related to the registration and continued qualification of the Trust's shares for sale;
K. Trustees' fees and expenses to trustees who are not directors, officers, employees or stockholders of the Manager or any of its affiliates;
L. Costs and expense of registering and maintaining the registration of the Trust and its shares under federal and any applicable state laws; including the printing and mailing of prospectuses to its shareholders;
M. Trade association dues;
N. The Trust's pro rata portion of fidelity bond, errors and omissions, and trustees and officer liability insurance premiums; and
O. The Trust's portion of the cost of any proxy voting service used on its behalf.
4. COMPENSATION OF THE MANAGER. The Trust shall pay an advisory fee in cash to the Manager based upon a percentage of the value of the Trust's net assets, calculated as set forth below, as compensation for the services rendered and obligations assumed by the Manager, during the preceding month, on the first business day of the month in each year.
A. For purposes of calculating such fee, the value of the net assets of the Trust shall be determined in the same manner as that Trust uses to compute the value of its net assets in connection with the determination of the net asset value of its shares, all as set forth more fully in the Trust's current prospectus and statement of additional information. The Trust's net assets will be deemed to be the value of the Trust's total assets minus the average daily sum of the Trust's liabilities (which liabilities exclude the aggregate liquidation preference of any outstanding preferred stock or the outstanding amount of any borrowing or short-term debt securities). The rate of the management fee payable by the Trust shall be calculated daily at the annual rate of [0.70%].
B. The advisory fee payable by the Trust shall be reduced or eliminated to the extent that Distributors has actually received cash payments of tender offer solicitation fees less certain costs and expenses incurred in connection therewith and to the extent necessary to comply with the limitations on expenses which may be borne by the Trust as set forth in the laws, regulations and administrative interpretations of those states in which the Trust's shares are registered. The Manager may waive all or a portion of its fees provided for hereunder and such waiver shall be treated as a reduction in purchase price of its services. The Manager shall be contractually bound hereunder by the terms of any publicly announced waiver of its fee, or any limitation of the Trust's expenses, as if such waiver or limitation were full set forth herein.
C. If this Agreement is terminated prior to the end of any month, the accrued advisory fee shall be paid to the date of termination.
5. ACTIVITIES OF THE MANAGER. The services of the Manager to the Trust hereunder are not to be deemed exclusive, and the Manager and any of its affiliates shall be free to render similar services to others. Subject to and in accordance with the Agreement and Declaration of Trust and By-Laws of the Trust and Section 10(a) of the 1940 Act, it is understood that trustees, officers, agents and shareholders of the Trust are or may be interested in the Manager or its affiliates as directors, officers, agents or stockholders; that directors, officers, agents or stockholders of the Manager or its affiliates are or may be interested in the Trust as trustees, officers, agents, shareholders or otherwise; that the Manager or its affiliates may be interested in the Trust as shareholders or otherwise; and that the effect of any such interests shall be governed by said Agreement and Declaration of Trust, By-Laws and the 1940 Act.
6. LIABILITIES OF THE MANAGER.
A. In the absence of willful misfeasance, bad faith, gross negligence, or reckless disregard of obligations or duties hereunder on the part of the Manager, the Manager shall not be subject to liability to the Trust or to any shareholder of the Trust for any act or omission in the course of, or connected with, rendering services hereunder or for any losses that may be sustained in the purchase, holding or sale of any security by the Trust.
B. Notwithstanding the foregoing, the Manager agrees to
reimburse the Trust for any and all costs, expenses, and counsel and
trustees' fees reasonably incurred by the Trust in the preparation, printing
and distribution of proxy statements, amendments to its Registration
Statement, holdings of meetings of its shareholders or trustees, the conduct
of factual investigations, any legal or administrative proceedings (including
any applications for exemptions or determinations by the Securities and
Exchange Commission) which the Trust incurs as the result of action or
inaction of the Manager or any of its affiliates or any of their officers,
directors, employees or stockholders where the action or inaction
necessitating such expenditures (i) is directly or indirectly related to any
transactions or proposed transaction in the stock or control of the Manager
or its affiliates (or litigation related to any pending or proposed or future
transaction in such shares or control) which shall have been undertaken
without the prior, express approval of the Trust's Board of Trustees; or,
(ii) is within the control of the Manager or any of its affiliates or any of
their officers, directors, employees or stockholders. The Manager shall not
be obligated pursuant to the provisions of this Subparagraph 6.B., to
reimburse the Trust for any expenditures related to the institution of an
administrative proceeding or civil litigation by the Trust or a shareholder
seeking to recover all or a portion of the proceeds derived by any
stockholder of the Manager or any of its affiliates from the sale of his
shares of the Manager, or similar matters. So long as this Agreement is in
effect, the Manager shall pay to the Trust the amount due for expenses
subject to this Subparagraph 6.B. within thirty (30) days after a bill or
statement has been received by the Manager therefor. This provision shall
not be deemed to be a waiver of any claim the Trust may have or may assert
against the Manager or others for costs, expenses or damages heretofore
incurred by the Trust or for costs, expenses or damages the Trust may
hereafter incur which are not reimbursable to it hereunder.
C. No provision of this Agreement shall be construed to protect any trustee or officer of the Trust, or director or officer of the Manager, from liability in violation of Sections 17(h) and (i) of the 1940 Act.
7. RENEWAL AND TERMINATION.
A. This Agreement shall become effective on the date written below and shall continue in effect for two (2) years thereafter, unless sooner terminated as hereinafter provided and shall continue in effect thereafter for periods not exceeding one (1) year so long as such continuation is approved at least annually (i) by a vote of a majority of the outstanding voting securities of the Trust or by a vote of the Board of Trustees of the Trust, and (ii) by a vote of a majority of the Trustees of the Trust who are not parties to the Agreement (other than as Trustees of the Trust), cast in person at a meeting called for the purpose of voting on the Agreement.
B. This Agreement:
(i) may at any time be terminated without the payment of any penalty either by vote of the Board of Trustees of the Trust or by vote of a majority of the outstanding voting securities of the Trust on sixty (60) days' written notice to the Manager;
(ii) shall immediately terminate with respect to the Trust in the event of its assignment; and
(iii) may be terminated by the Manager on sixty (60) days' written notice to the Trust.
C. As used in this Paragraph the terms "assignment," "interested person" and "vote of a majority of the outstanding voting securities" shall have the meanings set forth for any such terms in the 1940 Act.
D. Any notice under this Agreement shall be given in writing addressed and delivered, or mailed post-paid, to the other party at any office of such party.
8. SEVERABILITY. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby.
9. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and effective on the ------ day of -------, 2003.
FRANKLIN TEMPLETON LIMITED DURATION INCOME TRUST
By: ----------------------
Murray L. Simpson
Vice President & Secretary
FRANKLIN ADVISERS, INC.
By: -----------------------
Martin L. Flanagan
President
MASTER CUSTODY AGREEMENT
THIS CUSTODY AGREEMENT ("Agreement") is made and entered into as of February 16, 1996, by and between each Investment Company listed on Exhibit A, for itself and for each of its Series listed on Exhibit A, and BANK OF NEW YORK, a New York corporation authorized to do a banking business (the "Custodian").
RECITALS
A. Each Investment Company is an investment company registered under the Investment Company Act of 1940, as amended (the "Investment Company Act") that invests and reinvests, for itself or on behalf of its Series, in Domestic Securities and Foreign Securities.
B. The Custodian is, and has represented to each Investment Company that the Custodian is, a "bank" as that term is defined in Section 2(a)(5) of the Investment Company Act of 1940, as amended, and is eligible to receive and maintain custody of investment company assets pursuant to Section 17(f) and Rule 17f-2 thereunder.
C. The Custodian and each Investment Company, for itself and for each of its Series, desire to provide for the retention of the Custodian as a custodian of the assets of each Investment Company and each Series, on the terms and subject to the provisions set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows:
Section 1.0 FORM OF AGREEMENT
Although the parties have executed this Agreement in the form of a Master Custody Agreement for administrative convenience, this Agreement shall create a separate custody agreement for each Investment Company and for each Series designated on Exhibit A, as though each Investment Company had separately executed an identical custody agreement for itself and for each of its Series. No rights, responsibilities or liabilities of any Investment Company or Series shall be attributed to any other Investment Company or Series.
Section 1.1 DEFINITIONS
For purposes of this Agreement, the following terms shall have the respective meanings specified below:
"Agreement" shall mean this Custody Agreement.
"Board" shall mean the Board of Trustees, Directors or Managing General Partners, as applicable, of an Investment Company.
"Business Day" with respect to any Domestic Security means any day, other than a Saturday or Sunday, that is not a day on which banking institutions are authorized or required by law to be closed in The City of New York and, with respect to Foreign Securities, a London Business Day. "London Business Day" shall mean any day on which dealings and deposits in U.S. dollars are transacted in the London interbank market.
"Custodian" shall mean Bank of New York.
"Domestic Securities" shall have the meaning provided in Subsection 2.1 hereof.
"Executive Committee" shall mean the executive committee of a Board.
"Foreign Custodian" shall have the meaning provided in Section 4.1 hereof.
"Foreign Securities" shall have the meaning provided in Section 2.1 hereof.
"Foreign Securities Depository" shall have the meaning provided in
Section 4.1 hereof.
"Fund" shall mean an entity identified on Exhibit A as an Investment Company, if the Investment Company has no series, or a Series.
"Investment Company" shall mean an entity identified on Exhibit A under the heading "Investment Company."
"Investment Company Act" shall mean the Investment Company Act of 1940, as amended.
"Securities" shall have the meaning provided in Section 2.1 hereof.
"Securities System" shall have the meaning provided in Section 3.1 hereof.
"Securities System Account" shall have the meaning provided in Subsection 3.8(a) hereof.
"Series" shall mean a series of an Investment Company which is identified as such on Exhibit A.
"Shares" shall mean shares of beneficial interest of the Investment Company.
"Subcustodian" shall have the meaning provided in Subsection 3.7 hereof, but shall not include any Foreign Custodian.
"Transfer Agent" shall mean the duly appointed and acting transfer agent for each Investment Company.
"Writing" shall mean a communication in writing, a communication by telex, facsimile transmission, bankwire or other teleprocess or electronic instruction system acceptable to the Custodian.
Section 2. APPOINTMENT OF CUSTODIAN; DELIVERY OF ASSETS
2.1 Appointment of Custodian. Each Investment Company hereby appoints and designates the Custodian as a custodian of the assets of each Fund, including cash denominated in U.S. dollars or foreign currency ("cash"), securities the Fund desires to be held within the United States ("Domestic Securities") and securities it desires to be held outside the United States ("Foreign Securities"). Domestic Securities and Foreign Securities are sometimes referred to herein, collectively, as "Securities." The Custodian hereby accepts such appointment and designation and agrees that it shall maintain custody of the assets of each Fund delivered to it hereunder in the manner provided for herein.
2.2 Delivery of Assets. Each Investment Company may deliver to the Custodian Securities and cash owned by the Funds, payments of income, principal or capital distributions received by the Funds with respect to Securities owned by the Funds from time to time, and the consideration received by the Funds for such Shares or other securities of the Funds as may be issued and sold from time to time. The Custodian shall have no responsibility whatsoever for any property or assets of the Funds held or received by the Funds and not delivered to the Custodian pursuant to and in accordance with the terms hereof. All Securities accepted by the Custodian on behalf of the Funds under the terms of this Agreement shall be in "street name" or other good delivery form as determined by the Custodian.
2.3 Subcustodians. The Custodian may appoint BNY Western Trust Company as a Subcustodian to hold assets of the Funds in accordance with the provisions of this Agreement. In addition, upon receipt of Proper Instructions and a certified copy of a resolution of the Board or of the Executive Committee, and certified by the Secretary or an Assistant Secretary, of an Investment Company, the Custodian may from time to time appoint one or more other Subcustodians or Foreign Custodians to hold assets of the affected Funds in accordance with the provisions of this Agreement.
2.4 No Duty to Manage. The Custodian, a Subcustodian or a Foreign Custodian shall not have any duty or responsibility to manage or recommend investments of the assets of any Fund held by them or to initiate any purchase, sale or other investment transaction in the absence of Proper Instructions or except as otherwise specifically provided herein.
Section 3. DUTIES OF THE CUSTODIAN WITH RESPECT TO ASSETS OF THE FUNDS HELD BY THE CUSTODIAN
3.1 Holding Securities. The Custodian shall hold and physically segregate from any property owned by the Custodian, for the account of each Fund, all non-cash property delivered by each Fund to the Custodian hereunder other than Securities which, pursuant to Subsection 3.8 hereof, are held through a registered clearing agency, a registered securities depository, the Federal Reserve's book-entry securities system (referred to herein, individually, as a "Securities System"), or held by a Subcustodian, Foreign Custodian or in a Foreign Securities Depository.
3.2 Delivery of Securities. Except as otherwise provided in Subsection 3.5 hereof, the Custodian, upon receipt of Proper Instructions, shall release and deliver Securities owned by a Fund and held by the Custodian in the following cases or as otherwise directed in Proper Instructions:
(a) except as otherwise provided herein, upon sale of such Securities for the account of the Fund and receipt by the Custodian, a Subcustodian or a Foreign Custodian of payment therefor;
(b) upon the receipt of payment by the Custodian, a Subcustodian or a Foreign Custodian in connection with any repurchase agreement related to such Securities entered into by the Fund;
(c) in the case of a sale effected through a Securities System, in accordance with the provisions of Subsection 3.8 hereof;
(d) to a tender agent or other authorized agent in connection
with (i) a tender or other similar offer for Securities owned by the Fund, or
(ii) a tender offer or repurchase by the Fund of its own Shares;
(e) to the issuer thereof or its agent when such Securities are called, redeemed, retired or otherwise become payable; provided, that in any such case, the cash or other consideration is to be delivered to the Custodian, a Subcustodian or a Foreign Custodian;
(f) to the issuer thereof, or its agent, for transfer into the name or nominee name of the Fund, the name or nominee name of the Custodian, the name or nominee name of any Subcustodian or Foreign Custodian; or for exchange for a different number of bonds, certificates or other evidence representing the same aggregate face amount or number of units; provided that, in any such case, the new Securities are to be delivered to the Custodian, a Subcustodian or Foreign Custodian;
(g) to the broker selling the same for examination in accordance with the "street delivery" custom;
(h) for exchange or conversion pursuant to any plan of merger, consolidation, recapitalization, or reorganization of the issuer of such Securities, or pursuant to a conversion of such Securities; provided that, in any such case, the new Securities and cash, if any, are to be delivered to the Custodian or a Subcustodian;
(i) in the case of warrants, rights or similar securities, the surrender thereof in connection with the exercise of such warrants, rights or similar Securities or the surrender of interim receipts or temporary Securities for definitive Securities; provided that, in any such case, the new Securities and cash, if any, are to be delivered to the Custodian, a subcustodian or a Foreign Custodian;
(j) for delivery in connection with any loans of Securities made by the Fund, but only against receipt by the Custodian, a Subcustodian or a Foreign Custodian of adequate collateral as determined by the Fund (and identified in Proper Instructions communicated to the Custodian), which may be in the form of cash or obligations issued by the United States government, its agencies or instrumentalities, except that in connection with any loans for which collateral is to be credited to the account of the Custodian, a Subcustodian or a Foreign Custodian in the Federal Reserve's book-entry securities system, the Custodian will not be held liable or responsible for the delivery of Securities owned by the Fund prior to the receipt of such collateral;
(k) for delivery as security in connection with any borrowings by the Fund requiring a pledge of assets by the Fund, but only against receipt by the Custodian, a Subcustodian or a Foreign Custodian of amounts borrowed;
(l) for delivery in accordance with the provisions of any agreement among the Fund, the Custodian, a Subcustodian or a Foreign Custodian and a broker-dealer relating to compliance with the rules of registered clearing corporations and of any registered national securities exchange, or of any similar organization or organizations, regarding escrow or other arrangements in connection with transactions by the Fund;
(m) for delivery in accordance with the provisions of any agreement among the Fund, the Custodian, a Subcustodian or a Foreign Custodian and a futures commission merchant, relating to compliance with the rules of the Commodity Futures Trading Commission and/or any contract market, or any similar organization or organizations, regarding account deposits in connection with transactions by the Fund;
(n) upon the receipt of instructions from the Transfer Agent for delivery to the Transfer Agent or to the holders of Shares in connection with distributions in kind in satisfaction of requests by holders of Shares for repurchase or redemption; and
(o) for any other proper purpose, but only upon receipt of Proper Instructions, and a certified copy of a resolution of the Board or of the Executive Committee certified by the Secretary or an Assistant Secretary of the Fund, specifying the securities to be delivered, setting forth the purpose for which such delivery is to be made, declaring such purpose to be a proper purpose, and naming the person or persons to whom delivery of such securities shall be made.
3.3 Registration of Securities. Securities held by the Custodian, a Subcustodian or a Foreign Custodian (other than bearer Securities) shall be registered in the name or nominee name of the appropriate Fund, in the name or nominee name of the Custodian or in the name or nominee name of any Subcustodian or Foreign Custodian. Each Fund agrees to hold the Custodian, any such nominee, Subcustodian or Foreign Custodian harmless from any liability as a holder of record of such Securities.
3.4 Bank Accounts. The Custodian shall open and maintain a separate bank account or accounts for each Fund, subject only to draft or order by the Custodian acting pursuant to the terms of this Agreement, and shall hold in such account or accounts, subject to the provisions hereof, all cash received by it hereunder from or for the account of each Fund, other than cash maintained by a Fund in a bank account established and used in accordance with Rule 17f-3 under the Fund Act. Funds held by the Custodian for a Fund may be deposited by it to its credit as Custodian in the banking departments of the Custodian, a Subcustodian or a Foreign Custodian. Such funds shall be deposited by the Custodian in its capacity as Custodian and shall be withdrawable by the Custodian only in that capacity. In the event a Fund's account for any reason becomes overdrawn, or in the event an action requested in Proper Instructions would cause such an account to become overdrawn, the Custodian shall immediately notify the affected Fund.
3.5 Collection of Income; Trade Settlement; Crediting of Accounts. The Custodian shall collect income payable with respect to Securities owned by each Fund, settle Securities trades for the account of each Fund and credit and debit each Fund's account with the Custodian in connection therewith as stated in this Subsection 3.5. This Subsection shall not apply to repurchase agreements, which are treated in Subsection 3.2(b), above.
(a) Upon receipt of Proper Instructions, the Custodian shall effect the purchase of a Security by charging the account of the Fund on the contractual settlement date, and by making payment against delivery. If the seller or selling broker fails to deliver the Security within a reasonable period of time, the Custodian shall notify the Fund and credit the transaction amount to the account of the Fund, but the Custodian shall have no further liability or responsibility for the transaction.
(b) Upon receipt of Proper Instructions, the Custodian shall effect the sale of a Security by withdrawing a certificate or other indicia of ownership from the account of the Fund and by making delivery against payment, and shall credit the account of the Fund with the amount of such proceeds on the contractual settlement date. If the purchaser or the purchasing broker fails to make payment within a reasonable period of time, the Custodian shall notify the Fund, debit the Fund's account for any amounts previously credited to it by the Custodian as proceeds of the transaction and, if delivery has not been made, redeposit the Security into the account of the Fund.
(c) The Fund is responsible for ensuring that the Custodian receives timely and accurate Proper Instructions to enable the Custodian to effect settlement of any purchase or sale. If the Custodian does not receive such instructions within the required time period, the Custodian shall have no liability of any kind to any person, including the Fund, for failing to effect settlement on the contractual settlement date. However, the Custodian shall use its best reasonable efforts to effect settlement as soon as possible after receipt of Proper Instructions.
(d) The Custodian shall credit the account of the Fund with interest income payable on interest bearing Securities on payable date. Dividends and other amounts payable with respect to Domestic Securities and Foreign Securities shall be credited to the account of the Fund when received by the Custodian. The Custodian shall not be required to commence suit or collection proceedings or resort to any extraordinary means to collect such income and other amounts payable with respect to Securities owned by the Fund. The collection of income due the Fund on Domestic Securities loaned pursuant to the provisions of Subsection 3.2(j) shall be the responsibility of the Fund. The Custodian will have no duty or responsibility in connection therewith, other than to provide the Fund with such information or data as may be necessary to assist the Fund in arranging for the timely delivery to the Custodian of the income to which the Fund is entitled. The Custodian shall have no liability to any person, including the Fund, if the Custodian credits the account of the Fund with such income or other amounts payable with respect to Securities owned by the Fund (other than Securities loaned by the Fund pursuant to Subsection 3.2(j) hereof) and the Custodian subsequently is unable to collect such income or other amounts from the payors thereof within a reasonable time period, as determined by the Custodian in its sole discretion. In such event, the Custodian shall be entitled to reimbursement of the amount so credited to the account of the Fund.
3.6 Payment of Fund Monies. Upon receipt of Proper Instructions the Custodian shall pay out monies of a Fund in the following cases or as otherwise directed in Proper Instructions:
(a) upon the purchase of Securities, futures contracts or options on futures contracts for the account of the Fund but only, except as otherwise provided herein, (i) against the delivery of such securities, or evidence of title to futures contracts or options on futures contracts, to the Custodian or a Subcustodian registered pursuant to Subsection 3.3 hereof or in proper form for transfer; (ii) in the case of a purchase effected through a Securities System, in accordance with the conditions set forth in Subsection 3.8 hereof; or (iii) in the case of repurchase agreements entered into between the Fund and the Custodian, another bank or a broker-dealer (A) against delivery of the Securities either in certificated form to the Custodian or a Subcustodian or through an entry crediting the Custodian's account at the appropriate Federal Reserve Bank with such Securities or (B) against delivery of the confirmation evidencing purchase by the Fund of Securities owned by the Custodian or such broker-dealer or other bank along with written evidence of the agreement by the Custodian or such broker-dealer or other bank to repurchase such Securities from the Fund;
(b) in connection with conversion, exchange or surrender of Securities owned by the Fund as set forth in Subsection 3.2 hereof;
(c) for the redemption or repurchase of Shares issued by the Fund;
(d) for the payment of any expense or liability incurred by the Fund, including but not limited to the following payments for the account of the Fund: custodian fees, interest, taxes, management, accounting, transfer agent and legal fees and operating expenses of the Fund whether or not such expenses are to be in whole or part capitalized or treated as deferred expenses; and
(e) for the payment of any dividends or distributions declared by the Board with respect to the Shares.
3.7 Appointment of Subcustodians. The Custodian may appoint BNY Western Trust Company or, upon receipt of Proper Instructions, another bank or trust company, which is itself qualified under the Investment Company Act to act as a custodian (a "Subcustodian"), as the agent of the Custodian to carry out such of the duties of the Custodian hereunder as a Custodian may from time to time direct; provided, however, that the appointment of any Subcustodian shall not relieve the Custodian of its responsibilities or liabilities hereunder.
3.8 Deposit of Securities in Securities Systems. The Custodian may deposit and/or maintain Domestic Securities owned by a Fund in a Securities System in accordance with applicable Federal Reserve Board and Securities and Exchange Commission rules and regulations, if any, and subject to the following provisions:
(a) the Custodian may hold Domestic Securities of the Fund in the Depository Trust Company or the Federal Reserve's book entry system or, upon receipt of Proper Instructions, in another Securities System provided that such securities are held in an account of the Custodian in the Securities System ("Securities System Account") which shall not include any assets of the Custodian other than assets held as a fiduciary, custodian or otherwise for customers;
(b) the records of the Custodian with respect to Domestic Securities of the Fund which are maintained in a Securities System shall identify by book-entry those Domestic Securities belonging to the Fund;
(c) the Custodian shall pay for Domestic Securities purchased for the account of the Fund upon (i) receipt of advice from the Securities System that such securities have been transferred to the Securities System Account, and (ii) the making of an entry on the records of the Custodian to reflect such payment and transfer for the account of the Fund. The Custodian shall transfer Domestic Securities sold for the account of the Fund upon (A) receipt of advice from the Securities System that payment for such securities has been transferred to the Securities System Account, and (B) the making of an entry on the records of the Custodian to reflect such transfer and payment for the account of the Fund. Copies of all advices from the Securities System of transfers of Domestic Securities for the account of the Fund shall be maintained for the Fund by the Custodian and be provided to the Fund at its request. Upon request, the Custodian shall furnish the Fund confirmation of the transfer to or from the account of the Fund in the form of a written advice or notice; and
(d) upon request, the Custodian shall provide the Fund with any report obtained by the Custodian on the Securities System's accounting system, internal accounting control and procedures for safeguarding domestic securities deposited in the Securities System.
3.9 Segregated Account. The Custodian shall upon receipt of
Proper Instructions establish and maintain a segregated account or accounts
for and on behalf of a Fund, into which account or accounts may be
transferred cash and/or Securities, including Securities maintained in an
account by the Custodian pursuant to Section 3.8 hereof, (i) in accordance
with the provisions of any agreement among the Fund, the Custodian and a
broker-dealer or futures commission merchant, relating to compliance with the
rules of registered clearing corporations and of any national securities
exchange (or the Commodity Futures Trading Commission or any registered
contract market), or of any similar organization or organizations, regarding
escrow or other arrangements in connection with transactions by the Fund,
(ii) for purposes of segregating cash or securities in connection with
options purchased, sold or written by the Fund or commodity futures contracts
or options thereon purchased or sold by the Fund, and (iii) for other proper
corporate purposes, but only, in the case of this clause (iii), upon receipt
of, in addition to Proper Instructions, a certified copy of a resolution of
the Board or of the Executive Committee certified by the Secretary or an
Assistant Secretary, setting forth the purpose or purposes of such segregated
account and declaring such purposes to be proper corporate purposes.
3.10 Ownership Certificates for Tax Purposes. The Custodian shall execute ownership and other certificates and affidavits for all federal and state tax purposes in connection with receipt of income or other payments with respect to domestic securities of each Fund held by it and in connection with transfers of such securities.
3.11 Proxies. The Custodian shall, with respect to the Securities held hereunder, promptly deliver to each Fund all proxies, all proxy soliciting materials and all notices relating to such Securities. If the Securities are registered otherwise than in the name of a Fund or a nominee of a Fund, the Custodian shall use its best reasonable efforts, consistent with applicable law, to cause all proxies to be promptly executed by the registered holder of such Securities in accordance with Proper Instructions.
3.12 Communications Relating to Fund Portfolio Securities. The Custodian shall transmit promptly to each Fund all written information (including, without limitation, pendency of calls and maturities of Securities and expirations of rights in connection therewith and notices of exercise of put and call options written by the Fund and the maturity of futures contracts purchased or sold by the Fund) received by the Custodian from issuers of Securities being held for the Fund. With respect to tender or exchange offers, the Custodian shall transmit promptly to each Fund all written information received by the Custodian from issuers of the Securities whose tender or exchange is sought and from the party (or its agents) making the tender or exchange offer. If a Fund desires to take action with respect to any tender offer, exchange offer or any other similar transaction, the Fund shall notify the Custodian at least three Business Days prior to the date of which the Custodian is to take such action.
3.13 Reports by Custodian. The Custodian shall each business day furnish each Fund with a statement summarizing all transactions and entries for the account of the Fund for the preceding day. At the end of every month, the Custodian shall furnish each Fund with a list of the cash and portfolio securities showing the quantity of the issue owned, the cost of each issue and the market value of each issue at the end of each month. Such monthly report shall also contain separate listings of (a) unsettled trades and (b) when-issued securities. The Custodian shall furnish such other reports as may be mutually agreed upon from time-to-time.
Section 4. CERTAIN DUTIES OF THE CUSTODIAN WITH RESPECT TO ASSETS OF THE FUNDS
HELD OUTSIDE THE UNITED STATES
4.1 Custody Outside the United States. Each Fund authorizes the
Custodian to hold Foreign Securities and cash in custody accounts which have
been established by the Custodian with (i) its foreign branches, (ii) foreign
banking institutions, foreign branches of United States banks and
subsidiaries of United States banks or bank holding companies (each a
"Foreign Custodian") and (iii) Foreign Securities depositories or clearing
agencies (each a "Foreign Securities Depository"); provided, however, that
the appropriate Board or Executive Committee has approved in advance the use
of each such Foreign Custodian and Foreign Securities Depository and the
contract between the Custodian and each Foreign Custodian and that such
approval is set forth in Proper Instructions and a certified copy of a
resolution of the Board or of the Executive Committee certified by the
Secretary or an Assistant Secretary of the appropriate Investment Company.
Unless expressly provided to the contrary in this Section 4, custody of
Foreign Securities and assets held outside the United States by the
Custodian, a Foreign Custodian or through a Foreign Securities Depository
shall be governed by this Agreement, including Section 3 hereof.
4.2 Assets to be Held. The Custodian shall limit the securities and other assets maintained in the custody of its foreign branches, Foreign Custodians and Foreign Securities Depositories to: (i) "foreign securities", as defined in paragraph (c) (1) of Rule 17f-5 under the Fund Act, and (ii) cash and cash equivalents in such amounts as the Custodian or an affected Fund may determine to be reasonably necessary to effect the Fund's Foreign Securities transactions.
4.3 Omitted.
4.4 Segregation of Securities. The Custodian shall identify on its books and records as belonging to the appropriate Fund, the Foreign Securities of each Fund held by each Foreign Custodian.
4.5 Agreements with Foreign Custodians. Each agreement between the Custodian and a Foreign Custodian shall be substantially in the form as delivered to the Investment Companies for their Boards' review, and shall not be amended in a way that materially adversely affects any Fund without the prior written consent of the Fund. Upon request, the Custodian shall certify to the Funds that an agreement between the Custodian and a Foreign Custodian meets the requirements of Rule 17f-5 under the 1940 Act.
4.6 Access of Independent Accountants of the Funds. Upon request of a Fund, the Custodian will use its best reasonable efforts to arrange for the independent accountants or auditors of the Fund to be afforded access to the books and records of any Foreign Custodian insofar as such books and records relate to the custody by any such Foreign Custodian of assets of the Fund.
4.7 Transactions in Foreign Custody Accounts. Upon receipt of
Proper Instructions, the Custodian shall instruct the appropriate Foreign
Custodian to transfer, exchange or deliver Foreign Securities owned by a
Fund, but, except to the extent explicitly provided herein, only in any of
the cases specified in Subsection 3.2. Upon receipt of Proper Instructions,
the Custodian shall pay out or instruct the appropriate Foreign Custodian to
pay out monies of a Fund in any of the cases specified in Subsection 3.6.
Notwithstanding anything herein to the contrary, settlement and payment for
Foreign Securities received for the account of a Fund and delivery of Foreign
Securities maintained for the account of a Fund may be effected in accordance
with the customary or established securities trading or securities processing
practices and procedures in the jurisdiction or market in which the
transaction occurs, including, without limitation, delivering securities to
the purchaser thereof or to a dealer therefor (or an agent for such purchaser
or dealer) against a receipt with the expectation of receiving later payment
for such securities from such purchaser or dealer. Foreign Securities
maintained in the custody of a Foreign Custodian may be maintained in the
name of such entity or its nominee name to the same extent as set forth in
Section 3.3 of this Agreement and each Fund agrees to hold any Foreign
Custodian and its nominee harmless from any liability as a holder of record
of such securities.
4.8 Liability of Foreign Custodian. Each agreement between the Custodian and a Foreign Custodian shall, unless otherwise mutually agreed to by the Custodian and a Fund, require the Foreign Custodian to exercise reasonable care or, alternatively, impose a contractual liability for breach of contract without an exception based upon a standard of care in the performance of its duties and to indemnify and hold harmless the Custodian from and against any loss, damage, cost, expense, liability or claim arising out of or in connection with the Foreign Custodian's performance of such obligations, excepting, however, Citibank, N.A., and its subsidiaries and branches, where the indemnification is limited to direct money damages and requires that the claim be promptly asserted. At the election of a Fund, it shall be entitled to be subrogated to the rights of the Custodian with respect to any claims against a Foreign Custodian as a consequence of any such loss, damage, cost, expense, liability or claim if and to the extent that the Fund has not been made whole for any such loss, damage, cost, expense, liability or claim, unless such subrogation is prohibited by local law.
4.9 Monitoring Responsibilities.
(a) The Custodian will promptly inform each Fund in the event that the Custodian learns of a material adverse change in the financial condition of a Foreign Custodian or learns that a Foreign Custodian's financial condition has declined or is likely to decline below the minimum levels required by Rule 17f-5 of the 1940 Act.
(b) The custodian will furnish such information as may be reasonably necessary to assist each Investment Company's Board in its annual review and approval of the continuance of all contracts or arrangements with Foreign Subcustodians.
Section 5. PROPER INSTRUCTIONS
As used in this Agreement, the term "Proper Instructions" means instructions of a Fund received by the Custodian via telephone or in Writing which the Custodian believes in good faith to have been given by Authorized Persons (as defined below) or which are transmitted with proper testing or authentication pursuant to terms and conditions which the Custodian may specify. Any Proper Instructions delivered to the Custodian by telephone shall promptly thereafter be confirmed in accordance with procedures, and limited in subject matter, as mutually agreed upon by the parties. Unless otherwise expressly provided, all Proper Instructions shall continue in full force and effect until canceled or superseded. If the Custodian requires test arrangements, authentication methods or other security devices to be used with respect to Proper Instructions, any Proper Instructions given by the Funds thereafter shall be given and processed in accordance with such terms and conditions for the use of such arrangements, methods or devices as the Custodian may put into effect and modify from time to time. The Funds shall safeguard any testkeys, identification codes or other security devices which the Custodian shall make available to them. The Custodian may electronically record any Proper Instructions given by telephone, and any other telephone discussions, with respect to its activities hereunder. As used in this Agreement, the term "Authorized Persons" means such officers or such agents of a Fund as have been properly appointed pursuant to a resolution of the appropriate Board or Executive Committee, a certified copy of which has been provided to the Custodian, to act on behalf of the Fund under this Agreement. Each of such persons shall continue to be an Authorized Person until such time as the Custodian receives Proper Instructions that any such officer or agent is no longer an Authorized Person.
Section 6. ACTIONS PERMITTED WITHOUT EXPRESS AUTHORITY
The Custodian may in its discretion, without express authority from a Fund:
(a) make payments to itself or others for minor expenses of handling Securities or other similar items relating to its duties under this Agreement, provided that all such payments shall be accounted for to the Fund;
(b) endorse for collection, in the name of the Fund, checks, drafts and other negotiable instruments; and
(c) in general, attend to all non-discretionary details in connection with the sale, exchange, substitution, purchase, transfer and other dealings with the Securities and property of the Fund except as otherwise provided in Proper Instructions.
Section 7. EVIDENCE OF AUTHORITY
The Custodian shall be protected in acting upon any instructions (conveyed by telephone or in Writing), notice, request, consent, certificate or other instrument or paper believed by it to be genuine and to have been properly given or executed by or on behalf of a Fund. The Custodian may receive and accept a certified copy of a resolution of a Board or Executive Committee as conclusive evidence (a) of the authority of any person to act in accordance with such resolution or (b) of any determination or of any action by the Board or Executive Committee as described in such resolution, and such resolution may be considered as in full force and effect until receipt by the Custodian of written notice by an Authorized Person to the contrary.
Section 8. DUTY OF CUSTODIAN TO SUPPLY INFORMATION
The Custodian shall cooperate with and supply necessary information in its possession (to the extent permissible under applicable law) to the entity or entities appointed by the appropriate Board to keep the books of account of a Fund and/or compute the net asset value per Share of the outstanding Shares of a Fund.
Section 9. RECORDS
The Custodian shall create and maintain all records relating to its activities under this Agreement which are required with respect to such activities under Section 31 of the Investment Company Act and Rules 31a-1 and 31a-2 thereunder. All such records shall be the property of the appropriate Investment Company and shall at all times during the regular business hours of the Custodian be open for inspection by duly authorized officers, employees or agents of the Investment Company and employees and agents of the Securities and Exchange Commission. The Custodian shall, at a Fund's request, supply the Fund with a tabulation of Securities and Cash owned by the Fund and held by the Custodian and shall, when requested to do so by the Fund and for such compensation as shall be agreed upon between the Fund and the Custodian, include certificate numbers in such tabulations.
Section 10. COMPENSATION OF CUSTODIAN
The Custodian shall be entitled to reasonable compensation for its services and expenses as Custodian, as agreed upon from time to time between each Investment Company, on behalf of each Fund, and the Custodian. In addition, should the Custodian in its discretion advance funds (to include overdrafts) to or on behalf of a Fund pursuant to Proper Instructions, the Custodian shall be entitled to prompt reimbursement of any amounts advanced. In the event of such an advance, and to the extent permitted by the 1940 Act and the Fund's policies, the Custodian shall have a continuing lien and security interest in and to the property of the Fund in the possession or control of the Custodian or of a third party acting in the Custodian's behalf, until the advance is reimbursed. Nothing in this Agreement shall obligate the Custodian to advance funds to or on behalf of a Fund, or to permit any borrowing by a Fund except for borrowings for temporary purposes, to the extent permitted by the Fund's policies.
Section 11. RESPONSIBILITY OF CUSTODIAN
The Custodian shall be responsible for the performance of only such duties as are set forth herein or contained in Proper Instructions and shall use reasonable care in carrying out such duties. The Custodian shall be liable to a Fund for any loss which shall occur as the result of the failure of a Foreign Custodian engaged directly or indirectly by the Custodian to exercise reasonable care with respect to the safekeeping of securities and other assets of the Fund to the same extent that the Custodian would be liable to the Fund if the Custodian itself were holding such securities and other assets. Nothing in this Agreement shall be read to limit the responsibility or liability of the Custodian or a Foreign Custodian for their failure to exercise reasonable care with regard to any decision or recommendation made by the Custodian or Subcustodian regarding the use or continued use of a Foreign Securities Depository. In the event of any loss to a Fund by reason of the failure of the Custodian or a Foreign Custodian engaged by such Foreign Custodian or the Custodian to utilize reasonable care, the Custodian shall be liable to the Fund to the extent of the Fund's damages, to be determined based on the market value of the property which is the subject of the loss at the date of discovery of such loss and without reference to any special conditions or circumstances. The Custodian shall be held to the exercise of reasonable care in carrying out this Agreement, and shall not be liable for acts or omissions unless the same constitute negligence or willful misconduct on the part of the Custodian or any Foreign Custodian engaged directly or indirectly by the Custodian. Each Fund agrees to indemnify and hold harmless the Custodian and its nominees from all taxes, charges, expenses, assessments, claims and liabilities (including legal fees and expenses) incurred by the Custodian or its nominess in connection with the performance of this Agreement with respect to such Fund, except such as may arise from any negligent action, negligent failure to act or willful misconduct on the part of the indemnified entity or any Foreign Custodian. The Custodian shall be entitled to rely, and may act, on advice of counsel (who may be counsel for a Fund) on all matters and shall be without liability for any action reasonably taken or omitted pursuant to such advice. The Custodian need not maintain any insurance for the benefit of any Fund.
All collections of funds or other property paid or distributed in respect of Securities held by the Custodian, agent, Subcustodian or Foreign Custodian hereunder shall be made at the risk of the Funds. The Custodian shall have no liability for any loss occasioned by delay in the actual receipt of notice by the Custodian, agent, Subcustodian or by a Foreign Custodian of any payment, redemption or other transaction regarding securities in respect of which the Custodian has agreed to take action as provided in Section 3 hereof. The Custodian shall not be liable for any action taken in good faith upon Proper Instructions or upon any certified copy of any resolution of the Board and may rely on the genuineness of any such documents which it may in good faith believe to be validly executed. Notwithstanding the foregoing, the Custodian shall not be liable for any loss resulting from, or caused by, the direction of a Fund to maintain custody of any Securities or cash in a foreign country including, but not limited to, losses resulting from nationalization, expropriation, currency restrictions, civil disturbance, acts of war or terrorism, insurrection, revolution, nuclear fusion, fission or radiation or other similar occurrences, or events beyond the control of the Custodian. Finally, the Custodian shall not be liable for any taxes, including interest and penalties with respect thereto, that may be levied or assessed upon or in respect of any assets of any Fund held by the Custodian.
Section 12. LIMITED LIABILITY OF EACH INVESTMENT COMPANY
The Custodian acknowledges that it has received notice of and accepts the limitations of liability as set forth in each Investment Company's Agreement and Declaration of Trust, Articles of Incorporation, or Agreement of Limited Partnership. The Custodian agrees that each Fund's obligation hereunder shall be limited to the assets of the Fund, and that the Custodian shall not seek satisfaction of any such obligation from the shareholders of the Fund nor from any Board Member, officer, employee, or agent of the Fund or the Investment Company on behalf of the Fund.
Section 13. EFFECTIVE PERIOD; TERMINATION
This Agreement shall become effective as of the date of its execution and shall continue in full force and effect until terminated as hereinafter provided. This Agreement may be terminated by each Investment Company, on behalf of a Fund, or by the Custodian by 90 days notice in Writing to the other provided that any termination by an Investment Company shall be authorized by a resolution of the Board, a certified copy of which shall accompany such notice of termination, and provided further, that such resolution shall specify the names of the persons to whom the Custodian shall deliver the assets of the affected Funds held by the Custodian. If notice of termination is given by the Custodian, the affected Investment Companies shall, within 90 days following the giving of such notice, deliver to the Custodian a certified copy of a resolution of the Boards specifying the names of the persons to whom the Custodian shall deliver assets of the affected Funds held by the Custodian. In either case the Custodian will deliver such assets to the persons so specified, after deducting therefrom any amounts which the Custodian determines to be owed to it hereunder (including all costs and expenses of delivery or transfer of Fund assets to the persons so specified). If within 90 days following the giving of a notice of termination by the Custodian, the Custodian does not receive from the affected Investment Companies certified copies of resolutions of the Boards specifying the names of the persons to whom the Custodian shall deliver the assets of the Funds held by the Custodian, the Custodian, at its election, may deliver such assets to a bank or trust company doing business in the State of California to be held and disposed of pursuant to the provisions of this Agreement or may continue to hold such assets until a certified copy of one or more resolutions as aforesaid is delivered to the Custodian. The obligations of the parties hereto regarding the use of reasonable care, indemnities and payment of fees and expenses shall survive the termination of this Agreement.
Section 14. MISCELLANEOUS
14.1 Relationship. Nothing contained in this Agreement shall (i) create any fiduciary, joint venture or partnership relationship between the Custodian and any Fund or (ii) be construed as or constitute a prohibition against the provision by the Custodian or any of its affiliates to any Fund of investment banking, securities dealing or brokerages services or any other banking or financial services.
14.2 Further Assurances. Each party hereto shall furnish to the other party hereto such instruments and other documents as such other party may reasonably request for the purpose of carrying out or evidencing the transactions contemplated by this Agreement.
14.3 Attorneys' Fees. If any lawsuit or other action or proceeding relating to this Agreement is brought by a party hereto against the other party hereto, the prevailing party shall be entitled to recover reasonable attorneys' fees, costs and disbursements (including allocated costs and disbursements of in-house counsel), in addition to any other relief to which the prevailing party may be entitled.
14.4 Notices. Except as otherwise specified herein, each notice or other communication hereunder shall be in Writing and shall be delivered to the intended recipient at the following address (or at such other address as the intended recipient shall have specified in a written notice given to the other parties hereto):
if to a Fund or Investment Company: if to the Custodian: [Fund or Investment Company] The Bank of New York c/o Franklin Resources, Inc. Mutual Fund Custody Manager 777 Mariners Island Blvd. BNY Western Trust Co. San Mateo, CA 94404 550 Kearney St., Suite 60 Attention: Chief Legal Officer San Francisco, CA 94108 |
14.5 Headings. The underlined headings contained herein are for convenience of reference only, shall not be deemed to be a part of this Agreement and shall not be referred to in connection with the interpretation hereof.
14.6 Counterparts. This Agreement may be executed in counterparts, each of which shall constitute an original and both of which, when taken together, shall constitute one agreement.
14.7 Governing Law. This Agreement shall be construed in accordance with, and governed in all respects by, the laws of the State of New York (without giving effect to principles of conflict of laws).
14.8 Force Majeure. Notwithstanding the provisions of Section 11 hereof regarding the Custodian's general standard of care, no failure, delay or default in performance of any obligation hereunder shall constitute an event of default or a breach of this agreement, or give rise to any liability whatsoever on the part of one party hereto to the other, to the extent that such failure to perform, delay or default arises out of a cause beyond the control and without negligence of the party otherwise chargeable with failure, delay or default; including, but not limited to: action or inaction of governmental, civil or military authority; fire; strike; lockout or other labor dispute; flood; war; riot; theft; earthquake; natural disaster; breakdown of public or common carrier communications facilities; computer malfunction; or act, negligence or default of the other party. This paragraph shall in no way limit the right of either party to this Agreement to make any claim against third parties for any damages suffered due to such causes.
14.9 Successors and Assigns. This Agreement shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective successors and assigns, if any.
14.10 Waiver. No failure on the part of any person to exercise any power, right, privilege or remedy hereunder, and no delay on the part of any person in the exercise of any power, right, privilege or remedy hereunder, shall operate as a waiver thereof; and no single or partial exercise of any such power, right, privilege or remedy shall preclude any other or further exercise thereof or of any other power, right, privilege or remedy.
14.11 Amendments. This Agreement may not be amended, modified, altered or supplemented other than by means of an agreement or instrument executed on behalf of each of the parties hereto.
14.12 Severability. In the event that any provision of this Agreement, or the application of any such provision to any person or set of circumstances, shall be determined to be invalid, unlawful, void or unenforceable to any extent, the remainder of this Agreement, and the application of such provision to persons or circumstances other than those as to which it is determined to be invalid, unlawful, void or unenforceable, shall not be impaired or otherwise affected and shall continue to be valid and enforceable to the fullest extent permitted by law.
14.13 Parties in Interest. None of the provisions of this Agreement is intended to provide any rights or remedies to any person other than the Investment Companies, for themselves and for the Funds, and the Custodian and their respective successors and assigns, if any.
14.14 Pre-Emption of Other Agreements. In the event of any conflict between this Agreement, including without limitation any amendments hereto, and any other agreement which may now or in the future exist between the parties, the provisions of this Agreement shall prevail.
14.15 Variations of Pronouns. Whenever required by the context hereof, the singular number shall include the plural, and vice versa; the masculine gender shall include the feminine and neuter genders; and the neuter gender shall include the masculine and feminine genders.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered as of the date first above written.
THE BANK OF NEW YORK
By: /s/ F. RICCIARDI Its: SENIOR VICE PRESIDENT |
THE INVESTMENT COMPANIES LISTED ON EXHIBIT A
By: /s/ H.E. BURNS
Harmon E. Burns
Their: Vice President
By: /s/ DEBORAH R. GATZEK
Deborah R. Gatzek
Their: Vice President & Secretary
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FUND ADMINISTRATION AGREEMENT
AGREEMENT dated as of --------------- between FRANKLIN TEMPLETON LIMITED DURATION INCOME TRUST, a Delaware statutory trust (the "Trust"), and FRANKLIN TEMPLETON SERVICES, LLC (the "Administrator").
In consideration of the mutual agreements herein made, the parties hereby agree as follows:
(1) The Administrator agrees, during the life of this Agreement, to provide the following services to the Trust:
(a) providing office space, telephone, office equipment and supplies for the Trust;
(b) providing trading desk facilities for the Trust, unless these facilities are provided by the Trust's investment adviser;
(c) authorizing expenditures and approving bills for payment on behalf of the Trust;
(d) supervising preparation of periodic reports to Shareholders, notices of dividends, capital gains distributions and tax credits; and attending to routine correspondence and other communications with individual Shareholders when asked to do so by the Trust's shareholder servicing agent or other agents of the Trust;
(e) coordinating the daily pricing of the Trust's investment portfolio, including collecting quotations from pricing services engaged by the Trust; providing fund accounting services, including preparing and supervising publication of daily net asset value quotations, periodic earnings reports and other financial data;
(f) monitoring relationships with organizations serving the Trust, including custodians, transfer agents, public accounting firms, law firms, printers and other third party service providers;
(g) supervising compliance by the Trust with recordkeeping requirements under the federal securities laws, including the Investment Company Act of 1940 (the "1940 Act"), and the rules and regulations thereunder, supervising compliance with recordkeeping requirements imposed by state laws or regulations, and maintaining books and records for the Trust (other than those maintained by the custodian and transfer agent);
(h) preparing and filing of tax reports including the Trust's income tax returns, and monitoring the Trust's compliance with subchapter M of the Internal Revenue Code, and other applicable tax laws and regulations;
(i) monitoring the Trust's compliance with: 1940 Act and other federal securities laws, and rules and regulations thereunder; state and foreign laws and regulations applicable to the operation of investment companies; the Trust's investment objectives, policies and restrictions; and the Code of Ethics and other policies adopted by the Trust's Board of Trustees or ("Board") or by the Adviser and applicable to the Trust;
(j) providing executive, clerical and secretarial personnel needed to carry out the above responsibilities; and
(k) preparing regulatory reports, including without limitation NSARs, proxy statements and U.S. and foreign ownership reports.
Nothing in this Agreement shall obligate the Trust to pay any compensation to the officers of the Trust. Nothing in this Agreement shall obligate the Administrator to pay for the services of third parties, including attorneys, auditors, printers, pricing services or others, engaged directly by the Trust to perform services on behalf of the Trust.
(2) The Trust agrees to pay to the Administrator as compensation for such services a monthly fee equal on an annual basis to 0.20% of the average daily net assets of the Trust.
From time to time, the Administrator may waive all or a portion of its fees provided for hereunder and such waiver shall be treated as a reduction in the purchase price of its services. The Administrator shall be contractually bound hereunder by the terms of any publicly announced waiver of its fee, or any limitation of each affected Trust's expenses, as if such waiver or limitation were fully set forth herein.
(3) This Agreement shall remain in full force and effect through for one year after its execution and thereafter from year to year to the extent continuance is approved annually by the Board of the Trust.
(4) This Agreement may be terminated by the Trust at any time on sixty (60) days' written notice without payment of penalty, provided that such termination by the Trust shall be directed or approved by the vote of a majority of the Board of the Trust in office at the time or by the vote of a majority of the outstanding voting securities of the Trust (as defined by the 1940 Act); and shall automatically and immediately terminate in the event of its assignment (as defined by the 1940 Act).
(5) In the absence of willful misfeasance, bad faith or gross negligence on the part of the Administrator, or of reckless disregard of its duties and obligations hereunder, the Administrator shall not be subject to liability for any act or omission in the course of, or connected with, rendering services hereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their duly authorized officers.
FRANKLIN TEMPLETON LIMITED
DURATION INCOME TRUST
By: ------------------------
Murray L. Simpson
Vice President & Secretary
FRANKLIN TEMPLETON SERVICES, LLC
By: -------------------------
Leslie M. Kratter
Senior Vice President &
Secretary
12/02
FRANKLIN TEMPLETON INVESTMENTS
CODE OF ETHICS
AND
POLICY STATEMENT ON INSIDER TRADING
TABLE OF CONTENTS
CODE OF ETHICS...............................................................1
PART 1 - STATEMENT OF PRINCIPLES.............................................2
PART 2 - PURPOSES, AND CONSEQUENCES OF NON-COMPLIANCE........................3
PART 3 - COMPLIANCE REQUIREMENTS FOR ALL ACCESS PERSONS......................4
PART 4 - ADDITIONAL COMPLIANCE REQUIREMENTS APPLICABLE TO PORTFOLIO PERSONS.11
PART 5 - REPORTING REQUIREMENTS FOR ALL ACCESS PERSONS......................14
PART 6 - PRE-CLEARANCE REQUIREMENTS.........................................18
PART 7 - PENALTIES FOR VIOLATIONS OF THE CODE...............................23
PART 8 - A REMINDER ABOUT THE FRANKLIN TEMPLETON INVESTMENTS INSIDER TRADING
POLICY......................................................................25
PART 9 - FOREIGN COUNTRY SUPPLEMENTS (CANADA)...............................26
APPENDIX A: COMPLIANCE PROCEDURES AND DEFINITIONS.........................28
I. RESPONSIBILITIES OF EACH DESIGNATED COMPLIANCE OFFICER................29
II. COMPILATION OF DEFINITIONS OF IMPORTANT TERMS.........................34
III. SECURITIES EXEMPT FROM THE PROHIBITED, REPORTING, AND PRE-CLEARANCE
PROVISIONS............................................................36
IV. LEGAL REQUIREMENT.....................................................37
APPENDIX B: ACKNOWLEGMENT FORM AND SCHEDULES................................38
ACKNOWLEDGMENT FORM.........................................................39
SCHEDULE A: LEGAL AND COMPLIANCE OFFICERS AND PRECLEARANCE DESK TELEPHONE &
FAX NUMBERS.................................................................40
SCHEDULE B - TRANSACTIONS REPORT............................................41
SCHEDULE C - INITIAL, ANNUAL, & UPDATED DISCLOSURE OF ACCESS PERSONS
SECURITIES HOLDINGS.........................................................42
SCHEDULE D - NOTIFICATION OF SECURITIES ACCOUNT............................43
SCHEDULE E - NOTIFICATION OF DIRECT OR INDIRECT BENEFICIAL INTEREST.........44
SCHEDULE F - INITIAL, ANNUAL, & UPDATED DISCLOSURE OF SECURITIES ACCOUNTS...45
SCHEDULE G - INITIAL AND ANNUAL CERTIFICATION OF DISCRETIONARY AUTHORITY....46
SCHEDULE H: CHECKLIST FOR INVESTMENTS IN PARTNERSHIPS AND SECURITIES ISSUED
IN PRIVATE PLACEMENTS MADE BY PORTFOLIO PERSONS.............................47
APPENDIX C: INVESTMENT ADVISOR AND BROKER-DEALER AND OTHER SUBSIDIARIES OF
FRANKLIN RESOURCES, INC. - DECEMBER 2002...................................49
POLICY STATEMENT ON INSIDER TRADING..........................................1
A. LEGAL REQUIREMENT......................................................1
B. WHO IS AN INSIDER?.....................................................2
C. WHAT IS MATERIAL INFORMATION?..........................................2
D. WHAT IS NON-PUBLIC INFORMATION?........................................2
E. BASIS FOR LIABILITY....................................................2
F. PENALTIES FOR INSIDER TRADING..........................................3
G. INSIDER TRADING PROCEDURES.............................................4
H. FAIR DISCLOSURE POLICIES AND PROCEDURES................................6
SUPPLEMENTAL MEMORANDUM......................................................1
CHINESE WALL PROCEDURES......................................................1
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CODE OF ETHICS
Franklin Resources, Inc. and all of its subsidiaries, and the funds in the Franklin Templeton Group of Funds (the "Funds") (collectively, "Franklin Templeton Investments") will follow this Code of Ethics (the "Code") and Policy Statement on Insider Trading (the "Insider Trading Policy"), including any supplemental memoranda. Additionally, the subsidiaries listed in Appendix C of this Code, together with Franklin Resources, Inc., the Funds, the Fund's investment advisers and principal underwriter, have adopted the Code and Insider Trading Policy.
PART 1 - STATEMENT OF PRINCIPLES
Franklin Templeton Investments' policy is that the interests of
shareholders and clients are paramount and come before the interests of any
director, officer or employee of Franklin Templeton Investments.1
Personal investing activities of ALL directors, officers and employees of
Franklin Templeton Investments should be conducted in a manner to avoid actual
OR potential conflicts of interest with Franklin Templeton Investments, Fund
shareholders, and other clients of any Franklin Templeton adviser.
Directors, officers and employees of Franklin Templeton Investments shall
use their positions with Franklin Templeton Investments and any investment
opportunities they learn of because of their positions with Franklin Templeton
Investments, in a manner consistent with their fiduciary duties for the benefit
of Fund shareholders, and clients.
PART 2 - PURPOSES, AND CONSEQUENCES OF NON-COMPLIANCE
It is important that you read and understand this document, because its overall purpose is to help all of us comply with the law and to preserve and protect the outstanding reputation of Franklin Templeton Investments. This document was adopted to comply with Securities and Exchange Commission rules under the Investment Company Act of 1940 ("1940 Act"), the Investment Advisers Act of 1940 ("Advisers Act"), the Insider Trading and Securities Fraud Enforcement Act of 1988 ("ITSFEA"), industry practice and the recommendations contained in the ICI's Report of the Advisory Group on Personal Investing. Any violation of the Code or Insider Trading Policy, including engaging in a prohibited transaction or failing to file required reports, may result in disciplinary action, and, when appropriate, termination of employment and/or referral to appropriate governmental agencies.
PART 3 - COMPLIANCE REQUIREMENTS FOR ALL ACCESS PERSONS
3.1 WHO IS COVERED BY THE CODE AND HOW DOES IT WORK? The principles contained in the Code must be observed by ALL directors, officers and employees2 of Franklin Templeton Investments. However, there are different categories of restrictions on personal investing activities. The category in which you have been placed generally depends on your job function, although unique circumstances may result in you being placed in a different category. The Code covers the following categories of employees who are described below:
(1) ACCESS PERSONS: Access Persons are those employees who have "ACCESS TO INFORMATION" concerning recommendations made to a Fund or client with regard to the purchase or sale of a security. Examples of "ACCESS TO INFORMATION" would include having access to trading systems, portfolio accounting systems, research databases or settlement information. Access Persons would typically include employees, including Futures Associates, in the following departments:
o fund accounting;
o investment operations;
o information services & technology;
o product management;
o legal and legal compliance
o and anyone else designated by the Director, Global Compliance
In addition, you are an Access Person if you are any of the following:
o an officer or and directors of funds;
o an officer or director of an investment advisor or broker-dealer
subsidiary in Franklin Templeton Investments;
o a person that controls those entities; and
o any Franklin Resources' Proprietary Account ("Proprietary Account")3
(2) PORTFOLIO PERSONS: Portfolio Persons are a subset of Access Persons and are those employees of Franklin Templeton Investments, who, in connection with his or her regular functions or duties, makes or participates in the decision to purchase or sell a security by a Fund in Franklin Templeton Investments, or any other client or if his or her functions relate to the making of any recommendations about those purchases or sales. Portfolio Persons include:
o portfolio managers;
o research analysts;
o traders;
o employees serving in equivalent capacities (such as Futures Associates);
o employees supervising the activities of Portfolio Persons; and anyone else
o designated by the Director, Global Compliance
(3) NON-ACCESS PERSONS: If you are an employee of Franklin Templeton Investments AND you do not fit into any of the above categories, you are a Non-Access Person. Because you do not normally receive confidential information about Fund portfolios, you are subject only to the prohibited transaction provisions described in 3.4 of this Code and the Franklin Resources, Inc.'s Standards of Business Conduct contained in the Employee Handbook.
Please contact the Legal Compliance Department if you are unsure as to what category you fall in or whether you should be considered to be an Access Person or Portfolio Person.
The Code works by prohibiting some transactions and requiring pre-clearance and reporting of most others. NON-ACCESS PERSONS do not have to pre-clear their security transactions, and, in most cases, do not have to report their transactions. "INDEPENDENT DIRECTORS" need not pre-clear or report any securities transaction unless you knew, or should have known that, during the 15-day period before or after the transaction, the security was purchased or sold or considered for purchase or sale by a Fund or Franklin Resources for a Fund. (SEE Section 5.2.B below.) HOWEVER, PERSONAL INVESTING ACTIVITIES OF ALL EMPLOYEES AND INDEPENDENT DIRECTORS ARE TO BE CONDUCTED IN COMPLIANCE WITH THE PROHIBITED TRANSACTIONS PROVISIONS CONTAINED IN 3.4 BELOW. If you have any questions regarding your personal securities activity, contact the Legal Compliance Department.
3.2 WHAT ACCOUNTS AND TRANSACTIONS ARE COVERED? The Code covers all of your personal securities accounts and transactions, as well as transactions by any of Franklin Resource's Proprietary Accounts. It also covers all securities and accounts in which you have "beneficial ownership." 4 A transaction by or for the account of your spouse, or any other family member living in your home is considered to be the same as a transaction by you. Also, a transaction for any account in which you have any economic interest (other than the account of an unrelated client for which advisory fees are received) AND have or share investment control is generally considered the same as a transaction by you. For example, if you invest in a corporation that invests in securities and you have or share control over its investments, that corporation's securities transactions are considered yours.
However, you are not deemed to have a pecuniary interest in any securities held by a partnership, corporation, trust or similar entity unless you control, or share control of such entity, or have, or share control over its investments. For example, securities transactions of a trust or foundation in which you do not have an economic interest (i.e., you are not the trustor or beneficiary) but of which you are a trustee are not considered yours unless you have voting or investment control of its assets. Accordingly, each time the words "you" or "your" are used in this document, they apply not only to your personal transactions and accounts, but also to all transactions and accounts in which you have any direct or indirect beneficial interest. If it is not clear whether a particular account or transaction is covered, ask a Preclearance Officer for guidance.
(1) securities that are direct obligations of the U. S. Government (i.e., issued or guaranteed by the U.S. Government, such as Treasury bills, notes and bonds, including U.S. Savings Bonds and derivatives thereof);
(2) high quality short-term instruments, including but not limited to bankers' acceptances, bank certificates of deposit, commercial paper and repurchase agreements;
(3) shares of registered open-end investment companies ("mutual funds"); and
(4) commodity futures (excluding futures on individual securities), currencies, currency forwards and derivatives thereof.
Such transactions are also exempt from: (i) the prohibited transaction
provisions contained in Part 3.4 such as front-running; (ii) the additional
compliance requirements applicable to portfolio persons contained in Part 4; and
(iii) the applicable reporting requirements contained in Part 5.
3.4 PROHIBITED TRANSACTIONS FOR ALL ACCESS PERSONS
(1) purchase a security if you intend, or know of Franklin Templeton Investments' intention, to purchase that security or a related security on behalf of a Fund or client, or
(2) sell a security if you intend, or know of Franklin Templeton Investments' intention, to sell that security or a related security on behalf of a Fund or client.
(1) buy a security if you know that a Fund or client is selling the same or a related security, or has sold the security, until seven (7) calendar days after the Fund's or client's order has either been executed or withdrawn, or
(2) sell a security if you know that a Fund or client is buying the same or a related security, or has bought the security until seven (7) calendar days after the Fund's or client's order has either been executed or withdrawn.
Refer to Section I.A., "Pre-Clearance Standards," of Appendix A of the Code for more details regarding the preclearance of personal securities transactions.
You will be permitted to purchase or sell such security if the Appropriate Analyst(s) confirms to the Preclearance Desk that there is no intention to engage in a transaction regarding the security within seven (7) calendar days on behalf of an Associated Client7 and you subsequently preclear such security in accordance with Part 6 below.
3.5 SERVICE AS A DIRECTOR As an employee of Franklin Templeton Investments, you may not serve as a director, trustee, or in a similar capacity for any public or private company (excluding not-for-profit companies, charitable groups, and eleemosynary organizations) unless you receive approval from a member of the Office of the President or Office of the Chairman (excluding the vote of any member who is seeking such approval for himself) and it is determined that your service is consistent with the interests of the clients of Franklin Templeton Investments. You must notify the Legal Compliance Department in writing of your interest in serving as a director, which includes the justification for such directorship. Legal Compliance will process the request through the OOP/OOC.
Legal Compliance will advise you of the OOP/OOC's decision. If approved, the Legal Compliance Department will furnish procedures applicable to serving as an outside director to you.
PART 4 - ADDITIONAL COMPLIANCE REQUIREMENTS APPLICABLE TO PORTFOLIO PERSONS8
4.1 REQUIREMENT TO DISCLOSE INTEREST AND METHOD OF DISCLOSURE As a Portfolio Person, you must promptly disclose your direct or indirect beneficial interest in a security whenever you learn that the security is under consideration for purchase or sale by an Associated Client in the Franklin Templeton Group and you;
(1) Have or share investment control of the Associated Client;
(2) Make any recommendation or participate in the determination of which recommendation shall be made on behalf of the Associated Client; or
(3) Have functions or duties that relate to the determination of which recommendation shall be made to the Associated Client.
In such instances, you must initially disclose that beneficial interest orally to the primary portfolio manager (or other Appropriate Analyst) of the Associated Client(s) considering the security, the Director of Research and Trading or the Director, Global Compliance. Following that oral disclosure, you must send a written acknowledgment of that interest on Schedule E (or on a form containing substantially similar information) to the primary portfolio manager (or other Appropriate Analyst), with a copy to the Legal Compliance Department.
4.2 SHORT SALES OF SECURITIES You cannot sell short ANY security held by your Associated Clients, including "short sales against the box". Additionally, Portfolio Persons associated with the Templeton Group of Funds and clients cannot sell short any security on the Templeton "Bargain List". This prohibition would also apply to effecting economically equivalent transactions, including, but not limited to, sales of uncovered call options, purchases of put options while not owning the underlying security and short sales of bonds that are convertible into equity positions.
4.3 SHORT SWING TRADING Portfolio Persons cannot profit from the purchase and sale or sale and purchase within sixty calendar days of any security, including derivatives. Portfolio Persons are responsible for transactions that may occur in margin and option accounts and all such transactions must comply with this restriction.9 This restriction does NOT apply to:
(2) profiting on the purchase and sale or sale and purchase within sixty calendar days of the following securities:
[] securities that are direct obligations of the U.S. Government, such as Treasury bills, notes and bonds, and U.S. Savings Bonds and derivatives thereof;
[] high quality short-term instruments ("money market instruments")
including but not limited to (i) bankers' acceptances, (ii)
U.S. bank certificates of deposit; (iii) commercial paper; and
(iv) repurchase agreements;
[] shares of registered open-end investment companies; and
[] commodity futures, currencies, currency forwards and derivatives thereof.
Calculation of profits during the 60-calendar day holding period generally will be based on "last-in, first-out" ("LIFO"). Portfolio Persons may elect to calculate their 60 calendar day profits on either a LIFO or FIFO ("first-in, first-out") basis when there has not been any activity in such security by their Associated Clients during the previous 60 calendar days.
4.4 SECURITIES SOLD IN A PUBLIC OFFERING Portfolio Persons cannot buy securities in any initial public offering, or a secondary offering by an issuer, INCLUDING initial public offerings of securities made by closed-end funds and real estate investment trusts advised by Franklin Templeton Investments. Purchases of open-end mutual funds are excluded from this prohibition.
4.5 INTERESTS IN PARTNERSHIPS AND SECURITIES ISSUED IN PRIVATE PLACEMENTS Portfolio Persons cannot acquire limited partnership interests or other securities in private placements unless they:
(1) complete the Private Placement Checklist (Schedule H);
(2) provide supporting documentation (e.g., a copy of the offering
memorandum); and
(3) obtain approval of the appropriate Chief Investment Officer; and
(4) submit all documents to the Legal Compliance Department
Approval will only be granted after the Director of Global Compliance
consults with an executive officer of Franklin Resources, Inc.
PART 5 - REPORTING REQUIREMENTS FOR ALL ACCESS PERSONS
5.1 REPORTING OF BENEFICIAL OWNERSHIP AND SECURITIES TRANSACTIONS Compliance with the following personal securities transaction reporting procedures is essential to enable us to meet our responsibilities to Funds and other clients and to comply with regulatory requirements. You are expected to comply with both the letter and spirit of these requirements, including completing and filing all reports required under the Code in a timely manner.
5.2 INITIAL HOLDINGS AND BROKERAGE ACCOUNT REPORTS
A. ALL ACCESS PERSONS (EXCEPT INDEPENDENT DIRECTORS) Every employee
(new or transfer) of Franklin Templeton Investments who becomes an Access
Person, must file:
(1) An Acknowledgement Form;
(2) Schedule C: Initial, Annual & Updated Disclosure of Securities
Holdings; and
(3) Schedule F: Initial, Annual & Updated Disclosure of Securities
Accounts
The Acknowledgement Form, Schedule C and Schedule F MUST be completed and returned to the Legal Compliance Department within 10 CALENDAR DAYS of the date the employee becomes an access person.
5.3 QUARTERLY TRANSACTION REPORTS
A. ALL ACCESS PERSONS (EXCEPT INDEPENDENT DIRECTORS)
You MUST report ALL securities transactions by; (i) providing the Legal
Compliance Department with copies of ALL broker's confirmations and statements
within 10 calendar days after the end of the calendar quarter (which may be sent
under separate cover by the broker) showing ALL transactions and holdings in
securities AND (ii) certifying by January 30th of each year that you have
disclosed all such brokerage accounts on Schedule F to the Legal Compliance
Department. The brokerage statements and confirmations must include all
transactions in securities in which you have, or by reason of the transaction
acquire any direct or indirect beneficial ownership, including transactions in a
discretionary account and transactions for any account in which you have any
economic interest AND have or share investment control. Also, if you acquire
securities by any other method which is not being reported to the Legal
Compliance Department by a duplicate confirmation statement at or near the time
of the acquisition, you must report that acquisition to the Legal Compliance
Department on Schedule B within 10 calendar days after you are notified of the
acquisition. Such acquisitions include, among other things, securities acquired
by gift, inheritance, vesting,10 stock splits, merger or reorganization of the
issuer of the security.
You must file these documents with the Legal Compliance Department not later than 10 calendar days after the end of each quarter, but you need not show or report transactions for any account over which you had no direct or indirect influence or control.11 Failure to timely report transactions is a violation of Rule 17j-1 as well as the Code, and may be reported to the Fund's Board of Directors and may also result, among other things, in denial of future personal security transaction requests.
B. INDEPENDENT DIRECTORS If you are a director of a Fund within Franklin Templeton Investments but you are not an "interested person" of the Fund, you are not required to file transaction reports unless you knew or should have known that, during the 15-day period before or after a transaction, the security was purchased or sold, or considered for purchase or sale, by a Fund or by Franklin Templeton Investments on behalf of a Fund.
All access persons, including independent directors, will be asked to certify that they will comply with FRANKLIN TEMPLETON INVESTMENTS' CODE OF ETHICS AND POLICY STATEMENT ON INSIDER TRADING by filing the Acknowledgment Form with the Legal Compliance Department within 10 business days of receipt of the Code. Thereafter, you will be asked to certify that you have complied with the Code during the preceding year by filing a similar Acknowledgment Form by January 30 of each year.
5.5 BROKERAGE ACCOUNTS AND CONFIRMATIONS OF SECURITIES TRANSACTIONS (EXCEPT INDEPENDENT DIRECTORS) If you are an access person , in Franklin Templeton Investments, before or at a time contemporaneous with opening a brokerage account with a registered broker-dealer, or a bank, or placing an initial order for the purchase or sale of securities with that broker-dealer or bank, you must:
(1) notify the Legal Compliance Department, in writing, by completing Schedule D or by providing substantially similar information; and
(2) notify the institution with which the account is opened, in writing, of your association with Franklin Templeton Investments.
The Compliance Department will request the institution in writing to send to it duplicate copies of confirmations and statements for all transactions effected in the account simultaneously with their mailing to you.
If you have an existing account on the effective date of this Code or upon becoming an access person, you must comply within 10 days with conditions (1) and (2) above.
PART 6 - PRE-CLEARANCE REQUIREMENTS
6.1 PRIOR APPROVAL OF SECURITIES TRANSACTIONS
(1) FRANKLIN RESOURCES, INC., AND ITS AFFILIATES. Purchases and sales of securities of Franklin Resources, Inc., closed-end funds of the Franklin Templeton Group, or real estate investment trusts advised by Franklin Properties Inc., as these securities cannot be purchased on behalf of our advisory clients.12
(2) SMALL QUANTITIES.
o Transactions that do not result in purchases or sales of more than
100 shares of any one security, regardless of where it is traded,
in any 30 day period; or
o Transactions of 500 shares or less of any security listed on the
NYSE or NASDAQ NMS (does not include NASDAQ Small Cap or OTC) in
any 30 day period; or
o Transactions of 1000 shares or less of the top 50 securities by
volume during the previous calendar quarter on the NYSE or NASDAQ
NMS(does not include Small Cap or OTC) in any 30 day period.
o Transactions in municipal bonds with a face value of $100,000 or
less.
HOWEVER, YOU MAY NOT EXECUTE ANY TRANSACTION, REGARDLESS OF QUANTITY, IF YOU LEARN THAT THE FUNDS ARE ACTIVE IN THE SECURITY. IT WILL BE PRESUMED THAT YOU HAVE KNOWLEDGE OF FUND ACTIVITY IN THE SECURITY IF, AMONG OTHER THINGS, YOU ARE DENIED APPROVAL TO GO FORWARD WITH A TRANSACTION REQUEST.
(3) DIVIDEND REINVESTMENT PLANS: Transactions made pursuant to dividend reinvestment plans ("DRIPs") do not require preclearance regardless of quantity or Fund activity.
(4) GOVERNMENT OBLIGATIONS. Transactions in securities issued or guaranteed by the governments of the United States, Canada, the United Kingdom, France, Germany, Switzerland, Italy and Japan, or their agencies or instrumentalities, or derivatives thereof.
(5) PAYROLL DEDUCTION PLANS. Securities purchased by an employee's spouse pursuant to a payroll deduction program, provided the access person has previously notified the Compliance Department in writing that the spouse will be participating in the payroll deduction program.
(6) EMPLOYER STOCK OPTION PROGRAMS. Transactions involving the exercise and/or purchase by an access person or an access person's spouse of securities pursuant to a program sponsored by a corporation employing the access person or spouse.
(7) PRO RATA DISTRIBUTIONS. Purchases effected by the exercise of rights issued pro rata to all holders of a class of securities or the sale of rights so received.
(8) TENDER OFFERS. Transactions in securities pursuant to a bona fide tender offer made for any and all such securities to all similarly situated shareholders in conjunction with mergers, acquisitions, reorganizations and/or similar corporate actions. However, tenders pursuant to offers for less than all outstanding securities of a class of securities of an issuer must be precleared.
(9) NOT ELIGIBLE FOR FUNDS AND CLIENTS. Transactions in any securities that are prohibited investments for all Funds and clients advised by the entity employing the access person.
(10) NO INVESTMENT CONTROL. Transactions effected for an account or entity over which you do not have or share investment control (i.e., an account where someone else exercises complete investment control).
(11) NO BENEFICIAL OWNERSHIP. Transactions in which you do not acquire or dispose of direct or indirect beneficial ownership (i.e., an account where in you have no financial interest).
(12) ETFS AND HOLDRS. Transactions in Exchange-Traded Funds and Holding Company Depository Receipts (Holdrs).
Although an access person's securities transaction may be exempt from preclearing, such transactions must comply with the prohibited transaction provisions of Section 3.4 above. Additionally, you may not trade any securities as to which you have "inside information" (see attached FRANKLIN TEMPLETON INVESTMENTS' POLICY STATEMENT ON INSIDER TRADING). If you have any questions, contact a Preclearance Officer before engaging in the transaction. If you have any doubt whether you have or might acquire direct or indirect beneficial ownership or have or share investment control over an account or entity in a particular transaction, or whether a transaction involves a security covered by the Code, you should consult with a Preclearance Officer before engaging in the transaction.
(1) The terms of each account relationship ("Agreement") must be in writing and filed with a Preclearance Officer prior to any transactions.
(2) Any amendment to each Agreement must be filed with a Preclearance Officer prior to its effective date.
(3) The Portfolio Person certifies to the Compliance Department at the time such account relationship commences, and annually thereafter, as contained in Schedule G of the Code that such Portfolio Person does not have direct or indirect influence or control over the account, other than the right to terminate the account.
(4) Additionally, any discretionary account that you open or maintain with a registered broker-dealer, a registered investment adviser, or other investment manager acting in a similar fiduciary capacity must provide duplicate copies of confirmations and statements for all transactions effected in the account simultaneously with their delivery to you., If your discretionary account acquires securities which are not reported to a Preclearance Officer by a duplicate confirmation, such transaction must be reported to a Preclearance Officer on Schedule B within 10 days after you are notified of the acquisition.14
However, if you make ANY request that the discretionary account manager enter into or refrain from a specific transaction or class of transactions, you must first consult with a Preclearance Officer and obtain approval prior to making such request.
(1) You are a director of a Fund in Franklin Templeton Investments and
a director of the fund's advisor;
(2) You are not an "advisory person"15 of a Fund in Franklin Templeton
Investments; and
(3) You are not an employee of any Fund,
|
or
(1) You are a director of a Fund in the Franklin Templeton Group;
(2) You are not an "advisory representative"16 of Franklin Resources or
any subsidiary; and
(3) You are not an employee of any Fund,
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unless you know or should know that, during the 15-day period before the transaction, the security was purchased or sold, or considered for purchase or sale, by a Fund or by Franklin Resources on behalf of a Fund or other client.
Directors, other than independent Directors, qualifying under this paragraph are required to comply with all applicable provisions of the Code including reporting their initial holdings and brokerage accounts in accordance with 5.2, personal securities transactions and accounts in accordance with 5.3 and 5.5, and annual reports in accordance with 5.4 of the Code.
PART 7 - PENALTIES FOR VIOLATIONS OF THE CODE
The Code is designed to assure compliance with applicable law and to maintain shareholder confidence in Franklin Templeton Investments.
In adopting this Code, it is the intention of the Boards of Directors/Trustees, to attempt to achieve 100% compliance with all requirements of the Code - but it is recognized that this may not be possible. Incidental failures to comply with the Code are not necessarily a violation of the law or the Franklin Templeton Investment's Statement of Principles. Such isolated or inadvertent violations of the Code not resulting in a violation of law or the Statement of Principles will be referred to the Director, Global Compliance and/or management personnel, and disciplinary action commensurate with the violation, if warranted, will be imposed. Additionally, if you violate any of the enumerated prohibited transactions contained in Parts 3 and 4 of the Code, you will be expected to give up ANY profits realized from these transactions to Franklin Resources for the benefit of the affected Funds or other clients. If Franklin Resources cannot determine which Fund(s) or client(s) were affected, the proceeds will be donated to a charity chosen by Franklin Resources. Please refer to the following page for guidance of the types of sanctions that would likely be imposed for isolated or inadvertent violations of the Code.
However, failure to disgorge profits when requested or a pattern of violations that individually do not violate the law or Statement of Principles, but which taken together demonstrate a lack of respect for the Code of Ethics, may result in more significant disciplinary action including termination of employment. A violation of the Code resulting in a violation of the law will be severely sanctioned, with disciplinary action including, but not limited to, referral of the matter to the board of directors of the affected Fund, termination of employment or referral of the matter to the appropriate regulatory agency for civil and/or criminal investigation.
CODE OF ETHICS SANCTION GUIDELINES
-----------------------------------------------------------------------------
VIOLATION SANCTION IMPOSED
-----------------------------------------------------------------------------
o Failure to preclear but otherwise would Reminder Memo
have been approved (i.e., no conflict with
the fund's transactions).
-----------------------------------------------------------------------------
o Failure to preclear but otherwise would 30 Day Personal Securities
have been approved (i.e., no conflict Trading Suspension
with the fund's transactions)
twice within 12 calendar months -
o Failure to preclear and the transaction
would have been disapproved:
-----------------------------------------------------------------------------
o Failure to preclear but otherwise would Greater Than 30 Day
have been approved (i.e., no conflict with Personal Securities Trading
the fund's transactions) three times or Suspension (e.g., 60 or 90
more within 12 calendar months Days)
o Failure to preclear and the transaction
would have been disapproved twice or more
within 12 calendar months
-----------------------------------------------------------------------------
o Profiting from short-swing trades Profits are donated to The
(profiting on purchase & sale/sale & United Way (or charity of
purchase within 60 days employee's choice)
-----------------------------------------------------------------------------
o Repeated violations of the Code of Fines levied discussion with
after Ethics even if each the General Counsel and
individual violation might be considered and appropriate CIO.
deminimis
-----------------------------------------------------------------------------
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PART 8 - A REMINDER ABOUT THE FRANKLIN TEMPLETON INVESTMENTS INSIDER TRADING
POLICY
The Code of Ethics is primarily concerned with transactions in securities
held or to be acquired by any of the Funds or Franklin Resources' clients,
regardless of whether those transactions are based on inside information or
actually harm a Fund or a client.
The Insider Trading Policy (attached to this document) deals with the problem of insider trading in securities that could result in harm to a Fund, a client, or members of the public, and applies to all directors, officers and employees of any entity in the Franklin Templeton Investments. Although the requirements of the Code and the Insider Trading Policy are similar, you must comply with both.
PART 9 - FOREIGN COUNTRY SUPPLEMENTS (CANADA)
The Investment Funds Institute of Canada ("IFIC") has implemented a new Model Code of Ethics for Personal Investing (the "IFIC Code") to be adopted by all IFIC members. Certain provisions in the IFIC Code differ from the provisions of Franklin Templeton Investments Code of Ethics (the "FT Code"). This Supplementary Statement of Requirements for Canadian Employees (the "Canadian Supplement") describes certain further specific requirements that govern the activities of Franklin Templeton Investments Corp. ("FTIC"). It is important to note that the Canadian Supplement does not replace the FT Code but adds certain restrictions on trading activities, which must be read in conjunction with the Code.
All capitalized terms in this Canadian Supplement, unless defined in this Canadian Supplement, have the meaning set forth in the FT Code.
INITIAL PUBLIC AND SECONDARY OFFERINGS
Access Persons cannot buy securities in any initial public offering, or a
secondary offering by an issuer. Public offerings of securities made by Franklin
Templeton Investments, including open-end and closed-end mutual funds, real
estate investment trusts and securities of Franklin Resources, Inc, are excluded
from this prohibition.
NOTE: THE FT CODE PRESENTLY PROHIBITS PORTFOLIO PERSONS FROM BUYING SECURITIES
IN ANY INITIAL PUBLIC OFFERING, OR A SECONDARY OFFERING BY AN ISSUER (SEE
SECTION 4.5 OF THE FT CODE). THIS PROVISION EXTENDS SECTION 4.5 OF THE FT CODE
TO ALL ACCESS PERSONS.
INTERESTS IN PARTNERSHIPS AND SECURITIES ISSUED IN PRIVATE PLACEMENTS Access Persons and Portfolio Persons cannot acquire limited partnership interests or other securities in private placements unless they obtain approval of the Compliance Officer after he or she consults with an executive officer of Franklin Resources, Inc. Purchases of limited partnership interests or other securities in private placements will not be approved, unless in addition to the requirements for the approval of other trades and such other requirements as the executive officer of Franklin Resources, Inc. may require, the Compliance Officer is satisfied that the issuer is a "private company" as defined in the SECURITIES ACT (Ontario) and the Access Person has no reason to believe that the issuer will make a public offering of its securities in the foreseeable future.
NOTE: THE FT CODE PRESENTLY PROHIBITS AS A GENERAL RULE PORTFOLIO PERSONS FROM BUYING LIMITED PARTNERSHIP INTERESTS OR OTHER SECURITIES IN PRIVATE PLACEMENTS (SEE SECTION 4.6 OF THE FT CODE). THIS SECTION EXTENDS THE AMBIT OF THE PROHIBITION TO ACCESS PERSONS AND LIMITS THE EXCEPTION TO THE GENERAL RULE CONTAINED IN SECTION 4.6 OF THE FT CODE.
ADDITIONAL REQUIREMENTS TO OBTAIN APPROVAL FOR PERSONAL TRADES Prior to an Access Person obtaining approval for a personal trade he or she must advise the Compliance Officer that he or she:
o Does not possess material non-public information relating to the security;
o Is not aware of any proposed trade or investment program relating to that security by any of the Franklin Templeton Group of Funds;
o Believes that the proposed trade has not been offered because of the Access Person's position in Franklin Templeton Investments and is available to any market participant on the same terms;
o Believes that the proposed trade does not contravene any of the prohibited activities set out in Section 3.4 of the FT Code, and in the case of Portfolio Persons does not violate any of the additional requirements set out in Part 4 of the FT Code; and
o Will provide any other information requested by the Compliance Officer concerning the proposed personal trade.
An Access Person may contact the Compliance Officer by fax, phone or e-mail to obtain his or her approval.
NOTE: THE METHOD OF OBTAINING APPROVAL IS PRESENTLY SET OUT IN SECTION 6.1A OF THE FT CODE AND PROVIDES THAT AN ACCESS PERSON MAY CONTACT THE COMPLIANCE OFFICER BY FAX, PHONE OR E-MAIL. THE ADDITIONAL REQUIREMENT DESCRIBED ABOVE MAKES IT CLEAR THAT AN ACCESS PERSON MAY CONTINUE TO CONTACT THE COMPLIANCE OFFICER IN THE SAME MANNER AS BEFORE. THE ACCESS PERSON WILL HAVE DEEMED TO HAVE CONFIRMED COMPLIANCE WITH THE ABOVE REQUIREMENTS PRIOR TO OBTAINING APPROVAL FROM THE COMPLIANCE OFFICER.
APPOINTMENT OF INDEPENDENT REVIEW PERSON
FTIC shall appoint an independent review person who will be responsible for
approval of all personal trading rules and other provisions of the FT Code with
respect to FTIC and for monitoring the administration of the FT Code from time
to time with respect to FTIC employees. The Compliance Officer will provide a
written report to the Independent Review Person, at least annually, summarizing:
o Compliance with the FT Code for the period under review
o Violations of the FT Code for the period under review
o Sanctions imposed by Franklin Templeton Investments for the period under
review
o Changes in procedures recommended by the FT Code
o Any other information requested by the Independent Review Person
APPENDIX A: COMPLIANCE PROCEDURES AND DEFINITIONS
This appendix sets forth the additional responsibilities and obligations of Compliance Officers, and the Legal/Administration and Legal/Compliance Departments, under Franklin Templeton Investments' Code of Ethics and Policy Statement on Insider Trading.
I. RESPONSIBILITIES OF EACH DESIGNATED COMPLIANCE OFFICER
A. PRE-CLEARANCE STANDARDS
1. GENERAL PRINCIPLES The Director, Global Compliance, or a Preclearance Officer, shall only permit an access person to go forward with a proposed security17 transaction if he or she determines that, considering all of the facts and circumstances, the transaction does not violate the provisions of Rule 17j-1, or of this Code and there is no likelihood of harm to a client.
2. ASSOCIATED CLIENTS
Unless there are special circumstances that make it appropriate to
disapprove a personal securities transaction request, a Preclearance Officer
shall consider only those securities transactions of the "Associated Clients" of
the access person, including open and executed orders and recommendations, in
determining whether to approve such a request. "Associated Clients" are those
Funds or clients whose trading information would be available to the access
person during the course of his or her regular functions or duties. Currently,
there are three groups of Associated Clients: (i) the Franklin Mutual Series
Funds and clients advised by Franklin Mutual Advisers, LLC ("Mutual Clients");
(ii) the Franklin Group of Funds and the clients advised by the various Franklin
investment advisers ("Franklin Clients"); and (iii) the Templeton Group of Funds
and the clients advised by the various Templeton investment advisers ("Templeton
Clients"). Thus, persons who have access to the trading information of Mutual
Clients generally will be precleared solely against the securities transactions
of the Mutual Clients, including open and executed orders and recommendations.
Similarly, persons who have access to the trading information of Franklin
Clients or Templeton Clients generally will be precleared solely against the
securities transactions of Franklin Clients or Templeton Clients, as
appropriate.
Certain officers of Franklin Templeton Investments, as well as legal, compliance, fund accounting, investment operations and other personnel who generally have access to trading information of the funds and clients of Franklin Templeton Investments during the course of their regular functions and duties, will have their personal securities transactions precleared against executed transactions, open orders and recommendations of the entire Franklin Templeton Investments.
3. SPECIFIC STANDARDS
(b) SECURITIES UNDER CONSIDERATION
OPEN ORDERS
No clearance shall be given for any transaction in any security on any day which an Associated Client of the access person has a pending buy or sell order for such security, until seven (7) calendar days after the order has been executed.
RECOMMENDATIONS
No clearance shall be given for any transaction in any security on any day on which a recommendation for such security was made by a Portfolio Person, until seven (7) calendar days after the recommendation was made and no orders have subsequently been executed or are pending.
(c) PRIVATE PLACEMENTS
In considering requests by Portfolio Personnel for approval of limited partnerships and other private placement securities transactions, the Director, Global Compliance shall consult with an executive officer of Franklin Resources, Inc. In deciding whether to approve the transaction, the Director, Global Compliance and the executive officer shall take into account, among other factors, whether the investment opportunity should be reserved for a Fund or other client, and whether the investment opportunity is being offered to the Portfolio Person by virtue of his or her position with Franklin Templeton Investments. If the Portfolio Person receives clearance for the transaction, an investment in the same issuer may only be made for a Fund or client if an executive officer of Franklin Resources, Inc., who has been informed of the Portfolio Person's pre-existing investment and who has no interest in the issuer, approves the transaction.
(d) DURATION OF CLEARANCE
If a Preclearance Officer approves a proposed securities transaction, the order for the transaction must be placed and effected by the close of the next business day following the day approval was granted. The Director, Global Compliance may, in his or her discretion, extend the clearance period up to seven calendar days, beginning on the date of the approval, for a securities transaction of any access person who demonstrates that special circumstances make the extended clearance period necessary and appropriate.18 The Director, Global Compliance may, in his or her discretion, after consultation with a member of senior management for Franklin Resources, Inc., renew the approval for a particular transaction for up to an additional seven calendar days upon a similar showing of special circumstances by the access person. The Director, Global Compliance may shorten or rescind any approval or renewal of approval under this paragraph if he or she determines it is appropriate to do so.
B. WAIVERS BY THE DIRECTOR, GLOBAL COMPLIANCE
The Director, Global Compliance may, in his or her discretion, after
consultation with an executive officer of Franklin Resources, Inc., waive
compliance by any access person with the provisions of the Code, if he or she
finds that such a waiver:
(1) is necessary to alleviate undue hardship or in view of unforeseen
circumstances or is otherwise appropriate under all the relevant
facts and circumstances;
(2) will not be inconsistent with the purposes and objectives of the Code;
(3) will not adversely affect the interests of advisory clients of Franklin Templeton Investments, the interests of Franklin Templeton Investments or its affiliates; and
(4) will not result in a transaction or conduct that would violate provisions of applicable laws or regulations.
Any waiver shall be in writing, shall contain a statement of the basis for it, and the Director, Global Compliance, shall promptly send a copy to the General Counsel of Franklin Resources, Inc.
C. CONTINUING RESPONSIBILITIES OF THE LEGAL COMPLIANCE DEPARTMENT
A Preclearance Officer shall make a record of all requests for pre-clearance regarding the purchase or sale of a security, including the date of the request, the name of the access person, the details of the proposed transaction, and whether the request was approved or denied. A Preclearance Officer shall keep a record of any waivers given, including the reasons for each exception and a description of any potentially conflicting Fund or client transactions.
A Preclearance Officer shall also collect the signed initial acknowledgments of receipt and the annual acknowledgments from each access person of receipt of a copy of the Code and Insider Trading Policy, as well as reports, as applicable, on Schedules B, C, D, E and F of the Code. In addition, a Preclearance Officer shall request copies of all confirmations, and other information with respect to an account opened and maintained with the broker-dealer by any access person of the Franklin Templeton Group. A Preclearance Officer shall preserve those acknowledgments and reports, the records of consultations and waivers, and the confirmations, and other information for the period required by applicable regulation.
A Preclearance Officer shall review brokerage transaction confirmations, account statements, Schedules B, C, D, E, F and Private Placement Checklists of Access Persons for compliance with the Code. The reviews shall include, but are not limited to;
(1) Comparison of brokerage confirmations, Schedule Bs, and/or brokerage statements to preclearance request worksheets or, if a private placement, the Private Placement Checklist;
(2) Comparison of brokerage statements and/or Schedule Cs to current securities holding information;
(3) Comparison of Schedule F to current securities account information;
(4) Conducting periodic "back-testing" of access person transactions, Schedule Es and/or Schedule Gs in comparison to fund and client transactions;
A Preclearance Officer shall evidence review by initialing and dating the appropriate document. Any apparent violations of the Code detected by a Preclearance Officer during his or her review shall be promptly brought to the attention of the Director, Global Compliance.
D. PERIODIC RESPONSIBILITIES OF THE LEGAL COMPLIANCE DEPARTMENT
The Legal Compliance Department shall consult with the General Counsel and the Human Resources Department, as the case may be, to assure that:
(1) Adequate reviews and audits are conducted to monitor compliance with the reporting, pre-clearance, prohibited transaction and other requirements of the Code.
(2) Adequate reviews and audits are conducted to monitor compliance with the reporting, pre-clearance, prohibited transaction and other requirements of the Code.
(3) All access persons and new employees of the Franklin Templeton Group are adequately informed and receive appropriate education and training as to their duties and obligations under the Code.
(4) There are adequate educational, informational and monitoring efforts to ensure that reasonable steps are taken to prevent and detect unlawful insider trading by access persons and to control access to inside information.
(5) Written compliance reports are submitted to the Board of Directors of Franklin Resources, Inc., and the Board of each relevant Fund at least annually. Such reports will describe any issues arising under the Code or procedures since the last report, including, but not limited to, information about material violations of the Code or procedures and sanctions imposed in response to the material violations.
(6) The Legal Compliance Department will certify at least annually to the Fund's board of directors that Franklin Templeton Investments has adopted procedures reasonably necessary to prevent Access Persons from violating the Code, and
(7) Appropriate records are kept for the periods required by law.
E. APPROVAL BY FUND'S BOARD OF DIRECTORS
(1) Basis for Approval The Board of Directors/Trustees must base its approval of the Code on a determination that the Code contains provisions reasonably necessary to prevent access persons from engaging in any conduct prohibited by rule 17j-1.
(2) New Funds At the time a new fund is organized, the Legal Compliance Department will provide the Fund's board of directors, a certification that the investment adviser and principal underwriter has adopted procedures reasonably necessary to prevent Access Persons from violating the Code. Such certification will state that the Code contains provisions reasonably necessary to prevent Access Persons from violating the Code.
(3) Material Changes to the Code of Ethics The Legal Compliance Department will provide the Fund's board of directors a written description of all material changes to the Code no later than six months after adoption of the material change by Franklin Templeton Investments.
II. COMPILATION OF DEFINITIONS OF IMPORTANT TERMS For purposes of the Code of Ethics and Insider Trading Policy, the terms below have the following meanings:
ACCESSPERSON - Each director, trustee, general partner or officer, and any
other person that directly or indirectly controls (within the meaning of
Section 2(a)(9) of the 1940 Act) the Franklin Templeton Group or a person,
including an Advisory Representative, who has access to information
concerning recommendations made to a Fund or client with regard to the
purchase or sale of a security.
ADVISORY REPRESENTATIVE - Any officer or director of Franklin Resources; any employee who makes any recommendation, who participates in the determination of which recommendation shall be made, or whose functions or duties relate to the determination of which recommendation shall be made; any employee who, in connection with his or her duties, obtains any information concerning which securities are being recommended prior to the effective dissemination of such recommendations or of the information concerning such recommendations; and any of the following persons who obtain information concerning securities recommendations being made by Franklin Resources prior to the effective dissemination of such recommendations or of the information concerning such recommendations: (i) any person in a control relationship to Franklin Resources, (ii) any affiliated person of such controlling person, and (iii) any affiliated person of such affiliated person.
AFFILIATED PERSON - it meaning as Section 2(a)(3) of the Investment Company Act of 1940. An "affiliated person" of an investment company includes directors, officers, employees, and the investment adviser. In addition, it includes any person owning 5% of the company's voting securities, any person in which the investment company owns 5% or more of the voting securities, and any person directly or indirectly controlling, controlled by, or under common control with the company.
APPROPRIATE ANALYST - With respect to any access person, any securities analyst or portfolio manager making investment recommendations or investing funds on behalf of an Associated Client and who may be reasonably expected to recommend or consider the purchase or sale of a security.
ASSOCIATED CLIENT - A Fund or client whose trading information would be available to the access person during the course of his or her regular functions or duties.
BENEFICIAL OWNERSHIP - Has the same meaning as in Rule 16a-1(a)(2) under the 1934 Act. Generally, a person has a beneficial ownership in a security if he or she, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has or shares a direct or indirect pecuniary interest in the security. There is a presumption of a pecuniary interest in a security held or acquired by a member of a person's immediate family sharing the same household.
EXCHANGE TRADED FUNDS AND HOLDING COMPANY DEPOSITORY RECEIPTS - An Exchanged
Traded Fund or "ETF" is a basket of securities that is designed to
generally track an index--broad stock or bond market, stock industry
sector, or international stock. Holding Company Depository Receipts
"Holdrs" are securities that represent an investor's ownership in the
common stock or American Depository Receipts of specified companies in a
particular industry, sector or group.
HELD OR TO BE ACQUIRED - A security is "held or to be acquired" if within the most recent 15 days it (i) is or has been held by a Fund, or (ii) is being or has been considered by a Fund or its investment adviser for purchase by the Fund.
PORTFOLIO PERSON - Any employee of Franklin Templeton Investments, who, in connection with his or her regular functions or duties, makes or participates in the decision to purchase or sell a security by a Fund in Franklin Templeton Investments, or any other client or if his or her functions relate to the making of any recommendations about those purchases or sales. Portfolio Persons include portfolio managers, research analysts, traders, persons serving in equivalent capacities (such as Management Trainees), persons supervising the activities of Portfolio Persons, and anyone else designated by the Director, Global Compliance
PROPRIETARY ACCOUNTS - Any corporate account or other account including, but not limited to, a limited partnership, a corporate hedge fund, a limited liability company or any other pooled investment vehicle in which Franklin Resources or its affiliates, owns 25 percent or more of the outstanding capital or is entitled to 25% or more of the profits or losses in the account (excluding any asset based investment management fees based on average periodic net assets in accounts).
SECURITY - Any stock, note, bond, evidence of indebtedness, participation or
interest in any profit-sharing plan or limited or general partnership,
investment contract, certificate of deposit for a security, fractional
undivided interest in oil or gas or other mineral rights, any put, call,
straddle, option, or privilege on any security (including a certificate of
deposit), guarantee of, or warrant or right to subscribe for or purchase
any of the foregoing, and in general any interest or instrument commonly
known as a security, except commodity futures, currency and currency
forwards. For the purpose of this Code, "security" does not include:
(1) Direct obligations of the Government of the United States;
(2) Bankers' acceptances, bank certificates of deposit, commercial paper
and high quality short-term debt instruments, including repurchase
agreements; and
(3) Shares issued by open-end funds.
SEE Section III of Appendix A for a summary of different requirements for different types of securities.
III. SECURITIES EXEMPT FROM THE PROHIBITED , REPORTING, AND PRE-CLEARANCE PROVISIONS
A. PROHIBITED TRANSACTIONS
Securities that are EXEMPT from the prohibited transaction provisions of
Section 3.4 include:
(1) securities that are direct obligations of the U.S. Government, such as Treasury bills, notes and bonds, and U.S. Savings Bonds and derivatives thereof;
(2) high quality short-term instruments ("money market instruments") including but not limited to (i) bankers' acceptances, (ii) U.S. bank certificates of deposit; (iii) commercial paper; and (iv) repurchase agreements;
(3) shares of registered open-end investment companies;
(4) commodity futures, currencies, currency forwards and derivatives thereof;
(5) securities that are prohibited investments for all Funds and clients advised by the entity employing the access person; and
(6) transactions in securities issued or guaranteed by the governments or their agencies or instrumentalities of Canada, the United Kingdom, France, Germany, Switzerland, Italy and Japan and derivatives thereof.
B. REPORTING AND PRECLEARANCE Securities that are EXEMPT from both the reporting requirements of Section 5 and preclearance requirements of Section 6 of the Code include:
(1) securities that are direct obligations of the U.S. Government, such as Treasury bills, notes and bonds, and U.S. Savings Bonds and derivatives thereof;
(2) high quality short-term instruments ("money market instruments") including but not limited to (i) bankers' acceptances, (ii) U.S. bank certificates of deposit; (iii) commercial paper; and (iv) repurchase agreements;
(3) shares of registered open-end investment companies; and
(4) commodity futures, currencies, currency forwards and derivatives thereof.
IV. LEGAL REQUIREMENT Rule 17j-1 under the Investment Company Act of 1940 ("1940 Act") makes it unlawful for any affiliated person of Franklin Templeton Investments in connection with the purchase or sale of a security, including any option to purchase or sell, and any security convertible into or exchangeable for, any security that is "held or to be acquired" by a Fund in Franklin Templeton Investments:
A. To employ any device, scheme or artifice to defraud a Fund;
B. To make to a Fund any untrue statement of a material fact or omit to state to a Fund a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading;
C. To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon a Fund; or
D. To engage in any manipulative practice with respect to a Fund.
A security is "held or to be acquired" if within the most recent 15 days it (i) is or has been held by a Fund, or (ii) is being or has been considered by a Fund or its investment adviser for purchase by the Fund.
APPENDIX B: ACKNOWLEGMENT FORM AND SCHEDULES
ACKNOWLEDGMENT FORM
CODE OF ETHICS AND POLICY STATEMENT ON INSIDER TRADING
TO: DIRECTOR OF GLOBAL COMPLIANCE, LEGAL COMPLIANCE DEPARTMENT I HEREBY
ACKNOWLEDGE RECEIPT OF A COPY OF FRANKLIN TEMPLETON INVESTMENTS CODE OF ETHICS
AND POLICY STATEMENT ON INSIDER TRADING, Amended and Restated, December 2002,
WHICH I HAVE READ AND UNDERSTAND. I WILL COMPLY FULLY WITH ALL PROVISIONS OF THE
CODE AND THE INSIDER TRADING POLICY TO THE EXTENT THEY APPLY TO ME DURING THE
PERIOD OF MY EMPLOYMENT. ADDITIONALLY, I AUTHORIZE ANY BROKER-DEALER, BANK OR
INVESTMENT ADVISER WITH WHOM I HAVE SECURITIES ACCOUNTS AND ACCOUNTS IN WHICH I
HAVE BENEFICIAL OWNERSHIP, TO PROVIDE BROKERAGE CONFIRMATIONS AND STATEMENTS AS
REQUIRED FOR COMPLIANCE WITH THE CODE. I FURTHER UNDERSTAND AND ACKNOWLEDGE THAT
ANY VIOLATION OF THE CODE OR INSIDER TRADING POLICY, INCLUDING ENGAGING IN A
PROHIBITED TRANSACTION OR FAILURE TO FILE REPORTS AS REQUIRED (SEE SCHEDULES B,
C, D, E, F AND G), MAY SUBJECT ME TO DISCIPLINARY ACTION, INCLUDING TERMINATION
OF EMPLOYMENT.
Instructions:
1. Complete all sections of this form.
2. Print the completed form, sign, and date.
3. Submit completed form to Legal Compliance via:
Inter-office Mail to: Preclearance
L-Comp SM-920/2
U.S. Mail to: Franklin Templeton Investments Attn: Legal-Compliance/Preclearance P.O. Box 25050 San Mateo, CA 94402-5050 Telephone: (650) 312-3693 Fax: (650) 312-5646 E-mail: Preclear,Legal (internal address); Lpreclear@frk.com (external address)
SIGNATURE DATE ACKNOWLEDGMENT FORM WAS SIGNED
SCHEDULE A: LEGAL AND COMPLIANCE OFFICERS AND PRECLEARANCE DESK TELEPHONE
& FAX NUMBERS19
(650) 525 -7331
Director, Global Compliance PRECLEARANCE OFFICERS
James M. Davis Stephanie Harwood, Supervisor
Franklin Templeton Investments Lisa Del Carlo
One Franklin Parkway Darlene Nisby
San Mateo, CA 94403-1906 Legal Compliance Department
(650) 312-2832 Franklin Templeton Investments
One Franklin Parkway San Mateo, CA
94403-1906 (650) 312-3693 (telephone)
(650) 312-5646 (facsimile)
Preclear, Legal (internal
e-mail address)
Lpreclear@frk.com (external e-mail address)
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SCHEDULE B - TRANSACTIONS REPORT
This report of personal securities transactions not reported by duplicate confirmations and brokerage statements pursuant to Section 5.3 of the Code is required pursuant to Rule 204-2(a) of the Investment Advisers Act of 1940 or Rule 17j-1(c) of the Investment Company Act of 1940. The report must be completed and submitted to the Compliance Department no later than 10 calendar days after the end of the calendar quarter. Refer to Section 5.3 of the Code of Ethics for further instructions.
Instructions:
1. Complete all sections of this form.
2. Print completed form, sign, and date.
3. Submit completed form to Legal Compliance via:
Inter-office Mail to: Preclearance
L-Comp SM-920/2
U.S. Mail to: Franklin Templeton Investments Attn: Legal-Compliance/Preclearance P.O. Box 25050 San Mateo, CA 94402-5050 Telephone: (650) 312-3693 Fax: (650) 312-5646 E-mail: Preclear,Legal (internal address); Lpreclear@frk.com
(external address)
TRADE BUY, SELL SECURITY NAME QUANTITY PRICE PRINCIPAL BROKER-DEALER PRE-CLEARED
DATE OR OTHER DESCRIPTION AND TYPE AMOUNT OR BANK THROUGH
OF SECURITY COMPLIANCE
(COMMON, BOND, OPTION, DEPARTMENT
ETC.) (DATE OR
N/A)
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THE REPORT OR RECORDING OF ANY TRANSACTIONS ABOVE SHALL NOT BE CONSTRUED AS AN ADMISSION THAT I HAVE ANY DIRECT OR INDIRECT OWNERSHIP IN THE SECURITIES.
[] I DID NOT HAVE ANY PERSONAL SECURITIES HOLDINGS FOR YEAR
ENDED: _____________________(OR CURRENT DATE IF INITIAL
[] DISCLOSURE)
Security Description, Quanity & Name of Broker- Account
including interest rate and Security Type Principal Dealer or Bank Number
maturity (if appropriate) (Stock, Bond, Amount
Option, etc.)
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ARE YOU A REGISTERED [] Yes [] No REPRESENTATIVE? (NASD LICENSED, I.E. SERIES 6, 7) -------------------------------------------------------------------------------- ARE YOU AN ACCESS PERSON? [] Yes [] No -------------------------------------------------------------------------------- |
SPOUSE)
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ACCOUNT# OR SOCIAL
SECURITY#:
--------------------------------------------------------------------------------
FIRM NAME:
--------------------------------------------------------------------------------
ATTENTION (OPTIONAL):
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FIRM ADDRESS:
--------------------------------------------------------------------------------
CITY/STATE/ZIP CODE:
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---------------- ------------------
SIGNATURE DATE
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SCHEDULE E - NOTIFICATION OF DIRECT OR INDIRECT BENEFICIAL INTEREST
If you have any beneficial ownership in a security and you recommend to the Appropriate Analyst that the security be considered for purchase or sale by an Associated Client, or if you carry out a purchase or sale of that security for an Associated Client, you must disclose your beneficial ownership to the Legal-Compliance Department and the Appropriate Analyst in writing on Schedule E (or an equivalent form containing similar information) before the purchase or sale, or before or simultaneously with the recommendation.
SECURITY OWNERSHIP YEAR METHOD OF DATE AND PRIMARY NAME OF DATE OF
DESCRIPTION TYPE: ACQUIRED ACQUISITION METHOD LEARNED PORTFOLIO PERSON VERBAL
(DIRECT OR (PURCHASE/GIFT/ THAT MANAGER OR NOTIFIED NOTIFICATION
INDIRECT) OTHER) SECURITY'S PORTFOLIO
UNDER ANALYST
CONSIDERATION
BY FUNDS
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SCHEDULE F - INITIAL, ANNUAL, & UPDATED DISCLOSURE OF SECURITIES ACCOUNTS
This report shall set forth the name and description of each securities account in which you have a direct or indirect beneficial interest, including securities accounts of a spouse, minor children, trusts, foundations, and any account for which trading authority has been delegated to you, other than authority to trade for a Fund in or a client of the Franklin Templeton Group. In lieu of listing each securities account below, you may instead attach copies of the brokerage statements, sign below and return Schedule F and brokerage statements to the Compliance Department.
Instructions:
1. Complete all sections of this form.
2. Print completed form, sign, and date.
3. Submit completed form to Legal Compliance via:
Inter-office Mail to: Preclearance
L-Comp SM-920/2
U.S. Mail to: Franklin Templeton Investments Attn: Legal-Compliance/Preclearance P.O. Box 25050 San Mateo, CA 94402-5050 Telephone: (650) 312-3693 Fax: (650) 312-5646 E-mail: Preclear,Legal (internal address); Lpreclear@frk.com
(external address)
ACCOUNT NAME(S) NAME OF BROKERAGE FIRM, ADDRESS OF BROKERAGE NAME OF ACCOUNT ACCOUNT
(REGISTRATION SHOWN BANK OR INVESTMENT FIRM, BANK OR EXECUTIVE/REPRESENTATIVE NUMBER
ON STATEMENT) ADVISER INVESTMENT ADVISER
(STREET/CITY/STATE/ZIP
CODE)
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TO THE BEST OF MY KNOWLEDGE I HAVE DISCLOSED ALL OF MY SECURITIES ACCOUNTS IN WHICH I HAVE A DIRECT OR INDIRECT BENEFICIAL INTEREST, INCLUDING SECURITY ACCOUNTS OF A SPOUSE, MINOR CHILDREN, TRUSTS, FOUNDATIONS, AND ANY ACCOUNT FOR WHICH TRADING AUTHORITY HAS BEEN DELEGATED TO ME.
SCHEDULE G - INITIAL AND ANNUAL CERTIFICATION OF DISCRETIONARY AUTHORITY This
report shall set forth the account name or description in which you have a
direct or indirect beneficial interest, including holdings by a spouse, minor
children, trusts, foundations, and as to which trading authority has been
delegated by you to an unaffiliated registered broker-dealer, registered
investment adviser, or other investment manager acting in a similar fiduciary
capacity, who exercises sole investment discretion.
Instructions:
1. Complete all sections of this form.
2. Print completed form, sign, and date.
3. Submit completed form to Legal Compliance via:
Inter-office Mail to: Preclearance
L-Comp SM-920/2
U.S. Mail to: Franklin Templeton Investments Attn: Legal-Compliance/Preclearance P.O. Box 25050 San Mateo, CA 94402-5050 Telephone: (650) 312-3693 Fax: (650) 312-5646 E-mail: Preclear,Legal (internal address); Lpreclear@frk.com
(external address)
NAME(S) AS SHOWN ON ACCOUNT OR NAME/DESCRIPTION OF TYPE OF OWNERSHIP: ACCOUNT NUMBER
INVESTMENT BROKERAGE FIRM, BANK, DIRECT OWNERSHIP (DO) (IF APPLICABLE)
INVESTMENT ADVISER OR INDIRECT OWNERSHIP
INVESTMENT (IO)
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TO THE BEST OF MY KNOWLEDGE I HAVE DISCLOSED ALL OF MY SECURITIES ACCOUNTS
AND/OR INVESTMENTS IN WHICH I HAVE A DIRECT OR INDIRECT BENEFICIAL INTEREST,
INCLUDING SECURITY ACCOUNTS OF A SPOUSE, MINOR CHILDREN, TRUSTS, FOUNDATIONS,
AND ANY ACCOUNT FOR WHICH TRADING AUTHORITY HAS BEEN DELEGATED AN UNAFFILIATED
PARTY. FURTHER, I CERTIFY THAT I DO NOT HAVE ANY DIRECT OR INDIRECT INFLUENCE OR
CONTROL OVER THE ACCOUNTS LISTED ABOVE.
--------------------------------------------------------------------------------
EMPLOYEE'S NAME:
--------------------------------------------------------------------------------
YEAR ENDED:
--------------------------------------------------------------------------------
--------------- ----------------
SIGNATURE DATE
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SCHEDULE H: CHECKLIST FOR INVESTMENTS IN PARTNERSHIPS AND SECURITIES ISSUED IN
PRIVATE PLACEMENTS MADE BY PORTFOLIO PERSONS
In considering requests by Portfolio Personnel for approval of limited
partnerships and other private placement securities transactions, the Compliance
Officer shall consult with an executive officer of Franklin Resources, Inc.
In deciding whether to approve the transaction, the Compliance Officer and the
executive officer shall take into account, among other factors, whether the
is being offered to the access person by virtue of his or her position with
Franklin Templeton Investments. IF THE ACCESS PERSON RECEIVES CLEARANCE FOR THE
TRANSACTION, NO INVESTMENT IN THE SAME ISSUER MAY BE MADE FOR A FUND OR CLIENT
UNLESS AN EXECUTIVE OFFICER OF FRANKLIN RESOURCES, INC., WITH NO INTEREST IN THE
ISSUER, APPROVES THE TRANSACTION.
Instructions:
1. Complete all sections of this form.
2. Print the completed form, sign, and date.
3. Submit completed form to Legal Compliance via:
Inter-office Mail to: Preclearance
L-Comp SM-920/2
U.S. Mail to: Franklin Templeton Investments
Attn: Legal-Compliance/Preclearance
P.O. Box 25050
San Mateo, CA 94402-5050
Telephone: (650) 312-3693 Fax: (650) 312-5646 E-mail: Preclear,Legal (internal address); Lpreclear@frk.com
(external address)
IN ORDER TO EXPEDITE YOUR REQUEST, PLEASE PROVIDE THE FOLLOWING INFORMATION:
1) PLEASE ATTACH PAGES OF THE OFFERING MEMORANDUM (OR OTHER DOCUMENTS)
SUMMARIZING THE INVESTMENT OPPORTUNITY, INCLUDING:
i) Name of the partnership/hedge fund/issuer;
ii) Name of the general partner, location & telephone number;
iii) Summary of the offering; including the total amount the
offering/issuer;
iv) Percentage your investment will represent of the total offering;
v) Plan of distribution; and
vi) Investment objective and strategy,
2) PLEASE RESPOND TO THE FOLLOWING QUESTIONS:
a) Was this investment opportunity presented to you in your capacity as a
portfolio manager? If no, please explain the relationship, if any, you
have to the issuer or principals of the issuer.
b) Is this investment opportunity suitable for any fund/client that you advise? 20 If yes, why isn't the investment being made on behalf of the fund/client? If no, why isn't the investment opportunity suitable for the fund/clients?
c) Do any of the fund/clients that you advise presently hold securities of the issuer of this proposed investment (e.g., common stock, preferred stock, corporate debt, loan participations, partnership interests, etc.)? If yes, please provide the names of the funds/clients and security description.
d) Do you presently have or will you have any managerial role with the company/issuer as a result of your investment? If yes, please explain in detail your responsibilities, including any compensation you will receive.
e) Will you have any investment control or input to the investment decision making process?
f) Will you receive reports of portfolio holdings? If yes, when and how frequently will these be provided?
3) REMINDER: PERSONAL SECURITIES TRANSACTIONS THAT DO NOT GENERATE BROKERAGE CONFIRMATIONS (E.G., INVESTMENTS PRIVATE PLACEMENTS) MUST BE REPORTED TO THE LEGAL-COMPLIANCE DEPARTMENT ON THE SCHEDULE B FORM WITHIN 10 CALENDAR DAYS AFTER YOU ARE NOTIFIED.
------------------------ ---------------- --------
PORTFOLIO PERSON'S NAME SIGNATURE DATE
APPROVED BY:
------------------------------ ---------------- --------
CHIEF INVESTMENT OFFICER'S NAME SIGNATURE DATE
---------------------------------------------------------------------------
LEGAL COMPLIANCE USE ONLY
---------------------------------------------------------------------------
DATE RECEIVED:____________ DATE ENTERED IN LOTUS NOTES:______________
DATE FORWARDED TO FRI OFFICER:_______________
APPROVED BY:
___________________________________________ _________
JAMES M. DAVIS, DIRECTOR, GLOBAL COMPLIANCE DATE
__________________________________________ __________
MURRAY L. SIMPSON, EVP-GENERAL COUNSEL DATE
DATE ENTERED IN EXAMINER:_________ PRECLEAED: [] []
YES NO
(ATTACH E-MAIL)
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APPENDIX C: INVESTMENT ADVISOR AND BROKER-DEALER AND OTHER SUBSIDIARIES OF
FRANKLIN RESOURCES, INC. - DECEMBER 2002
--------------------------------------------------------------------------------
Franklin Advisers, Inc. IA Templeton Investment Counsel, LLC IA
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Franklin Advisory Services, LLC IA Templeton Asset Management, Ltd. IA/FIA
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Franklin Investment Advisory IA Franklin Templeton Investments FIA
Services, Inc. Japan Ltd.
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Franklin Private Client Group, Inc. IA Closed Joint-Stock Company FIA
Templeton (Russia)
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Franklin Mutual Advisers, LLC IA Templeton Unit Trust Management FBD
Ltd. (UK)
-------------------------------------------------------------------------------
Franklin Properties, Inc. REA Orion Fund Management Ltd. FIA
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Franklin/Templeton Distributors, BD Templeton Global Advisors Ltd. IA
Inc. (Bahamas)
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IA Templeton Asset Management (India) FIA/FBD
Pvt. Ltd.
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Templeton (Switzerland), Ltd. FBD Templeton Italia SIM S.P.A. (Italy) FBD
--------------------------------------------------------------------------------
FBD Franklin Templeton Investment FBD
Services GmbH (Germany)
--------------------------------------------------------------------------------
IA/FIA FTTrust Company Trust Co
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Franklin Templeton International FBD Franklin Templeton Services, LLC BM
Services S.A. (Luxembourg)
--------------------------------------------------------------------------------
Franklin Templeton Investments FIA Franklin Templeton Investments IA/FIA
Australia Limited Corp. (Ontario)
--------------------------------------------------------------------------------
Franklin/Templeton Investor TA Templeton Global Advisors Limited IA
Services, LLC (Bahamas)
--------------------------------------------------------------------------------
Franklin Templeton Alternative IA Templeton Asset Management Ltd. IA/FIA
Strategies, LLC (Singapore)
--------------------------------------------------------------------------------
FTI Institutional, LLC IA Fiduciary Trust Company Trust
International Co.
-------------------------------------------------------------------------------
Franklin Templeton Asset IA Fiduciary International, Inc IA
Strategies LLC
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Fiduciary Financial Services, Corp. BD Fiduciary Investment Management IA
International Inc
--------------------------------------------------------------------------------
Franklin Templeton Asset FIA Fiduciary Trust International FIA
Management S.A. (France) Australia Limited
--------------------------------------------------------------------------------
Franklin Templeton Investments FBD/IA Fiduciary Trust International Asia FIA
(Asia) Limited (Hong Kong) Limited (Hong Kong)
--------------------------------------------------------------------------------
Franklin Templeton Investment IA/FIA Fiduciary Trust International IA/FIA
Management Limited (UK) Limited (UK)
--------------------------------------------------------------------------------
Franklin Templeton Investments IA/FIA Fiduciary Trust International FIA
Corp. (Canada) Investment Management, Inc. (Japan)
--------------------------------------------------------------------------------
Templeton/Franklin Investment IA/BD
Services, Inc
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Codes: IA: US registered investment adviser
BD: US registered broker-dealer
FIA: Foreign equivalent investment adviser
FBD: Foreign equivalent broker-dealer
TA: US registered transfer agent
BM: Business manager to the funds
REA: Real estate adviser
Trust: Trust company
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POLICY STATEMENT ON INSIDER TRADING
A. LEGAL REQUIREMENT
Pursuant to the Insider Trading and Securities Fraud Enforcement Act of
1988, it is the policy of Franklin Templeton Investments to forbid any officer,
director, employee, consultant acting in a similar capacity, or other person
associated with Franklin Templeton Investments from trading, either personally
or on behalf of clients, including all client assets managed by the entities in
Franklin Templeton Investments, on material non-public information or
communicating material non-public information to others in violation of the law.
This conduct is frequently referred to as "insider trading." Franklin Templeton
Investment's Policy Statement on Insider Trading applies to every officer,
director, employee or other person associated with Franklin Templeton
Investments and extends to activities within and outside their duties with
Franklin Templeton Investments. Every officer, director and employee must read
and retain this policy statement. Any questions regarding Franklin Templeton
Investments Policy Statement on Insider Trading or the Compliance Procedures
should be referred to the Legal Department.
The term "insider trading" is not defined in the federal securities laws, but generally is used to refer to the use of material non-public information to trade in securities (whether or not one is an "insider") or to communications of material non-public information to others.
While the law concerning insider trading is not static, it is generally understood that the law prohibits:
(1) trading by an insider, while in possession of material non-public information; or
(2) trading by a non-insider, while in possession of material non-public information, where the information either was disclosed to the non-insider in violation of an insider's duty to keep it confidential or was misappropriated; or
(3) communicating material non-public information to others.
The elements of insider trading and the penalties for such unlawful conduct are discussed below. If, after reviewing this policy statement, you have any questions, you should consult the Legal Department.
0B. WHO IS AN INSIDER?
The concept of "insider" is broad. It includes officers, directors and
employees of a company. In addition, a person can be a "temporary insider" if he
or she enters into a special confidential relationship in the conduct of a
company's affairs and as a result is given access to information solely for the
company's purposes. A temporary insider can include, among others, a company's
outside attorneys, accountants, consultants, bank lending officers, and the
employees of such organizations. In addition, an investment adviser may become a
temporary insider of a company it advises or for which it performs other
services. According to the U.S. Supreme Court, the company must expect the
outsider to keep the disclosed non-public information confidential and the
relationship must at least imply such a duty before the outsider will be
considered an insider.
C. WHAT IS MATERIAL INFORMATION? Trading on inside information is not a basis for liability unless the information is material. "Material information" generally is defined as information for which there is a substantial likelihood that a reasonable investor would consider it important in making his or her investment decisions, or information that is reasonably certain to have a substantial effect on the price of the company's securities. Information that officers, directors and employees should consider material includes, but is not limited to: dividend changes, earnings estimates, changes in previously released earnings estimates, significant merger or acquisition proposals or agreements, major litigation, liquidation problems, and extraordinary management developments.
Material information does not have to relate to a company's business. For example, in CARPENTER V. U.S., 108 U.S. 316 (1987), the Supreme Court considered as material certain information about the contents of a forthcoming newspaper column that was expected to affect the market price of a security. In that case, a WALL STREET JOURNAL reporter was found criminally liable for disclosing to others the dates that reports on various companies would appear in the WALL STREET JOURNAL and whether those reports would be favorable or not.
D. WHAT IS NON-PUBLIC INFORMATION? Information is non-public until it has been effectively communicated to the marketplace. One must be able to point to some fact to show that the information is generally public. For example, information found in a report filed with the Securities and Exchange Commission ("SEC"), or appearing in Dow Jones, Reuters Economic Services, THE WALL STREET JOURNAL or other publications of general circulation would be considered public.
E. BASIS FOR LIABILITY
1. FIDUCIARY DUTY THEORY In 1980, the Supreme Court found that there is no general duty to disclose before trading on material non-public information, but that such a duty arises only where there is a fiduciary relationship. That is, there must be a relationship between the parties to the transaction such that one party has a right to expect that the other party will not disclose any material non-public information or refrain from trading. CHIARELLA V. U.S., 445 U.S. 22 (1980). In DIRKS V. SEC, 463 U.S. 646 (1983), the Supreme Court stated alternate theories under which non-insiders can acquire the fiduciary duties of insiders. They can enter into a confidential relationship with the company through which they gain information (E.G., attorneys, accountants), or they can acquire a fiduciary duty to the company's shareholders as "tippees" if they are aware or should have been aware that they have been given confidential information by an insider who has violated his fiduciary duty to the company's shareholders.
However, in the "tippee" situation, a breach of duty occurs only if the insider personally benefits, directly or indirectly, from the disclosure. The benefit does not have to be pecuniary but can be a gift, a reputational benefit that will translate into future earnings, or even evidence of a relationship that suggests a quid pro quo.
2. MISAPPROPRIATION THEORY Another basis for insider trading liability is the "misappropriation" theory, under which liability is established when trading occurs on material non-public information that was stolen or misappropriated from any other person. In U.S. V. CARPENTER, SUPRA, the Court found, in 1987, a columnist defrauded THE WALL STREET JOURNAL when he stole information from the WALL STREET JOURNAL and used it for trading in the securities markets. It should be noted that the misappropriation theory can be used to reach a variety of individuals not previously thought to be encompassed under the fiduciary duty theory.
F. PENALTIES FOR INSIDER TRADING Penalties for trading on or communicating material non-public information are severe, both for individuals involved in such unlawful conduct and their employers. A person can be subject to some or all of the penalties below even if he or she does not personally benefit from the violation. Penalties include:
o civil injunctions;
o treble damages;
o disgorgement of profits;
o jail sentences;
o fines for the person who committed the violation of up to three times
the profit gained or loss avoided, whether or not the person actually
benefited; and
o fines for the employer or other controlling person of up to the
greater of $1,000,000 or
three times the amount of the profit gained or loss avoided.
In addition, any violation of this policy statement can result in serious sanctions by the Franklin Templeton Group, including dismissal of any person involved.
G. INSIDER TRADING PROCEDURES Each access person, Compliance Officer, the Risk Management Department, and the Legal Department, as the case may be, shall comply with the following procedures.
1. IDENTIFYING INSIDE INFORMATION Before trading for yourself or others, including investment companies or private accounts managed by the Franklin Templeton Group, in the securities of a company about which you may have potential inside information, ask yourself the following questions:
o Is the information material?
o Is this information that an investor would consider important in making his or her investment decisions?
o Is this information that would substantially affect the market price of the securities if generally disclosed?
o Is the information non-public?
o To whom has this information been provided?
o Has the information been effectively communicated to the marketplace (e.g., published in REUTERS, THE WALL STREET JOURNAL or other publications of general circulation)?
If, after consideration of these questions, you believe that the information may be material and non-public, or if you have questions as to whether the information is material and non-public, you should take the following steps:
(i) Report the matter immediately to the designated Compliance Officer, or if he or she is not available, to the Legal Department.
(ii) Do not purchase or sell the securities on behalf of yourself or others, including investment companies or private accounts managed by Franklin Templeton Investments.
(iii) Do not communicate the information inside or outside Franklin Templeton Investments , other than to the Compliance Officer or the Legal Department.
(iv) The Compliance Officer shall immediately contact the Legal Department for advice concerning any possible material, non-public information.
(v) After the Legal Department has reviewed the issue and consulted with
the Compliance Officer, you will be instructed either to continue
the prohibitions against trading and communication noted in (ii) and
(iii), or you will be allowed to trade and communicate the
information.
(vi) In the event the information in your possession is determined by the Legal Department or the Compliance Officer to be material and non-public, it may not be communicated to anyone, including persons within Franklin Templeton Investments, except as provided in (i) above. In addition, care should be taken so that the information is secure. For example, files containing the information should be sealed and access to computer files containing material non-public information should be restricted to the extent practicable.
2. RESTRICTING ACCESS TO OTHER SENSITIVE INFORMATION All Franklin Templeton Investments personnel also are reminded of the need to be careful to protect from disclosure other types of sensitive information that they may obtain or have access to as a result of their employment or association with Franklin Templeton Investments.
(I) GENERAL ACCESS CONTROL PROCEDURES Franklin Templeton Investments has established a process by which access to company files that may contain sensitive or non-public information such as the Bargain List and the Source of Funds List is carefully limited. Since most of the Franklin Templeton Group files, which contain sensitive information, are stored in computers, personal identification numbers, passwords and/or code access numbers are distributed to Franklin Templeton Investments computer access persons only. This activity is monitored on an ongoing basis. In addition, access to certain areas likely to contain sensitive information is normally restricted by access codes.
H. FAIR DISCLOSURE POLICIES AND PROCEDURES
WHAT IS REGULATION FD?
Regulation FD under the Securities Exchange Act of 1934, as amended (the "1934
Act"), prohibits certain persons associated with Franklin Resources, Inc.
("Resources") and persons associated with each U.S. closed-end fund advised by
an investment advisory subsidiary of Resources (collectively, the "FTI
Closed-End Funds") and persons associated with the FTI investment adviser to the
FTI Closed-End Funds, from selectively disclosing material nonpublic information
about Resources and the FTI Closed-End Funds to certain securities market
professionals and shareholders. Regulation FD is designed to promote the full
and fair disclosure of information by issuers such as Resources and the FTI
Closed-End Funds.
The scope of Regulation FD is limited. Regulation FD applies to Resources and
FTI Closed-End Funds, but does not apply to open-end investment companies
managed by the FTI investment advisers. The rule also does not apply to all
communications about Resources or FTI Closed-End Funds with outside persons.
Rather, Regulation FD applies only to communications to securities market
professionals and to any shareholder of Resources or FTI Closed-End Funds under
circumstances in which it is reasonably foreseeable that such shareholder will
trade on the basis of the information. In addition, Regulation FD does not apply
to all employees and officers. It only applies to certain senior officers of
Resources and the FTI Closed-End Funds and those persons who regularly
communicate with securities market professionals or with shareholders.
Consequently, Regulation FD and the Franklin Templeton Investments Fair
Disclosure Policies and Procedures (the "Policies and Procedures") will not
apply to a variety of legitimate, ordinary-course business communications or to
disclosures made to the media. Irrespective of Regulation FD, all Franklin
personnel must comply with the "Franklin Templeton Investment Policy Statement
on Insider Trading" and should be aware that disclosure of material nonpublic
information to another person may constitute a form of illegal insider trading
called "tipping."
FTI'S CORPORATE POLICY FOR REGULATION FD
Franklin Templeton Investments is committed to complying with Regulation FD by
making fair disclosure of information about Resources or FTI Closed-End Funds
without advantage to any particular securities market professional, shareholder
or investor. It is not the intention of these Policies and Procedures, however,
to interfere with legitimate, ordinary-course business communications or
disclosures made to the media or governmental agencies. FTI believes it is in
its best interest to maintain an active and open dialogue with securities market
professionals, shareholders and investors regarding Resources and the FTI
Closed-End Funds. FTI will continue to provide current and potential
shareholders access to key information reasonably required for making an
informed decision on whether to invest in shares of Resources or FTI Closed-End
Funds. FTI personnel will make appropriate announcements and conduct interviews
about Resources and FTI Closed-End Funds with the media, in accordance with
Corporate Communication's Procedures regarding such announcements or interviews.
GENERAL PROVISIONS OF REGULATION FD
WHENEVER:
(1) AN ISSUER, OR PERSON ACTING ON ITS BEHALF (i.e. any senior officer or any other officer, employee or agent of an issuer (or issuer's investment adviser) who regularly communicates with securities professionals or shareholders, or any employee directed to make a disclosure by a member of senior management)
(2) DISCLOSES MATERIAL NON-PUBLIC INFORMATION
(3) TO CERTAIN SPECIFIED PERSONS (generally, securities market professionals or holders of the issuer's securities who may trade on the basis of the information)
THEN:
(4) the issuer must make public disclosure of that same information:
o simultaneously (for intentional disclosures), or
o promptly (for non-intentional disclosures). In the case of non-intentional disclosures, "promptly" means no later than 24 hours (or the commencement of the next day's trading on the NYSE, whichever is later), after a senior officer learns of the disclosure and knows, or is reckless in not knowing, that the information is both material and non-public.
PERSONS TO WHOM SELECTIVE DISCLOSURE MAY NOT BE MADE:
(1) BROKER-DEALERS and their associated persons;
(2) INVESTMENT ADVISERS, certain institutional investment managers and
their associated persons,
(3) INVESTMENT COMPANIES, hedge funds and their affiliated persons, and
(4) HOLDERS OF THE ISSUER'S SECURITIES, under circumstances where it is reasonably foreseeable that such person would purchase or sell securities on the basis of the information.
The Regulation is designed to cover sell-side analysts, buy-side analysts, institutional investment managers, and other market professionals who may be likely to trade on the basis of selectively disclosed information.
(2) any person who expressly agrees to maintain the information in confidence (i.e., disclosures by a public company to private investors in private offerings);
(3) an entity whose primary business is the issuance of a credit rating, if the information is disclosed for the sole purpose of developing such ratings and the entity's ratings are publicly available; and
(4) communications made in connection with most offerings of securities registered under the Securities Act of 1933.
METHODS OF PUBLIC DISCLOSURE:
An issuer's disclosure obligation may be met by any method reasonably designed
to provide broad, non-exclusionary distribution of the information to the
public. Acceptable methods of public disclosure include:
o Furnishing or filing with the SEC a Form 8-K (not applicable to
closed-end investment companies);
o press releases distributed through a widely circulated news or wire
service; or
o announcements made through press conferences or conference calls that
interested members of the public may attend or listen to either in person, by
telephonic transmission, or by other electronic transmission (including use
of the Internet), of which the public has adequate notice and means of
access.
Posting of new information on an issuer's own website is NOT by itself a sufficient method of public disclosure. It may be used in combination with other methods.
FREQUENTLY ASKED QUESTIONS:
(1) WHEN IS DISCLOSURE CONSIDERED INTENTIONAL WITHIN THE MEANING OF
REGULATION FD?
Under Regulation FD, selective disclosure is considered
intentional when the issuer (or person acting on its behalf)
knows, or is reckless in not knowing, that the information
disclosed is BOTH material and non-public. For example,
non-intentional selective disclosures may occur when company
officials inadvertently disclose material information in response
to questions from analysts or shareholders or when a decision is
made to selectively disclose information that the company does
not view as material but the market moves in response to the
disclosure.
(2) WHAT IS NON-PUBLIC INFORMATION? Information is non-public if it has not been disseminated in a manner making it available to investors generally.
(3) WHAT IS MATERIAL INFORMATION? Regulation FD deems information material if "there is a substantial likelihood that a reasonable shareholder would consider it important" in making an investment decision or if there a substantial likelihood that a fact would be viewed by a reasonable investor as having "significantly altered the `total mix' of information made available."
(4) ARE THERE SPECIFIC TYPES OF INFORMATION THAT ARE CONSIDERED MATERIAL? There is no bright line test to determine materiality. However, below is a list of items that should be reviewed carefully to determine whether they are material.
o An impending departure of a portfolio manager who is primarily responsible for day-to-day management of a Closed-End Fund;
o A plan to convert a Closed-End Fund from a closed-end investment company to an open-end investment company;
o A plan to merge a Closed-End Fund into another investment company;
o Impending purchases or sales of particular portfolio securities;
o Information about Resources related to earnings or earnings forecasts;
o Mergers, acquisitions, tender offers, joint ventures, or material change in assets;
o Changes in control or in management;
o Change in auditors or auditor notification that the issuer may no longer rely on an auditor's audit report;
o Events regarding Resources or an FTI Closed-End Fund's securities
- e.g., repurchase plans, stock splits or changes in dividends,
calls of securities for redemption, changes to the rights of
security holders, public or private sales of additional
securities; and
o Bankruptcies or receiverships.
(5) ARE ALL ISSUER COMMUNICATIONS COVERED BY THE REGULATION? No. Regulation FD applies only to communications by the issuer's senior management, its investor relations professionals and others who regularly communicate with securities market professionals and security holders when those communications are made to securities market professionals and security holders under circumstances in which it is reasonably foreseeable that the holders will trade on the basis of the information. Regulation FD isn't intended to apply to persons who are engaged in ordinary-course business communications with the issuer or to interfere with disclosures to the media. However, the traditional disclosure concerns (such as "tipping" material non-public information and leaking disclosure into the market) still apply.
(6) ARE COMMUNICATIONS TO THE MEDIA COVERED BY REGULATION FD? No, but, as a general policy, we advise the press that we cannot tell them anything that is material and non-public about FRI or the FTI Closed-End Funds without putting out a press release.
(7) ARE ONE-ON-ONE DISCUSSIONS WITH ANALYSTS PERMITTED? Yes. Reg FD is not intended to undermine the role of analysts in "sifting through and extracting information that may not be significant to the ordinary investor to reach material conclusions." However, persons covered by Regulation FD must be cautious not to selectively provide material non-public information in one-on-one discussions.
(8) MAY ISSUERS PROVIDE GUIDANCE ON EARNINGS? Not selectively. Although many issuers have historically provided earnings guidance, the SEC observed in Regulation FD's adopting release that an issuer that has a private conversation with an analyst in which the issuer provides direct or indirect guidance as to whether earnings will be higher than, lower than or even the same as forecasted will likely violate the rule. Regulation FD may be violated simply by confirming in a non-public manner an earnings forecast that is already public, because such confirmation may be material.
(9) WHAT HAPPENS IF SOMEONE COVERED BY THESE POLICIES AND PROCEDURES THINKS THAT HE OR SHE MAY HAVE MISTAKENLY DISCLOSED MATERIAL NON-PUBLIC INFORMATION ABOUT RESOURCES OR A CLOSED-END FUND TO A SECURITIES MARKET PROFESSIONAL OR SHAREHOLDER? That person should report such inadvertent disclosure immediately to the compliance or legal department, which will review the nature of the disclosure and the audience to verify whether further disclosure must be made pursuant to these Policies and Procedures or some other appropriate action must be taken.
TRAINING
Appropriate training will be provided to certain employees identified as
follows:
o Corporate Communications Department;
o Investor Relations Department;
o Portfolio managers of closed-end funds and their assistants;
o Managers and supervisors of Customer Service Representatives.
As a part of this training, each employee will be notified that they should not communicate on substantive matters involving Franklin Resources Inc., or the FTI Closed-end Funds except in accordance with these Policies and Procedures.
QUESTIONS
All inquiries regarding these Policies and Procedures should be addressed to
Murray Simpson, General Counsel (650-525-7331), Barbara Green, Deputy General
Counsel (650-525-7188), or Jim Davis, Director, Global Compliance
(650-312-2832).
1 12/02
SUPPLEMENTAL MEMORANDUM
CHINESE WALL PROCEDURES
Under The Chinese Wall, access persons from Advisory Groups (as defined in Appendix A) are prohibited from having access to investment information of an Advisory Group other than his or her own Advisory Group with the following exception: Access persons to Floating Rate may have access to Investment Information of Franklin Templeton, but access persons to Franklin Templeton may not have access to Floating Rate.
The Chinese Wall applies to all access persons, including part-time employees, and consultants, and are in addition to those obligations prescribed by Franklin Templeton Code of Ethics (the "Code of Ethics").
Questions regarding these procedures should be directed to the attention of Jim
Davis, Legal Compliance Department, at 650-312-2832 or e-mailed to:
jdavis@frk.com.
GENERAL PROCEDURES
CONFIDENTIALITY. Access persons within one Advisory Group (e.g., Franklin Templeton) may not disclose Investment Information to access persons of the other Advisory Group (e.g., Franklin Mutual). Any communication of Investment Information outside an Advisory Group should be limited to persons (such as Accounting, Investment Operations, Legal and Compliance personnel) who have a valid "need to know" such information and each of whom is specifically prohibited from disclosing Investment Information from one to another except when necessary for regulatory purposes. Nothing contained herein is designed to prohibit the proper exchange of accounting, operational, legal or compliance information among such persons in the normal course of performing his or her duties.
DISCUSSIONS. Access persons within one Advisory Group should avoid discussing Investment Information in the presence of persons who do not have a need to know the information. Extreme caution should be taken with discussions in public places such as hallways, elevators, taxis, airplanes, airports, restaurants, and social gatherings. Avoid discussing confidential information on speakerphones. Mobile telephones should be used with great care because they are not secure.
ACCESS. Access persons should limit physical access to areas where confidential or proprietary information may be present or discussed. Only persons with a valid business reason for being in such an area should be permitted. In this regard, meetings with personnel who are not members of the same Advisory Group should be conducted in conference rooms rather than employee offices. Work on confidential projects should take place in areas that are physically separate and secure.
OUTSIDE INQUIRIES. Any person not specifically authorized to respond to press or other outside inquiries concerning a particular matter should refer all calls relating to the matter to the attention of Holly Gibson-Brady, Director, Corporate Communications, Franklin Templeton Investments, in San Mateo, California, at (650) 312-4701.
DOCUMENTS AND DATABASES. Confidential documents should not be stored in common office areas where unauthorized persons may read them. Such documents should be stored in secure locations and not left exposed overnight on desks or in workrooms.
Confidential databases and other confidential information accessible by computer should be protected by passwords or otherwise secured against access by unauthorized persons.
FAXING PROCEDURES. Confidential documents should not be faxed to locations where they may be read by unauthorized persons, including to other FRI offices outside the Advisory Group, unless steps have been taken to remove or redact any confidential information included in such documents. Prior to faxing a document that includes confidential information, the sender should confirm that the recipient is attending the machine that receives such documents.
THE CHINESE WALL
GENERAL. FRI has adopted the Chinese Wall to separate investment management activities conducted by certain investment advisory subsidiaries of FRI. The Chinese Wall may be amended or supplemented from time to time by memoranda circulated by the Legal Compliance Department.
CHINESE WALL RESTRICTIONS. Except in accordance with the Wall-crossing procedures described below or in accordance with such other procedures as may be developed by the Legal Compliance Department for a particular department or division:
o No access person in any Advisory Group (as defined in Appendix A) should disclose Investment Information to any access person in the any other Advisory Group, or give such access persons access to any file or database containing such Investment Information; and
o No access person in any Advisory Group should obtain or make any effort to obtain Investment Information within the any other Advisory Group from any person.
An access person who obtains Investment Information of an Advisory Group other than his or her own in a manner other than in accordance with the Chinese Wall procedures described herein, should immediately notify an appropriate supervisory person in his or her department who, in turn, should consult with the Legal Compliance Department concerning what, if any, action should be taken. Unless expressly advised to the contrary by the Legal Compliance Department, such employee should refrain from engaging in transactions in the related securities or other securities of the related issuer for any account and avoid further disclosure of the information.
CROSSING PROCEDURES. Disclosure of Investment Information of one Advisory Group to an access person in another Advisory Group on a "need to know" basis in the performance of his or her duties, should be made only if absolutely necessary. In such instance, the disclosure of such information may be made only in accordance with the specific procedures set forth below.
An access person within one Advisory Group must obtain prior approval from the Legal Compliance Department before making any disclosure of Investment Information to an access person within the other Advisory Group.
Before approval is granted, the Legal Compliance Department must be notified in writing by an Executive Officer within the Advisory Group (the "Originating Group") which proposes to cross the Chinese Wall of (1) the identity of the Advisory Group access person(s) who are proposed to cross the Chinese Wall, (2) the identity of the access person(s) in the other Advisory Group (the "Receiving Group") who are proposed to receive the Investment Information, (3) the applicable issuer(s), (4) the nature of the information to be discussed, and (5) the reason for crossing the Chinese Wall. The form of notice is attached to this Memorandum as Appendix B.
The Legal Compliance Department will notify an Executive Officer within the Receiving Group of the identity of the access person(s) who are proposed to cross the Chinese Wall. The Legal Compliance Department may not disclose any additional information to such person.
If approval is obtained from an Executive Officer within the Receiving Group, the Legal Compliance Department will notify the requesting Executive Officer in the Originating Group that the proposed Wall-crosser(s) may be contacted. Personnel from the Legal Compliance Department or their designees must attend all meetings where Wall-crossing communications are made. Communications permitted by these crossing procedures should be conducted in a manner not to be overheard or received by persons not authorized to receive confidential information.
The Legal Compliance Department will maintain a record of Wall-crossings.
An access person who has crossed the Chinese Wall under these procedures must maintain the confidentiality of the Investment Information received and may use it only for the purposes for which it was disclosed.
Any questions or issues arising in connection with these crossing procedures will be resolved between the appropriate Executive Officers(s), the Legal Compliance Department and the Legal Department.
APPENDIX A
FRANKLIN TEMPLETON INVESTMENT'S ADVISORY GROUPS (12/02)
1. FRANKLIN/TEMPLETON ADVISORY GROUP
Franklin Advisers, Inc.
Franklin Advisory Services, LLC
Franklin Investment Advisory Services, Inc.
Franklin Private Client Group, Inc.
Franklin Templeton Investments Corp (Canada)
Franklin Templeton Investment Management, Limited (UK)
Franklin Templeton Investments Japan, Ltd.
Franklin Templeton Investments Australia Limited
FTI Institutional, LLC
Franklin Templeton Asset Strategies, LLC
Franklin Templeton Investments (Asia) Limited
Franklin Templeton Asset Management S.A., (France)
Templeton/Franklin Investment Services, Inc.
Templeton Investment Counsel, LLC
Templeton Asset Management, Limited.
Templeton Global Advisors Limited (Bahamas)
Templeton Asset Management (India) Pvt. Ltd.
Fiduciary Trust Company International (NY)
Fiduciary International, Inc.
Fiduciary Investment Management International, Inc.
Fiduciary Trust International Asia Limited (Hong Kong)
Fiduciary Trust International Australia Limited
Fiduciary Trust International Limited (UK)
Fiduciary Trust International Investment Management, Inc. (Japan)
Fiduciary Trust International of California
Fiduciary Trust International of the South (Florida)
FTI -Banque Fiduciary Trust (Switzerland)
2. FRANKLIN FLOATING RATE TRUST ADVISORY GROUP
3. FRANKLIN MUTUAL ADVISORY GROUP
APPENDIX B
M E M O R A N D U M
TO: The Legal Compliance Department - San Mateo FROM: RE: Chinese Wall Crossing |
DATE:
The following access person(s)
Name Title Department
within the _______________________ Advisory Group are proposing to cross the Chinese Wall and communicate certain Investment Information to the access persons within the ______________________ Advisory Group identified below.
Name Title Department
Such access person(s) will cross the Chinese Wall with respect to the following issuer:
The following is a description of the nature of the information to be discussed by such access person(s):
Modified on
Code of Ethics Revised 12-03-02 Readonly.doc
APPROVED:________________________________________
EXECUTIVE OFFICER (ORIGINATING GROUP)
POWER OF ATTORNEY
The undersigned officers and trustees of FRANKLIN TEMPLETON LIMITED DURATION
INCOME TRUST (the "Registrant") hereby appoint BRUCE G. LETO, KAREN L.
SKIDMORE, MURRAY L. SIMPSON, BARBARA J. GREEN, DAVID P. GOSS and STEVEN J.
GRAY (with full power to each of them to act alone) his attorney-in-fact and
agent, in all capacities, to execute, deliver and file in the names of the
undersigned, any and all instruments that said attorneys and agents may deem
necessary or advisable to enable the Registrant to comply with or register
any security issued by the Registrant under the Securities Act of 1933, as
amended, and/or the Investment Company Act of 1940, as amended, and the
rules, regulations and interpretations thereunder, including but not limited
to, any registration statement, including any and all pre- and post-effective
amendments thereto, any other document to be filed with the U.S. Securities
and Exchange Commission and any and all documents required to be filed with
respect thereto with any other regulatory authority. Each of the undersigned
grants to each of said attorneys, full authority to do every act necessary to
be done in order to effectuate the same as fully, to all intents and
purposes, as he could do if personally present, thereby ratifying all that
said attorneys-in-fact and agents may lawfully do or cause to be done by
virtue hereof.
This Power of Attorney may be executed in one or more counterparts, each of which shall be deemed to be an original and all of which shall be deemed to be a single document.
The undersigned officers and trustees hereby execute this Power of Attorney as of the 19TH day of JUNE, 2003.
/s/ CHRISTOPHER MOLUMPHY /s/ FRANK H. ABBOTT, III --------------------------------- ------------------------------------- Christopher Molumphy, Frank H. Abbott, III, Chief Executive Officer - Trustee Investment Management /s/ HARRIS J. ASHTON /s/ ROBERT F. CARLSON --------------------------------- ------------------------------------- Harris J. Ashton, Robert F. Carlson, Trustee Trustee /s/ MARTIN L. FLANAGAN /s/ S. JOSEPH FORTUNATO --------------------------------- ------------------------------------- Martin L. Flanagan, S. Joseph Fortunato, Trustee Trustee /s/ CHARLES B. JOHNSON /s/ RUPERT H. JOHNSON, JR. --------------------------------- ------------------------------------- Charles B. Johnson, Rupert H. Johnson, Jr. Trustee Trustee /s/ FRANK W.T. LAHAYE /s/ GORDON S. MACKLIN --------------------------------- ------------------------------------- Frank W.T. LaHaye, Gordon S. Macklin, Trustee Trustee /s/ JIMMY D. GAMBILL /s/ KIMBERLEY H. MONASTERIO --------------------------------- ------------------------------- Jimmy D. Gambill, Kimberley H. Monasterio, Chief Executive Officer - Chief Financial Officer Finance and Administration |