Form 485APOS METROPOLITAN WEST FUNDS
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As filed with the Securities and Exchange Commission on April 13, 2018
File No. 333-18737
File No. 811-07989
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 | [ X ] | |||
Pre-Effective Amendment No. | [ ] | |||
Post-Effective Amendment No. 56 | [ X ] | |||
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 | [ X ] | |||
Amendment No. 58 | [ X ] |
METROPOLITAN WEST FUNDS
(Exact Name of Registrant as Specified on Charter)
865 South Figueroa Street
Los Angeles, California 90017
(Address of Principal Executive Offices)
(213) 244-0000
(Registrants Telephone Number)
David B. Lippman
865 South Figueroa Street
Los Angeles, California 90017
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box).
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485
[ ] on __________ pursuant to paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[ ] on __________ pursuant to paragraph (a)(1) of Rule 485
[X] 75 days after filing pursuant to paragraph (a)(2) of Rule 485
[ ] on __________ pursuant to paragraph (a)(2) of Rule 485
Please send Copy of Communications to:
David A. Hearth, Esq.
Paul Hastings LLP
101 California Street, Forty-Eighth Floor
San Francisco, CA 94111
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PRELIMINARY PROSPECTUS
Subject to Completion -- April 13, 2018
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 is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
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Metropolitan West Flexible Income Fund
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Metropolitan West Investment Grade Credit Fund
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Metropolitan West Corporate Bond Fund
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Annual/Semiannual Reports
The Funds annual and semiannual reports to shareholders contain additional information about the Funds investments. The annual report includes a discussion of the market conditions and investment strategies that significantly affected the Funds performance during their last fiscal year.
Statement of Additional Information (SAI)
The SAI provides more detailed information about the Funds and is incorporated by reference and is legally considered a part of this Prospectus.
The reports and the SAI are available, free of charge, on our website at http://www.tcw.com. You can request free copies of the reports and the SAI, or request other information and discuss your questions about the Funds by contacting us at:
METROPOLITAN WEST FUNDS
865 SOUTH FIGUEROA STREET
LOS ANGELES, CALIFORNIA 90017
(800) 241-4671
You can also review the Funds reports and SAI at the Public Reference Room of the Securities and Exchange Commission (SEC). Information on the operation of the Public Reference Room may be obtained by calling the SEC at (202) 551-8090. In addition, you can get copies of this information:
| For a fee, by writing the Public Reference Section of the Commission, Washington, D.C. 20549-1520 or by electronic request at the following E-mail address: [email protected]. |
| Free of charge from the EDGAR Database on the SECs Website at http://www.sec.gov. |
Investment Company Act File No. 811-07989
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JUNE
2018
Statement of Additional Information
Subject to Completion April 13, 2018
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 is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
METROPOLITAN WEST FLEXIBLE INCOME FUND (Flexible Income Fund)
(I Share: _____; M Share: _____)
METROPOLITAN WEST INVESTMENT GRADE CREDIT FUND (Investment Grade Credit Fund)
(I Share: _____; M Share: _____)
METROPOLITAN WEST CORPORATE BOND FUND (Corporate Bond Fund)
(I Share: _____; M Share: _____)
This Statement of Additional Information (SAI) is not a prospectus, and it should be read in conjunction with the Prospectus dated June __, 2018, as supplemented from time to time, which describes the Flexible Income Fund, Investment Grade Credit Fund and Corporate Bond Fund, each a separate investment series (each, a Fund and collectively, the Funds) of Metropolitan West Funds (the Trust). Copies of the Prospectus may be obtained at no charge by writing to Metropolitan West Funds, 865 South Figueroa Street, Los Angeles, California 90017. Metropolitan West Asset Management, LLC (the Adviser) is the investment adviser to the Funds.
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RISK FACTORS RELATING TO INVESTING IN MORTGAGE-RELATED AND ASSET-BACKED SECURITIES |
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INFORMATION ABOUT EACH TRUSTEES QUALIFICATIONS, EXPERIENCE, ATTRIBUTES OR SKILLS |
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The Trust was organized on December 9, 1996 as a Delaware statutory trust and is registered with the U.S. Securities and Exchange Commission (SEC) as an open-end, management investment company. The Trust currently consists of twelve separate series, each of which has separate assets and liabilities. Each series of the Trust is a diversified fund. Each series of the Trust other than the AlphaTrak 500 Fund, the Low Duration Bond Fund and the Total Return Bond Fund has two classes of shares of beneficial interest, Class M and Class I, each with a par value of $0.01 per share. The Low Duration Bond Fund and the Total Return Bond Fund each also has an Administrative Class of shares of beneficial interest, each with a par value of $0.01 per share. The Total Return Bond Fund additionally has a Plan Class of shares of beneficial interest, with a par value of $0.01 per share. The Trusts Board of Trustees decides matters of general policy and reviews the activities of the Adviser. The Trusts officers conduct and supervise the daily business operations of the Trust. The Board of Trustees may, at its own discretion, create additional series of shares and classes within each series.
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each Fund is described in the Prospectus.
The portfolio and strategies with respect to the composition of each Fund are described in the Prospectus.
Each Fund has adopted the following restrictions (in addition to those indicated in the Prospectus) as fundamental policies, which may not be changed without the favorable vote of the holders of a majority of that Funds outstanding voting securities, as defined in the Investment Company Act of 1940, as amended (the 1940 Act). Under the 1940 Act, the vote of the holders of a majority of a Funds outstanding voting securities means the vote of the holders of the lesser of (i) 67% of the shares of the Fund represented at a meeting at which the holders of more than 50% of its outstanding shares are represented or (ii) more than 50% of the outstanding shares.
Except as noted, no Fund may:
1. | Purchase any security, other than obligations of the U.S. Government, its agencies, or instrumentalities (U.S. Government securities) or mutual funds, if as a result of that purchase: (i) with respect to 75% of its total assets, more than 5% of the Funds total assets (determined at the time of investment) would then be invested in securities of a single issuer, or (ii) more than 25% of the Funds total assets (determined at the time of investment) would be invested in one or more issuers having their principal business activities in a single industry. For purposes of the industry concentration test, (a) finance company subsidiaries will be considered to be in the industries of their parent companies if their activities are primarily related to financing the activities of the parent companies; and (b) utilities will be regarded as separate industries based on their services; for example, electric, natural gas, telephone, among others, will each be considered a separate industry. |
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2. | Purchase securities on margin (but any Fund may obtain such short-term credits as may be necessary for the clearance of transactions and may otherwise borrow as expressly permitted by the Prospectus or this SAI) provided that the deposit or payment by a Fund of initial or maintenance margin in connection with futures or options is not considered the purchase of a security on margin. |
3. | Make short sales of securities or maintain a short position, unless at all times when a short position is open it owns an equal amount of collateral consisting of liquid securities or such securities or securities convertible into or exchangeable, without payment of any further consideration, for securities of the same issue as, and equal in amount to, the securities sold short (short sale against-the-box), and unless not more than 33 1/3% of the Funds net assets (taken at current value) is held as collateral for such sales at any one time. |
4. | Issue senior securities, borrow money or pledge its assets, except that any Fund may borrow from a bank in amounts not exceeding 33 1/3% of its total assets (including borrowings) and may pledge its assets to secure such borrowings. The Funds may borrow from banks or enter into reverse repurchase agreements and pledge assets in connection therewith, but only if, to the extent required by applicable law, immediately after each borrowing there is asset coverage of at least 300%, except for borrowing for temporary administrative purposes on an unsecured basis in an amount not to exceed 5% of total assets. |
5. | Purchase any security (other than U.S. Government securities) if as a result of that purchase, with respect to 75% of the Funds total assets, the Fund would then hold more than 10% of the outstanding voting securities of an issuer. |
6. | Act as an underwriter except to the extent that, in connection with the disposition of portfolio securities, it may be deemed to be an underwriter under certain federal securities laws. |
7. | Make investments for the purpose of exercising control or management. (However, this does not prohibit representatives of the Fund or the Adviser from participating on creditors committees with respect to the Funds portfolio investments.) |
8. | Participate on a joint or joint and several basis in any trading account in securities that would be restricted or prohibited by the 1940 Act, except to the extent the Fund has received an exemptive order from the Securities and Exchange Commission (SEC) permitting such account or otherwise is in compliance with interpretive guidance from the staff of the SEC. (As of the date of this SAI, the Trust has neither obtained nor applied for such an order.) |
9. | Invest in commodities, except that the Fund may invest in futures contracts, options on futures contracts and other instruments, such as swaps, that are regulated by the Commodity Futures Trading Commission (CFTC) to the extent permitted by the CFTCs regulations, so that either (a) the aggregate initial margin and premiums required to establish the positions in those futures contracts and other CFTC-regulated instruments do not exceed five percent of the respective Funds liquidation value (after taking into account unrealized profits and losses on those positions) or (b) the net aggregate notional value or obligation of all futures contracts and other CFTC-regulated instruments do not exceed the liquidation value of the Funds portfolio at the time the most recent position was established (after taking into account unrealized profits and losses on those positions). (This exception is an operating policy that may be changed without shareholder approval, consistent with applicable regulations.) |
10. | Lend money or other assets to other persons in any form or manner except as permitted to the fullest extent by the 1940 Act and other applicable law. To the extent the following activities constitute loans within the meaning of applicable law, none of the following are prohibited: (i) acquiring floating rate instruments, corporate loans, bonds, debentures or other corporate debt securities, (ii) investing in government obligations, commercial paper, pass-through instruments, certificates of deposit, bankers acceptances, repurchase agreements or any similar instruments and (iii) lending its portfolio securities. |
11. | Purchase or sell real estate or interests in real estate, except that the Fund may purchase securities backed by real estate or interests therein, or issued by companies, including real estate investment trusts, which invest in real estate or interests therein. (For purposes of this restriction, investments by a Fund in mortgage-backed securities and other securities representing interests in mortgage pools shall not constitute the purchase or sale of real estate or interests in real estate or real estate mortgage loans.) |
In addition, the Trust has adopted the following non-fundamental policies, which may be changed without shareholder approval, so that no Fund will: (a) invest more than 15% of its net assets in illiquid securities, excluding securities that have been determined to be liquid pursuant to procedures adopted by the Board of Trustees such as restricted securities eligible for resale pursuant to Rule 144A under the Securities Act of 1933, as amended (Securities Act); and (c) purchase securities of other investment companies, except in connection with a merger, consolidation, reorganization or other acquisition of assets or except as disclosed in the Prospectus or this SAI, but not more than 3% of the total outstanding stock of such company would be owned by the Fund and its
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affiliates. Notwithstanding the diversification limits described above, Rule 5b-2 adopted under the 1940 Act allows the Trust and each Fund to disregard for purposes of those limits the total value of securities issued or guaranteed by a single guarantor so long as the value of all securities owned by a Fund issued or guaranteed by a common guarantor does not exceed 10% of the value of the total assets of that Fund.
Investment restrictions based on a percentage of a Funds net or total assets generally will be based at the time of investment in a security or instrument, except for investments that would constitute a senior security. Typically, certain designated or segregated assets are specified to cover a Funds obligation under what would be otherwise regarded as a senior security, in which case a mark-to-market valuation would be used to test compliance with the investment restriction. For example, the market value of a position in a swap contract that is purchased would be used for these purposes rather than the initial purchase price or the notional value or reference value of the contract. The Fund would look through any affiliated investment company in which it invests for purposes of testing the industry concentration limit under investment restriction no. 1 above. Also for purposes of investment restriction no. 1 above with respect to industry concentration, each Fund relies on categories from recognized industry references such as the U.S. Department of Labors Standard Industrial Classification (SIC codes) or Bloombergs Industry Sub-Groups, as determined to be reasonable and up-to-date by the Adviser. Also, for this purpose, the Funds analyze privately issued mortgage-backed securities and asset-backed securities to determine the particular industry categories that apply to those securities. Further, the Funds consider a government of an emerging market country to be an industry.
SECURITIES AND TECHNIQUES USED BY THE FUNDS
The following provides more detailed information about securities and techniques used by the Funds and the risks associated with them.
The Funds will attempt to achieve their objectives by investing in the following types of securities (that may be issued by domestic or foreign entities) such as but not limited to: (i) U.S. Government and agency securities; (ii) corporate debt securities, including bonds, notes and debentures; (iii) corporate and asset-backed commercial paper; (iv) mortgage and other asset-backed securities, including CMOs and REMICs (see Mortgage-Related Securities); (v) variable and floating rate debt securities (including inverse floaters); (vi) subordinated corporate, mortgage, and asset-backed securities; (vii) structured debentures, bonds and notes; (viii) collateralized bond obligations (CBOs), collateralized loan obligations (CLOs) and other collateralized debt obligations (CDOs), including CDO equity and preference shares; (ix) bank certificates of deposit; (x) fixed time deposits and bankers acceptances; (xi) money market securities; (xii) repurchase agreements and reverse repurchase agreements; (xiii) debt securities that are convertible into or exchangeable for equity securities (convertible securities); (xiv) warrants; (xv) preferred and common equity securities; (xvi) obligations of foreign governments or their subdivisions, agencies and instrumentalities; (xvii) obligations of international agencies (such as the Agency for International Development) or supranational entities; (xviii) loan participations and assignments; (xix) derivatives (including but not limited to swap agreements such as credit default swaps, index credit default swaps, total return swaps, interest rate swaps, swaptions and net interest margins); (xx) privately placed and Rule 144A securities; (xxi) leveraged loans; (xxii) mezzanine investments; (xxiii) futures and options on futures relating to currencies, indexes and other financial factors; (xxiv) bank loans or loan participations; (xxv) defaulted debt securities; (xxvi) dollar rolls; (xxvii) sell buybacks; (xxviii) other mutual funds, including Exchange Traded Funds (ETFs), such as iShares; (xxix) TRAC-X related securities (TRAC-X is an index of credit default swaps);(xxx) unrated securities; (xxxi) municipal bonds and securities and (xxxii) bridge loans.
There is no limitation on the percentage of a Funds assets that may be committed to any of these types of securities, except to the extent that a security may be deemed to be illiquid. As new fixed income products and securities are developed, the Adviser may invest in those opportunities for the Funds as well.
Note that preferred stocks normally differ greatly from common stocks, with which most people are familiar. Although preferred stock can possess many characteristics of equity, such as the right to convert to common stock, preferred stock often possesses characteristics of bonds because it operates like debt, plus interest, owed to the owner of the preferred stock.
Because each Fund may invest up to 25% of its total assets in mutual funds that invest in stocks or bonds or other baskets of securities (such as ETFs), subject to other limits under applicable law, investors should know that a Fund would pay the additional fees and expenses of a mutual fund investment. Each Fund also may invest an unlimited amount of its cash in a money market fund. This would result in an additional layer of management fees and expenses for shareholders in a Fund. To the extent the acquiring Fund pays a sales load, distribution fee, or service fee on acquired fund shares (if it does), the Adviser must waive a sufficient amount of its advisory fee to offset the cost of the loads or distribution fees. The Funds also may invest in other affiliated funds to the extent permitted by applicable rule. Additional information (if applicable) is available in the Prospectus.
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Each Fund may invest in debt securities or other obligations whose issuers are in default. However, under normal conditions, each Fund will not invest more than 5% [(__% for the Flexible Income Fund)] of its total assets in debt securities or other obligations whose issuers are in default at the time of purchase.
A Fund may hold equity securities under certain circumstances, including, but not limited to, the resolution of a default or bankruptcy of a bond issuer, 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 include a wide range of securities and instruments, including those listed above, that have risk and other characteristics of stocks or of both stocks and bonds.
By holding and investing in equity securities, a 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 holdings share price or an overall decline in the stock market. Equity securities are not expected to represent a material portion of a Funds portfolio unless the Fund exercises conversion or purchase rights or otherwise receives equity securities other than through the direct purchase of those equity securities.
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 a 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.
The Prospectus describes the permissible range of credit ratings (generally assigned by a Nationally Recognized Statistical Rating Organization) for the securities in which each Fund is permitted to invest. Securities rated Baa are considered by Moodys to have speculative characteristics. For Baa/BBB rated securities, changes in economic conditions or other circumstances are more likely to lead to a weakened capacity to make principal and interest payments than is the case with higher grade securities. Securities rated below BBB or Baa are considered to be below investment grade and are judged to be predominantly speculative with respect to their capacity to pay interest and repay principal in accordance with the terms of their obligations and are commonly known as junk bonds. The Flexible Income Fund will invest up to 65% of its total assets in junk bonds if rated as such by at least one of the nationally recognized statistical rating organizations, or, if unrated, determined by the Adviser to be of comparable quality. The Corporate Bond Fund may invest up to 20% of its total assets in securities rated below investment grade at the time of purchase. The Investment Grade Credit Fund may invest up to 10% of its total assets in debt securities rated below investment grade at the time of purchase.
Unpredicted and unforeseen economic and other external events can affect the credit ratings of portfolio securities, resulting in the assignment of a lower rating for a security or perhaps resulting in a security not being rated. Such downgrades can, in turn, adversely impact the average dollar-weighted credit quality of the Fund. This would not require the Fund to sell the security, but the Adviser will consider such an event (among other factors) in determining whether the Fund should continue to hold the security in the portfolio. The Adviser may assign credit ratings to unrated securities based on criteria which are, in the Advisers opinion, relevant to assessing the credit quality of the security, such as but not limited to the credit worthiness of the issuer, risk of default, issuer asset valuations, securities with comparable risk profiles and the issuers financial fundamentals, such as revenue. When calculating the average credit quality of a Fund, the Adviser also may assign a credit rating to equity securities held as a means of assessing the overall portfolio, absent any external sources.
In selecting fixed-income securities for the Funds, the Adviser makes use of the concept of duration. Duration is a measure of the expected life of a fixed-income security on a present value basis. Most debt obligations provide interest (coupon) payments in addition to a final (par) payment at maturity. Some obligations also have call provisions. Depending on the relative magnitude of these payments, the market values of debt obligations may respond differently to changes in the level and structure of interest rates. Duration takes the length of time intervals between the present time and the time that the interest and principal payments are scheduled or, in the case of a mortgage-backed, asset-backed, or callable bond, expected to be received, and weights them by the present values of the cash to be received at each future point in time.
For any fixed-income security with interest payments occurring before the payment of principal, duration is ordinarily less than maturity. In general, all other things being equal, the lower the stated or coupon rate of interest of a fixed-income security, the longer the duration of the security; conversely, the higher the stated or coupon rate of interest of a fixed-income security, the shorter the duration of the security. There are some situations where even the standard duration calculation does not properly reflect the interest rate exposure of a security. In these and other similar situations, the Adviser will use more sophisticated analytical techniques that incorporate the economic life of a security into the determination of its interest rate exposure. A Funds computation of duration is based on estimated rather than known factors. Thus, there can be no assurance that any particular portfolio duration will at all times be achieved by a Fund.
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Futures, options and options on futures have durations, which, in general, are closely related to the duration of the securities that underlie them. Holding long futures or call option positions will lengthen a Funds duration by approximately the same amount that holding an equivalent amount of the underlying securities would.
Short futures or put option positions have durations roughly equal to the negative of the duration of the securities that underlie those positions, and have the effect of reducing portfolio duration by approximately the same amount that selling an equivalent amount of the underlying securities would.
There are some situations where even the standard duration calculation does not properly reflect the interest rate exposure of a security. For example, floating and variable rate securities often have final maturities of ten or more years; however, their interest rate exposure corresponds to the frequency that coupon is reset. Another example where the interest rate exposure is not properly captured by duration is the case of mortgage pass-through securities. The stated final maturity of such securities is generally 30 years, but current prepayment rates are more critical in determining the securities interest rate exposure. In these and other similar situations, the Adviser will use more sophisticated analytical techniques that incorporate the economic life of a security into the determination of its interest rate exposure.
Assuming an expected average duration of 5 years for the Flexible Income Fund, a 1% decline in interest rates would cause the Fund to gain 5% in value; likewise, a 1% rise in interest rates would produce a decline of 5% in the Funds value. Assuming an expected average duration of 5 years for the Investment Grade Credit Fund, a 1% decline in interest rates would cause each Fund to gain 5% in value; likewise, a 1% rise in interest rates would produce a decline of 5% in each Funds value. Assuming an expected average duration of 5 years for the Corporate Bond Fund, a 1% decline in interest rates would cause the Fund to gain 5% in value; likewise, a 1% rise in interest rates would produce a decline of 5% in the Funds value. Other factors such as changes in credit quality, prepayments, the shape of the yield curve and liquidity affect the net asset value of the Funds and may be correlated with changes in interest rates. These factors can increase swings in the Funds share prices during periods of volatile interest rate changes.
RISK FACTORS RELATING TO INVESTING IN HIGH-YIELD SECURITIES (JUNK BONDS)
Investments in securities rated below investment grade that are eligible for purchase by the Funds, and in particular the Flexible Income Fund, are described as speculative by both Moodys and S&P. Lower-rated or unrated (i.e., high-yield or junk bond) securities are more likely to react to developments affecting market risk (such as interest rate sensitivity, market perception of creditworthiness of the issuer and general market liquidity) and credit risk (such as the issuers inability to meet its obligations) than are more highly rated securities, which react primarily to movements in the general level of interest rates. The Adviser considers both credit risk and market risk in making investment decisions for the Funds. Investors should carefully consider the relative risk of investing in high-yield securities and understand that such securities are not generally meant for short-term trading. These high-yield securities are regarded as predominantly speculative with respect to the issuers continuing ability to meet principal and interest payments. Analysis of the creditworthiness of issuers of debt securities that are high-yield may be more complex than for issuers of higher quality debt securities.
High-yield securities may be more susceptible to real or perceived adverse economic and competitive industry conditions than investment grade securities. The prices of high-yield securities have been found to be less sensitive to interest-rate changes than higher-rated investments, but more sensitive to adverse economic downturns or individual corporate developments. A projection of an economic downturn or of a period of rising interest rates, for example, could cause a decline in high yield security prices because the advent of a recession could lessen the ability of a highly leveraged company to make principal and interest payments on its debt securities. If an issuer of high-yield securities defaults, in addition to risking payment of all or a portion of interest and principal, the Funds investing in such securities may incur additional expenses to seek recovery. In the case of high-yield securities structured as zero-coupon or pay-in-kind securities, their market prices are affected to a greater extent by interest rate changes, and therefore tend to be more volatile than securities that pay interest periodically and in cash. The Adviser seeks to reduce these risks through diversification, credit analysis and attention to current developments and trends in both the economy and financial markets.
The amount of high-yield securities outstanding proliferated in the 1980s in conjunction with the increase in merger and acquisition and leveraged buyout activity. Under adverse economic conditions, there is a risk that highly leveraged issuers may be unable to service their debt obligations upon maturity. In addition, the secondary market for high-yield securities, which is concentrated in relatively few market makers, may not be as liquid as the secondary market for more highly rated securities. Adverse publicity and investor perceptions, whether or not based on fundamental analysis, may decrease the values of high-yield securities, especially in a thinly traded market. Under adverse market or economic conditions, the secondary market for high-yield securities could contract further, independent of any specific adverse changes in the condition of a particular issuer. As a result, the Adviser could find it more difficult to sell these securities or may be able to sell the securities only at prices lower than if such securities were widely traded. Prices realized upon the sale of such lower-rated or unrated securities, under these circumstances, may be less than the prices used in calculating the Funds net asset value. Additionally, when secondary markets for high-yield securities are less liquid than the market for higher grade securities, it may be more difficult to value the securities because valuation may require more research, and elements of judgment may play a greater role in the valuation because there is less reliable, objective data available.
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The use of credit ratings as the sole method of evaluating high-yield securities can involve certain risks. For example, credit ratings evaluate the safety of principal and interest payments, not the market value risk of high-yield securities. Also, credit rating agencies may fail to change credit ratings in a timely fashion to reflect events since the security was last rated. The Adviser does not rely solely on credit ratings when selecting securities for the Funds, and develops its own independent analysis of issuer credit quality. If a credit rating agency changes the rating of a portfolio security held by a Fund, the Fund may retain the portfolio security if the Adviser deems it in the best interest of shareholders.
Lower-rated or unrated debt obligations present risks based on payment expectations. If an issuer calls the obligation for redemption, a Fund may have to replace the security with a lower yielding security, resulting in a decreased return for investors. If a Fund experiences unexpected net redemptions, it may be forced to sell its higher- rated securities, resulting in a decline in the overall credit quality of the Funds portfolio and increasing the exposure of the Fund to the risks of high-yield securities.
PARTICIPATION ON CREDITOR COMMITTEES: Representatives of a Fund (in particular but not limited to the Flexible Income Fund) or the Adviser 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 a Fund to expenses such as legal fees and may make a Fund an insider of the issuer for purposes of the federal securities laws, and therefore may restrict such Funds ability to trade in or acquire additional positions in a particular security when it might otherwise desire to do so. Participation by a 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. A Fund will participate on such committees only when the Adviser believes that such participation is necessary or desirable to enforce the Funds rights as a creditor or to protect the value of securities held by the Fund.
Each Fund may enter into repurchase agreements involving U.S. Government securities or other collateral including mortgage-related products or corporate securities with commercial banks or broker-dealers, whereby the seller of a security agrees to repurchase the security from the Fund on an agreed-upon date in the future. While each Fund intends to be fully collateralized as to such agreements, and the collateral will be marked to market daily, if the person obligated to repurchase from the Fund defaults, there may be delays and expenses in liquidating the securities subject to the repurchase agreement, a decline in their value and a loss of interest income.
A repurchase transaction occurs when, at the time a Fund purchases a security, that Fund also resells it to a vendor (normally a commercial bank or broker-dealer) and must deliver the security (and/or securities substituted for them under the repurchase agreement) to the vendor on an agreed-upon date in the future. Such securities, including any securities so substituted, are referred to as the Resold Securities. The resale price is in excess of the purchase price in that it reflects an agreed-upon market interest rate effective for the period of time during which the Funds money is invested in the Resold Securities. The majority of these transactions run from day to day, and the delivery pursuant to the resale typically will occur within one to five days of the purchase. The Funds risk is limited to the ability of the vendor to pay the agreed-upon sum at the delivery date; in the event of bankruptcy or other default by the vendor, there may be possible delays and expenses in liquidating the instrument purchased, decline in its value and loss of interest. The Adviser will consider the creditworthiness of any vendor of repurchase agreements. Repurchase agreements can be considered as loans collateralized by the Resold Securities, and are defined as loans in the 1940 Act. The return on such collateral may be more or less than that from the repurchase agreement. The Resold Securities will be marked to market every business day so that the value of the collateral is at least equal to the value of the loan, including the accrued interest earned thereon. All Resold Securities will be held by the Funds custodian either directly or through a securities depository (tri-party repurchase agreement) or the Federal Reserve book-entry system.
The Funds may enter into reverse repurchase agreements, whereby a Fund sells securities concurrently with entering into an agreement to repurchase those securities at a later date at a fixed price. During the reverse repurchase agreement period, the Fund continues to receive principal and interest payments on those securities. Reverse repurchase agreements are speculative techniques involving leverage and are considered borrowings by the Fund for purposes of the percentage limitations applicable to borrowings.
The Funds also may enter into dollar roll transactions in which the Funds sell a fixed income security for delivery in the current month and simultaneously contracts to purchase substantially similar (same type, coupon and maturity) securities at an agreed upon future time. By engaging in a dollar roll transaction, the Funds forego principal and interest paid on the security that is sold, but
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receive the difference between the current sales price and the forward price for the future purchase. The Funds would also be able to earn interest on the income that is received from the initial sale. The obligation to purchase securities on a specified future date involves the risk that the market value of the securities that the Funds are obligated to purchase may decline below the purchase price. In addition, in the event the other party to the transaction files for bankruptcy, becomes insolvent or defaults on its obligation, the Funds may be adversely affected.
The Funds 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 Funds repurchase of the underlying security. A Funds obligations under a sale-buyback typically would be offset by liquid assets equal in value to the amount of the Funds forward commitment to repurchase the subject security.
The Funds may invest in U.S. Government securities. U.S. Government securities include direct obligations issued by the United States Treasury, such as Treasury bills, certificates of indebtedness, notes, bonds and component parts of notes or bonds (including the principal of such obligations or the interest payments scheduled to be paid on such obligations). U.S. Government securities also can include securities issued or guaranteed by U.S. Government agencies and instrumentalities that issue or guarantee securities, including, but not limited to, the Federal National Mortgage Association (FNMA), Government National Mortgage Association (GNMA), Federal Home Loan Banks, Federal Financing Bank, Student Loan Marketing Association. Federal Home Loan Mortgage Corporation (FHLMC), Federal Intermediate Credit Banks, Federal Land Banks, Tennessee Valley Authority, Inter-American Development Bank, Asian Development Bank and the International Bank for Reconstruction and Development. Certain of these entities are U.S. Government Sponsored Enterprises (GSE). Although the securities of these GSEs, and others like them, may be chartered or sponsored by Acts of Congress, their securities are neither issued nor guaranteed by the United States Treasury. For example, FNMAs guarantee is supported by its ability to borrow from the U.S. Treasury, while FHLMCs guarantee is backed by reserves set aside to protect holders against losses due to default. In September 2008, the Federal Housing Finance Agency placed FNMA and the FHLMC into conservatorship to control their operations. Certain financing arrangements were put in place to support their bonds, but they are not backed by the full faith and credit of the U.S. Government. Also included as U.S. Government securities are bank-issued debt instruments that are guaranteed by the Federal Deposit Insurance Corporation (FDIC) under its Temporary Liquidity Guarantee Program, which is backed by the full faith and credit of the U.S. Government.
Except for U.S. Treasury securities, obligations of U.S. Government agencies and instrumentalities may or may not be supported by the full faith and credit of the United States. Some are backed by the right of the issuer to borrow from the Treasury; others by discretionary authority of the U.S. Government to purchase the agencies obligations; while still others, such as the Student Loan Marketing Association, are supported only by the credit of the instrumentality. In the case of securities not backed by the full faith and credit of the United States, the investor must look principally to the agency or instrumentality issuing or guaranteeing the obligation for ultimate repayment, and may not be able to assert a claim against the United States itself in the event the agency or instrumentality does not meet its commitment. Each Fund will invest in securities of such instrumentality only when the Adviser is satisfied that the credit risk with respect to that instrumentality is acceptable.
Among the U.S. Government securities that may be purchased by the Funds are certain mortgage-backed securities of GNMA, the FHLMC and FNMA. See the discussion under Mortgage-Related Securities.
The Funds may invest in component parts of the U.S. Treasury notes or bonds, namely, either the principal of such Treasury obligations or one of the interest payments scheduled to be paid on such obligations. These obligations may take the form of (i) Treasury obligations from which the interest coupons have been stripped, (ii) the interest coupons that are stripped, (iii) book-entries at a Federal Reserve member bank representing ownership of Treasury obligation components, or (iv) receipts evidencing the component parts (principal or interest) of Treasury obligations that have not actually been stripped. Such receipts evidence ownership of component parts of Treasury obligations (principal or interest) purchased by a third party (typically an investment banking firm) and held on behalf of the third party in physical or book-entry form by a major commercial bank or trust company pursuant to a custody agreement with the third party. These custodial receipts are known by various names, including Treasury Receipts, Treasury Investment Growth Receipts (TIGRs) and Certificates of Accrual on Treasury Securities (CATS), and are not issued by the U.S. Treasury. Therefore they are not U.S. Government securities, although the underlying bonds represented by these receipts are debt obligations of the U.S. Treasury.
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CORPORATE DEBT AND OTHER OBLIGATIONS
The Funds may invest in corporate debt securities, variable and floating rate debt securities and corporate commercial paper in the rating categories described above. Floating rate securities normally have a rate of interest that is set as a specific percentage of a designated base rate, such as the rate on Treasury bonds or bills or the prime rate at a major commercial bank. The interest rate on floating rate securities changes periodically when there is a change in the designated base rate. Variable rate securities provide for a specified periodic adjustment in the interest rate based on prevailing market rates.
The Funds may invest in corporate debt securities with contractual call provisions that permit the seller of the security to repurchase the security at a pre-determined price. The market price typically reflects the presence of a call provision.
The Funds may invest in structured debentures and structured notes. These are hybrid instruments with characteristics of both bonds and swap agreements. Like a bond, these securities make regular coupon payments and generally have fixed principal amounts. However, the coupon payments are typically tied to a swap agreement that can be affected by changes in a variety of factors such as exchange rates, the shape of the yield curve and foreign interest rates. Because of these factors, structured debentures and structured notes can display price behavior that is more volatile than and often not correlated to other fixed-income securities.
The Funds may also invest in inverse floaters and tiered index bonds. An inverse floater is a type of derivative that bears a floating or variable interest rate that moves in the opposite direction to the interest rate on another security or index level. Changes in the interest rate of the other security or index inversely affect the residual interest rate paid on the inverse floater, with the result that the inverse floaters price will be considerably more volatile than that of a fixed-rate bond. Tiered index bonds are also a type of derivative instrument. The interest rate on a tiered index bond is tied to a specified index or market rate. So long as this index or market rate is below a predetermined strike rate, the interest rate on the tiered index bond remains fixed. If, however, the specified index or market rate rises above the strike rate, the interest rate on the tiered index bond will decrease. In general, the interest rates on tiered index bonds and inverse floaters move in the opposite direction of prevailing interest rates. The market for inverse floaters and tiered index bonds is relatively new. These corporate debt obligations may have characteristics similar to those of mortgage-related securities, but corporate debt obligations, unlike mortgage-related securities, are not subject to prepayment risk other than through contractual call provisions that generally impose a penalty for prepayment.
A Funds investments in U.S. dollar or foreign currency-denominated corporate debt securities of domestic or foreign issuers are limited to corporate debt securities (corporate bonds, debentures, notes or other similar corporate debt instruments) which meet the minimum ratings criteria set forth for the Fund, or, if unrated, which are in the Advisers opinion comparable in quality to corporate debt securities in which the Fund may invest. These criteria are described in the Prospectus. The rate of return or return of principal on some debt obligations may be linked or indexed to the level of exchange rates between the U.S. dollar and a foreign currency or currencies.
DELAYED FUNDING LOANS AND REVOLVING CREDIT FACILITIES
The Funds may enter into, or acquire participations in, delayed funding loans and revolving credit facilities, in which a lender agrees to make loans up to a maximum amount upon demand by the borrower during a specified term. These commitments may have the effect of requiring a Fund to increase its investment in a company at a time when it might not otherwise decide to do so (including at a time when the companys financial condition makes it unlikely that such amounts will be repaid). To the extent that a Fund is committed to advance additional funds, it will segregate assets determined to be liquid by the Adviser in accordance with procedures established by the Board of Trustees in an amount sufficient to meet such commitments. Delayed funding loans and revolving credit facilities are subject to credit, interest rate and liquidity risk of being a lender.
The Funds may invest in convertible securities of domestic or foreign issuers that meet the ratings criteria set forth in the Prospectus. A convertible security is a fixed-income security (a bond or preferred stock) which may be converted at a stated price within a specific period of time into a certain quantity of common stock or other equity securities of the same or a different issuer. Convertible securities rank senior to common stock in a corporations capital structure but are usually subordinated to similar non-convertible securities. While providing a fixed-income stream (generally higher in yield than the income derivable from common stock but lower than that afforded by a similar non-convertible security), a convertible security also offers an investor the opportunity, through its conversion feature, to participate in the capital attendant upon a market price advance in the convertible securitys underlying common stock.
In general, the market value of a convertible security is at least the higher of its investment value (i.e., its value as a fixed-income security) or its conversion value (i.e., its value upon conversion into its underlying stock). As a fixed-income security, a convertible security tends to increase in market value when interest rates decline and tends to decrease in value when interest rates
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rise. However, the price of a convertible security is also influenced by the market value of the securitys underlying stock. The price of a convertible security tends to increase as the market value of the underlying stock rises, whereas it tends to decrease as the market value of the underlying stock declines. While no securities investment is without some risk, investments in convertible securities generally entail less risk than investments in the stock of the same issuer.
WARRANTS TO PURCHASE SECURITIES
The Funds may invest in or acquire warrants to purchase equity or fixed income securities. Bonds 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. Bonds also may be issued with warrants attached to purchase additional fixed income securities at the same coupon rate. A decline in interest rates would permit the Funds 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.
The Funds are authorized to lend their portfolio securities in an effort to increase the return and income on the Funds portfolio. A Fund that loans portfolio securities will typically loan those securities to well-known and recognized U.S. and foreign brokers, dealers and banks. These loans, if and when made, may not exceed one-third of the value of the Funds total assets. The Funds loans of securities will be collateralized by cash, letters of credit, government securities or qualifying liquid securities. The Funds will retain the right to all interest and dividends payable with respect to the loaned securities. If a Fund lends its portfolio securities it may charge the borrower a negotiated fee and retain the ability to terminate the loan at any time. In lending securities, a Fund will be subject to risks, including the potential inability to recall the loaned securities should the borrower fail financially, and the possible loss in market value of the collateral. While voting rights on the loaned securities may pass to the borrower, the Trusts Board of Trustees must be able to terminate the loan and regain the right to vote the securities if a material event adversely affecting the investment occurs.
The Funds may purchase securities on a when-issued or delayed-delivery basis, generally in connection with an underwriting or other offering. When-issued and delayed-delivery transactions occur when securities are bought with payment for and delivery of the securities scheduled to take place at a future time, beyond normal settlement dates, generally from 15 to 45 days after the transaction. The price that the Fund is obligated to pay on the settlement date may be different from the market value on that date. While securities may be sold prior to the settlement date, the Funds intend to purchase such securities with the purpose of actually acquiring them, unless a sale would be desirable for investment reasons. At the time the Fund makes a commitment to purchase a security on a when-issued basis, it will record the transaction and reflect the value of the security each day in determining the Funds net asset value. The Fund will also designate liquid securities, marked-to-market daily, equal in value to its obligations for when-issued securities.
If a Fund anticipates that the price of a security will decline, it may sell the security short and borrow the same security from a broker or other institution to complete the sale. The Fund may make a profit or loss depending upon whether the market price of the security decreases or increases between the date of the short sale and the date on which the Fund must replace the borrowed security. Until the security is replaced, the Fund generally is required to pay to the lender amounts equal to any interest that accrues during the period of the loan. To borrow the security, the Fund also may be required to pay a premium, which would also increase the cost of the security sold. The proceeds of the short sale will be retained by the broker (or by the Funds custodian in a special custody account), to the extent necessary to meet the margin requirements, until the short position is closed out.
Until the Fund closes its short position or replaces the borrowed security, the Fund will designate liquid securities at such a level that (i) the amount deposited in the account plus the amount deposited with the broker as collateral will equal the current value of the security sold short and (ii) the amount designated plus the amount deposited with the broker as collateral will not be less than the market value of the security at the time it was sold short.
The Funds may not make short sales of securities or maintain a short position if more than 33 1/3% of the Funds total assets (taken at current value) are held as collateral for such sales at any one time.
The Funds may invest in residential or commercial mortgage-related securities, including mortgage pass-through securities, collateralized mortgage obligations (CMOs), adjustable rate mortgage securities, CMO residuals, stripped mortgage-related securities, floating and inverse floating rate securities and tiered index bonds. CMOs and other mortgage-related securities that are
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issued or guaranteed by the U.S. Government or by any of its agencies or instrumentalities will be considered U.S. Government securities for purposes of applying a Funds diversification and industry concentration tests. For purposes of a Funds industry concentration policy, the Funds will analyze the characteristics of a particular issuer, security, underlying collateral and related obligors and then assign an industry or sector classification consistent with those characteristics.
MORTGAGE PASS-THROUGH SECURITIES: Mortgage pass-through securities represent interests in pools of mortgages in which payments of both principal and interest on the securities are generally made monthly, in effect passing through monthly payments made by borrowers on the residential or commercial mortgage loans which underlie the securities (net of any fees paid to the issuer or guarantor of the securities). Mortgage pass-through securities differ from other forms of debt securities, which normally provide for periodic payment of interest in fixed amounts with principal payments at maturity or specified call dates. Early payment of principal on mortgage pass-through securities (arising from prepayments of principal due to the sale of underlying property, refinancing, or foreclosure, net of fees and costs which may be incurred) may expose a Fund to a lower rate of return upon reinvestment of principal. Also, if a security subject to repayment has been purchased at a premium, in the event of prepayment, the value of the premium would be lost.
There are currently three types of mortgage pass-through securities, (i) those issued by the U.S. Government or one of its agencies or instrumentalities, such as the GNMA, the FNMA and the FHLMC; (ii) those issued by private issuers that represent an interest in or are collateralized by pass-through securities issued or guaranteed by the U.S. Government or one of its agencies or instrumentalities; and (iii) those issued by private issuers that represent an interest in or are collateralized by whole mortgage loans or pass-through securities without a government guarantee but usually having some form of private credit enhancement.
GNMA is a wholly-owned United States Government corporation within the Department of Housing and Urban Development. GNMA is authorized to guarantee, with the full faith and credit of the United States Government, the timely payment of principal and interest on securities issued by the institutions approved by GNMA (such as savings and loan institutions, commercial banks and mortgage banks), and backed by pools of mortgages insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs.
Obligations of FNMA and FHLMC are not backed by the full faith and credit of the United States Government. In the case of obligations not backed by the full faith and credit of the United States Government, a Fund must look principally to the agency issuing or guaranteeing the obligation for ultimate repayment. FNMA and FHLMC may borrow from the U.S. Treasury to meet their obligations, but the U.S. Treasury is under no obligation to lend to FNMA or FHLMC.
Private mortgage pass-through securities are structured similarly to GNMA, FNMA and FHLMC mortgage pass-through securities and are issued by originators of and investors in mortgage loans, including depository institutions, mortgage banks, investment banks and special purpose subsidiaries of the foregoing. Pools created by private mortgage pass-through issuers generally offer a higher rate of interest than government and government-related pools because there are no direct or indirect government or agency guarantees of payments in the private pools. However, timely payment of interest and principal of these pools may be supported by various forms of insurance or guarantees, including individual loan, title, pool and hazard insurance and letters of credit. The insurance and guarantees are issued by governmental entities, private insurers and the mortgage poolers. The insurance and guarantees and the credit worthiness of the issuers thereof will be considered in determining whether a mortgage-related security meets the Funds investment quality standards. There can be no assurance that the private insurers or guarantors can meet their obligations under the insurance policies or guarantee arrangements. Private mortgage pass-through securities may be bought without insurance or guarantees if, through an examination of the loan experience and practices of the originator/services and poolers, the Adviser determines that the securities meet the Funds quality standards.
COLLATERALIZED MORTGAGE OBLIGATIONS: CMOs, including CMOs that have elected to be treated for federal income tax purposes as Real Estate Mortgage Investment Conduits (REMICs), are hybrid instruments with characteristics of both bonds and mortgage pass-through securities. CMOs are debt obligations collateralized by residential or commercial mortgage loans or residential or commercial mortgage pass-through securities. Interest and prepaid principal are generally paid monthly. CMOs may be collateralized by whole mortgage loans or private mortgage pass-through securities but are more typically collateralized by portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC or FNMA. The issuer of a series of CMOs may elect to be treated for tax purposes as a REMIC. All future references to CMOs shall also be deemed to include REMICs.
CMOs are structured into multiple classes, each bearing a different stated maturity. Monthly payment of principal received from the pool of underlying mortgages, including prepayments, is first returned to investors holding the shortest maturity class. Investors holding the longer maturity classes usually receive principal only after shorter classes have been retired. An investor may be partially protected against a sooner than desired return of principal because of the sequential payments.
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Issuers of CMOs generally are not considered investment companies because of available exclusions under the 1940 Act and, as a result, the Funds may invest in the securities of these issuers without the limitations imposed by the 1940 Act on investments by the Fund in other investment companies. In the unusual situation that a Fund invests in a CMO that does not meet the requirements of those exclusions or of any separate exemptive order the CMO may have obtained from the SEC, that Fund may not invest more than 10% of its assets in all such entities considered to be investment companies and may not acquire more than 3% of the voting securities of any single entity.
The Funds also may invest in, among other things, parallel pay CMOs, Planned Amortization Class CMOs (PAC bonds), sequential pay CMOs, and floating rate CMOs. Parallel pay CMOs are structured to provide payments of principal on each payment date to more than one class. PAC bonds generally require payments of a specified amount of principal on each payment date. Sequential pay CMOs generally pay principal to only one class while paying interest to several classes. Floating rate CMOs are securities whose coupon rate fluctuates according to some formula related to an existing mortgage index or rate. Typical indices would include the Eleventh District Cost-of-Funds Index, the London Interbank Offered Rate, one-year Treasury yields, and ten-year Treasury yields.
ADJUSTABLE RATE MORTGAGE SECURITIES: Adjustable rate mortgage securities (ARMs) are pass-through securities collateralized by mortgages with adjustable rather than fixed rates. ARMs eligible for inclusion in a mortgage pool generally provide for a fixed initial mortgage interest rate for either the first three, six, twelve, thirteen, 36, or 60 scheduled monthly payments. Thereafter, the interest rates are subject to periodic adjustment based on changes to a designated benchmark index.
The ARMs contain maximum and minimum rates beyond which the mortgage interest rate may not vary over the lifetime of the security. In addition, certain ARMs provide for additional limitations on the maximum amount by which the mortgage interest may be adjusted for any single adjustment period. In the event that market rates of interest rise more rapidly to levels above that of the ARMs maximum rate, the ARMs coupon may represent a below market rate of interest. In these circumstances, the market value of the ARM security will likely have fallen.
Some ARMs contain limitations on changes in the required monthly payment. In the event that a monthly payment is not sufficient to pay the interest accruing on an ARM, any such excess interest is added to the principal balance of the mortgage loan, which is repaid through future monthly payments. If the monthly payment for such an instrument exceeds the sum of the interest accrued at the applicable mortgage interest rate and the principal payment required at such point to amortize the outstanding principal balance over the remaining term of the loan, the excess is then utilized to reduce the outstanding principal balance of the ARM.
CMO RESIDUALS: CMO residuals are derivative mortgage securities issued by agencies or instrumentalities of the U.S. Government or by private originators of, or investors in, mortgage loans, including savings and loan associations, homebuilders, mortgage banks, commercial banks, investment banks, and special purpose entities of the foregoing.
The cash flow generated by the mortgage assets underlying a series of CMOs is applied first to make required payments of principal and interest on the CMOs and second to pay the related administrative expenses of the issuer. The residual in a CMO structure generally represents the interest in any excess cash flow remaining after making the foregoing payments. Each payment of such excess cash flow to a holder of the related CMO residual represents income and/or a return of capital. The amount of residual cash flow resulting from a CMO will depend on, among other things, the characteristics of the mortgage assets, the coupon rate of each class of CMO, prevailing interest rates, the amount of administrative expenses and the prepayment experience on the mortgage assets. In part, the yield to maturity on the CMO residuals is extremely sensitive to prepayments on the related underlying mortgage assets, in the same manner as an interest-only (IO) class of stripped mortgage-related securities. See Stripped Mortgage-Related Securities below. In addition, if a series of a CMO includes a class that bears interest at an adjustable rate, the yield to maturity on the related CMO residual will also be extremely sensitive to changes in the level of the index upon which interest rate adjustments are based. As described below with respect to stripped mortgage-related securities, in certain circumstances a Fund may fail to recoup its initial investment in a CMO residual.
CMO residuals are generally purchased and sold by institutional investors through several investment banking firms acting as brokers or dealers. The CMO residual market has recently developed and CMO residuals currently may not have the liquidity of other more established securities trading in other markets. Transactions in CMO residuals are generally completed only after careful review of the characteristics of the securities in question. In addition, CMO residuals may or, pursuant to an exemption, may not have been registered under the Securities Act. CMO residuals, whether or not registered under the Securities Act, may be subject to certain restrictions on transferability, and may be deemed illiquid and subject to a Funds limitations on investment in illiquid securities.
STRIPPED MORTGAGE-RELATED SECURITIES: Stripped mortgage-related securities (SMRS) are derivative multi-class mortgage securities. SMRS may be issued by agencies or instrumentalities of the U.S. Government, or by private originators of, or investors in, mortgage loans, including savings and loan associations, mortgage banks, commercial banks, investment banks, and special purpose entities of the foregoing.
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SMRS are usually structured with two classes that receive different proportions of the interest and principal distributions on a pool of mortgage assets. A common type of SMRS will have one class receiving some of the interest and most of the principal from the mortgage assets, while the other class will receive most of the interest and the remainder of the principal. In the most extreme case, one class will receive all of the interest (the IO class), while the other class will receive the entire principal (the principal-only or PO class). The yield to maturity on an IO class is extremely sensitive to the rate of principal payments (including prepayments) on the related underlying mortgage assets, and a rapid rate of principal payments may have a material adverse effect on a Funds yield to maturity from these securities. If the underlying mortgage assets experience greater than anticipated prepayments of principal, a Fund may fail to fully recoup its initial investment in these securities even if the security is in one of the highest rating categories.
SMRS are purchased and sold by institutional investors through several investment banking firms acting as brokers or dealers. Although the market for these securities is increasingly liquid, the Adviser may determine that certain stripped mortgage-backed securities issued by the U. S. government, its agencies or instrumentalities are not readily marketable. If so, these securities, together with privately-issued stripped mortgage-backed securities, will be considered illiquid and subject to a Funds limitations on investment in illiquid securities. The Funds also may invest in stripped mortgage-backed securities that are privately issued. The liquidity of these securities will be determined in accordance with the policies and procedures established by the Board of Trustees.
INVERSE FLOATERS: An inverse floater is a debt instrument with a floating or variable interest rate that moves in the opposite direction to the interest rate on another security or index level. Changes in the interest rate on the other security or index inversely affect the residual interest rate paid on the inverse floater, with the result that the inverse floaters price will be considerably more volatile than that of a fixed-rate bond. Inverse floaters may experience gains when interest rates fall and may suffer losses in periods of rising interest rates. The market for inverse floaters is relatively new.
TIERED INDEX BONDS: Tiered index bonds are relatively new forms of mortgage-related securities. The interest rate on a tiered index bond is tied to a specified index or market rate. So long as this index or market rate is below a predetermined strike rate, the interest rate on the tiered index bond remains fixed. If, however, the specified index or market rate rises above the strike rate, the interest rate of the tiered index bond will decrease. Thus, under these circumstances, the interest rate on a tiered index bond, like an inverse floater, will move in the opposite direction of prevailing interest rates, with the result that the price of the tiered index bond may be considerably more volatile than that of a fixed-rate bond.
RESIDENTIAL MORTGAGE-BACKED SECURITIES (RMBS SECURITIES): Beginning in early 2008, the U.S. residential mortgage-backed securities market, particularly the portion commonly referred to as subprime, was well into a period of extreme stress and dislocation. Most market participants believe this stress to be the result of years of excessive volume growth in residential mortgage loans (which will be referred to in this paragraph as Loans or, individually, as a Loan) and a sharp deterioration of Loan quality. The phrase subprime refers to a Loan given to a borrower with a poor or no credit history and usually includes one or more aggressive Loan terms such as a high Loan-to-value ratio. Such Loans carry a higher degree of risk than other Loans, and, therefore, a higher probability of default. Credit and other structural enhancements provided within residential mortgage-backed securities (RMBS Securities) backed in whole or in part by subprime Loans (such RMBS Securities, Subprime RMBS) were intended to incorporate this higher degree of risk. Such enhancements were provided as a protection to holders of such Subprime RMBS. However, the current market prices of these Subprime RMBS and the delinquencies and defaults of their underlying Loans imply that many of these Subprime RMBS do not have adequate credit protection and may indeed suffer further partial or a complete loss of principal. Credit rating agencies have downgraded tens of billions of dollars of RMBS Securities and CDOs that include Subprime RMBS and other RMBS Securities and additional downgrades are expected. Some or all of the principal may be lost in these Subprime RMBS. While such Subprime RMBS will be purchased with the expectation of a potential for a positive long-term internal rate of return, it is possible that a prolonged period of continued stress and dislocation in the subprime residential mortgage sector will have a negative impact on the short-term liquidity and market pricing of these assets. Such effects have the potential to adversely impact the short-term and long-term liquidity and returns of the Funds.
The Funds 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 automobiles, credit card loans, and home equity loans. These securities generally take the form of a structured type of security, including pass-through, pay-through, and stripped interest payout structures similar to the CMO structure. Investments in these and other types of asset-backed securities must be consistent with the investment objectives and policies of the Funds.
RISK FACTORS RELATING TO INVESTING IN MORTGAGE-RELATED AND ASSET-BACKED SECURITIES
The yield characteristics of mortgage-related and asset-backed securities differ from traditional debt securities. Among the major differences are that interest and principal payments are made more frequently, usually monthly, and that principal may be prepaid at any time because the underlying mortgage loans or other assets generally may be prepaid at any time. As a result, if the Funds purchase such a security at a premium, a prepayment rate that is faster than expected will reduce yield to maturity, while a prepayment rate that is slower than expected will have the opposite effect of increasing yield to maturity. Alternatively, if the Funds
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purchase these securities at a discount, faster than expected prepayments will increase, while slower than expected prepayments will reduce, yield to maturity. The Funds may invest a portion of their assets in derivative mortgage-related securities that are highly sensitive to changes in prepayment and interest rates. The Adviser will seek to manage these risks (and potential benefits) by diversifying its investments in such securities and through hedging techniques.
During periods of declining interest rates, prepayment of mortgages underlying mortgage-related securities can be expected to accelerate. Accordingly, a Funds ability to maintain positions in high-yielding mortgage-related securities will be affected by reductions in the principal amount of such securities resulting from such prepayments, and its ability to reinvest the returns of principal at comparable rates is subject to generally prevailing interest rates at that time. Prepayments may also result in the realization of capital losses with respect to higher yielding securities that had been bought at a premium or the loss of opportunity to realize capital gains in the future from possible future appreciation.
Asset-backed securities involve certain risks that are not posed by mortgage-related securities, resulting mainly from the fact that asset-backed securities do not usually contain the complete benefit of a security interest in the related collateral. For example, credit card receivables generally are unsecured and the debtors are entitled to the protection of a number of state and federal consumer credit laws, some of which may reduce the ability to obtain full payment. In the case of automobile receivables, due to various legal and economic factors, proceeds from repossessed collateral may not always be sufficient to support payments on these securities.
COLLATERALIZED BOND OBLIGATIONS (CBOs), COLLATERALIZED LOAN OBLIGATIONS (CLOs) AND OTHER COLLATERALIZED DEBT OBLIGATIONS (CDOs)
The Funds may invest in CBOs, CLOs and other 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 a 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 Funds 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: distributions from collateral securities may not be adequate to make interest or other payments; the quality of the collateral may decline in value or default; the CBOs, CLOs or other CDOs in which the Funds invest may be subordinate to other classes or may experience volatility in values; and the complex structure of the security may not be fully understood at the time of investment, potentially producing disputes with the issuer or unexpected investment results.
Bank obligations in which the Funds may invest include certificates of deposit, bankers acceptances and 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 specific 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 may be withdrawn on demand by the investor, but may be subject to early withdrawal penalties that vary depending upon market conditions and the remaining maturity of the obligation. There are 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.
Obligations of foreign banks involve somewhat different risks than those affecting obligations of United States banks, including the possibility that their liquidity could be impaired because of future political and economic developments, that their obligations may be less marketable than comparable obligations of United States 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 or 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, and practices and requirements applicable to foreign banks that differ from those applicable to United States banks. Foreign banks are not generally subject to examination by any U.S. Government agency or instrumentality.
Municipal bonds (also municipal securities or municipal obligations) generally are issued by state and local governments and their agencies, authorities and other instrumentalities. Municipal obligations include obligations issued to obtain funds for various public purposes, including constructing a wide range of public facilities, such as bridges, highways, housing, hospitals, mass
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transportation, schools and streets. Other public purposes for which municipal obligations may be issued include the refunding of outstanding obligations, the obtaining of funds for general operating expenses and the making of loans to other public institutions and facilities. In addition, certain types of industrial development bonds (IDBs) and private activity bonds (PABs) are issued by or on behalf of public authorities to finance various privately operated facilities, including certain pollution control facilities, convention or trade show facilities, and airport, mass transit, port or parking facilities.
The two principal classifications of municipal obligations are general obligation and revenue bonds. General obligation bonds are secured by the issuers pledge of its faith, credit and taxing power. Revenue bonds are payable only from the revenues derived from a particular facility or class of facilities or from the proceeds of a special excise tax or other specific revenue source such as the corporate user of the facility being financed. IDBs and PABs are usually revenue bonds and are not payable from the unrestricted revenues of the issuer. The credit quality of IDBs and PABs is usually directly related to the credit standing of the corporate user of the facilities.
The ability of state, county or local governments to meet their obligations will depend primarily on the availability of tax and other revenues to those governments and on their fiscal conditions generally. The amounts of tax and other revenues available to governmental issuers may be affected from time to time by economic, political and demographic conditions within or outside of the particular state. In addition, constitutional or statutory restrictions may limit a governments power to raise revenues or increase taxes.
Municipal bonds are subject to interest rate, credit and market risk. Because of how they are issued, municipal bonds also are subject to the risk that litigation, legislation, various political events, local business or economic conditions, or the bankruptcy of the issuer could have a significant effect on an issuers ability to make payments of principal and/or interest. Lower rated municipal bonds generally are subject to greater credit and market risk than higher quality municipal bonds. The types of municipal bonds in which the Funds may invest include municipal lease obligations. The Funds may also invest in industrial development bonds, which are municipal bonds issued by a government agency on behalf of a private sector company and, in most cases, are not backed by the credit of the issuing municipality and may therefore involve more risk. The Funds may also invest in securities issued by entities whose underlying assets are municipal bonds.
The Funds may invest, without limitation, in residual interest bonds (sometimes referred to as inverse floaters) (RIBs), which brokers create by depositing municipal bonds into a trust. The trust in turn issues a variable rate security and RIBs. The interest rate for the variable rate security is determined by an index or an auction process held approximately every 7 to 35 days, while the RIB holder receives the balance of the income from the underlying municipal bond less an auction fee. The market prices of RIBs may be highly sensitive to changes in market rates and may decrease significantly when market rates increase. In a transaction in which a Fund purchases a RIB from a trust, and the underlying municipal bond was held by the Fund prior to being deposited into the trust, the Fund treats the transaction as a secured borrowing for financial reporting purposes. As a result, the Fund will incur a non-cash interest expense with respect to interest paid by the trust on the variable rate securities, and will recognize additional interest income in an amount directly corresponding to the non-cash interest expense. Therefore, the Funds net asset value per share and performance are not affected by the non-cash interest expense. This accounting treatment does not apply to RIBs acquired by the Funds where the Funds did not previously own the underlying municipal bond.
BANK LOANS; PARTICIPATIONS AND ASSIGNMENTS
The Funds may purchase participations in commercial loans, or may purchase assignments of these loans. This indebtedness may be secured or unsecured. Loan participations typically represent direct participation in a loan made to a corporate borrower, and generally are offered by banks or other financial institutions or lending syndicates. The Funds may participate in such syndications, or can buy part of a loan, becoming a part lender. When purchasing loan participations, a Fund assumes the credit risk associated with the corporate borrower and may assume the credit risk associated with an interposed bank or other financial intermediary. The participation interests in which a Fund intends to invest may not be rated by any nationally recognized rating service. Participations and assignments also involve special types of risk, including interest rate risk, liquidity risk, and the risks of being a lender. If the Fund purchases a participation, it may be able to enforce its rights only through the lender, and may assume the credit risk of the lender in addition to the borrower.
A loan is often administered by an agent bank acting as agent for all holders. The agent bank administers the terms of the loan, as specified in the loan agreement. In addition, the agent bank is normally responsible for the collection of principal and interest payments from the corporate borrower and the apportionment of these payments to the credit of all institutions that are parties to the loan agreement. Unless, under the terms of the loan or other indebtedness, a Fund has direct recourse against the corporate borrower, the Fund may have to rely on the agent bank or other financial intermediary to apply appropriate credit remedies against a corporate borrower.
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A financial institutions employment as agent bank might be terminated if it fails to observe a requisite standard of care or becomes insolvent. A successor agent bank would generally be appointed to replace the terminated agent bank, and assets held by the agent bank under the loan agreement should remain available to holders of such indebtedness. However, if assets held by the agent bank for the benefit of a Fund were determined to be subject to the claims of the agent banks general creditors, the Fund might incur certain costs and delays in realizing payment on a loan or loan participation and could suffer a loss of principal and/or interest. In situations involving other interposed financial institutions (e.g., an insurance company or governmental agency) similar risks may arise.
Purchasers of loans and other forms of direct indebtedness depend primarily upon the creditworthiness of the corporate borrower for payment of principal and interest. If a Fund does not receive scheduled interest or principal payments on such indebtedness, the Funds share price and yield could be adversely affected. Loans that are fully secured offer a Fund more protection than an unsecured loan in the event of non-payment of scheduled interest or principal. However, there is no assurance that the liquidation of collateral from a secured loan would satisfy the corporate borrowers obligation, or that the collateral can be liquidated.
The Funds may invest in loan participations with credit quality comparable to that of issuers of its securities investments. 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 owned. Consequently, when investing in indebtedness of companies with poor credit, a Fund bears a substantial risk of losing the entire amount invested.
Loan assignments, loan participations, delayed funding loans, revolving credit facilities, bridge loans and other types of direct indebtedness may not be readily marketable and may be subject to restrictions on resale. In some cases, negotiations involved in disposing of indebtedness may require weeks to complete. Consequently, some indebtedness may be difficult or impossible to dispose of readily at what the Adviser believes to be a fair price. Certain types of loans, such as bridge loans may provide certain types of equity features such as warrants and conversion rights. Those equity-type instruments and investments involve additional risks of an investment in equity, including potentially significant changes in value, difficulty in accurately valuing them, a lack of liquidity, and a significant loss on the investment, and the possibility that the particular right could expire worthless if not exercised.
In addition, valuation of illiquid indebtedness involves a greater degree of judgment in determining a Funds net asset value than if that value were based on available market quotations, and could result in significant variations in the Funds daily share price. At the same time, some loan interests are traded among certain financial institutions and accordingly may be deemed liquid. As the market for different types of indebtedness continues to develop, the liquidity of these instruments is expected to improve. In addition, the Funds currently intend to treat indebtedness for which there is no readily available market as illiquid for purposes of the Funds limitation on illiquid investments. To the extent this is the case, a Fund would consider the loan participation as illiquid and subject to the Funds restriction on investing no more than 15% of its net assets in illiquid securities. (See also the discussion entitled Illiquid Securities.)
Each Fund limits the amount of it total assets that it will invest in any one issuer or in issuers within the same industry (see Investment Restrictions). For purposes of these limits, a Fund will generally treat the corporate borrower as the issuer of indebtedness held by the Fund. In the case of loan participations where a bank or other lending institution serves as a financial intermediary between the Fund and the corporate borrower, SEC interpretations require the Fund to treat both the lending bank or other lending institution and the corporate borrower as issuers for the purpose of determining whether the Fund has invested more than 5% of its total assets in a single issuer. Treating a financial intermediary as an issuer of indebtedness may restrict the Funds ability to invest in indebtedness related to a single financial intermediary, or a group of intermediaries engaged in the same industry, even if the underlying borrowers represent many different companies and industries.
Loans and other types of direct indebtedness may not be readily marketable and may be subject to restrictions on resale. In some cases, negotiations involved in disposing of indebtedness may require weeks to complete. Consequently, some indebtedness may be difficult or impossible to dispose of readily at what the Adviser believes to be a fair price. In addition, valuation of illiquid indebtedness involves a greater degree of judgment in determining a Funds net asset value than if the value were based on available market quotations, and could result in significant variations in the Funds daily share price. At the same time, some loan interests are traded among certain financial institutions and accordingly may be deemed liquid. As the market for different types of indebtedness develops, the liquidity of these instruments is expected to improve. In addition, the Funds currently intend to treat indebtedness for which there is no readily available market as illiquid for purposes of the Funds limitation on illiquid investments. The liquidity of each loan investment will be reviewed according to the requirements of the Funds liquidity policy established by the Board of Trustees. Investments in loan participations are considered to be debt obligations for purposes of any investment restriction relating to the lending of funds or assets by a Fund.
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Investments in loans through a direct assignment of the financial institutions interests with respect to the loan may involve additional risks to the Funds. In an assignment, the Funds would acquire a contractual relationship with the borrower and associated rights against that borrower. For example, if the loan is foreclosed, a Fund could become part owner of any collateral, and would bear the costs and liabilities associated with owning and disposing of the collateral. In addition, it is conceivable that under emerging legal theories of lender liability, a Fund could be held liable as co-lender. It is unclear whether loans and other forms of direct indebtedness offer securities law protections against fraud and misrepresentation.
In addition to the asset-backed securities, CBOs, CLOs and other CDOs and mortgage-related securities (including tiered index bonds and inverse floaters) which may be purchased by the Funds, the Funds may utilize certain other financial instruments with performance derived from the performance of an underlying asset (derivatives). Each Fund may, but is not required to, use derivative instruments for risk management purposes or as part of its investment strategies. The Funds might not employ any of the strategies described below, and no assurance can be given that any strategy used will succeed. The use of derivatives in general may be subject to management risk, credit risk, market risk, liquidity risk, lack of availability or other unanticipated risks.
Derivatives utilized by a Fund may involve the purchase and sale of derivative instruments. Derivatives may relate to a wide variety of underlying instruments, including equity and debt securities, indexes, interest rates, currencies and other assets. Certain derivative instruments which a Fund may use and the risks of those instruments are described in further detail elsewhere in this Statement of Additional Information. A Fund may in the future also utilize derivatives techniques, instruments and strategies that may be newly developed or permitted as a result of regulatory changes, consistent with the Funds investment objective and policies. Such newly developed techniques, instruments and strategies may involve risks different than or in addition to those described herein. No assurance can be given that any derivatives strategy employed by a Fund will be successful.
The risks associated with the use of derivatives are different from, and possibly greater than, the risks associated with investing directly in the instruments underlying such derivatives. Derivatives are highly specialized instruments that require investment techniques and risk analyses different from other portfolio investments. The use of derivative instruments requires an understanding not only of the underlying instrument but also of the derivative itself. Certain risk factors generally applicable to derivative transactions are described below.
Derivatives are subject to the risk that the market value of the derivative itself or the market value of underlying instruments will change in a way adverse to a Funds interests. A Fund bears the risk that the Adviser may incorrectly forecast future market trends and other financial or economic factors or the value of the underlying security, index, interest rate or currency when establishing a derivatives position for the Fund.
Derivatives may be subject to pricing or basis risk, which exists when a derivative becomes extraordinarily expensive (or inexpensive) relative to historical prices or corresponding instruments. Under such market conditions, it may not be economically feasible to initiate a transaction or liquidate a position at an advantageous time or price.
Many derivatives are complex and often valued subjectively. Improper valuations can result in increased payment requirements to counterparties or a loss of value to a Fund.
Using derivatives as a hedge against a portfolio investment subjects a Fund to the risk that the derivative will have imperfect correlation with the portfolio investment, which could result in the Fund incurring substantial losses. This correlation risk may be greater in the case of derivatives based on an index or other basket of securities, as the portfolio securities being hedged may not duplicate the components of the underlying index or the basket may not be of exactly the same type of obligation as those underlying the derivative. The use of derivatives for cross hedging purposes (using a derivative based on one instrument as a hedge on a different instrument) may also involve greater correlation risks.
While using derivatives for hedging purposes can reduce a Funds risk of loss, it may also limit the Funds opportunity for gains or result in losses by offsetting or limiting the Funds ability to participate in favorable price movements in portfolio investments.
Derivatives transactions for non-hedging purposes involve greater risks and may result in losses which would not be offset by increases in the value of portfolio securities or declines in the cost of securities to be acquired. In the event that a Fund enters into a derivatives transaction as an alternative to purchasing or selling the underlying instrument or in order to obtain desired exposure to an index or market, the Fund will be exposed to the same risks as are incurred in purchasing or selling the underlying instruments directly.
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The use of certain derivatives transactions involves the risk of loss resulting from the insolvency or bankruptcy of the other party to the contract (i.e., the counterparty) or the failure by the counterparty to make required payments or otherwise comply with the terms of the contract. In the event of default by a counterparty, a Fund may have contractual remedies pursuant to the agreement related to the transaction.
Liquidity risk exists when a particular derivative is difficult to purchase or sell. If a derivative transaction is particularly large or if the relevant market is illiquid, a Fund may be unable to initiate a transaction or liquidate a position at an advantageous time or price.
Certain derivatives transactions are not entered into or traded on exchanges or in markets regulated by the CFTC or the SEC. Instead, such over-the-counter (OTC) derivatives are entered into directly by the counterparties and may be traded only through financial institutions acting as market makers. OTC derivatives transactions can only be entered into with a willing counterparty that is approved by the Adviser in accordance with guidelines established by the Board of Trustees. Where no such counterparty is available, a Fund will be unable to enter into a desired transaction. There also may be greater risk that no liquid secondary market in the trading of OTC derivatives will exist, in which case the liquidity that is afforded to exchange participants will not be available to the Fund as a participant in OTC derivatives transactions. OTC derivatives transactions are not subject to the guarantee of an exchange or clearinghouse and as a result a Fund would bear greater risk of default by the counterparties to such transactions.
A Fund may be required to make physical delivery of portfolio securities underlying a derivative in order to close out a derivatives position or to sell portfolio securities at a time or price at which it may be disadvantageous to do so in order to obtain cash to close out or to maintain a derivatives position.
As a result of the structure of certain derivatives, adverse changes in the value of the underlying instrument can result in losses substantially greater than the amount invested in the derivative itself. Certain derivatives have the potential for unlimited loss, regardless of the size of the initial investment.
Certain derivatives may be considered illiquid and therefore subject to a Funds limitation on investments in illiquid securities.
Derivatives transactions conducted outside the United States may not be conducted in the same manner as those entered into on U.S. exchanges, and may be subject to different margin, exercise, settlement or expiration procedures. Brokerage commissions, clearing costs and other transaction costs may be higher on foreign exchanges. Many of the risks of OTC derivatives transactions are also applicable to derivatives transactions conducted outside the United States. Derivatives transactions conducted outside the United States are subject to the risk of governmental action affecting the trading in, or the prices of, foreign securities, currencies and other instruments. The value of such positions could be adversely affected by foreign political and economic factors; lesser availability of data on which to make trading decisions; delays on a Funds ability to act upon economic events occurring in foreign markets; and less liquidity than U.S. markets.
Currency derivatives are subject to additional risks. Currency derivatives transactions may be negatively affected by government exchange controls, blockages, and manipulations. Currency exchange rates may be influenced by factors extrinsic to a countrys economy. There is not systematic reporting of last sale information with respect to foreign currencies. As a result, the available information on which trading in currency derivatives will be based may not be as complete as comparable data for other transactions. Events could occur in the foreign currency market which will not be reflected in currency derivatives until the following day, making it more difficult for a Fund to respond to such events in a timely manner.
The Funds may purchase and write call and put options on securities, securities indices and on foreign currencies, and enter into futures contracts and use options on futures contracts. The Funds also may enter into swap agreements with other institutional investors with respect to corporate securities, foreign currencies, interest rates, and securities indices, to name just a few of the various types of swap transactions. The Funds may use these techniques to hedge against changes in interest rates, foreign currency exchange rates or securities prices or as part of their overall investment strategies. Each Fund will maintain designated assets consisting of cash, U.S. Government securities, equity securities or other liquid, unencumbered assets that are permitted under applicable laws and regulations to be used for this purpose (including net proceeds from purchases and redemptions of Fund shares that have not settled but are expected to timely settle in the usual way), marked-to-market daily (or, as permitted by applicable regulation, enter into certain offsetting positions), to cover its obligations under options contracts, futures contracts and swap agreements to avoid leveraging the Fund. The value of some derivative investments in which the Funds invest may be particularly sensitive to changes in prevailing interest rates or securities prices. A Funds ability to successfully utilize these instruments may depend in part on the Advisers ability to forecast correctly the movement of interest rates, securities prices and other economic factors. Should the Adviser incorrectly forecast those factors, and take positions in derivative instruments contrary to prevailing market trends, the Funds could lose value and experience substantial volatility. A Fund may invest up to 15% of its total assets in premiums and margins on options and futures. (See Limitations on Use of Futures, Options and Swaps below.)
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The Funds may buy or sell interest rate futures contracts, options on interest rate futures contracts and options on debt securities for the purpose of hedging against changes in the value of securities which a Fund owns or anticipates purchasing due to anticipated changes in interest rates. The Funds also may engage in currency exchange transactions by means of buying or selling foreign currency on a spot basis, entering into forward foreign currency exchange contracts, and buying and selling foreign currency options, futures and options on futures. Foreign currency exchange transactions may be entered into for the purpose of hedging against foreign currency exchange risk arising from the Funds investment or anticipated investment in securities denominated in foreign currencies.
OPTIONS ON SECURITIES AND ON SECURITIES INDEXES: A Fund may purchase put options on securities to seek to protect holdings in an underlying or related security against a substantial decline in market value. A Fund may purchase call options on securities to seek to protect against substantial increases in prices of securities the Fund intends to purchase pending its ability to invest in such securities in an orderly manner. A Fund may sell put or call options it has previously purchased, which could result in a net gain or loss depending on whether the amount realized on the sale is more or less than the premium and other transaction costs paid on the put or call option that is sold. A Fund may write a call or put option only if the option is covered by the Funds holding a position in the underlying securities or by other means which would permit immediate satisfaction of the Funds obligation as writer of the option. Prior to exercise or expiration, an option may be closed out by an offsetting purchase or sale of an option of the same series.
The purchase and writing of options involves certain risks. During the option period, the covered call writer has, in return for the premium on the option, given up the opportunity to profit from a price increase in the underlying securities above the sum of the premium and exercise price, but, as long as its obligation as a writer continues, has retained the risk of loss should the price of the underlying securities decline. The writer of an option has no control over the time when it may be required to fulfill its obligation as a writer of the option. Once an option writer has received an exercise notice, it cannot effect a closing purchase transaction in order to terminate its obligation under the option and must deliver the underlying securities at the exercise price. If a put or call option purchased by the Fund is not sold when it has remaining value, and if the market price of the underlying security, in the case of a put, remains equal to or greater than the exercise price or, in the case of a call, remains less than or equal to the exercise price, the Fund will lose its entire investment in the option. Also, where a put or call option on a particular security is purchased to hedge against price movements in a related security, the price of the put or call option may move more or less than the price of the related security. There can be no assurance that a liquid market will exist when a Fund seeks to close out an option position. Furthermore, if trading restrictions or suspensions are imposed on the options markets, a Fund may be unable to close out a position.
Risks Associated with Options on Securities and Indexes. As mentioned above, there are several risks associated with transactions in options on securities and on indexes. For example, there are significant differences between the securities and options markets that could result in an imperfect correlation between these markets, causing a given transaction not to achieve its objectives. A decision as to whether, when and how to use options involves the exercise of skill and judgment, and even a well-conceived transaction may be unsuccessful to some degree because of market behavior or unexpected events.
There can be no assurance that a liquid market will exist when a Fund seeks to close out an option position. If a Fund were unable to close out an option that it had purchased on a security, it would have to exercise the option in order to realize any profit or the option may expire worthless. If a Fund were unable to close out a covered call option that it had written on a security, it would not be able to sell the underlying security unless the option expired without exercise.
If trading were suspended in an option purchased by a Fund, the Fund would not be able to close out the option. If restrictions on exercise were imposed, the Fund might be unable to exercise an option it had purchased. Except to the extent that a call option on an index written by the Fund is covered by an option on the same index purchased by the Fund, movements in the index may result in a loss to the Fund; however, such losses may be mitigated by changes in the value of the Funds securities during the period the option was outstanding.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS: A Fund may use interest rate, foreign currency or index futures contracts, as specified for that Fund in the Prospectus. An interest rate, foreign currency or index futures contract provides for the future sale by one party and purchase by another party of a specified quantity of a financial instrument, foreign currency or the cash value of an index at a specified price and time. A futures contract on an index is an agreement pursuant to which two parties agree to take or make delivery of an amount of cash equal to the difference between the value of the index at the close of the last trading day of the contract and the price at which the index contract was originally written. Although the value of an index might be a function of the value of certain specified securities, no physical delivery of these securities is made. A public market exists in futures contracts covering a number of indexes as well as financial instruments and foreign currencies, including but not limited to: the S&P 500; the S&P 100; the S&P Midcap 400; the Nikkei 225; the NYSE composite; U.S. Treasury bonds; U.S. Treasury notes; GNMA Certificates; three-month U.S. Treasury bills; 90-day commercial paper; bank certificates of deposit; Eurodollar certificates of deposit; the Australian dollar; the Canadian dollar; the British pound; the Japanese yen; the Swiss franc; the Mexican peso; and certain multinational currencies, such as Euro. It is expected that other futures contracts will be developed and traded by the Funds in the future.
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A 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.
Each Fund will use futures contracts and options on futures contracts in accordance with the applicable rules of the CFTC under which the Trust and the Funds avoid being deemed a commodity pool and the Adviser being deemed a commodity pool operator. Because of these plans, the Funds have claimed the applicable exemptions under CFTC Rules and are not registered as commodity pool operators. Accordingly, each Fund intends generally to limit its use of futures contracts and futures options as described below under Limitations on Use of Futures, Options and Swaps.
The Funds generally will use futures for hedging and other purposes described in the Prospectus and elsewhere in this SAI. Hedging purposes include gaining exposure to desired investments or markets rather than making direct investments in the underlying securities or instruments. With respect to hedging transactions, for example, a Fund might use futures contracts to hedge against anticipated changes in interest rates that might adversely affect either the value of the Funds securities or the price of the securities that the Fund intends to purchase. A Funds hedging activities may include sales of futures contracts as an offset against the effect of expected increases in interest rates, and purchases of futures contracts as an offset against the effect of expected declines in interest rates. Although other techniques could be used to reduce a Funds 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.
A Fund will only enter into futures contracts and futures options that are standardized and traded on a U.S. or foreign exchange, board of trade, or similar entity, or quoted on an automated quotation system. The Funds might, but do not expect to, engage in futures trading based on tangible assets.
When a purchase or sale of a futures contract is made by a Fund, the Fund is required to deposit with its custodian (or broker, if legally permitted) a specified amount of assets determined to be liquid by the Adviser 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. Margin requirements on foreign exchanges may be different than U.S. exchanges. 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. Each Fund expects to earn interest income on its initial margin deposits. A futures contract held by a Fund is valued daily at the official settlement price of the exchange on which it is traded. Each day the Fund pays or receives cash, called variation margin, equal to the daily change in value of the futures contract. This process is known as marking to market. Variation margin does not represent a borrowing or loan by a Fund but is instead a settlement between the Fund and the broker of the amount one would owe the other if the futures contract expired. In computing daily net asset value, each Fund will mark to market its open futures positions.
A Fund is also required to deposit and maintain margin with respect to put and call options on futures contracts written by it. Such margin deposits will vary depending on the nature of the underlying futures contract (and the related 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 (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 Funds 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 Funds immediate obligations. A 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 Funds will also designate liquid assets equivalent to the amount, if any, by which the put is in the money.
Risks Associated with Futures and Futures Options. There are several risks associated with the use of futures contracts and futures options as hedging techniques, in addition to those described above. 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
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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 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 days 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.
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. 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 Trusts 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.
LIMITATIONS ON USE OF FUTURES, OPTIONS, AND SWAPS. The Funds generally will enter into positions in futures contracts, options on futures and foreign currency, forward contracts on financial commodities, and swaps only for bona fide hedging purposes as defined by the rules of the CFTC. With respect to positions in such futures, options, forwards, and swaps that do not constitute bona fide hedging, a Fund will only enter into such contracts to the extent permitted by the regulations of the CFTC and so that the aggregate net notional value or obligation of all futures contracts does not exceed the liquidation value of the Funds portfolio, after taking into account unrealized profits and losses. This means that, with respect to forwards and futures that are not contractually required to settle for cash, a Fund must cover its open contract positions by setting aside liquid assets equal to the contracts full notional value. With respect to forwards and futures that are contractually required to settle for cash, a Fund may, however, instead set aside liquid assets in an amount equal to the Funds daily marked-to-market net obligation (that is, any net liability) rather than the notional value. Using this net liability or market value to determine the amount of liquid assets to set aside allows a Fund to employ greater leverage.
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. There is no other percentage limitation on a Funds use of options, futures and options thereon, except for the limitation on foreign currency option contracts described below.
When purchasing a futures contract, a Fund will designate (and mark-to-market on a daily basis) assets determined to be liquid by the Adviser in accordance with procedures established by the Board of Trustees, that, when added to the amounts deposited with (or for the benefit of) a futures commission merchant as margin, are equal to the market value of the futures contract as described above. Alternatively, the Fund may cover its position by purchasing a put option on the same futures contract with a strike price as high or higher than the price of the contract held by the Fund.
When selling a futures contract, a Fund will designate (and mark-to-market on a daily basis) assets determined to be liquid by the Adviser in accordance with procedures established by the Board of Trustees that are equal to the market value of the instruments underlying the contract, or the related liability as described above. 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 Trusts custodian).
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When selling a call option on a futures contract, a Fund will maintain with its custodian (and mark-to-market on a daily basis) assets determined to be liquid by the Adviser in accordance with procedures established by the Board of Trustees, that, when added to the amounts deposited with (or for the benefit of) a futures commission merchant as margin, equal the total market value of the futures contract underlying the call option as described above. Alternatively, the Fund may cover its position by entering into a long position in the same futures contract at a price no higher than the strike price of the call option, by owning the instruments underlying the futures contract, or by holding a separate call option permitting the Fund to purchase the same futures contract at a price not higher than the strike price of the call option sold by the Fund.
When selling a put option on a futures contract, a Fund will maintain with its custodian (and mark-to-market on a daily basis) assets determined to be liquid by the Adviser 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 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 establish and collateralize or cover a Funds obligations under futures contracts and related options, such use will not eliminate the risk of a form of leverage, which may tend to exaggerate the effect on net asset value of any increase or decrease in the market value of a Funds portfolio, and may require liquidation of portfolio positions when it is not advantageous to do so. However, any potential risk of leverage resulting from the use of securities with maturities greater than one year may be mitigated by the overall duration limit on a Funds portfolio securities. Thus, the use of a longer-term security may require a Fund to hold offsetting short-term securities to balance the Funds portfolio such that the Funds duration does not exceed the maximum permitted for the Fund in the Prospectus.
The requirements for qualification as a regulated investment company also may limit the extent to which a Fund may enter into futures, futures options or forward contracts. See Dividends and Tax Status.
SWAP AGREEMENTS. The Funds may enter into various swap agreements, including (but not limited to) credit default, interest rate, total return, index and currency exchange rate swap agreements. These transactions attempt to obtain a particular return when it is considered desirable to do so, possibly at a lower cost to a Fund than if the Fund had invested directly in an instrument that yielded that desired return. Swap agreements are two-party contracts entered into primarily by institutional investors for periods ranging from a few weeks to more than one year. In a standard swap transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments, which may be adjusted for an interest factor. The gross returns to be exchanged or swapped between the parties are generally calculated with respect to a notional amount, i.e., the return on or increase in value of a particular dollar amount invested at a particular interest rate, in a particular foreign currency, or in a basket of securities representing a particular index. Forms of swap agreements include interest rate caps, under which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates exceed a specified rate, or cap; interest rate floors, under which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates fall below a specified rate, or floor; and interest rate collars, under which a party sells a cap and purchases a floor or vice versa in an attempt to protect itself against interest rate movements exceeding given minimum or maximum levels.
Most swap agreements entered into by the Funds calculate the obligations of the parties to the agreement on a net basis. Consequently, a Funds 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). A Funds current obligations under a swap agreement will be accrued daily (offset against any amounts owing to the Fund) and any accrued but unpaid net amounts owed to a swap counterparty will be covered by the maintenance of a designated account consisting of assets determined to be liquid by the Adviser in accordance with procedures established by the Board of Trustees, to avoid any potential leveraging of the Funds portfolio. Obligations under swap agreements so covered will not be construed to be senior securities for purposes of the Funds investment restriction concerning senior securities. Swap agreements are subject to the Funds overall limit that no more than 15% of net assets may be invested in illiquid securities, although a swap agreement may be deemed to be liquid pursuant to policies approved by the Funds Board of Trustees. A Fund will not enter into a swap agreement with any single party if the net amount owed or to be received under existing contracts with that party would exceed 5% of the Funds total assets at time of purchase.
Whether a Funds use of swap agreements will be successful in furthering its investment objectives will depend on the Advisers ability to predict correctly whether certain types of investments are likely to produce greater returns than other investments. Because they are two party contracts and because they may have terms of greater than seven days, swap agreements may be considered to be illiquid. Whether a particular swap is liquid is assessed on a case by case basis under guidelines and standards established by the Funds Board of Trustees. Moreover, a Fund bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap agreement counterparty. The Funds will enter into swap agreements that are not cleared through a recognized market only with counterparties that meet certain standards of creditworthiness (generally, such counterparties would have to be eligible counterparties under the terms of the Funds repurchase agreement guidelines). Certain restrictions imposed on the Funds by the Internal Revenue Code of 1986, as amended (the Code) may limit the Funds ability to use
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swap agreements. The portions of the swaps market involving swaps that are not cleared through a central market are largely unregulated. It is possible that developments in the swaps market, including further government regulation, could adversely affect a Funds ability to terminate existing swap agreements or to realize amounts to be received under such agreements. There can be no assurance that a Funds use of swap agreements will assist it in meeting its investment objectives.
CREDIT DEFAULT SWAP CONTRACTS: Each Fund may enter into credit default swap agreements. The buyer in a credit default contract is obligated to pay the seller a periodic, stream of payments over the term of the contract provided no event of default by a selected entity (or entities) has occurred. In the event of default, the seller must pay the buyer the par value (full notional value) of the reference obligation in exchange for the reference obligation. The Fund may be either the buyer or seller in the transaction. If the Fund is a buyer and no event of default occurs, the Fund loses its investment and recovers nothing. However, if an event of default occurs, the buyer receives full notional value for a reference obligation that may have little or no value. As a seller, the Fund receives a fixed rate of income throughout the term of the contract, provided there is no default event. If an event of default occurs, the seller may pay the notional value of the reference obligation. The value of the reference obligation received by the seller, coupled with the periodic payments previously received may be less than the full notional value it pays to the buyer, resulting in a loss of value to the Fund. Credit default swaps involve greater risks than if the Fund had invested in the reference obligation directly. In addition to general market risks, credit default swaps are subject to risks such as but not limited to illiquidity risk, counterparty risk and credit risks.
INTEREST RATE SWAP CONTRACTS: A Fund may also enter into interest rate swaps, which involve the exchange of interest payments by the Fund with another party, such as an exchange of floating rate payments for fixed interest rate payments with respect to a notional amount of principal. If the Adviser is incorrect in its interest rate forecasts and/or an interest rate swap used as a hedge negates a favorable interest rate movement, the investment performance of a Fund would be less than what it would have been if the Fund had not entered into the interest rate swap.
TOTAL RETURN SWAP CONTRACTS: Each Fund may enter into total return swap agreements. Total Return Swap is the generic name for any non-traditional swap where one party agrees to pay the other the total return of a defined underlying asset, usually in return for receiving a stream of LIBOR-based cash flows. The Total Return Swap may be applied to any underlying asset but is most commonly used with equity indices, single stocks, bonds and defined portfolios of loans and mortgages. The Total Return Swap is a mechanism for the user to accept the economic benefits of asset ownership without utilizing the balance sheet. The other leg of the swap, usually LIBOR, is spread to reflect the non-balance sheet nature of the product. Total Return Swaps can be designed with any underlying asset agreed between two parties. No notional amounts are exchanged with Total Return Swaps.
STRUCTURED NOTES: Structured notes are derivative debt securities, the interest rate or principal of which is determined by an unrelated indicator. Indexed securities include structured notes as well as securities other than debt securities, the interest rate or principal of which is determined by an unrelated indicator. Indexed securities may include a multiplier that multiplies the indexed element by a specified factor and, therefore, the value of such securities may be very volatile. To the extent a Fund invests in these securities, however, the Adviser analyzes these securities in its overall assessment of the effective duration of the Funds portfolio in an effort to monitor the Funds interest rate risk.
FOREIGN CURRENCY OPTIONS AND RELATED RISKS: The Funds may take positions in options on foreign currencies to hedge against the risk of foreign exchange rate fluctuations on foreign securities the Funds hold in their portfolios or intend to purchase. For example, if a Fund were to enter into a contract to purchase securities denominated in a foreign currency, it could effectively fix the maximum U.S. dollar cost of the securities by purchasing call options on that foreign currency. Similarly, if a Fund held securities denominated in a foreign currency and anticipated a decline in the value of that currency against the U.S. dollar, it could hedge against such a decline by purchasing a put option on the currency involved. The markets in foreign currency options are relatively new, and a Funds ability to establish and close out positions in such options is subject to the maintenance of a liquid secondary market. There can be no assurance that a liquid secondary market will exist for a particular option at any specific time. In addition, options on foreign currencies are affected by all of those factors that influence foreign exchange rates and investments generally.
No Fund will enter into foreign currency option contracts if the premiums on such options exceed 5% of the Funds total assets.
The quantities of currencies underlying option contracts represent odd lots in a market dominated by transactions between banks, and as a result extra transaction costs may be incurred upon exercise of an option.
There is no systematic reporting of last sale information for foreign currencies or any regulatory requirement that quotations be firm or revised on a timely basis. Quotation information is generally representative of very large transactions in the interbank market and may not reflect smaller transactions where rates may be less favorable. Option markets may be closed while round-the-clock interbank currency markets are open, and this can create price and rate discrepancies.
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RISKS OF OPTIONS TRADING: The Funds may effectively terminate their rights or obligations under options by entering into closing transactions. Closing transactions permit a Fund to realize profits or limit losses on its options positions prior to the exercise or expiration of the option. The value of a foreign currency option depends on the value of the underlying currency relative to the U.S. dollar. Other factors affecting the value of an option are the time remaining until expiration, the relationship of the exercise price to market price, the historical price volatility of the underlying currency and general market conditions. As a result, changes in the value of an option position may have no relationship to the investment merit of a foreign security. Whether a profit or loss is realized on a closing transaction depends on the price movement of the underlying currency and the market value of the option.
Options normally have expiration dates of up to nine months. The exercise price may be below, equal to or above the current market value of the underlying currency. Options that expire unexercised have no value, and a Fund will realize a loss of any premium paid and any transaction costs. Closing transactions may be effected only by negotiating directly with the other party to the option contract, unless a secondary market for the options develops. Although the Funds intend to enter into foreign currency options only with dealers which agree to enter into, and which are expected to be capable of entering into, closing transactions with the Funds, there can be no assurance that a Fund will be able to liquidate an option at a favorable price at any time prior to expiration. In the event of insolvency of the counter-party, a Fund may be unable to liquidate a foreign currency option. Accordingly, it may not be possible to effect closing transactions with respect to certain options, with the result that a Fund would have to exercise those options that it had purchased in order to realize any profit.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS: The Funds may use forward contracts to protect against uncertainty in the level of future exchange rates. The Funds will not speculate with forward contracts or foreign currency exchange rates.
A Fund may enter into forward contracts with respect to specific transactions. For example, when a Fund enters into a contract for the purchase or sale of a security denominated in a foreign currency, or when a Fund anticipates the receipt in a foreign currency of dividend or interest payments on a security that it holds, the Fund may desire to lock in the U.S. dollar price of the security or the U.S. dollar equivalent of the payment, by entering into a forward contract for the purchase or sale, for a fixed amount of U.S. dollars or foreign currency, of the amount of foreign currency involved in the underlying transaction. A Fund will thereby be able to protect itself against a possible loss resulting from an adverse change in the relationship between the currency exchange rates during the period between the date on which the security is purchased or sold, or on which the payment is declared, and the date on which such payments are made or received.
A Fund also may use forward contracts in connection with portfolio positions to lock in the U.S. dollar value of those positions, to increase the Funds exposure to foreign currencies that the Adviser believes may rise in value relative to the U.S. dollar or to shift the Funds exposure to foreign currency fluctuations from one country to another. For example, when the Adviser believes that the currency of a particular foreign country may suffer a substantial decline relative to the U.S. dollar or another currency, it may enter into a forward contract to sell the amount of the former foreign currency approximating the value of some or all of the Funds portfolio securities denominated in such foreign currency. This investment practice generally is referred to as cross-hedging when another foreign currency is used.
The precise matching of the forward contract amounts and the value of the securities involved will not generally be possible because the future value of such securities in foreign currencies will change as a consequence of market movements in the value of those securities between the date the forward contract is entered into and the date it matures. Accordingly, it may be necessary for a Fund to purchase additional foreign currency on the spot (i.e., cash) market (and bear the expense of such purchase) if the market value of the security is less than the amount of foreign currency the Fund is obligated to deliver and if a decision is made to sell the security and make delivery of the foreign currency. Conversely, it may be necessary to sell on the spot market some of the foreign currency received upon the sale of the portfolio security if its market value exceeds the amount of foreign currency the Fund is obligated to deliver. The projection of short-term currency market movements is extremely difficult, and the successful execution of a short-term hedging strategy is highly uncertain. Forward contracts involve the risk that anticipated currency movements will not be accurately predicted, causing the Fund to sustain losses on these contracts and transaction costs. A Fund may enter into forward contracts or maintain a net exposure to such contracts only if (1) the consummation of the contracts would not obligate the Fund to deliver an amount of foreign currency in excess of the value of the Funds portfolio securities or other assets denominated in that currency or (2) the Fund designates liquid assets in an amount not less than the value of the Funds total assets committed to the consummation of the contracts. Under normal circumstances, consideration of the prospect for currency parities will be incorporated into the longer-term investment decisions made with regard to overall diversification strategies. However, the Adviser believes it is important to have the flexibility to enter into such forward contracts when it determines that the best interests of a Fund will be served.
At or before the maturity date of a forward contract that requires a Fund to sell a currency, the Fund either may sell a portfolio security and use the sale proceeds to make delivery of the currency or retain the security and offset its contractual obligation to deliver the currency by purchasing a second contract pursuant to which the Fund will obtain, on the same maturity date, the same amount of
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the currency that it is obligated to deliver. Similarly, a Fund may close out a forward contract requiring it to purchase a specified currency by entering into a second contract entitling it to sell the same amount of the same currency on the maturity date of the first contract. The Fund would realize a gain or loss as a result of entering into such an offsetting forward contract under either circumstance to the extent the exchange rate between the currencies involved moved between the execution dates of the first and second contracts.
The cost to the Fund of engaging in forward contracts varies with factors such as the currencies involved, the length of the contract period and the market conditions then prevailing. Because forward contracts are usually entered into on a principal basis, no fees or commissions are involved. The use of forward contracts does not eliminate fluctuations in the prices of the underlying securities the Fund owns or intends to acquire, but it does fix a rate of exchange in advance. In addition, although forward contracts limit the risk of loss due to a decline in the value of the hedged currencies, at the same time they limit any potential gain that might result should the value of the currencies increase.
Although the Funds value their assets daily in terms of U.S. dollars, they do not intend to convert holdings of foreign currencies into U.S. dollars on a daily basis. The Funds may convert foreign currency from time to time, and investors should be aware of the costs of currency conversion. Although foreign exchange dealers do not charge a fee for conversion, they do realize a profit based on the difference between the prices at which they are buying and selling various currencies. Thus, a dealer may offer to sell a foreign currency to a Fund at one rate, while offering a lesser rate of exchange should the Fund desire to resell that currency to the dealer.
Each Fund may invest, without limitation, in securities of foreign issuers. The Flexible Income Fund may invest up to 40% of its total assets in securities that are not denominated in U.S. dollars. Investments by the Investment Grade Credit Fund and Corporate Bond Fund in securities that are not denominated in U.S. dollars will be limited to a maximum of 20% of the respective Funds total assets. Foreign economies may differ from the U.S. economy; individual foreign companies may differ from domestic companies in the same industry; and foreign currencies may be stronger or weaker than the U.S. dollar. The Adviser believes that the ability to invest abroad will enable the Funds to take advantage of these differences when they are favorable.
Fixed-income securities that may be purchased by the Funds include debt obligations issued or guaranteed by foreign governments, their subdivisions, agencies or instrumentalities, or by supranational entities that have been constituted by the governments of several countries to promote economic development, such as The World Bank and The Asian Development Bank. Foreign investment in certain foreign government debt is restricted or controlled to varying degrees.
The Funds may also invest in fixed-income securities of issuers located in emerging foreign markets. The Flexible Income Fund may invest up to 50% of its total assets in emerging foreign market securities; [the Investment Grade Credit Fund and Corporate Bond Fund have no such restriction on investments in emerging market securities]. Emerging markets generally include every country in the world other than the United States, Canada, Japan, Australia, Malaysia, New Zealand, Hong Kong, Singapore and most Western European countries. In determining what countries constitute emerging markets, the Adviser will consider, among other things, data, analysis and classification of countries published or disseminated by the International Bank for Reconstruction and Development (the World Bank) and the International Financial Corporation. Currently, investing in many emerging markets may not be desirable or feasible, because of the lack of adequate custody arrangements for a Funds assets, overly burdensome repatriation and similar restrictions, the lack of organized and liquid securities markets, unacceptable political risks or other reasons. As opportunities to invest in securities in emerging markets develop, the Funds expect to expand and further broaden the group of emerging markets in which they invest.
From time to time, emerging markets have offered the opportunity for higher returns in exchange for a higher level of risk. Accordingly, the Adviser believes that each Funds ability to invest in emerging markets throughout the world may enable the achievement of results superior to those produced by funds with similar objectives to those of the Funds that invest solely in securities in developed markets. There is no assurance that any Fund will achieve these results.
The Funds may invest in the following types of emerging market fixed-income securities: (a) fixed-income securities issued or guaranteed by governments, their agencies, instrumentalities or political subdivisions, or by government-owned, controlled or sponsored entities, including central banks (collectively, Sovereign Debt), including Brady Bonds (described below); (b) interests in issuers organized and operated for the purpose of restructuring the investment characteristics of Sovereign Debt; (c) fixed-income securities issued by banks and other business entities; and (d) fixed-income securities denominated in or indexed to the currencies of emerging markets. Fixed-income securities held by the Funds may take the form of bonds, notes, bills, debentures, bank debt obligations, short-term paper, loan participations, assignments and interests issued by entities organized and operated for the purpose of restructuring the investment characteristics of any of the foregoing. There is no requirement with respect to the maturity of fixed-income securities in which the Funds may invest.
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The Funds may invest in Brady Bonds and other Sovereign Debt of countries that have restructured or are in the process of restructuring Sovereign Debt pursuant to the Brady Plan. Brady Bonds are debt securities issued under the framework of the Brady Plan, an initiative announced by former U.S. Treasury Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to restructure their outstanding external commercial bank indebtedness. In restructuring its external debt under the Brady Plan framework, a debtor nation negotiates with its existing bank lenders as well as multilateral institutions such as the World Bank and the International Monetary Fund (IMF). The Brady Plan framework, as it has developed, contemplates the exchange of commercial bank debt for newly issued Brady Bonds. Brady Bonds may also be issued in respect of new money being advanced by existing lenders in connection with the debt restructuring. The World Bank and/or the IMF support the restructuring by providing funds pursuant to loan agreements or other agreements which enable the debtor nation to collateralize the new Brady Bonds or to repurchase outstanding bank debt at a discount.
Investment in sovereign debt can involve a high degree of risk. The governmental entity that controls the repayment of sovereign debt may not be able or willing to repay the principal and/or interest when due in accordance with the terms of its debt. A governmental entitys willingness or ability to repay principal and interest due in a timely manner may be affected by, among other factors, its cash flow situation, the extent of its foreign reserves, the availability of sufficient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole, the governmental entitys policy towards the IMF and the political constraints to which a governmental entity may be subject. Governmental entities may also be dependent on expected disbursements from foreign governments, multilateral agencies and others abroad to reduce principal and interest arrearages on their debt. The commitment on the part of these governments, agencies and others to make such disbursements may be conditioned on the implementation of economic reforms and/or economic performance and the timely service of such debtors obligations. Failure to implement such reforms, achieve such levels of economic performance or repay principal or interest when due may result in the cancellation of such third parties commitments to lend funds to the governmental entity, which may further impair such debtors ability or willingness to timely service its debts. Consequently, governmental entities may default on their sovereign debt.
Holders of sovereign debt may be requested to participate in the rescheduling of such debt and to extend further loans to governmental entities. In the event of a default by a governmental entity, there may be few or no effective legal remedies for collecting on that debt.
Emerging market fixed-income securities generally are considered to be of a credit quality below investment grade, even though they often are not rated by any nationally recognized statistical rating organizations. Investment in emerging market fixed-income securities will be allocated among various countries based upon the Advisers analysis of credit risk and its consideration of a number of factors, including: prospects for relative economic growth among the different countries in which the Funds may invest; expected levels of inflation; government policies influencing business conditions; the outlook for currency relationships; and the range of the individual investment opportunities available to international investors. The Advisers emerging market sovereign credit analysis includes an evaluation of the issuing countrys total debt levels, currency reserve levels, net exports/imports, overall economic growth, level of inflation, currency fluctuation, political and social climate and payment history. Particular fixed-income securities will be selected based upon credit risk analysis of potential issuers, the characteristics of the security and interest rate sensitivity of the various debt issues available with respect to a particular issuer, analysis of the anticipated volatility and liquidity of the particular debt instruments, and the tax implications to the Fund. The emerging market fixed-income securities in which the Funds may invest are not subject to any minimum credit quality standards.
Investments in emerging market and other foreign securities involve certain risk considerations not typically associated with investing in securities of U.S. issuers, including: (a) currency devaluations, other currency exchange rate fluctuations, or the imposition of currency controls; (b) political uncertainty and instability, including circumstances that lead to scenarios such as but not limited to the privatization and confiscation of invested assets; (c) more substantial government involvement in the economy; (d) higher rates of inflation; (e) less government supervision and regulation of the securities markets and participants in those markets; (f) controls on foreign investment and limitations on repatriation of invested capital and on the Funds ability to exchange local currencies for U.S. dollars; (g) greater price volatility, substantially less liquidity and significantly smaller capitalization of securities markets; (h) absence of uniform accounting and auditing standards; (i) generally higher commission expenses; (j) delay in settlement of securities transactions; and (k) greater difficulty in enforcing shareholder rights and remedies.
A Fund may not invest more than 15% of its net assets in repurchase agreements that have a maturity of longer than seven days or in other illiquid securities, including securities that are illiquid by virtue of the absence of a readily available market (either within or outside of the United States) or legal or contractual restrictions of resale. Historically, illiquid securities have included securities subject to contractual or legal restrictions on resale because they have not been registered under the Securities Act, securities that are otherwise not readily marketable and repurchase agreements that have a maturity of longer than seven days. Securities which have not been registered under the Securities Act generally are referred to as private placements or restricted securities and are purchased directly from the issuer or in the secondary market. Mutual funds do not typically hold a significant amount of these restricted or other
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illiquid securities because of the potential for delays on resale and uncertainty in valuation. Limitations on resale may have an adverse effect on the marketability of portfolio securities and a mutual fund might be unable to dispose of restricted or other illegal securities promptly or at reasonable prices and might thereby experience difficulty satisfying redemptions within seven days. A mutual fund might also have to register such restricted securities in order to dispose of them resulting in additional expense and delay. Adverse market conditions could impede such a public offering of securities. Currently the Funds may invest in securities issued in private placements. The Funds also may invest in mezzanine securities that are placed between debt and equity in a companys capital structure. These securities are typically subordinated debt instruments for late stage venture and mature companies and may offer income through a current coupon and equity participation through a warrant. In addition to being subject to credit risk, mezzanine securities are generally considered less liquid.
Over a period of years, however, a large institutional market has developed for certain securities that are not registered under the Securities Act, including repurchase agreements, commercial paper, foreign securities, municipal securities, convertible securities and corporate bonds and notes. Institutional investors depend on an efficient institutional market in which the unregistered security can be readily resold or on an issuers ability to honor a demand for repayment. The fact that there are contractual or legal restrictions on resale to the general public or to certain institutions may not be indicative of the liquidity of such investments.
Rule 144A under the Securities Act allows for a broader institutional trading market for securities otherwise subject to restriction on resale to the general public. The market for Rule 144A securities is active and liquid as a result of automated systems for the trading, clearance and settlement of unregistered securities of domestic and foreign issuers, such as the PORTAL Alliance platform sponsored by various securities industry participants.
Restricted securities eligible for resale pursuant to Rule 144A under the Securities Act and commercial paper for which there is a readily available market will not be deemed to be illiquid. The Adviser will monitor the liquidity of such restricted securities subject to the supervision of the Board of Trustees. In reaching liquidity decisions, the Adviser will consider the following factors, among other considerations: (1) the frequency of trades and quotes for the security; (2) the number of dealers wishing to purchase or sell the security and the number of other potential purchasers; (3) dealer undertakings to make a market in the security; and (4) the nature of the security and the nature of the marketplace trades (e.g., the time needed to dispose of the security, the method of soliciting offers and the mechanics of the transfer). In addition, in order for commercial paper that is issued in reliance on Section 4(a)(2) of the Securities Act to be considered liquid, (i) it must be rated in one or two of the highest rating categories by at least two nationally recognized statistical rating organizations (NRSRO), or if only one NRSRO rates the securities, by that NRSRO, or, if unrated, be of comparable quality in the view of the Adviser, and (ii) it must not be traded flat (i.e., without accrued interest) or in default as to principal or interest. While the Adviser uses procedures to determine that certain Rule144A securities are liquid, market conditions may later affect that assessment adversely. Therefore, the Fund could potentially hold higher levels of illiquid securities than previously anticipated. Investing in Rule 144A securities could have the effect of increasing the level of Fund illiquidity to the extent that qualified institutional buyers become, for a time, uninterested in purchasing these securities. Repurchase agreements subject to demand are deemed to have a maturity equal to the notice period.
The Funds may borrow money to the extent permitted under the 1940 Act, and as interpreted, modified or otherwise permitted by regulatory authority having jurisdiction, from time to time. This means that, in general, these Funds may borrow money from banks for any purpose on a secured basis in an amount up to one-third of the Funds total assets. These Funds may also borrow for temporary administrative purposes on an unsecured basis in an amount not to exceed 5% of the Funds total assets.
The Funds may borrow for temporary, emergency or investment purposes up to the amount permitted by its fundamental investment restrictions. This borrowing may be unsecured.
The provisions of the 1940 Act require a Fund to maintain continuous asset coverage (that is, total assets including borrowings, less liabilities exclusive of borrowings) of 300% of the amount borrowed, with an exception for borrowings not in excess of 5% of the Funds total assets made for temporary administrative purposes. Any borrowings for temporary administrative purposes in excess of the Funds total assets must maintain continuous asset coverage. If the 300% asset coverage should decline as a result of market fluctuations or other reasons, a Fund may be required to sell some of its portfolio holdings within three days to reduce debt and restore the 300% asset coverage, even though it may be disadvantageous from an investment standpoint to sell securities at that time.
Borrowing subjects a Fund to interest costs that may or may not be recovered by appreciation of the securities purchased, and can exaggerate the effect on net asset value of any increase or decrease in the market value of a Funds portfolio. This is the speculative factor known as leverage.
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As noted above, a Fund also may enter into certain transactions, including reverse repurchase agreements, that can be viewed as constituting a form of borrowing or financing transaction by the Fund. To the extent a Fund covers its commitment under a reverse purchase agreement (or economically similar transaction) by the designation of assets determined in accordance with procedures adopted by the Board of Trustees to be equal in value to the amount of the Funds commitment to repurchase, such an agreement will not be considered a senior security by the Fund and therefore will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by the Funds. Borrowing will tend to exaggerate the effect on net asset value of any increase or decrease in the market value of a Funds portfolio. Money borrowed will be subject to interest costs that may or may not be recovered by appreciation of the securities purchased. A 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.
The Flexible Income Fund may invest in publicly traded master limited partnerships (MLPs), which are limited partnerships or limited liability companies taxable as partnerships. MLPs may derive income and gains from the exploration, development, mining or production, processing, refining, transportation (including pipelines transporting gas, oil, or products thereof), or the marketing of any mineral or natural resources. MLPs generally have two classes of owners, the general partner and limited partners. When investing in an MLP, the Fund intends to purchase publicly traded common units issued to limited partners of the MLP. The general partner is typically owned by a major energy company, an investment fund, the direct management of the MLP or is an entity owned by one or more of those parties. The general partner may be structured as a private or publicly traded corporation or other entity. The general partner typically controls the operations and management of the MLP through an up to 2% equity interest in the MLP together with, in many cases, ownership of common units and subordinated units. Limited partners own the remainder of the partnership, through ownership of common units, and have a limited role in the partnerships operations and management.
MLPs are typically structured such that common units and general partner interests have first priority to receive quarterly cash distributions up to an established minimum amount (referred to as minimum quarterly distributions or MQD). Common and general partner interests also accrue arrearages in distributions to the extent the MQD is not paid. Once common and general partner interests have been paid, subordinated units receive distributions of up to the MQD; however, subordinated units do not accrue arrearages. Distributable cash in excess of the MQD paid to both common and subordinated units is distributed to both common and subordinated units generally on a pro rata basis. The general partner is also eligible to receive incentive distributions if the general partner operates the business in a manner that results in distributions paid per common unit surpassing specified target levels. As the general partner increases cash distributions to the limited partners, the general partner receives an increasingly higher percentage of the incremental cash distributions. These incentive distributions encourage the general partner to streamline costs, increase capital expenditures and acquire assets in order to increase the partnerships cash flow and raise the quarterly cash distribution in order to reach higher tiers. This result benefits all security holders of the MLP.
MLP common units represent a limited partnership interest in the MLP. Common units are listed and traded on U.S. securities exchanges, with their value fluctuating predominantly based on prevailing market conditions, distributions levels and the success of the MLP. The Fund intends to purchase common units in market transactions. Unlike owners of common stock of a corporation, owners of common units have limited voting rights and have no ability annually to elect directors. If the MLP is liquidated, common units have preference over subordinated units, but not over debt or preferred units, to the remaining assets of the MLP.
Portfolio securities are sold whenever the Adviser believes it appropriate, regardless of how long the securities have been held. Portfolio turnover generally involves some expense to the Fund, including brokerage commissions, dealer markups and other transaction costs, and may result in the recognition of capital gains that may be distributed to shareholders. Generally, portfolio turnover over 100% is considered high and increases these costs. The Adviser does not view turnover as an important consideration in managing the Funds and does not strive to limit portfolio turnover. Each Funds investment program emphasizes active portfolio management with a sensitivity to short-term market trends and price changes in individual securities. Accordingly, each Fund may take frequent trading positions, resulting in portfolio turnover that may exceed the portfolio turnover of most investment companies of comparable size.
The Funds may engage in defensive investing, which is a deliberate, temporary shift in portfolio strategy that may be undertaken when markets start behaving in volatile or unusual ways. Depending on the Advisers analysis of the various markets and other considerations, the Funds may, for temporary defensive purposes, invest a substantial part or all of their assets in bonds of U.S. or foreign governments, cash, certificates of deposit, bankers acceptances, high-grade commercial paper, and repurchase agreements. Such investments may also be made for temporary purposes pending investment in other securities or following substantial new investment in a Fund. When the Funds have invested defensively in low risk, low return securities, they may not achieve their investment objectives. There is no assurance that the Funds will enter into a defensive strategy in the event of volatility or other unusual activity in the securities markets.
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INTERFUND BORROWING AND LENDING
The SEC has issued an exemptive order permitting the Funds to borrow money from and lend money to each other, as well as funds managed by TCW Investment Management Company LLC, an affiliate of the Adviser. A Fund will borrow through the program only when the costs are equal to or lower than the cost of bank loans, and will lend through the program only when the returns are higher than those available from an investment in overnight repurchase agreements. Interfund loans and borrowings normally extend overnight, but can have a maximum duration of seven days. Loans may be called on one days notice. In addition, a Fund may participate in the program only if and to the extent that such participation is consistent with the Funds investment restrictions, policies, limitations and organizational documents. A borrowing Fund may have to borrow from a bank at a higher interest rate if an interfund loan is called or not renewed. Any delay in repayment of an interfund borrowing to a lending Fund could result in lost investment opportunities or additional borrowing costs. The Board of Trustees is responsible for overseeing and periodically reviewing the interfund lending program.
BOARD LEADERSHIP STRUCTURE AND RISK OVERSIGHT
The operations of the Funds are under the direction of the Board of Trustees. The Board establishes the Funds policies and oversees and reviews the management of the Funds. The Board meets regularly (i.e., at least quarterly) to review the investment performance of the Funds and other financial and operational matters, including policies and procedures with respect to compliance with regulatory and other requirements, as well as to review the activities of the Trusts officers, who are responsible for the day-to-day operations of the Funds. The Board met five times during the fiscal year ended March 31, 2017.
The Board consists of eight Trustees, six of whom are not interested persons (as defined in the Investment Company Act of 1940, as amended) of the Trust (the Independent Trustees). An Independent Trustee serves as Chairman of the Board. In addition, there are four standing committees of the Board to which the Board has delegated certain authority and supervisory responsibilities, two of which are comprised exclusively of Independent Trustees. Those committees are the Audit Committee, Nominating and Governance Committee and Valuation Committee, whose responsibilities and activities are described below.
As part of each regular Board meeting, the Independent Trustees meet separately from the Adviser, and as needed with their independent legal counsel and with the Trusts Chief Compliance Officer. The Board reviews its leadership structure periodically as part of its annual self-assessment process and believes that its structure is appropriate to enable the Board to exercise its oversight of the Funds.
The Funds have retained the Adviser as the Funds investment adviser. Subject to the objectives and policies as the Trustees may determine, the Adviser furnishes a continuing investment program for the Funds, makes investment decisions on their behalf, manages risks that arise from the Funds investments and operations, and provides administrative services to each Fund, all pursuant and subject to its investment advisory agreement with the Funds. Employees of the Adviser serve as the Trusts officers, including the Trusts President, Treasurer, Secretary and Chief Compliance Officer.
The Board oversees the services provided by the Adviser, including certain risk management functions. Risk management is a broad concept that can cover many elements. The Board handles its review of different elements and types of risks in different ways. In the course of providing oversight, the Board and the Committees receive reports on the Funds activities, including regarding each Funds investment portfolio and the Funds financial accounting and reporting. The Board also meets periodically with the Trusts Chief Compliance Officer who reports on the compliance of the Funds with the federal securities laws and the Trusts internal compliance policies and procedures. The Audit Committees meetings with the Funds independent auditors also contribute to its oversight of certain internal control risks. In addition, the Board meets periodically with the portfolio managers of the Funds to receive reports regarding the management of the Funds, including certain investment and operational risks. Because the Board has delegated the day-to-day activities of the Funds to the Adviser and other service providers, the risk management oversight provided by the Board can mitigate but not eliminate the identified risks. Not all risks that may affect a Fund can be identified or processes and controls developed to eliminate or mitigate their occurrence or effects, and some risks are simply beyond any control of a Fund or the Adviser, its affiliates or other service providers.
Information pertaining to the Trustees and officers of the Trust is provided in the table below. The term officer means president, vice president, secretary, treasurer, controller, or any other officer who performs policymaking functions. All officers serve without direct compensation from the Funds. Fund Complex used in this SAI refers to the Trust (consisting of 12 portfolios), TCW Funds, Inc. (consisting of 21 portfolios), TCW Strategic Income Fund, Inc. (consisting of 1 portfolio), and TCW Alternative Funds (consisting of 6 portfolios).
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NAME AND YEAR OF BIRTH*** |
POSITION(S) HELD WITH TRUST |
TERM OF OFFICE AND LENGTH OF TIME SERVED**** |
PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS |
NUMBER OF FUNDS IN FUND COMPLEX OVERSEEN BY TRUSTEE |
OTHER HELD | |||||
Independent Trustees of the Trust* | ||||||||||
Ronald J. Consiglio (1943) |
Trustee | Indefinite term, since 2003 |
Since 1999, Mr. Consiglio has served as the managing director of Synergy Trading, a securities-trading partnership. | 12 | Mannkind Corp. (pharmaceutical preparations) | |||||
Patrick C. Haden (1953) |
Trustee | Indefinite term, since 2010 |
President (since 2003), Wilson Ave. Consulting (business consulting firm); Senior Advisor to President (July 2016 - June 2017), Athletic Director, University of Southern California (August 2010 - June 2016). | 39 | Tetra Tech, Inc. (Environmental Consulting); The Rose Hills Foundation; Unihealth Foundation; Fletcher Jones Foundation; Mayr Foundation (Charitable Foundations); First Beverage (Beverage Consulting); Auto Club (Affiliate of AAA); TCW Funds, Inc. (mutual funds); TCW Strategic Income Fund, Inc. (closed-end fund); TCW Alternative Funds (mutual funds) | |||||
Martin Luther King III (1957) |
Trustee and Chairman of the Nominating |
Indefinite term, since 1997 |
Since 1998, Mr. King has served as the President and Chief Executive Officer of The King Center. Since January 2006, he has served as Chief Executive Officer of Realizing the Dream, a non-profit organization that continues the humanitarian and liberating work of Dr. Martin Luther King, Jr. and Mrs. Coretta Scott King. He has been engaged as an independent motivational lecturer since 1980. | 12 | None | |||||
Peter McMillan (1957) |
Trustee | Indefinite term, since 2008 |
Co-founder, Managing Partner and Chief Investment Officer (since May 2013), Temescal Canyon Partners (investment advisory firm); Co-founder and Executive Vice President (since 2005), KBS Capital Advisors (a manager of real estate investment trusts); Co-founder and Managing Partner (since 2000) of Willowbrook Capital Group LLC (investment advisory firm). | 39 | KBS Real Estate Investment Trusts (real estate investments); KBS Strategic Opportunity REIT (real estate investments); TCW Funds, Inc. (mutual funds); TCW Strategic Income Fund, Inc. (closed-end fund); TCW Alternative Funds (mutual funds) |
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NAME AND YEAR OF BIRTH*** |
POSITION(S) HELD WITH TRUST |
TERM OF OFFICE AND LENGTH OF TIME SERVED**** |
PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS |
NUMBER OF FUNDS IN FUND COMPLEX OVERSEEN BY TRUSTEE |
OTHER HELD | |||||
Robert G. Rooney (1957) |
Trustee and Chairman of the Audit Committee |
Indefinite term, since 2009 |
Since September 2015, Mr. Rooney serves as Chief Financial Officer of Novitex Enterprise Solutions, Inc. From 2006 until 2011, Mr. Rooney served as Executive Vice President and Chief Operating Officer of Affinion Group, Inc. (Affinion), a customer engagement and loyalty company. | 12 | None | |||||
Andrew Tarica (1959) |
Trustee and Chairman of the Board |
Indefinite term, since 2002 and 2008, respectively |
Employee (since 2003), Cowen Prime Services (broker-dealer); Chief Executive Officer (since 2001), Meadowbrook Capital Management (asset management company). | 39 | TCW Funds, Inc. (mutual funds); TCW Strategic Income Fund, Inc. (closed-end fund); TCW Alternative Funds (mutual funds); TCW Direct Lending VII LLC (business development company) |
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NAME AND YEAR OF BIRTH*** |
POSITION(S) HELD WITH TRUST |
TERM OF OFFICE AND LENGTH OF TIME SERVED**** |
PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS |
NUMBER OF FUNDS IN FUND COMPLEX OVERSEEN BY TRUSTEE |
OTHER HELD | |||||
Interested Trustees** | ||||||||||
Patrick Moore (1964) |
Trustee | Indefinite term, since 2014 |
Mr. Moore is a Group Managing Director for the Adviser, TCW Investment Management Company LLC, TCW Asset Management Company LLC and TCW LLC. He has been with the Adviser since 2000. Mr. Moore is a member of the CFA Institute. | 12 | None | |||||
Laird Landmann (1964) |
Trustee and Executive Vice President |
Indefinite term, since 2008 and 2007, respectively |
Mr. Landmann is President for the Adviser and Group Managing Director of The TCW Group, Inc., TCW Investment Management Company LLC, TCW Asset Management Company LLC and TCW LLC. Since August 1996, Mr. Landmann has been a Generalist Portfolio Manager with the Adviser and currently serves as the Advisers President. | 12 | MetWest Enhanced TALF Strategy Fund, Ltd. (investment fund) | |||||
Officers of the Trust who are not Trustees | ||||||||||
David B. Lippman (1958) |
President and Principal Executive Officer |
Indefinite term, since November 2008 |
Mr. Lippman is the Chief Executive Officer of the Adviser (since February 2013), and the Chief Executive Officer and President of The TCW Group, Inc., TCW Investment Management Company LLC, TCW Asset Management Company LLC and TCW LLC. He has served as Chief Executive Officer with the Adviser since June 2008. | 1 | TCW Strategic Income Fund, Inc. (closed-end fund) | |||||
David S. DeVito (1962) |
Treasurer and Chief Financial Officer |
Indefinite term, since 2010 |
Mr. DeVito is Executive Vice President and Chief Operating Officer of the Adviser, TCW Investment Management Company LLC, The TCW Group, Inc., TCW LLC and TCW Asset Management Company LLC; President and Chief Executive Officer, TCW Alternative Funds, TCW Funds, Inc. and TCW Strategic Income Fund, Inc. | 21 | TCW Funds, Inc. (mutual funds); TCW Strategic Income Fund, Inc. (closed-end fund) | |||||
Eric Chan (1978) |
Assistant Treasurer |
Indefinite term, since 2010 |
Mr. Chan is Senior Vice President of Fund Operations for the Adviser, TCW Investment Management Company LLC, TCW Asset Management Company LLC and TCW LLC. He has worked for the Adviser since November 2006. Mr. Chan is a Certified Public Accountant. | N/A | N/A |
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NAME AND YEAR OF BIRTH*** |
POSITION(S) HELD WITH TRUST |
TERM OF OFFICE AND LENGTH OF TIME SERVED**** |
PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS |
NUMBER OF FUNDS IN FUND COMPLEX OVERSEEN BY TRUSTEE |
OTHER HELD | |||||
Bibi Khan (1953) |
Vice President |
Indefinite term, since 2007 |
Ms. Khan is Managing Director of Operations for the Adviser, The TCW Group, Inc., TCW Investment Management Company LLC, TCW Asset Management Company LLC and TCW LLC. She has worked for the Adviser since 2005. From 2003 through 2005, Ms. Khan served as Director, Securities Group Operations Manager for Columbia Management (formerly Banc of America Capital Management, LLC). Ms. Khan is a Certified Trust and Financial Analyst. | N/A | N/A | |||||
Tad Rivelle (1961) |
Executive Vice President |
Indefinite term, since 2007 |
Mr. Rivelle is the Chief Investment Officer and Group Managing Director for the Adviser, TCW Investment Management Company LLC, TCW Asset Management Company LLC and TCW LLC. He has been with the Adviser since August 1996. | N/A | N/A | |||||
Stephen M. Kane (1962) |
Executive Vice President |
Indefinite term, since 2007 |
Mr. Kane is a Group Managing Director for the Adviser, TCW Investment Management Company LLC, TCW Asset Management Company LLC and TCW LLC. He has been with the Adviser since August 1996. | N/A | N/A | |||||
Cal Rivelle (1958) |
Executive Vice President |
Indefinite term, since 2009 |
Mr. Rivelle is a Group Managing Director for the Adviser, The TCW Group, Inc., TCW Investment Management Company LLC, TCW Asset Management Company LLC and TCW LLC. He has served as Executive Vice President of the Funds since March 2009. | N/A | N/A | |||||
Jeffrey Engelsman (1967) |
Chief Compliance Officer and ALM Officer |
Indefinite term, since 2014 and 2016, respectively |
Mr. Engelsman is the AML Officer of TCW Funds, Inc., TCW Alternative Funds, and TCW Strategic Income Fund, Inc. (since December 2016); Managing Director and Global Chief Compliance Officer of the Adviser, TCW Investment Management Company LLC, TCW Asset Management Company LLC and TCW LLC (since January 2016). He is the Chief Compliance Officer of The TCW Group, Inc. Prior to joining TCW, he was a Managing Director of New York Life Investments and the Chief Compliance Officer of the MainStay Funds, a group of more than 70 open-ended and closed-end funds. Mr. Engelsman holds the Series 7, 24 and 63 FINRA licenses. He is Chief Compliance Officer for the TCW Alternative Funds, TCW Funds, Inc. and TCW Strategic Income Fund, Inc. | N/A | N/A |
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NAME AND YEAR OF BIRTH*** |
POSITION(S) HELD WITH TRUST |
TERM OF OFFICE AND LENGTH OF TIME SERVED**** |
PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS |
NUMBER OF FUNDS IN FUND COMPLEX OVERSEEN BY TRUSTEE |
OTHER HELD | |||||
Meredith Jackson (1959) |
Senior Vice President, |
Indefinite term, since 2013 |
Ms. Jackson is Executive Vice President and General Counsel and Secretary of the Adviser, The TCW Group, Inc., TCW LLC, TCW Investment Management Company LLC, and TCW Asset Management Company LLC (since February 2013); before then she was Partner, Irell & Manella LLP (law firm). She is Senior Vice President, Secretary and General Counsel for the TCW Alternative Funds, TCW Funds, Inc. and TCW Strategic Income Fund, Inc. | N/A | N/A | |||||
Patrick Dennis (1981) |
Vice President and |
Indefinite term, since 2013 |
Mr. Dennis is Senior Vice President, Associate General Counsel and Assistant Secretary of the Adviser, TCW Investment Management Company LLC, TCW LLC and TCW Asset Management Company LLC (since February 2013); before then from 2010 to 2013, he was Associate, Paul Hastings LLP (law firm), and from 2006 to 2010, he was Associate, Dechert LLP (law firm). He is Vice President and Assistant Secretary for the TCW Alternative Funds, TCW Funds, Inc. and TCW Strategic Income Fund, Inc. | N/A | N/A |
* | Denotes a Trustee who is not an interested person of the Funds as defined in the 1940 Act. |
** | Denotes a Trustee who is an interested person of the Trust as defined in the 1940 Act, due to the relationship indicated with the Adviser. |
*** | For purposes of Trust business, the address for all Trustees and officers is c/o Metropolitan West Asset Management, LLC, 865 South Figueroa Street, Los Angeles, California 90017. |
**** | On December 12, 2016, members of the Board of Trustees recognized the value of having a retirement policy and that having such a policy would be consistent with best practices in the mutual fund industry. For that reason, the Board adopted the following retirement policy (the Policy): A member of the Board shall be required to retire from the Board (and any committee(s) of the Board on which he or she serves) no later than the first regular quarterly meeting of the Board next held after that Board member reaches his or her 75th birthday; provided, however, that the affected Board member may continue to serve as a member of the Board (and member of committee(s) of the Board) for one or more successive one-year periods, or such shorter extension periods, as shall be approved by a unanimous secret vote of the other members of the Board then serving. Any member of the Board who has already reached his or her 75th birthday at the time of adoption of the Policy shall be automatically granted a two-year extension term, subject to any prior resignation or removal as a member of the Board before the expiration of that two-year term. Any continuation of that Board members service beyond that two-year extension would be subject to the vote requirement previously specified above. |
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The Board of Trustees will consider nominees for Trustee recommended by shareholders provided that such recommendations are submitted by the date disclosed in a Funds proxy statement and otherwise comply with applicable securities laws, including Rule 14a-8 under the 1934 Act. Such shareholder recommendations must be in writing and should be sent to the attention of the Board of Trustees in care of the Fund at 865 South Figueroa Street, Los Angeles, California 90017. Shareholder recommendations should include the proposed nominees biographical information (including business experience for the past ten years) and a description of the qualifications of the proposed nominee, along with a statement from the proposed nominee that he or she is willing to serve and meets the requirements to be a disinterested Trustee, if applicable.
INFORMATION ABOUT EACH TRUSTEES QUALIFICATIONS, EXPERIENCE, ATTRIBUTES OR SKILLS
The Board took into account a variety of factors in the original selection of candidates to serve as a Trustee, including the then composition of the Board. Generally, no one factor was decisive in the selection of an individual to join the Board. Among the factors the Board considered when concluding that an individual should serve on the Board were the following: (i) the individuals business and professional experience and accomplishments; (ii) the individuals ability to work effectively with the other members of the Board; and (iii) how the individuals skills, experience, and attributes would contribute to an appropriate mix of relevant skills and experience on the Board. In addition, the Trustees also possess various other intangible qualities such as intelligence, work ethic, the ability to work together, to communicate effectively, to ask incisive questions and exercise judgment, and to oversee the business of the Trust. The Board also considered, among other factors, the particular attributes described below with respect to the various individual Trustees. The summaries set forth below as to the qualifications, attributes, and skills of the Trustees are furnished in response to disclosure requirements imposed by the SEC, do not constitute any representation or guarantee that the Board or any Trustee has any special expertise or experience, and do not impose any greater or additional responsibility or obligation on, or change any standard of care of, any such person or on the Board as a whole than otherwise would be the case.
Mr. Consiglio has many years of experience as an executive in the securities industry, including service as a board member. From 1999 through 2001, Mr. Consiglio was Executive Vice President and Chief Financial Officer of Trading Edge, Inc., a national automated bond-trading firm. From January 1993 to 1998, Mr. Consiglio served as Chief Executive Officer and President of Angeles Mortgage Investment Trust, a publicly traded Real Estate Investment Trust. Before that position, he served as Senior Vice President and Chief Financial Officer of Cantor Fitzgerald & Co. and as a member of its board of directors. Mr. Consiglio is a certified public accountant and was an audit partner with Deloitte Haskins & Sells from 1977 through 1984. He also has in-depth experience with audit and accounting principles and practices, and serves as the Audit Committee Financial Expert on the Audit Committee. He also has many years of experience serving on the Trusts Board.
Mr. Haden is the Independent Chairman of TCW Funds, Inc. and the President of Wilson Ave. Consulting. From July 2016 through June 2017, he served as the Senior Advisor to the President of the University of Southern California. He also serves on the board of directors of The Rose Hills Foundation, a foundation that makes grants to qualified charitable organizations, Unihealth Foundation, a private grant making foundation, Tetra Tech, Inc., an environmental consulting company, Fletcher Jones Foundation, a charitable foundation, Mayr Foundation, a charitable foundation, First Beverage, a beverage consulting firm, Auto Club, an affiliate of AAA, TCW Alternative Funds and TCW Strategic Income Fund, Inc., a publicly-traded closed end fund, of which he is also the Independent Chairman. Previously, he was the Athletic Director of the University of Southern California. Mr. Haden is a Rhodes Scholar and prior to August 2010, was a member of the board of trustees of the University of Southern California. All of these positions give him extensive experience serving as a board member and discharging his fiduciary responsibilities with respect to investment companies, including approximately eight years of experience serving on the Trusts Board.
Mr. King is a nationally prominent community leader and organizer, and has had leadership positions with various community organizations. He also has many years of experience serving on the Trusts Board.
Mr. McMillan is the Co-Founder and Managing Partner of Willowbrook Capital Group, LLC, an investment advisory firm, Co-Founder, Managing Partner and Chief Investment Officer of Temescal Canyon Partners, an investment advisory firm, and Co-Founder and Executive Vice President of KBS Capital Advisors, a manager of real estate investment trusts. He serves on the boards of five KBS real estate investment trusts, TCW Funds, Inc., TCW Alternative Funds and TCW Strategic Income Fund, Inc. Prior to forming Willowbrook Capital Group in 2000, Mr. McMillan served as the Executive Vice President and Chief Investment Officer of Sun America Investments, Inc. Prior to 1989, he served as Assistant Vice President for Aetna Life Insurance for Aetna Life Insurance and Annuity Company with responsibility for the companys fixed income portfolios. He also has approximately ten years of experience serving on the Trusts Board.
Mr. Rooney has many years of senior executive and board experience with various companies, including in-depth experience with financial matters. Previously, he was Executive Vice President and interim Chief Financial Officer at Affinion from October 2005 to January 2006. Between November 2004 and October 2005, Mr. Rooney was Executive Vice President at CMG (predecessor to Affinion) and between January 2004 to October 2004, Mr. Rooney was Executive Vice President and Chief Financial Officer at CMG. From July 2001 to January 2004, Mr. Rooney was Executive Vice President and Chief Financial Officer at Trilegiant, a subsidiary of Affinion. He also has approximately nine years of experience serving on the Trusts Board.
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Mr. Tarica is the founder and CEO of Meadowbrook Capital Management (MCM), a fixed income credit asset management business he founded in 2001. Mr. Tarica is currently the CEO of MCM as well as an employee of Cowen Prime Services (CPS), an SEC/FINRA registered broker dealer. He runs fixed income proprietary trading at CPS. Prior to founding MCM, he was the global head of the high grade corporate bond department at Donaldson, Lufkin & Jenrette from 1992 to 1999. From 1990 to 1992 he ran the investment grade sales and trading department at Kidder Peabody. He began his career at Drexel Burnham in 1983 in the investment grade trading area, where he eventually became the head of trading. He is a member of the Board of Directors of TCW Funds, Inc., TCW Strategic Income Fund, TCW Alternative Funds, and TCW Direct Lending VII LLC. Mr. Tarica is a graduate of Northeastern University.
Mr. Landmann is an executive and co-founder of the Adviser, and has many years of experience managing fixed-income portfolios for clients of the Adviser including the Funds. Mr. Landmann also previously served as a Trustee of the Trust.
Mr. Moore is an executive officer with the Adviser, and has many years of experience with the Advisers portfolio management activities for its clients, including the Funds. Mr. Moore also previously served as a Trustee of the Trust from 2010 until 2011.
The Board has an Audit Committee consisting of Messrs. King, Consiglio, Haden, Tarica, Rooney and McMillan. Mr. Rooney is the Chairman of the Audit Committee. All of the members of the Audit Committee are not interested persons of the Trust as defined in the 1940 Act (Independent Trustees). The Audit Committee reviews the scope and results of the Trusts annual audit with the Trusts independent registered public accountants, recommends the engagement of such accountants and approves all audit services and permissible non-audit services. The Audit Committee met two times during the fiscal year ended March 31, 2017.
The Board has a Nominating and Governance Committee consisting of all the Independent Trustees. The Nominating and Governance Committee (i) evaluates the qualifications of Board member candidates and makes nominations for Independent Trustee membership on the Board; (ii) recommends Trustee compensation for consideration by the full Board; and (iii) considers general matter of Trust governance and Board operations. Mr. King is Chairman of the Nominating and Governance Committee. The Nominating and Governance Committee met once during the fiscal year ended March 31, 2017.
The Board has a Valuation Committee consisting of Messrs. Haden, Landmann, McMillan and Tarica. The Valuation Committee monitors the implementation of the Trusts valuation procedures and has the authority to resolve valuation issues that may arise from time to time in consultation with the Advisers Pricing Committee. The Valuation Committee did not meet during the fiscal year ended March 31, 2017.
The table below sets forth the dollar range of equity securities beneficially owned by each Trustee in the Funds and in all registered investment companies overseen by the Trustee within the Trusts family of investment companies, as of December 31, 2016.
Name of Trustee |
Dollar Range of Equity Securities in the Funds (1) |
Aggregate Dollar Range of Equity | ||
INDEPENDENT TRUSTEES |
||||
Ronald J. Consiglio |
None | Over $100,000 | ||
Patrick C. Haden |
None | Over $100,000 | ||
Martin Luther King, III |
None | None | ||
Andrew Tarica |
None | Over $100,000 | ||
Peter McMillan |
None | Over $100,000 | ||
Robert Rooney |
None | Over $100,000 | ||
INTERESTED TRUSTEES |
||||
Laird Landmann |
None | Over $100,000 | ||
Patrick Moore |
None | Over $100,000 |
(1) | Securities beneficially owned as defined under the Securities Exchange Act of 1934 (the 1934 Act) include direct and/or indirect ownership of securities where the trustees economic interest is tied to the securities, employment ownership and securities when the trustee can exert voting power and when the trustee has authority to sell the securities. The dollar ranges are: None, $1-$10,000, $10,001-$50,000, $50,001-$100,000, over $100,000. |
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(2) | Certain figures represent and include the Trustees economic exposure to each series of the Trust through the deferred compensation plan. See DEFERRED COMPENSATION PLAN for additional details. |
As of December 31, 2016, none of the Independent Trustees, or their immediate family members owned, beneficially or of record, any securities in the Adviser or principal underwriter of the Trust, or in a person (other than a registered investment company) directly or indirectly controlling, controlled by or under common control with the adviser or principal underwriter of the Trust.
The Trust does not pay salaries to any of its officers or fees to any of its Trustees who are affiliated with the Adviser. The Independent Trustees each receive an annual retainer of $120,000, with the Independent Chairman of the Board receiving an additional annual retainer of $51,000. The Chairman of the Audit Committee receives an additional annual retainer of $34,000 and the Chairman of the Nominating Committee receives an additional annual retainer of $17,000. Each Independent Trustee also receives a fee of $10,000 for each meeting of the Board of Trustees attended in person and for each telephonic meeting related to the annual investment management contract renewal process pursuant to Section 15(c) of the 1940 Act, and a fee of $2,500 for each meeting of the Board of Trustees attended telephonically. The total compensation paid by the Trust to each Trustee for the fiscal year ended March 31, 2017 is set forth below.
Name of Trustee |
Aggregate
|
Pension or Retirement |
Estimated Annual
|
Total Compensation From the Trust and Fund Complex(2) Paid to Trustees | ||||
Patrick Moore |
None | None | None | None | ||||
Laird Landmann |
None | None | None | None | ||||
Ronald J. Consiglio |
None | None | None | $128,750 | ||||
Patrick C. Haden |
None | None | None | $306,675 | ||||
Martin Luther King III |
None | None | None | $141,625 | ||||
Andrew Tarica(3) |
None | None | None | $299,725 | ||||
Peter McMillan(3) |
None | None | None | $274,050 | ||||
Robert G. Rooney(3) |
None | None | None | $149,500 |
(1) | As the Funds have not commenced operations as of the date of this SAI, the figures are estimated for the current fiscal year. |
(2) | Includes TCW Alternative Funds, TCW Funds, Inc. and TCW Strategic Income Fund, Inc., each registered investment companies advised by TCW Investment Management Company LLC, an affiliate of the Adviser. |
(3) | Messrs. Tarica, McMillan and Rooney participated in a deferred compensation plan for certain eligible Trustees of the Trust during the last fiscal year. Mr. Rooney has elected to receive 50% of his compensation in cash and 50% in the deferred compensation plan. The total value of deferred compensation as of March 31, 2017 was as follows: $568,096 for Mr. Tarica, $465,142 for Mr. McMillan and $277,243 for Mr. Rooney. The deferred compensation plan is discussed in more detail below. |
The Trust has an unfunded, non-qualified deferred compensation plan (the Plan) for certain eligible Trustees. The Plan allows Trustees to defer some or all of their annual trustees fees otherwise payable by the Trust for a minimum of three years. The fees deferred are posted to a bookkeeping account maintained by the Trust. The various series of the Trust will use the returns on those Funds selected by the Trustee to determine the income, gains and losses to allocate to the account. At the time for commencing distributions from a Trustees deferral account, which is no later than when the Trustee ceases to be a member of the Board of Trustees, deferred fees will be paid out in a single sum in cash or a maximum of ten annual installments.
The Trust and the Adviser, together with the Advisers TCW affiliates, have adopted a joint Code of Ethics under Rule 17j-l of the 1940 Act and Rule 204A-1 under the Investment Advisers Act of 1940 (the Advisers Act) that (i) establishes procedures for personnel with respect to personal investing; (ii) prohibits or restricts certain transactions that may be deemed to create a conflict of interest between personnel and the Funds; and (iii) permits personnel to invest in securities, including securities that may be purchased or held by the Funds. The Code of Ethics is available at www.sec.gov under the Metropolitan West Funds, or will be provided upon request.
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The Board has adopted joint Proxy Voting Guidelines and Procedures (the Policy) with the Adviser and its TCW affiliates. The Policy delegates the responsibility for voting proxies relating to the Trust to the Adviser, subject to the Boards continuing oversight. Summary of Advisers Proxy Voting Policy: The Adviser believes that the right to vote proxies is a significant asset of its clients holdings. In order to carry out its fiduciary responsibilities in the voting of proxies for its clients, the Adviser has established a proxy voting committee (the Proxy Committee) and adopted these proxy voting guidelines and procedures (the Guidelines).
The Proxy Committee generally meets quarterly (or at such other frequency as determined by the Proxy Committee), and its duties include establishing proxy voting guidelines and procedures, overseeing the internal proxy voting process, and reviewing proxy voting issues. The members of the Proxy Committee include personnel from the Advisers investment, compliance, legal and marketing departments. The Adviser also uses outside proxy voting services (each an Outside Service) to help manage the proxy voting process. An Outside Service facilitates the Advisers voting according to the Guidelines (or, if applicable, according to guidelines submitted by the Advisers clients) and helps maintain the Advisers proxy voting records. In the event of a conflict between contractual requirements and the Guidelines, TCW will vote in accordance with its contractual obligations. All proxy voting and record keeping by the Adviser is, of course, dependent on the timely provision of proxy ballots by custodians, clients and other third parties. Under specified circumstances described below involving potential conflicts of interest, an Outside Service may also be requested to help decide certain proxy votes. The Proxy Committee shall review and evaluate the voting recommendations of such Outside Service to ensure that recommendations are consistent with the Advisers clients best interests. In the event that the Adviser inadvertently receives any proxy materials on behalf of a client that has retained proxy voting responsibility, and where it is reasonably feasible for the Adviser to determine the identity of the client, the Adviser will promptly forward such materials to the client.
As a matter of firm policy, the Adviser does not disclose to unaffiliated third parties how it expects to vote on upcoming proxies and does not disclose the way it voted proxies without a legitimate need to know such information.
Philosophy
When voting proxies, the Advisers utmost concern is that all decisions be made solely in the interests of the client and with the goal of maximizing the value of the clients investments. Generally, proposals will be voted in accordance with the Guidelines and any applicable guidelines provided by the Advisers clients. The Advisers underlying philosophy, however, is that its portfolio managers, who are primarily responsible for evaluating the individual holdings of the Advisers clients, are best able to determine how to further client interests and goals. The portfolio managers may, in their discretion, take into account the recommendations of the Adviser management, the Proxy Committee, and an Outside Service.
Proxy Voting Overrides
Individual portfolio managers, in the exercise of their best judgment and discretion, may from time to time override the Guidelines and vote proxies in a manner that they believe will enhance the economic value of clients assets, keeping in mind the best interests of the beneficial owners. A portfolio manager choosing to abstain on a vote will provide a written rationale for doing so and that rationale will be in the vote notes of the proxy when it is voted. A portfolio manager choosing to override the Guidelines must deliver a written rationale for each such decision to the Advisers Proxy Specialist (the Proxy Specialist), who will maintain such documentation in the Advisers proxy voting records and deliver a quarterly report to the Proxy Committee of all votes cast other than in accordance with the Guidelines. If the Proxy Specialist believes there is a question regarding a portfolio managers vote, he/she will liaise with the portfolio manager as necessary to clarify the rationale. If the Proxy Specialist is unable to resolve the question to his/her satisfaction after liaising with the relevant portfolio manager, TCWs Director of Research (the Director of Research) will review the portfolio managers vote and make a determination. If the Director of Research believes it appropriate, he/she may elect to convene the Proxy Committee for its independent consideration as to how the vote should be cast.
Conflicts of Interest
In the event a potential conflict of interest arises in the context of voting proxies for the Advisers clients, the primary means by which the Adviser will avoid a conflict is by casting such votes solely according to the Guidelines and any applicable guidelines provided by the Advisers clients, as outlined below. If a potential conflict of interest arises and there is no predetermined vote, or the Guidelines (or any applicable the Adviser client guidelines) themselves refer such vote to the portfolio manager for decision, or the portfolio manager would like to override a predetermined vote, then the Adviser will undertake the following analysis:
Where the issuer soliciting proxy votes is itself a client of the Advisers (or because an affiliate of such issuer, such as a pension or profit sharing plan sponsored by such issuer, is a client of the Advisers), then the Proxy Specialist will determine whether such relationship may be deemed not to be material to the Adviser based on the level of assets under management and other relevant facts and circumstances and will submit his/her analysis to the Proxy Committee for its approval. Where the
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relationship is deemed material, the Adviser will refrain completely from exercising its discretion with respect to voting the proxy with respect to such vote and will, instead, refer that vote to an Outside Service for its independent consideration as to how the vote should be cast.
Where an employee of the Adviser sits on the Board of a public company, the Proxy Specialist will determine whether such Board member is the portfolio manager for the account holding the security, or whether the Board member has spoken with the portfolio managers for the account holding the security. If either the particular Board member is the portfolio manager or there has been communication concerning such proxy vote between the portfolio manager and the particular Board member, then the Proxy Specialist will provide the Proxy Committee with the facts and vote rationale so that it can determine and vote the securities.
Where the issuer is a known affiliate of the Adviser, the Adviser will refrain completely from exercising its discretion with respect to voting the proxy with respect to such a vote and will, instead, refer that vote to an Outside Service for its independent consideration as to how the vote should be cast.
Where any other portfolio manager conflict is identified with respect to a given proxy vote, the Proxy Committee will remove such vote from the conflicted portfolio manager and will itself consider and cast the vote.
International Proxy Voting
While the Adviser utilizes these Proxy Voting Guidelines for both international and domestic portfolios and clients, there are some significant differences between voting U.S. company proxies and voting non-U.S. company proxies. For U.S. companies, it is relatively easy to vote proxies, as the proxies are automatically received and may be voted by mail or electronically.
For proxies of non-U.S. companies, although it is typically both difficult and costly to vote proxies, the Adviser will make every reasonable effort to vote such proxies.
The Trust is required to file Form N-PX, with each Funds complete proxy voting record for the 12 months ended June 30th, no later than August 31st of each year. Form N-PX for each Fund is available without charge, upon request, by calling toll-free (800) 241-4671 and on the SECs website at www.sec.gov.
The Trust has adopted an Anti-Money Laundering Policy (the AML Policy) as required by the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA Patriot Act). To ensure compliance with this law, the AML Policy provides for the development of internal practices, procedures and controls, designation of anti-money laundering compliance officers, an ongoing training program and an independent audit function to determine the effectiveness of the AML Policy. Procedures to implement the AML Policy include, but are not limited to, determining that the Funds Underwriter and Transfer Agent have established proper anti-money laundering and customer identification procedures, reported suspicious and/or fraudulent activity and reviewed all new opening account applications. As a result of the AML Policy, the Trust may be required to freeze the account of a shareholder if the shareholder appears to be involved in suspicious activity or if certain account information matches information on government lists of known terrorists or other suspicious persons, or the Trust may be required to transfer the account or proceeds of the account to a governmental agency. The Trust will not transact business with any person or entity whose identity cannot be adequately verified under the provisions of the USA PATRIOT Act (such actions generally are taken by the Funds servicing agents on behalf of the Trust).
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of March 31, 2017, no persons beneficially owned more than 5% of the outstanding voting securities of the Funds.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Investment Advisory Agreement (the Advisory Agreement) between the Trust and the Adviser states that in connection with its duties to arrange for the purchase and sale of securities held in the portfolio of each Fund by placing purchase and sale orders for that Fund, the Adviser shall select such broker-dealer (brokers) as shall, in the Advisers judgment, implement the policy of the Trust to achieve best execution, i.e., placing trades in ways that are intended to capture the maximum value of the investment ideas, giving due regard to all of the circumstances in which the trade is placed. In making such selection, the Adviser is authorized in the Advisory Agreement to consider the reliability, integrity and financial condition of the broker.
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The Adviser normally causes the Funds to purchase and sell portfolio securities on a principal basis from the owner or purchaser of the security, such as a broker-dealer. Those principal trades do not involve the payment of a commission and, therefore, are not permitted to be used to generate soft dollar benefits. In rare situations where a Fund pays a commission, the following discussion would apply: The Adviser is also authorized by the Advisory Agreement to consider whether the broker provides brokerage and/or research services to the Funds and/or other accounts of the Adviser. The Advisory Agreement states that the commissions paid to brokers may be higher than another broker would have charged if a good faith determination is made by the Adviser that the commission is reasonable in relation to the services provided, viewed in terms of either that particular transaction or the Advisers overall responsibilities as to the accounts as to which it exercises investment discretion and that the Adviser shall use its judgment in determining that the amount of commissions paid are reasonable in relation to the value of brokerage and research services provided and need not place or attempt to place a specific dollar value on such services or on the portion of commission rates reflecting such services. The Advisory Agreement provides that to demonstrate that such determinations were in good faith, and to show the overall reasonableness of commissions paid, the Adviser shall be prepared to show that commissions paid (i) were for purposes contemplated by the Advisory Agreement; (ii) were for products or services which provide lawful and appropriate assistance to the Advisers decision-making process; and (iii) were within a reasonable range as compared to the rates charged by brokers to other institutional investors as such rates may become known from available information.
The research services discussed above may be in written form or through direct contact with individuals and may include information as to particular companies and securities as well as market, economic, or institutional areas and information assisting the Trust in the valuation of the Funds investments. The research that the Adviser may receive for the Funds brokerage commissions, whether or not useful to a Fund, may be useful to the Adviser in managing the accounts of the Advisers other advisory clients. Similarly, the research received for the commissions of such accounts may be useful to any Fund. The Adviser may receive typical unsolicited research materials routinely sent by broker-dealers to their clients.
In the over-the-counter market, securities are generally traded on a net basis with dealers acting as principal for their own accounts without a stated commission although the price of the security usually includes a profit to the dealer. Money market instruments usually trade on a net basis as well. On occasion, certain money market instruments may be purchased by the Funds directly from an issuer in which case no commissions or discounts are paid. In underwritten offerings, securities are purchased at a fixed price that includes an amount of compensation to the underwriter, generally referred to as the underwriters concession or discount.
There may be occasions where the Adviser believes that it would be in the best interest of one or more Funds to participate in a cross transaction between a Fund and another Fund or an account managed by the Adviser or an affiliate of the Adviser. A cross transaction is a transaction directly between a Fund and another Fund or an advised account without the use of a broker-dealer. The Adviser would cause a cross transaction to be used only if believed to be in the best interest of the participating Fund(s) and any other accounts such as the ability to obtain more favorable terms without effecting the transaction in the open market. Any such cross transaction would be effected in compliance with the pricing and other requirements of applicable SEC rules (such as Rule 17a-7 under the 1940 Act) and any other applicable contractual restriction or regulatory requirements, as well as policies and procedures adopted by the Trust.
As the Funds have not commenced operations, no Fund has paid brokerage commissions as of the date of this SAI.
Each Fund may at times invest in securities of its regular broker-dealers or the parent of its regular broker-dealers.
The Adviser, Metropolitan West Asset Management, LLC, with principal offices at 865 South Figueroa Street, Los Angeles, California 90017, is a registered investment adviser and was organized as a California limited liability company in 1996. The Adviser is a wholly owned subsidiary of TCW Asset Management Company LLC. Under the Advisory Agreement relating to the Funds, the Adviser provides the Funds with investment management services. Shareholders are not parties to, or intended (or third party) beneficiaries of, the Advisory Agreement. Rather, the Trust and the Funds are the sole intended beneficiaries of the Advisory Agreement. Neither this SAI nor the Prospectus is intended to give rise to any contract rights or other rights in any shareholder, other than any rights conferred by federal or state securities laws that may not be waived.
Under the Advisory Agreement, subject to the supervision and direction of the Board of Trustees, the Trust retains the Adviser, among other things, to act as investment manager to the Funds and supervise the investments of the Funds, including to furnish the Funds with advice and recommendations with respect to the investment of each Funds assets and the purchase and sale of portfolio securities for the Funds, and to take such other steps as may be necessary to implement such advice and recommendations; to furnish the Funds with reports, statements and other data on securities, economic conditions and other pertinent subjects which the Board of Trustees may reasonably request; to provide persons to act as officers and employees of the Trust and the Funds; and to render to the Board of Trustees such periodic and special reports with respect to each Funds investment activities as the Board may reasonably request.
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The Advisory Agreement also provides that, with respect to the operation of each Fund and to the extent not paid or reimbursed through a plan adopted by the Fund under Rule 12b-1 under the 1940 Act, the Adviser is responsible for the compensation of any of the Trusts trustees, officers, and employees who are affiliates of the Adviser (other than employees performing services in connection with expenses that are the Funds responsibility under the Advisory Agreement); the expenses of printing and distributing the Funds prospectuses, statements of additional information, and sales and advertising materials to prospective investors; and providing office space and equipment reasonably necessary for the operation of the Funds. Except for expenses specifically assumed by the Adviser under the Advisory Agreement, each Fund is responsible for all of its expenses, including, without limitation, fees and expenses of the Independent Trustees, broker commissions and other ordinary or extraordinary costs and expenses incurred by the Fund in the course of its operation.
As compensation for these services, each Fund pays management fees at an annualized rate of its average daily net assets, as described in the Prospectus. As the Funds have not commenced operations, no Fund has paid advisory fees as of the date of this SAI.
The Advisory Agreement may be terminated by the Trust on behalf of any one or more of the Funds at any time, without payment of any penalty, by the Board of Trustees of the Trust or by vote of a majority of the outstanding voting securities of a Fund, upon 60 days written notice to the Adviser, and by the Adviser upon 60 days written notice to a Fund.
At an in-person meeting held on ____, 2018, the Board of Trustees of the Trust, including the Independent Trustees, approved the Advisory Agreement with respect to the Funds for an initial term of two years. A discussion regarding the basis for the Board of Trustees approval of the Advisory Agreement with respect to each Fund will be contained in the Trusts semi-annual report to shareholders for the six months ending September 30, 2018.
The Advisory Agreement also provides that in the absence of willful misfeasance, bad faith, gross negligence, or reckless disregard of the obligations or duties under the Advisory Agreement, the Adviser will not be subject to liability to the Trust or the Funds or any shareholder of the Funds for any act or omission in the course of, or connected with, rendering services to the Funds or for any losses that may be sustained in the purchase, holding or sale of any security by the Funds. Under the Advisory Agreement, the Funds will also indemnify and hold harmless the Adviser and the partners, members, officers and employees of the Adviser and its general partner against any loss, liability, claim, damage or expense arising out of such persons or persons performance or non-performance of any duties under the Advisory Agreement, except for liability resulting from willful misfeasance, bad faith or gross negligence in the performance of those duties or from reckless disregard of obligations and duties under the Advisory Agreement.
On October 16, 2015, Thomas J. Kennis filed a derivative lawsuit against Metropolitan West Asset Management, LLC (the Adviser) on behalf of the Metropolitan West Total Return Bond Fund. The lawsuit, which was filed in the U.S. District Court for the Central District of California, seeks recovery under Section 36(b) of the 1940 Act for the alleged overpayment of investment management fees to the Adviser. The Adviser believes that the Fund has among the best long-term risk-adjusted performance results and lowest fees in its peer group category and, accordingly, considers the claim to be entirely without merit. The Adviser has retained special counsel experienced in these matters and is vigorously defending against the action. The Board of Trustees, including the Independent Trustees, is carefully monitoring the proceedings.
The Adviser has agreed in an Operating Expenses Agreement with the Trust to limit each Funds expenses as described in the Prospectus. The Operating Expenses Agreement has a one-year term, renewable with respect to the periods for which the prospectus is effective, which normally means an annual term ending July 31 of the applicable year. Each Fund has agreed to reimburse the Adviser, for a period of up to three years, for any such expense subsidy payments or fee reductions, to the extent that the Funds operating expenses are otherwise below its expense cap. The Advisers obligation will not be recorded as a liability on the books of the applicable Fund to the extent that the total operating expenses of the Fund are at or above the expense cap. However, if the total operating expenses of a Fund fall below the expense cap, the reimbursement to the Adviser (up to the cap) will be accrued by the Fund as a liability if the Adviser seeks to recoup those amounts and the Independent Trustees have approved that reimbursement. The Adviser may not request or receive reimbursement from a Fund for prior reductions or reimbursements before the payment of a Funds operating expenses for the current fiscal year. Certain officers and Trustees of the Funds are also officers and directors of the Adviser.
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Other Accounts Managed
The following tables provide information about funds and accounts, other than the Funds, for which the Funds portfolio managers are primarily responsible for the day-to-day portfolio management as of [March 31, 2018].
Tad Rivelle
Type of Accounts |
Total # of Accounts Managed |
Total Assets (millions) |
# of Accounts Managed with Performance- Based Advisory Fee |
Total Assets with Performance-Based Advisory Fee (millions) |
||||||||||||
Registered Investment Companies: |
$ | $ | ||||||||||||||
Other Pooled Investment Vehicles: |
$ | $ | ||||||||||||||
Other Accounts: |
$ | $ |
Stephen Kane, CFA
Type of Accounts |
Total # of Accounts Managed |
Total Assets (millions) |
# of Accounts Managed with Performance- Based Advisory Fee |
Total Assets with Performance-Based Advisory Fee (millions) |
||||||||||||
Registered Investment Companies: |
$ | $ | ||||||||||||||
Other Pooled Investment Vehicles: |
$ | $ | ||||||||||||||
Other Accounts: |
$ | $ |
Laird R. Landmann
Type of Accounts |
Total # of Accounts Managed |
Total Assets (millions) |
# of Accounts Managed with Performance- Based Advisory Fee |
Total Assets with Performance-Based Advisory Fee (millions) |
||||||||||||
Registered Investment Companies: |
$ | $ | ||||||||||||||
Other Pooled Investment Vehicles: |
$ | $ | ||||||||||||||
Other Accounts: |
$ | $ |
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Jerry Cudzil
Type of Accounts |
Total # of Accounts Managed |
Total Assets (millions) |
# of Accounts Managed with Performance-Based Advisory Fee |
Total Assets with Performance-Based Advisory Fee (millions) |
||||||||||||
Registered Investment Companies: |
$ | $ | ||||||||||||||
Other Pooled Investment Vehicles: |
$ | $ | ||||||||||||||
Other Accounts: |
$ | $ |
Bryan T. Whalen
Type of Accounts |
Total # of Accounts Managed |
Total Assets (millions) |
# of Accounts Managed with Performance-Based Advisory Fee |
Total Assets with Performance-Based Advisory Fee (millions) |
||||||||||||
Registered Investment Companies: |
$ | $ | ||||||||||||||
Other Pooled Investment Vehicles: |
$ | $ | ||||||||||||||
Other Accounts: |
$ | $ |
Portfolio Manager Compensation
The overall objective of the Advisers compensation program for portfolio managers is to attract experienced and expert investment professionals and to retain them over the long term. Compensation is comprised of several components which, in the aggregate, are designed to achieve these objectives and to reward the portfolio managers for their contributions to the successful performance of the accounts they manage. Portfolio managers are compensated through a combination of base salary, fee sharing based compensation (fee sharing), bonus and equity incentive participation in the Advisers parent company (equity incentives). Fee sharing and equity incentives generally represent most of the portfolio managers compensation. In some cases, portfolio managers are eligible for discretionary bonuses.
Salary. Salary is agreed to with portfolio managers at the time of employment and is reviewed from time to time. It does not change significantly and often does not constitute a significant part of a portfolio managers compensation.
Fee Sharing. Fee sharing for investment professionals is based on revenues generated by accounts in the investment strategy area for which the investment professionals are responsible. In most cases, revenues are allocated to a pool and fee sharing compensation is allocated among members of the investment team after the deduction of certain expenses (including compensation over a threshold level) related to the strategy group. The allocations are based on the investment professionals contribution to TCW and its clients, including qualitative and quantitative contributions.
In general, the same fee sharing percentage is used to compensate a portfolio manager for investment services related to a Fund as that used to compensate portfolio managers for other client accounts in the same strategy managed by the Adviser or an affiliate of the Adviser (collectively, the TCW Advisers). In some cases, the fee sharing pool includes revenues related to more than one product, in which case each participant in the pool is entitled to fee sharing derived from his or her contributions to all the included products.
Investment professionals are not directly compensated for generating performance fees. In some cases, the overall fee sharing pool is subject to fluctuation based on the relative pre-tax performance of the investment strategy composite returns, net of fees and expenses, to that of the benchmark. The measurement of performance relative to the benchmark can be based on single year or multiple year metrics, or a combination thereof. The benchmark used is the one associated with the Fund managed by the portfolio manager as disclosed in the prospectus. Benchmarks vary from strategy to strategy but, within a given strategy, the same benchmark applies to all accounts, including the Funds.
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Discretionary Bonus/Guaranteed Minimums. Discretionary bonuses may be paid out of an investment teams fee sharing pool, as determined by the supervisor(s) in the department. In other cases where portfolio managers do not receive fee sharing or where it is determined that the combination of salary and fee sharing does not adequately compensate the portfolio manager, discretionary bonuses may be paid by the applicable TCW Adviser. Also, pursuant to contractual arrangements, some portfolio managers received minimum bonuses.
Equity Incentives. Management believes that equity ownership aligns the interests of portfolio managers with the interests of the firm and its clients. Accordingly, TCWs key investment professionals participate in equity incentives through ownership or participation in restricted unit plans that vest over time or unit appreciation plans of the Advisers parent company. The plans include the Fixed Income Retention Plan, Restricted Unit Plan and 2013 Equity Unit Incentive Plan.
Under the Fixed Income Retention Plan, certain portfolio managers in the fixed income area were awarded cash and/or partnership units in the Advisers parent company, either on a contractually-determined basis or on a discretionary basis. Awards under this plan were made in 2010 that vest over time.
Under the Restricted Unit Plan, certain portfolio managers in the fixed income and equity areas may be awarded partnership units in the Advisers parent company. Awards under this plan have vested over time, subject to satisfaction of performance criteria.
Under the 2013 Equity Unit Incentive Plan, certain portfolio managers in the fixed income and equity areas may be awarded options to acquire partnership units in the Advisers parent company with a strike price equal to the fair market value of the option at the date of grant. The options granted under this plan are subject to vesting and other conditions.
Other Plans and Compensation Vehicles. Portfolio managers may also elect to participate in the applicable TCW Advisers 401(k) plan, to which they may contribute a portion of their pre- and post-tax compensation to the plan for investment on a tax-deferred basis.
Ownership of Securities
As of March 31, 2017, no portfolio manager beneficially owns any equity securities of the Funds.
DISCLOSURE OF PORTFOLIO HOLDINGS
General. The Trust has established a policy governing the disclosure of each Funds portfolio holdings that is designed to protect the confidentiality of that Funds non-public portfolio holdings and to prevent inappropriate selective disclosure of those holdings. The Board of Trustees has approved this policy and will be asked to approve any material amendments to this policy. Exceptions to the Funds portfolio holdings disclosure policies may be granted only by an officer of the Trust or the Chief Executive Officer of the Adviser upon a determination that the release of information would be in the best interests of the Funds shareholders and appropriate for legitimate business purposes, and must be reported quarterly to the Board of Trustees. There is no guarantee that the Funds policies on the use and dissemination of portfolio holdings information will protect the Funds from the potential misuse of holdings by individuals or firms in possession of such information. The Board of Trustees will monitor disclosure of portfolio holdings by approval in advance of material changes to that policy, and by occasional review of reports or discussions with the Trusts officers about disclosures of the Funds portfolio holdings.
Investors in separate accounts and unregistered products managed by the Adviser or its affiliates have access to their portfolio holdings, and prospective investors of separate accounts and unregistered products have access to representative portfolio holdings. Disclosures of portfolio holdings to those investors and prospective investors are not subject to the Funds disclosure of portfolio holdings policies discussed above and below. Some of these separate accounts and unregistered products have substantially similar or identical investment objectives and strategies as certain Funds and, therefore, may have similar, or in certain cases nearly identical, portfolio holdings as those Funds.
Neither the Adviser nor the Funds will receive any compensation or other consideration in connection with disclosure of a Funds portfolio holdings.
Public Disclosure of Portfolio Holdings. The Funds currently disclose portfolio holdings with respect to holdings at the end of the second and fourth quarters in their semi-annual and annual reports to shareholders, and with respect to holdings at the end of the first and third quarters in their Form N-Q reports, which are available at www.sec.gov and www.tcw.com. The Funds or the Adviser may distribute non-specific information about the Funds and/or summary information about the Funds at any time. Such information will not identify any specific portfolio holding, but may reflect, among other things, the quality or character of a Funds holdings. In
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addition, it is the policy of the Funds to provide certain unaudited information regarding the portfolio composition of the Funds as of month-end to shareholders and others upon request to the Funds, beginning on the 15th calendar day after the end of the month (or, if not a business day, the next business day thereafter). These complete holdings lists are not contained on the Funds website. Top ten quarter-end holdings lists and other portfolio characteristics at month-end for certain Funds may be posted on the Funds website at www.tcw.com.
Shareholders and others who wish to obtain portfolio holdings for a particular month may make a request by contacting the Funds between the hours of 7:00 a.m. and 5:00 p.m. Pacific time, Monday through Friday, toll free at (877) 829-4768 beginning on the 15th day following the end of that month (or, if not a business day, the next business day thereafter). Requests for portfolio holdings may be made on a monthly basis pursuant to this procedure, or standing requests for portfolio holdings may be accepted.
Persons making requests will be asked to provide their name and a mailing address, e-mail address or fax number. The Funds reserve the right to refuse to fulfill a request if they believe that providing portfolio holdings would be contrary to the best interests of the Funds. Those decisions are made by personnel of the Adviser of the Trust with the Title of Managing Director, Senior Vice President or higher (an Authorized Person).
Disclosure of Non-Public Portfolio Holdings. A Fund may, in certain cases, disclose to third parties its portfolio holdings that have not been made publicly available. Disclosure of non-public portfolio holdings to third parties may be made only if an Authorized Person determines that such disclosure is in the best interests of the Funds shareholders. In addition, the third party receiving that information, or any representatives of a third party receiving that information, will be required to agree in writing to keep that information confidential and use it for an agreed upon legitimate business purpose. The Advisers legal department reviews any confidentiality agreement entered into with a third party receiving non-public portfolio holdings. The restrictions and obligations described in this paragraph do not apply to non-public portfolio holdings provided to entities that provide on-going services to the Funds in connection with their day-to-day operations and management, including the Funds Adviser and its affiliates, and the Funds custodian, administrator, pricing services, broker-dealers, accounting services provider, independent registered public accounting firm, financial printer, and proxy voting service provider.
To the extent that an Authorized Person determines that there is a potential conflict of interest with respect to the disclosure of information that is not publicly available between the interests of a Funds shareholders, on the one hand, and the Adviser, or an affiliated person of the Adviser or the Fund, on the other, the Authorized Person must inform the Trusts Chief Compliance Officer of that potential conflict of interest, and the Trusts Chief Compliance Officer shall determine whether, in light of the potential conflict, disclosure is reasonable under the circumstances.
Current or quarterly portfolio holdings may be disclosed to governmental authorities pursuant to applicable laws or regulations, or a judicial, regulatory or other similar request. Information regarding the characteristics of a Fund portfolio, such as its current credit quality or duration, may be provided upon request, subject to the discretion of the Trusts officers.
Ongoing Arrangements To Make Portfolio Holdings Available. With authorization from the Trusts Chief Compliance Officer or an Authorized Person, Trust representatives disclose Fund portfolio holdings to the following recipients on an ongoing basis: the Adviser; fund rating agencies (including Lipper, Morningstar, Standard & Poors and Weisenberger); consultants and analysts (including Bloomberg, FactSet Research Systems, Fidelity, Vestek and Yon Drake); State Street Bank and Trust Company (the Funds custodian); Chase Bank (the Funds limited custodian under the terms of certain repurchase and futures agreements); U.S. Bancorp Fund Services, LLC (the Funds transfer agent); LLP (the Funds independent registered public accounting firm); Donnelley Financial Solutions (financial printer); and Glass Lewis & Co., LLC (the proxy voting service provider and the service provider that has been retained to process votes and corporation actions on behalf of the Funds). Each recipient, except the Funds independent registered public accounting firm and the Funds financial printer, receives the portfolio holdings information on a daily basis. Each of the Funds independent registered public accounting firm and the Funds financial printer receives the information when requested in connection with its services to the Funds.
ADMINISTRATION AND ACCOUNTING SERVICES
The Funds have a Fund Administration and Accounting Agreement (the Administration Agreement) with The Bank of New York Mellon (BNY Mellon), which has offices at 760 Moore Road, King of Prussia, Pennsylvania 19406. The Administration Agreement provides that BNY Mellon will perform certain administrative services for the Trust including, among other things, prepare and coordinate with the Funds and Funds counsel the filing of the Funds annual post-effective amendment; assemble and distribute quarterly Board materials including the drafting of notices, agendas and resolutions for quarterly Board meetings; maintain the Trusts corporate records; administratively assist in arranging the fidelity bond and directors and officers/errors and omissions insurance policies; and maintain the Trusts regulatory calendar. BNY Mellon also performs certain administrative and accounting services for the Trust such as preparing and filing shareholder reports, preparing and filing federal and state tax returns on behalf of
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the Trust and providing statistical and research data. In addition, BNY Mellon prepares and files certain reports with the appropriate regulatory agencies and prepares certain materials required by the SEC or any state securities commission having jurisdiction over the Trust. The accounting services performed by BNY Mellon include maintaining the accounting books and records of the Funds, calculating the Funds net asset value per share, maintaining records relating to the securities transactions of the Funds and coordinating the preparation and payment of Fund-related expenses. As the Funds have not commenced operations, no Fund has paid administrative services fees as of the date of this SAI.
In addition to the services provided by BNY Mellon as described above, the Adviser provides various supplemental administrative services under an administrative services agreement. Those services may include, without limitation, administrative, compliance, legal, operational, accounting and other middle and back office activities and services, including the review and coordination of services provided by BNY Mellon. The Adviser is reimbursed a portion of its costs in providing those supplemental administrative services to the Funds under an agreement and in an amount approved by the Board of Trustees. The portion of the Advisers costs that is expected to be reimbursed annually based on the Boards approval is approximately $650,000 for the Trust, and will be reviewed and approved annually by the Board and the Independent Trustees.
The Bank of New York Mellon, located at One Wall Street, New York, New York 10286, serves as the Funds custodian under a separate Custodian Agreement. Under the Custodian Agreement, The Bank of New York (i) maintains a separate account or accounts in the name of each Fund, (ii) holds and transfers portfolio securities on account of each Fund, (iii) accepts receipts and makes disbursements of money on behalf of each Fund, (iv) collects and receives all income and other payments and distributions on account of each Funds securities, and (v) makes periodic reports to the Board of Trustees concerning each Funds operations. Pursuant to applicable rules, The Bank of New York Mellon also acts as the Funds foreign custody manager.
Pursuant to applicable rules, the Funds also maintain futures accounts with Barclays Bank PLC and Citigroup Global Markets Inc., both of which are investment banks. Because of margin requirements for futures transactions, certain Funds assets occasionally may be held in the accounts instead of with the Funds custodian.
BNY Mellon Investment Servicing (US) Inc. serves as the transfer agent for the Funds under a Transfer Agency and Shareholder Services Agreement.
TCW Funds Distributors LLC (the Underwriter), located at 865 S. Figueroa Street, Suite 1800, Los Angeles, California 90017, is a broker-dealer that serves as each Funds principal underwriter in a continuous public offering of the Funds shares on a best-efforts basis. The Underwriter is under common ownership with the Adviser.
Under a Distribution Agreement with the Trust (the Distribution Agreement), the Underwriter acts as the agent of the Trust in connection with the continuous offering of shares of the Funds. The Underwriter continually distributes shares of the Funds on a best efforts basis. The Underwriter has no obligation to sell any specific quantity of Fund shares. The Underwriter and its officers have no role in determining the investment policies or which securities are to be purchased or sold by the Trust.
The Underwriter may enter into agreements with selected broker-dealers, banks or other financial intermediaries for distribution of shares of the Funds. With respect to certain financial intermediaries and related fund supermarket platform arrangements, the Funds and/or the Adviser, rather than the Underwriter, typically enter into such agreements. These financial intermediaries may charge a fee for their services and may receive shareholder service or other fees from parties other than the Underwriter. These financial intermediaries may otherwise act as processing agents and are responsible for promptly transmitting purchase, redemption and other requests to the Funds.
Investors who purchase shares through financial intermediaries will be subject to the procedures of those intermediaries through which they purchase shares, which may include charges, investment minimums, cutoff times and other restrictions in addition to, or different from, those listed herein. Information concerning any charges or services will be provided to customers by the financial intermediary through which they purchase shares. Investors purchasing shares of the Funds through financial intermediaries should acquaint themselves with their financial intermediarys procedures and should read the Prospectus in conjunction with any materials and information provided by their financial intermediary. The financial intermediary, and not its customers, will be the shareholder of record, although customers may have the right to vote shares depending upon their arrangement with the financial intermediary. The Underwriter does not receive compensation from the Funds for its distribution services except the distribution/service fees with respect to the shares of those classes for which a 12b-1 Plan is effective. The Adviser or its parent company may reimburse expenses or contribute capital to the Underwriter.
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After its initial term of two years, the Distribution Agreement between the Funds and the Underwriter will continue in effect for periods not exceeding one year if approved at least annually by (i) the Board of Trustees or the vote of a majority of the outstanding shares of each Fund (as defined in the 1940 Act) and (ii) a majority of the Independent Trustees, in each case cast in person at a meeting called for the purpose of voting on such agreement. The Distribution Agreement may be terminated without penalty by the parties thereto upon 60 days written notice, and it is automatically terminated in the event of its assignment as defined in the 1940 Act.
The Trust has adopted a Share Marketing Plan (or Rule 12b-1 Plan) (the 12b-1 Plan) with respect to the Funds pursuant to Rule 12b-1 under the 1940 Act. The Underwriter serves as the Distribution Coordinator under the 12b-1 Plan and, as such, receives for disbursement any fees paid by the Funds pursuant to the 12b-1 Plan.
On , 2018, the Board of Trustees of the Trust, including a majority of the Independent Trustees who have no direct or indirect financial interest in the operation of the 12b-1 Plan or in any agreement related to the 12b-1 Plan adopted the 12b-1 Plan for Class M shares of the Flexible Income Fund, Investment Grade Credit Fund and Corporate Bond Fund.
Under the 12b-1 Plan, each Fund pays distribution fees to the Distribution Coordinator at an annual rate of up to 0.25% of the Funds aggregate average daily net assets to reimburse expenses incurred in connection with the promotion and distribution of each Funds shares. The promotional and distribution activities paid by the 12b-1 Plan include, but are not limited to, compensation of intermediaries such as broker-dealers that sponsor fund marketplaces or platforms, and service shareholder accounts.
The 12b-1 Plan provides that the Distribution Coordinator may use the Rule 12b-1 distribution fees received from a Fund only to pay for the distribution and shareholder servicing expenses of the Fund. Distribution fees are accrued daily and paid monthly, and are charged as expenses of the shares as accrued.
A Fund is not obligated under the 12b-1 Plan to pay any distribution expense in excess of the distribution fee. Thus, if the 12b-1 Plan were terminated or otherwise not continued, no amounts (other than current amounts accrued but not yet paid) would be owed to the Distribution Coordinator. Using its own resources, the Adviser may pay distribution and other fees and expenses in excess of the distribution fee under agreements with certain intermediaries (such as but not limited to broker-dealers, banks, employee benefit plan alliances, record keepers or other financial institutions) under selling or servicing agreements for the Funds.
The 12b-1 Plan provides that it shall continue in effect from year to year provided that a majority of the Board of Trustees of the Trust, including a majority of the Independent Trustees, vote annually to continue the 12b-1 Plan. The 12b-1 Plan (and any distribution agreement between the Trust, the Underwriter or the Adviser and a selling agent) may be terminated without penalty upon at least 60-days notice by the Underwriter or the Adviser, or by the Trust by vote of a majority of the Independent Trustees, or by vote of a majority of the outstanding shares (as defined in the 1940 Act).
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All distribution fees paid by the Funds under the 12b-1 Plan will be paid in accordance with FINRA Conduct Rule 2830, as such Rule may change from time to time. Pursuant to the 12b-1 Plan, the Board of Trustees will review at least quarterly a written report of the distribution expenses on behalf of each Fund. In addition, as long as the 12b-1 Plan remains in effect, the selection and nomination of Trustees who are not interested persons (as defined in the 1940 Act) of the Trust shall be made by the Trustees then in office who are not interested persons of the Trust.
As the Funds have not commenced operations, no Fund has paid 12b-1 fees as of the date of this SAI.
In addition, Adviser and its affiliates may, at their own expense and out of their own legitimate profits or other resources, pay additional compensation to an authorized broker-dealer, investment adviser, financial adviser, retirement plan administrator, insurance company, or other financial intermediary that has entered into a distribution agreement, service agreement or other type of arrangement with Adviser, the Underwriter or the Funds (Authorized Firms) for selling or servicing one or more class of Fund shares. Authorized Firms that receive these payments may be affiliated with Adviser. Payments may relate to selling and/or servicing activities, such as: access to an Authorized Firms customers or network; recordkeeping services; aggregating, netting and transmission of orders; generation of sales and other informational materials; individual or broad-based marketing and sales activities; wholesaling activities; conferences; retention of assets; new sales of Fund shares, and a wide range of other activities. Compensation amounts generally vary, and can include various initial and on-going payments. Additional compensation may also be paid to broker-dealers who offer certain Funds as part of a special preferred-list or other preferred treatment program. Additional compensation creates a potential conflict of interest in the form of an additional financial incentive to a registered representative of an Authorized Firm to recommend the purchase of the Funds over another mutual fund or another investment option. As of March 31, 2017, the Adviser has entered into arrangements to make additional distribution related payments to the following Authorized Firms: ADP Retirement Services, Aon Hewitt, American Century, Ameriprise Financial Services, Inc., BPA, Charles Schwab & Co Inc., Edward D Jones & Co LP, Fidelity Investments, Financial Data Services (Merril Lynch Pierce Fenner), First Clearing/Wells Fargo Advisors, First Mercantile, Goldman Sachs, GWFS Equities In, Hartford Life Insurance, JP Morgan Retirement Plan, Lincoln Financial Group, John Hancock Retirement Plan Services, LPL Financial Corporation, MassMutual Financial Group, Mercer HR Services, Mid-Atlantic Capital Group, Morgan Stanley, Morgan Stanley Smith Barney, Matrix Financial Solutions, Nationwide Financial Services Inc., Pershing LLC, Principal Life Insurance, Prudential Investment Management Services, Raymond James Financial Services, RBC Capital Markets Corporation, Schwab 529 (Allianz Global Investors), Reliance Trust, Standard Insurance Company, T. Rowe Price, TD Ameritrade Inc., The Newport Group, TIAA-CREF Individual, UBS Financial Services Inc., U.S. Bank, Valic Retirement Services, Vanguard Fiduciary Trust, Voya Financial and Wells Group. Inclusion on this list does not imply that the additional compensation paid to such Authorized Firms necessarily constitutes special cash compensation as defined by FINRA Conduct Rule 2830(l)(4). The Adviser will update this listing annually and interim arrangements may not be reflected. The Adviser and the Funds assume no duty to notify any investor whether an Authorized Firm through which he/she invests should be included in any such listing. You are encouraged to review the Prospectus for each Fund for any other compensation arrangements pertaining to the distribution of Fund shares. You also are encouraged to ask your brokerage representative or other contact with the distribution platform (or broker) what compensation that person or the relevant firm may be receiving for your investment in the Funds.
OTHER SHAREHOLDER SERVICING EXPENSES PAID BY THE FUNDS
Each Fund is authorized to compensate each broker-dealer and other third-party intermediary up to 0.10 percent (10 basis points) of the assets serviced for that Fund by that intermediary for shareholder services to each Fund and its shareholders. These services constitute sub-recordkeeping, sub-transfer agent or similar services and are similar in scope to services provided by the transfer agent to a Fund. These expenses paid by a Fund would remain subject to any overall expense limitation applicable to that Fund. These expenses are in addition to any supplemental amounts the Adviser pays out of its own resources and are in addition to the Funds payment of any amounts through the 12b-1 Plan. This amount may be adjusted, subject to approval by the Board of Trustees.
As stated in the Prospectus, the net asset value or NAV per share of each Funds shares will be determined at the close of the New York Stock Exchange (the NYSE) (generally 4:00 p.m. ET, but the NYSE sometimes closes earlier) on each day that the NYSE is open for trading. The determination of NAV per share of each Funds shares may utilize portfolio valuations established prior to the close of the NYSE, as opposed to the closing market price, particularly with respect to fixed income instruments where prices are received from a pricing service or fair value process. The NYSE annually announces the days on which it will not be open for trading; the most recent announcement indicates that it will not be open on the following days: New Years Day, Martin Luther King Jr. Day, Presidents Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The NYSE may, however, close on days not included in that announcement. No Fund is required to compute its net asset value on any day on which no order to purchase or redeem its shares is received. The daily net asset value may not reflect the closing market price for all futures contracts held by the Funds because the markets for certain futures contracts close shortly after the time net asset value is calculated.
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Fixed-income securities for which market quotations are readily available are valued at prices as provided by independent pricing vendors. As appropriate, quotations for high yield bonds may also take additional factors into consideration such as the activity of the underlying equity or sector movements. However, securities with a demand feature exercisable within one to seven days are valued at par. The Funds receive pricing information from independent pricing vendors approved by the Board of Trustees. The Funds use what they refer to as a benchmark pricing system to the extent vendors prices for securities are either inaccurate (such as when the reported prices are different from recent known market transactions) or are not available from another pricing source. For a security priced using this system, the Adviser, initially selects a proxy comprised of a relevant security (i.e., U.S. Treasury Note) or benchmark (i.e., LIBOR) and a multiplier, divisor or margin that the Adviser believes would together best reflect changes in the market value of the security. The Adviser adjusts the value of the security daily based on changes to the market price of the assigned benchmark. Once each month, the Adviser obtains from one or more dealers an independent review of prices produced by the benchmark system as well as a review of the benchmark selected to adjust the price. Although the Adviser believes that benchmark pricing is the most reliable method for pricing securities not priced by pricing services, there is no assurance that the benchmark price reflects the actual price for which a Fund could sell a security. The accuracy of benchmark pricing depends on the judgment of one or more market makers regarding a securitys market price, as well as the choice of the appropriate benchmark, subject to review by the Adviser. The benchmark pricing system is continuously reviewed by the Adviser and implemented according to the pricing policy reviewed at least annually by the Board of Trustees.
Debt securities that mature in fewer than 60 days are valued at amortized cost if their original maturity was 60 or fewer days or by amortizing the value as of the 61st day before maturity, if their original term to maturity exceeded 60 days (unless the Board of Trustees determines that this method does not represent fair value).
Fixed income securities can be complicated financial instruments. There are many methodologies (including computer-based analytical modeling and individual security evaluations) available to generate approximations of their market value, and there is significant professional disagreement about which is best. No evaluation method may consistently generate approximations that correspond to actual traded prices of the instruments. Evaluations may not reflect the transaction price at which an investment can be purchased or sold in the market.
Equity securities, including depository receipts, are valued at the last reported sale price as reported by the stock exchange or pricing service. In cases where equity securities are traded on more than one exchange, the securities are valued using the prices from the respective primary exchange of each security. Options on equity securities are valued at the average of the latest bid and ask prices as reported by the stock exchange or pricing service. S&P 500 futures contracts generally are valued at the first sale price after 4:00 p.m. ET on the Chicago Mercantile Exchange. All other futures contracts are valued at the official settlement price of the exchange on which the applicable contract is traded. Changes to market closure times may alter when futures contracts are valued.
Trading in securities listed on foreign securities exchanges is normally completed before the close of regular trading on the NYSE. In addition, foreign securities trading may not take place on all business days in New York and may occur on days on which the NYSE is not open. Foreign currency exchange rates are generally determined prior to the close of trading on the NYSE. Events affecting the value of foreign securities and currencies will not be reflected in the determination of net asset value unless the Board of Trustees determines that the particular event would materially affect net asset value, in which case an adjustment will be made. Foreign currency exchange transactions conducted on a spot basis are valued at the spot rate prevailing in the foreign exchange market.
Securities and other assets that cannot be valued as described above will be valued at their fair value as determined by the Adviser under guidelines established by and under the general supervision and responsibility of the Board of Trustees. These guidelines generally take into account appropriate factors such as institutional-sized trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics, and other market data. Information that becomes known to the Funds or their agents after the NAV has been calculated on a particular day will not generally be used to retroactively adjust the price of a security or the NAV determined earlier that day. Valuing a security at a fair value involves relying on a good faith value judgment made by individuals rather than on price quotations obtained in the marketplace. Although intended to reflect the actual value at which securities could be sold in the market, the fair value of one or more securities could be different from the actual value at which those securities could be sold in the market. Therefore, if a shareholder purchases or redeems shares in a Fund and the Fund holds securities priced at fair value, valuing a security at a fair value may have the unintended effect of increasing or decreasing the number of shares received in a purchase or the value of the proceeds received upon a redemption.
Each Funds liabilities are allocated among its classes. The total of such liabilities allocated to a class plus that classs distribution and/or servicing fees (if any) and any other expenses specially allocated to that class are then deducted from the classs proportionate interest in the Funds assets, and the resulting amount for each class is divided by the number of shares of that class outstanding to produce the classs net asset value per share.
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CONVERSION OF SHARES BETWEEN CLASSES
You will be permitted to convert shares between Class I Shares and Class M Shares, provided that your investment meets the minimum initial investment requirements in the other class, that the shares of the other class are eligible for sale in your state of residence and that those shares are otherwise available for offer and sale. When an individual shareholder cannot meet the initial investment requirements of the other class, conversions of shares from one class to another class will be permitted if such a shareholders investment is normally aggregated with other shareholders requests, such as through a broker-dealers omnibus account. Shareholders will not be charged any fees by the Funds for such conversions, nor shall any intermediary charge any fees for such conversions. Ongoing fees and expenses incurred by a given share class will differ from those of other share classes, and a shareholder receiving new shares in an intra-Fund exchange may be subject to higher or lower total expenses following such exchange. Not all Funds offer all classes of shares or may be open to new investors. Conversion transactions will be effected only into an identically registered account. Conversion transactions will not be treated as a redemption for federal income tax purposes. Shareholders should consult their tax advisors as to the federal, foreign, state and local tax consequences of an intra-Fund exchange. Such conversion transactions must be effected according to other applicable law. The Funds also reserve the right to revise or terminate the conversion privilege, limit the amount or number of conversions or reject any conversion. A conversion of shares between Class I Shares and Class M Shares is exempt from the Frequent Trading Policy described under Trading Limits in the Prospectus.
If the Board of Trustees determines that it would be detrimental to the best interests of the remaining shareholders of any Fund to make payment wholly in cash, the Fund may pay the redemption price in part by a distribution in kind of readily marketable securities from the portfolio of that Fund, in lieu of cash. The Trust has elected to be governed by Rule 18f-1 under the 1940 Act pursuant to which each Fund is obligated to redeem shares solely in cash up to the lesser of $250,000 or one percent of the net asset value of the Fund during any 90-day period for any one shareholder. Should redemptions by any shareholder exceed such limitation the Fund will have the option of redeeming the excess in cash or in kind. If shares are redeemed in kind, the redeeming shareholder would incur brokerage costs in converting the assets into cash.
Each Fund has elected and intends to continue to qualify to be treated as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the Code). Each Fund is taxed as a separate entity under Subchapter M and must qualify on a separate basis. Qualification as a regulated investment company requires, among other things, that (a) at least 90% of a Funds annual gross income, without offset for losses from the sale or other disposition of securities, be derived from interest, dividends, payments with respect to securities loans, and gains from the sale or other disposition of securities, foreign currencies or options (including forward contracts) thereon; and (b) a Fund diversify its holdings so that, at the end of each quarter of the taxable year, (i) at least 50% of the market value of the Funds assets is represented by cash, U.S. Government securities, securities of other regulated investment companies and other securities limited in respect of any one issuer to an amount not greater than 5% of the Funds assets and 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of its assets is invested in the securities of any one issuer (other than U.S. Government securities), two or more issuers that the Fund controls and are engaged in the same or similar business or qualified publicly-traded partnerships. In addition, in order to qualify as a regulated investment company a Fund must distribute to its shareholders at least 90% of its net investment income, other than net capital gains, earned in each year. As such, and by complying with the applicable provisions of the Code, a Fund will not be subject to federal income tax on taxable income (including realized capital gains) that it distributes to shareholders in accordance with the timing requirements of the Code.
A Fund must pay an excise tax to the extent it does not distribute to its shareholders during each calendar year at least 98% of its ordinary income for that calendar year, 98.2% of its capital gains over capital losses for the one-year period ending October 31 in such calendar year, and all undistributed ordinary income and capital gains for the preceding respective one-year period. The Funds intend to meet these distribution requirements to avoid excise tax liability. If the net asset value of shares of a Fund should, by reason of a distribution of realized capital gains, be reduced below a shareholders cost, such distribution would to that extent be a return of capital to that shareholder even though taxable to the shareholder, and a sale of shares by a shareholder at net asset value at that time would establish a capital loss for federal income tax purposes.
An additional 3.8% federal tax is imposed on certain net investment income (including ordinary dividends and capital gain distributions received from a Fund and net gains from redemptions or other taxable dispositions of Fund shares) of U.S. individuals, estates and trusts to the extent that such persons modified adjusted gross income (in the case of an individual) or adjusted gross
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income (in the case of an estate or trust) exceeds certain threshold amounts. Shareholders are advised to consult their tax advisors regarding the possible implications of this additional tax on their investment in the Fund. Corporate shareholders are eligible to deduct 70% of dividends received from domestic corporations. The Funds pass through this benefit to their corporate shareholders subject to certain limitations under the Code. The dividends-received deduction is allowed to a corporate shareholder only if the shareholder satisfies a 46-day holding period for the dividend-paying stock (or a 91-day period for certain dividends on preferred stock). The 46-day and 91-day holding periods generally do not include any time in which the shareholder is protected from the risk of loss otherwise inherent in the ownership of an equity interest.
A Fund must satisfy the above holding period requirements in order to pass through this benefit to its corporate shareholders. In addition, a corporate shareholder of a Fund must also satisfy the holding period requirement with respect to its Fund Shares. In determining the extent to which a Funds dividends may be eligible for the 70% dividends-received deduction by corporate shareholders, interest income, capital gain net income, gain or loss from Section 1256 contracts (described below), dividend income from foreign corporations and income from other sources will not constitute qualified dividends. Corporate shareholders should consult their tax advisers regarding other requirements applicable to the dividends-received deduction.
The use of hedging strategies, such as entering into futures contracts and forward contracts and purchasing options, involves complex rules that will determine the character and timing of recognition of the income received in connection therewith by the Funds. Income from foreign currencies (except certain gains therefrom that may be excluded by future regulations) and income from transactions in options, futures contracts and forward contracts derived by a Fund with respect to its business of investing in securities or foreign currencies will qualify as permissible income under Subchapter M of the Code.
For accounting purposes, when a Fund purchases an option, the premium paid by the Fund is recorded as an asset and is subsequently adjusted to the current market value of the option. Any gain or loss realized by a Fund upon the expiration or sale of such options held by the Fund generally will be capital gain or loss.
Any security, option, or other position entered into or held by a Fund that substantially diminishes the Funds risk of loss from any other position held by the Fund may constitute a straddle for federal income tax purposes. In general, straddles are subject to certain rules that may affect the amount, character and timing of a Funds gains and losses with respect to straddle positions by requiring, among other things, that the loss realized on disposition of one position of a straddle be deferred until gain is realized on disposition of the offsetting position; that the Funds holding period in certain straddle positions not begin until the straddle is terminated (possibly resulting in the gain not being treated as long-term capital gain); and that losses recognized with respect to certain straddle positions, which would otherwise constitute short-term capital losses, be treated as long-term losses. Different elections are available to a Fund that may mitigate the effects of the straddle rules.
Certain options, futures contracts and forward contracts that are subject to Section 1256 of the Code (Section 1256 Contracts) and that are held by a Fund at the end of its taxable year generally will be required to be marked to market for federal income tax purposes, that is, deemed to have been sold at market value. Sixty percent of any net gain or loss recognized on these deemed sales and 60% of any net gain or loss realized from any actual sales of Section 1256 Contracts will be treated as long-term capital gain or loss, and the balance will be treated as short-term gain or loss.
A Fund may be subject to foreign withholding taxes on dividends and interest earned with respect to securities of foreign corporations. A Fund may invest in the stock of foreign investment companies that may be treated as passive foreign investment companies (PFICs) under the Code. Certain other foreign corporations, not operated as investment companies, may nevertheless satisfy the PFIC definition. A portion of the income and gains that a Fund derives from PFIC stock may be subject to a non-deductible federal income tax at the Fund level. In some cases, a Fund may be able to avoid this tax by electing to be taxed currently on its share of the PFICs income, whether or not such income is actually distributed by the PFIC. Each Fund will endeavor to limit its exposure to the PFIC tax by investing in PFICs only where the election to be taxed currently will be made. Because it is not always possible to identify a foreign issuer as a PFIC in advance of making the investment, a Fund may incur the PFIC tax in some instances.
Under Section 988 of the Code, gains or losses attributable to fluctuations in exchange rates which occur between the time a Fund accrues interest or other receivables or accrues expenses or other liabilities denominated in a foreign currency and the time the Fund actually collects such receivables or pays such liabilities are treated as ordinary income or loss. Similarly, gains or losses on forward foreign currency exchange contracts (other than forward foreign currency exchange contracts that are governed by Section 1256 of the Code and for which no election is made) or dispositions of debt securities denominated in a foreign currency attributable to fluctuations in the value of the foreign currency between the date of acquisition of the security and the date of disposition are also treated as ordinary gain or loss. These gains and losses, referred to as Section 988 gains or losses, increase or decrease the amount of a Funds investment company taxable income available to be distributed to its shareholders as ordinary income, rather than increasing or decreasing the Funds net capital gain. If a Funds Section 988 losses exceed other investment company taxable income during a taxable year, the Fund would not be able to make any ordinary dividend distributions, or distributions made before the losses were realized would be recharacterized as a return of capital to shareholders, rather than as an ordinary dividend, reducing the basis of each shareholders shares.
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Any loss realized on a sale, redemption or exchange of shares of a Fund by a shareholder will be disallowed to the extent the shares are replaced within a 61-day period (beginning 30 days before the disposition of shares). Shares received in connection with the payment of a dividend by a Fund constitute a replacement of shares.
Under the Foreign Account Tax Compliance Act (FATCA), a 30% withholding tax on a Funds distributions, including capital gains distributions, and on gross proceeds from the sale or other disposition of shares of the Fund generally applies if paid to a foreign entity unless: (i) if the foreign entity is a foreign financial institution, it undertakes certain due diligence, reporting, withholding and certification obligations, (ii) if the foreign entity is not a foreign financial institution, it identifies certain of its U.S. investors or (iii) the foreign entity is otherwise excepted under FATCA. If applicable under the foregoing requirements and subject to any applicable intergovernmental agreements, withholding under FATCA is required: (i) generally with respect to distributions from a Fund; and (ii) with respect to certain capital gains distributions and gross proceeds from a sale or disposition of Fund shares that occur on or after January 1, 2019. If withholding is required under FATCA on a payment related to your shares, investors that otherwise would not be subject to withholding (or that otherwise would be entitled to a reduced rate of withholding) on such payment generally will be required to seek a refund or credit from the IRS to obtain the benefits of such exemption or reduction. The Funds will not pay any additional amounts in respect to amounts withheld under FATCA. You should consult your tax advisor regarding the effect of FATCA based on your individual circumstances.
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 a Fund as an investment through such plans and the precise effect of such an investment in their particular tax situations.
The above discussion and the related discussion in the Prospectus are not intended to be complete discussions of all applicable federal tax consequences of an investment in a Fund. This discussion does not purport to consider all aspects of U.S. federal income taxation that might be relevant to beneficial owners of shares of the Funds. Paul Hastings LLP has expressed no opinion in respect thereof. Nonresident aliens and other foreign persons are subject to different tax rules, and may be subject to United States federal income tax withholding on certain payments received from a Fund. Shareholders are advised to consult with their own tax advisers concerning the application of federal, state, local, and foreign taxes to an investment in a Fund.
FURTHER INFORMATION ABOUT THE TRUST
The Declaration of Trust for the Trust permits the Board of Trustees to issue an unlimited number of full and fractional shares of beneficial interest and to divide or combine the shares into a greater or lesser number of shares without thereby changing the proportionate beneficial interest in each Fund. Each share represents an interest in a Fund proportionately equal to the interest of each other share. Upon the Trusts liquidation, all shareholders would share pro rata in the net assets of the Fund in question available for distribution to shareholders. If it deems it advisable and in the best interest of shareholders, the Board of Trustees may create additional classes of shares. Each of such classes has or will have a different designation. Income and operating expenses not specifically attributable to a particular Fund are allocated fairly among the Funds by the Board of Trustees, generally on the basis of the relative net assets of each Fund.
Rule 18f-2 under the 1940 Act provides that any matter required to be submitted to the holders of the outstanding voting securities of an investment company such as the Trust shall not be deemed to have been effectively acted upon unless approved by a majority of the outstanding shares of the series of the Trust affected by the matter. Under Rule 18f-2, a series is presumed to be affected by a matter, unless the interests of each series in the matter are identical or the matter does not affect any interest of such series. Under Rule 18f-2 the approval of an investment advisory agreement or any change in a fundamental investment policy would be effectively acted upon with respect to a Fund only if approved by a majority of its outstanding shares. However, the rule also provides that the ratification of independent registered public accounting firms, the approval of principal underwriting contracts and the election of directors may be effectively acted upon by the shareholders of the Trust voting without regard to a Fund.
The Declaration of Trust provides that the Board of Trustees will not be liable for errors of judgment or mistakes of fact or law, but nothing in the Declaration of Trust protects a Trustee against any liability to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. The Declaration of Trust also provides that the Trust shall, upon request, assume the defense of any claim made against any shareholder for any act or obligation of the Trust and satisfy any judgment thereon.
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The Trusts custodian is responsible for holding the Funds assets. Sub-custodians provide custodial services for assets of the Trust held outside the U.S. The Trusts independent registered public accounting firm examines the Trusts financial statements and assists in the preparation of certain reports to the SEC.
The validity of the shares offered by the Prospectus has been passed upon by Paul Hastings LLP, 101 California Street, Forty-Eighth Floor, San Francisco, California 94111.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The annual financial statements of the Funds will be audited by LLP, Los Angeles, California 90013, independent registered public accounting firm for the Funds. An affiliate of LLP provides tax services.
The Prospectus and this SAI, together, do not contain all of the information set forth in the Registration Statement of Metropolitan West Funds filed with the SEC. Certain information is omitted in accordance with rules and regulations of the Commission. The Registration Statement may be inspected at the Public Reference Room of the Commission at 100 F Street, NE, Washington, D.C. 20549, and copies thereof may be obtained from the Commission at prescribed rates. It is also available on the SECs Internet Web site at http://www.sec.gov. Statements contained in the Prospectus or this SAI as to the contents of any contract or other document referred to herein or in the Prospectus 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 Trusts registration statement, each such statement being qualified in all respects by that reference.
Audited financial statements and the accompanying report of LLP, the Independent Registered Public Accounting Firm, for the fiscal year ended March 31, 2019 for the Funds, will be contained in the Annual Report to Shareholders for the fiscal year ended March 31, 2019.
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APPENDIX DESCRIPTION OF RATINGS
MOODYS INVESTORS SERVICE
BOND RATINGS:
AaaBonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as gilt-edged. Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues.
AaBonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long term risks appear somewhat larger than in Aaa securities.
Moodys applies numerical modifiers l, 2 and 3 in each generic rating classification from Aa through B. The modifier l indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the company ranks in the lower end of that generic rating category.
ABonds which are rated A possess many favorable investment attributes and are to be considered as upper medium-grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment sometime in the future.
BaaBonds 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.
BaBonds 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.
BBonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small.
CaaBonds 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.
CaBonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings.
CBonds 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.
SHORT-TERM DEBT RATINGS:
Moodys short-term debt ratings are opinions regarding the ability of issuers to repay punctually senior debt obligations. These obligations have an original maturity not exceeding one year, unless explicitly noted.
P-1Issuers rated Prime-l or P-1 (or supporting institutions) have a superior ability for repayment of senior short-term debt obligations.
P-2Issuers rated Prime-2 or P-2 (or supporting institutions) have a strong ability for repayment of senior short-term debt obligations.
P-3Issuers rated Prime-3 or P-3 (or supporting institutions) have an acceptable ability for repayment of senior short-term debt obligations.
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Not PrimeIssuers rated Not Prime do not fall within any of the Prime rating categories. In addition, in certain countries the prime rating may be modified by the issuers or guarantors senior unsecured long-term debt rating.
STANDARD & POORS RATING GROUP
BOND RATINGS:
AAADebt rated AAA has the highest rating assigned by S&P. Capacity to pay interest and repay principal is extremely strong.
AADebt rated AA has a very strong capacity to pay interest and repay principal and differs from the highest rated issues only in small degree.
ADebt rated A has a strong capacity to pay interest and repay principal, although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher-rated categories.
BBBDebt rated BBB is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher-rated categories.
Debt rated BB and B is regarded as having predominantly speculative characteristics with respect to capacity to pay interest and repay principal. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major exposures to adverse conditions.
CCCDebt rated CCC is regarded as being currently vulnerable to nonpayment, and is dependent upon favorable business, financial, and economic conditions for the debtor to meet its financial commitment on the debt. In the event of adverse business, financial, or economic conditions, the debtor is not likely to have the capacity to meet its financial commitment on the debt.
CCAn obligation rated CC is currently highly vulnerable to nonpayment.
CDebt rated C is regarded as being 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 debt are being continued.
DDebt rated D is regarded as in payment default. The D rating category is used when payments on debt are not made on the date due even if the applicable grace period has not expired, unless S&P believes that such payments will be made during such grace period. The D rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on a debt are jeopardized.
Plus (+) 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.
COMMERCIAL PAPER RATINGS:
An S&P commercial paper rating is a current assessment of the likelihood of timely payment of debt considered short-term in the relevant market.
A-1This highest category indicates that the degree of safety regarding timely payment is strong. Those issues determined to possess extremely strong safety characteristics are denoted with a plus (+) designation.
A-2Capacity for timely payment on issues with this designation is satisfactory. However, the relative degree of safety is not as high as for issues designated A-1.
A-3This designation exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the debtor to meet its financial commitment on the debt.
BThis designation is regarded as having significant speculative characteristics. The debtor currently has the capacity to meet its financial commitment on the debt; however, it faces major ongoing uncertainties which could lead to the debtors inadequate capacity to meet its financial commitment on the debt.
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CThis designation is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the debtor to meet its financial commitment on the debt.
DA short-term debt rated D is in payment default. The D rating category is used when payments on a debt are not made on the date due even if the applicable grace period has not expired, unless S&P believes that such payments will be made during such grace period. The D rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on a debt are jeopardized.
FITCH IBCA RATINGS
BOND RATINGS:
The following summarizes the ratings used by Fitch for corporate bonds:
AAABonds 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.
AABonds considered to be investment grade and of very high credit quality. The obligors 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+.
ABonds considered to be investment grade and of high credit quality. The obligors 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.
BBBBonds considered to be investment grade and of satisfactory credit quality. The obligors ability to pay interest and repay is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have adverse impact on these bonds and, therefore, impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings.
BBBonds are considered speculative. The obligors 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.
BBonds 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 obligors limited margin of safety and the need for reasonable business and economic activity throughout the life of the issue.
CCC, CC, CBonds considered to have high default risk. Capacity for meeting financial commitments is solely reliant upon sustained, favorable business or economic developments. A CC rating indicates that default of some kind appears probable. C ratings signal imminent default.
DDD, DD, DThe ratings of obligations in this category are based on their prospects for achieving partial or full recovery in a reorganization or liquidation of the obligor. Expected recovery values are highly speculative and cannot be estimated with any precision.
Entities rated in this category have defaulted on some or all of their obligations. Entities rated DDD have the highest prospect for resumption of performance or continued operation with or without a formal reorganization process. Entities rated DD and D are generally undergoing a formal reorganization or liquidation process; those rated DD are likely to satisfy a higher portion of their outstanding obligations, while entities rated D have a poor prospect of repaying all obligations.
Plus (+) Minus (-)Plus and minus signs are used with a rating symbol to indicate the relative position of a credit within the rating category. Plus and minus signs, however, are not used in the AAA category.
SHORT-TERM DEBT RATINGS:
F-1+Exceptionally Strong Credit Quality. Issues assigned this rating are regarded as having the strongest degree of assurance for timely payment.
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F-1Very Strong Credit Quality. Issues assigned this rating reflect an assurance of timely payment only slightly less in degree than issues rated F-1+.
F-2Good Credit Quality. Issues assigned this rating have a satisfactory degree of assurance for timely payment, but the margin of safety is not as great as for issues assigned F-1+ or F-1 ratings.
F-3Fair Credit Quality. Issues assigned this rating have adequate capacity for timely payment of financial commitments; however, near-term adverse changes could result in a reduction to non-investment grade.
BSpeculative. Issues assigned this rating have minimal capacity for timely payment of financial commitments, plus vulnerability to near-term adverse changes in financial and economic conditions.
CHigh Default Risk. Default is a real possibility for issues assigned this rating. Capacity for meeting financial commitments is solely reliant upon a sustained, favorable business and economic environment.
DDefault. Issues assigned this rating denote actual or imminent payment default.
SHORT-TERM MUNICIPAL BOND RATINGS
There are three rating categories for short-term municipal bonds that define an investment grade situation, which are listed below. In the case of variable rate demand obligations (VRDOs), a two-component rating is assigned. The first element represents an evaluation of the degree of risk associated with scheduled principal and interest payments, and the other represents an evaluation of the degree of risk associated with the demand feature. The short-term rating assigned to the demand feature of VRDOs is designated as VMIG. When either the long- or short-term aspect of a VRDO is not rated, that piece is designated NR, e.g., Aaa/NR or NR/VMIG 1. MIG ratings terminate at the retirement of the obligation while VMIG rating expiration will be a function of each issues specific structural or credit features.
MIG 1/VMIG 1: This designation denotes superior quality. There is present strong protection by established cash flows, superior liquidity support or demonstrated broad-based access to the market for refinancing.
MIG 2/VMIG 2: This designation denotes strong quality. Margins of protection are ample although not so large as in the preceding group.
MIG 3/VMIG 3: This designation denotes acceptable quality. All security elements are accounted for but there is lacking the undeniable strength of the preceding grades. Liquidity and cash flow protection may be narrow and market access for refinancing is likely to be less well established.
SG: This designation denotes speculative quality. Debt instruments in this category lack margins of protection.
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METROPOLITAN WEST FUNDS
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FORM N-1A
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PART C
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Item 28. Exhibits
(a) |
Agreement and Declaration of Trust dated December 9, 1996 (incorporated by reference to Registrants initial Registration Statement on Form N-1A filed on December 24, 1996 [the Registration Statement]). | |
(b)(1) |
By-Laws dated December 9, 1996 (incorporated by reference to Registration Statement filed on December 24, 1996). | |
(b)(2) |
Amendment to By-Laws (incorporated by reference to Post-Effective Amendment No. 52 filed on July 25, 2016). | |
(c) |
Instruments Defining Rights of Security Holders (not applicable). | |
(d)(1) |
Investment Management Agreement as revised March 27, 2000 (incorporated by reference to Post-Effective Amendment No. 8 filed on July 26, 2000). | |
(d)(2) |
Investment Management Agreement as revised June 27, 2002 (incorporated by reference to Post-Effective Amendment No. 19 filed on July 22, 2002). | |
(d)(3) |
Investment Management Agreement as revised May 19, 2003 for the Strategic Income Fund (incorporated by reference to Post-Effective Amendment No. 22 filed on July 28, 2003). | |
(d)(4) |
Amendment dated February 24, 2005 to the Investment Management Agreement (incorporated by reference to Post-Effective Amendment No. 25 filed on March 15, 2005). | |
(d)(5) |
Investment Management Agreement dated February 21, 2007 (incorporated by reference to Post-Effective Amendment No. 28 filed on July 20, 2007). | |
(d)(6) |
Amendment dated July 18, 2008 to the Investment Management Agreement (incorporated by reference to Post-Effective Amendment No. 32 filed on July 24, 2009). | |
(d)(7) |
Investment Management Agreement dated March 31, 2010 (incorporated by reference to Post-Effective Amendment No. 33 filed on May 27, 2010). | |
(d)(8) |
Amended Appendix A dated September 28, 2011 to the Investment Management Agreement as revised for the Unconstrained Bond Fund (incorporated by reference to Post-Effective Amendment No. 41 filed on July 25, 2012). | |
(d)(9) |
Investment Management Agreement dated February 6, 2013 (incorporated by reference to Post-Effective Amendment No. 43 filed on April 12, 2013). | |
(d)(10) |
Amended Appendix A dated June 26, 2013 to the Investment Management Agreement as revised for the Floating Rate Income Fund (incorporated by reference to Post-Effective Amendment No. 46 filed on July 26, 2013). | |
(d)(11) |
Amended Appendix A dated June __, 2018 to the Investment Management Agreement as revised for the Metropolitan West Flexible Income Fund, Metropolitan West Investment Grade Credit Fund and Metropolitan West Corporate Bond Fund to be filed by further amendment. | |
(e) |
Underwriting Agreement between Metropolitan West Funds and PFPC Distributors, Inc. dated November 13, 2000 (incorporated by reference to Post-Effective Amendment No. 8 filed on July 26, 2000). |
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(e)(1) |
Amendment to Underwriting Agreement dated May 21, 2001 (incorporated by reference to Post-Effective Amendment No. 14 filed on July 25, 2001). | |
(e)(2) |
Amendment to Underwriting Agreement dated June 27, 2002 (incorporated by reference to Post-Effective Amendment No. 19 filed on July 22, 2002). | |
(e)(3) |
Amendment to Underwriting Agreement dated May 19, 2003 (incorporated by reference to Post-Effective Amendment No. 22 filed on July 28, 2003). | |
(e)(4) |
Amended and Restated Schedule A dated November 13, 2007 to the Underwriting Agreement (incorporated by reference to Post-Effective Amendment No. 32 filed on July 24, 2009). | |
(e)(5) |
Underwriting Agreement between Metropolitan West Funds and BNY Mellon Distributors Inc. dated July 1, 2010 (incorporated by reference to Post-Effective Amendment No. 34 filed on July 30, 2010). | |
(e)(6) |
Amended and Restated Schedule A to the Underwriting Agreement dated September 30, 2011 (incorporated by reference to Post-Effective Amendment No. 41 filed on July 25, 2012). | |
(e)(7) |
Underwriting Agreement between Metropolitan West Funds and Foreside Funds Distributors LLC dated July 1, 2010 (incorporated by reference to Post-Effective Amendment No. 41 filed on July 25, 2012). | |
(e)(8) |
Amended and Restated Schedule A to the Underwriting Agreement dated June 26, 2013 (incorporated by reference to Post-Effective Amendment No. 46 filed on July 26, 2013). | |
(e)(9) |
Distribution Agreement between Metropolitan West Funds and TCW Funds Distributors LLC dated January 1, 2018. | |
(e)(10) |
Amended Exhibit A to Distribution Agreement with TCW Funds Distributors LLC dated June __, 2018 to be filed by further amendment. | |
(f) |
Bonus or Profit Sharing Contracts (not applicable). | |
(g)(1) |
Custody Agreement between Metropolitan West Funds and The Bank of New York (incorporated by reference to Pre-Effective Amendment No. 2 filed on March 27, 1997). | |
(g)(2) |
Custody Agreement between Metropolitan West Funds and The Bank of New York dated April 1, 2002 (incorporated by reference to Post-Effective Amendment No. 19 filed on July 22, 2002). | |
(g)(3) |
Amendment to Custody Agreement dated June 27, 2002 (incorporated by reference to Post-Effective Amendment No. 19 filed on July 22, 2002). | |
(g)(4) |
Foreign Custody Manager Agreement between Metropolitan West Funds and The Bank of New York (incorporated by reference to Post-Effective Amendment No. 19 filed on July 22, 2002). | |
(g)(5) |
Amendment to Custody Agreement dated June 1, 2003 (incorporated by reference to Post-Effective Amendment No. 22 filed on July 28, 2003). | |
(g)(6) |
Amendment to Schedule II of Custody Agreement dated September 2011 (incorporated by reference to Post-Effective Amendment No. 41 filed on July 25, 2012). | |
(g)(7) |
Amendment to Schedule II of Custody Agreement dated July 16, 2013 (incorporated by reference to Post-Effective Amendment No. 46 filed on July 26, 2013). | |
(g)(8) |
Amendment to Schedule II of Custody Agreement dated June __, 2018 -- to be filed by further amendment. | |
(h)(1) |
Amended and Restated Services Agreement dated March 31, 2004 between Metropolitan West Funds and PFPC Inc. (incorporated by reference to Exhibit (h)(1) of Post-Effective Amendment No. 23 filed on July 28, 2004). | |
(h)(2) |
Amended and Restated Operating Expenses Agreement dated November 13, 2007 (incorporated by reference to Post-Effective Amendment No. 32 filed on July 24, 2009). |
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(h)(3) |
Shareholder Servicing Plan dated November 13, 2007 (incorporated by reference to Post-Effective Amendment No. 29 filed on November 19, 2007). | |
(h)(4) |
Amendment dated July 19, 2007 to the Amended and Restated Services Agreement between Metropolitan West Funds and PFPC Inc. (incorporated by reference to Post-Effective Amendment No. 32 filed on July 24, 2009). | |
(h)(5) |
Amended and Restated Schedule A dated November 13, 2007 to the Amended and Restated Services Agreement between Metropolitan West Funds and PFPC Inc. (incorporated by reference to Post-Effective Amendment No. 32 filed on July 24, 2009). | |
(h)(6) |
Amendment dated April 1, 2009 to the Amended and Restated Services Agreement between Metropolitan West Funds and PNC Global Investment Servicing (U.S.) Inc. (incorporated by reference to Post-Effective Amendment No. 32 filed on July 24, 2009). | |
(h)(7) |
Red Flags Services Amendment dated May 1, 2009 to the Amended and Restated Services Agreement between Metropolitan West Funds and PNC Global Investment Servicing (U.S.) Inc. (incorporated by reference to Post-Effective Amendment No. 32 filed on July 24, 2009). | |
(h)(8) |
Amended and Restated Schedule A dated September 30, 2011 to the Amended and Restated Services Agreement between Metropolitan West Funds and BNY Mellon Investment Servicing (US) Inc. (incorporated by reference to Post-Effective Amendment No. 41 filed on July 25, 2012). | |
(h)(9) |
Amendment to the Amended and Restated Services Agreement dated April 1, 2011 between Metropolitan West Funds and BNY Mellon Investment Servicing (US) Inc. (incorporated by reference to Post-Effective Amendment No. 37 filed on July 27, 2011). | |
(h)(10) |
Amended and Restated Appendix A to the Amended and Restated Operating Expenses Agreement (incorporated by reference to Post-Effective Amendment No. 35 filed on May 23, 2011). | |
(h)(11) |
Amended Appendix A dated September 28, 2011 to the Amended and Restated Operating Expenses Agreement (incorporated by reference to Post-Effective Amendment No. 41 filed on July 25, 2012). | |
(h)(12) |
Amended and Restated Appendix A dated June 26, 2013 to the Amended and Restated Operating Expenses Agreement (incorporated by reference to Post-Effective Amendment No. 46 filed on July 26, 2013). | |
(h)(13) |
Fund Administration and Accounting Services Agreement dated March 31, 2013 between Metropolitan West Funds and BNY Mellon Investment Servicing (US) Inc. (incorporated by reference to Post-Effective Amendment No. 46 filed on July 26, 2013). | |
(h)(14) |
Transfer Agency and Shareholder Services Agreement dated March 31, 2013 between Metropolitan West Funds and BNY Mellon Investment Servicing (US) Inc. (incorporated by reference to Post-Effective Amendment No. 46 filed on July 26, 2013). | |
(h)(15) |
Amended and Restated Appendix A effective July 29, 2014 to the Amended and Restated Operating Expense Agreement (incorporated by reference to Post-Effective Amendment No. 48 filed on July 25, 2014). | |
(h)(16) |
Supplemental Administration Agreement effective July 29, 2015 between Metropolitan West Asset Management, LLC and Metropolitan West Funds (incorporated by reference to Post-Effective Amendment No. 50 filed on July 24, 2015). | |
(h)(17) |
Amendment to Fund Administration and Accounting Agreement dated April 1, 2017 between Metropolitan West Funds and BNY Mellon Investment Servicing (US) Inc. (incorporated by reference to Post-Effective Amendment No. 54 filed on July 26, 2017). | |
(h)(18) |
Amendment to Fund Administration and Accounting Agreement dated June __, 2018 between Metropolitan West Funds and BNY Mellon Investment Servicing (US) Inc. to be filed by further amendment. | |
(i)(1) |
For TOTAL RETURN BOND FUND and LOW DURATION BOND FUND: Consent and Opinion of Counsel as to legality of shares (incorporated by reference to Pre-Effective Amendment No. 1 to the Registration Statement filed on March 18, 1997 [Pre-Effective Amendment No. 1]). |
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(i)(2) |
For ALPHATRAK 500 FUND: Consent and Opinion of Counsel as to legality of shares (incorporated by reference to Post-Effective Amendment No. 4). | |
(i)(3) |
For TOTAL RETURN BOND FUND and LOW DURATION BOND FUND: Consent and Opinion of Counsel as to legality of Class I shares (incorporated by reference to Post-Effective Amendment No. 8 filed on July 26, 2000). | |
(i)(4) |
For INTERMEDIATE BOND FUND and HIGH YIELD BOND FUND: Consent and Opinion of Counsel as to legality of shares (incorporated by reference to Post-Effective Amendment No. 19 filed on July 22, 2002). | |
(i)(5) |
For STRATEGIC INCOME FUND: Consent and Opinion of Counsel as to legality of shares (incorporated by reference to Post-Effective Amendment No. 21 filed on June 30, 2003). | |
(i)(6) |
For UNCONSTRAINED BOND FUND: Consent and Opinion of Counsel as to legality of shares (incorporated by reference to Post-Effective Amendment No. 39 filed on September 26, 2011). | |
(i)(7) |
For FLOATING RATE INCOME FUND: Consent and Opinion of Counsel as to legality of shares (incorporated by reference to Post-Effective Amendment No. 44 filed on June 24, 2013). | |
(i)(8) |
For METROPOLITAN WEST FLEXIBLE INCOME FUND, METROPOLITAN WEST INVESTMENT GRADE CREDIT FUND and METROPOLITAN WEST CORPORATE BOND FUND: Consent and Opinion of Counsel as to legality of shares to be filed by further amendment. | |
(i)(9) |
Consent of Counsel is filed herewith. | |
(j) |
Consent of Independent Registered Public Accounting Firm to be filed by further amendment. | |
(k) |
Omitted Financial Statements (not applicable). | |
(l) |
Initial Capital Agreements (incorporated by reference to Pre-Effective Amendment No. 2). | |
(m) |
Share Marketing Plan (Rule 12b-1 Plan), as amended March 31, 2000 (incorporated by reference to Post-Effective Amendment No. 8 filed July 26, 2000). | |
(m)(1) |
Share Marketing Plan (Rule 12b-1 Plan) as amended June 27, 2002 (incorporated by reference to Post-Effective Amendment No. 19 filed on July 22, 2002). | |
(m)(2) |
Share Marketing Plan (Rule 12b-1 Plan) as amended May 19, 2003 (incorporated by reference to Post-Effective Amendment No. 22 filed on July 28, 2003). | |
(m)(3) |
Share Marketing Plan (Rule 12b-1 Plan) as amended November 13, 2007 (incorporated by reference to Post-Effective Amendment No. 29 filed on November 19, 2007). | |
(m)(4) |
Amended Share Marketing Plan (Rule 12b-1 Plan) dated September 28, 2011 (incorporated by reference to Post-Effective Amendment No. 41 filed on July 25, 2012). | |
(m)(5) |
Amended and Restated Exhibit A to the Share Marketing Plan (Rule 12b-1 Plan) dated June 26, 2013 (incorporated by reference to Post-Effective Amendment No. 46 filed on July 26, 2013). | |
(m)(6) |
Amended Exhibit A to the Share Marketing Plan (Rule 12b-1 Plan) dated June __, 2018 to be filed by further amendment. | |
(n) |
Rule 18f-3 Plan (incorporated by reference to Post-Effective Amendment No. 7 filed January 27, 2000). | |
(n)(1) |
Rule 18f-3 Plan as amended June 27, 2002 (incorporated by reference to Post-Effective Amendment No. 19 filed on July 22, 2002). | |
(n)(2) |
Rule 18f-3 Plan as amended May 19, 2003 (incorporated by reference to Post-Effective Amendment No. 22 filed on July 28, 2003). |
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(n)(3) |
Rule 18f-3 Plan as amended November 13, 2007 (incorporated by reference to Post-Effective Amendment No. 29 filed on November 19, 2007). | |
(n)(4) |
Rule 18f-3 Plan as amended January 31, 2011 (incorporated by reference to Post-Effective Amendment No. 35 filed on May 23, 2011). | |
(n)(5) |
Amended Appendix A of the Rule 18f-3 Plan (incorporated by reference to Post-Effective Amendment No. 39 filed on September 26, 2011). | |
(n)(6) |
Amended Appendix A of the Rule 18f-3 Plan (incorporated by reference to Post-Effective Amendment No. 44 filed on June 24, 2013). | |
(n)(7) |
Amended Appendix A of the Rule 18f-3 Plan to be filed by further amendment. | |
(p)(1) |
Code of Ethics of Metropolitan West Asset Management LLC and Metropolitan West Funds as amended February 28, 2005 (incorporated by reference to Post-Effective Amendment No. 25 filed March 15, 2005). | |
(p)(2) |
Code of Ethics of Metropolitan West Asset Management LLC, MWAM Distributors, LLC, Metropolitan West Funds and West Gate Advisors, LLC as amended October (incorporated by reference to Post-Effective Amendment No. 27 filed July 20, 2006). | |
(p)(3) |
Code of Ethics of Metropolitan West Asset Management LLC, MWAM Distributors, LLC, Metropolitan West Funds and West Gate Advisors, LLC as amended February 2007 (incorporated by reference to Post-Effective Amendment No. 29 filed on November 29, 2007). | |
(p)(4) |
Code of Ethics of Metropolitan West Asset Management LLC, MWAM Distributors, LLC, Metropolitan West Funds and West Gate Advisors, LLC as amended February 2008 (incorporated by reference to Post-Effective Amendment No. 31 filed on July 22, 2008). | |
(p)(5) |
Code of Ethics of Metropolitan West Asset Management LLC, MWAM Distributors, LLC, Metropolitan West Funds and West Gate Advisors, LLC as amended November 2008 (incorporated by reference to Post-Effective Amendment No. 32 filed on July 24, 2009). | |
(p)(6) |
TCW Code of Ethics (incorporated by reference to Post-Effective Amendment No. 34 filed on July 30, 2010). | |
(p)(7) |
TCW Code of Ethics, as amended April 11, 2011 (incorporated by reference to Post-Effective Amendment No. 35 filed on May 23, 2011). | |
(p)(8) |
TCW Code of Ethics, as amended June 8, 2015 (incorporated by reference to Post-Effective Amendment No. 50 filed on July 24, 2015). | |
(p)(9) |
TCW Code of Ethics, as amended March 3, 2016 (incorporated by reference to Post-Effective Amendment No. 52 filed on July 25, 2016). | |
(p)(10) |
TCW Code of Ethics, as amended June 12, 2017 (incorporated by reference to Post-Effective Amendment No. 54 filed on July 26, 2017). | |
(Other) |
Power of Attorney dated July 21, 2009 (incorporated by reference to Post-Effective Amendment No. 32 filed on July 24, 2009). | |
(Other) |
Power of Attorney dated May 20, 2013 (incorporated by reference to Post-Effective Amendment No. 44 filed on June 24, 2013). |
Item 29. Persons Controlled by or Under Common Control with Registrant
Metropolitan West Asset Management, LLC, a California limited liability company, is the investment adviser for each series of the Registrant (the Adviser). The Adviser is a wholly owned subsidiary of TCW Asset Management Company LLC, a Delaware limited liability company and registered investment adviser, which in turn is a wholly owned subsidiary of The TCW Group, Inc., a Nevada corporation (TCW). The Carlyle Group, LP (Carlyle) may be deemed to be a control person of the Adviser by reason of its control of certain investment funds that indirectly control more than 25% of the voting stock of TCW. On December 27, 2017, Nippon Life Insurance Company completed an acquisition of a 24.75% indirect minority stake in TCW from Carlyle. As a result of
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this transaction, ownership in TCW by TCW management and employees increased to 44.07%, and Carlyle maintains a 31.18% indirect interest in TCW through a purchase by private investment funds controlled by Carlyle. Other investment adviser and broker-dealer entities under common control with the Adviser as subsidiaries of The TCW Group, Inc. include: TCW Funds Distributors LLC (a Delaware limited liability company and a registered-broker-dealer), TCW Asset Management Company LLC (a Delaware limited liability company and a registered investment adviser), TCW Investment Management Company LLC (a Delaware limited liability company and a registered investment adviser) and TCW LLC (a Delaware limited liability company). Carlyle also controls various other pooled investment vehicles and, indirectly, many of the portfolio companies owned by those funds.
Item 30. Indemnification
Article VII of the Agreement and Declaration of Trust empowers the Trustees of the Trust, to the full extent permitted by law, to purchase with Trust assets insurance for indemnification from liability and to pay for all expenses reasonably incurred or paid or expected to be paid by a Trustee or officer in connection with any claim, action, suit or proceeding in which he or she becomes involved by virtue of his or her capacity or former capacity with the Trust.
Article VI of the By-Laws of the Trust provides that the Trust shall indemnify any person who was or is a party or is threatened to be made a party to any proceeding by reason of the fact that such person is or was an agent of the Trust, against expenses, judgments, fines, settlement and other amounts actually and reasonable incurred in connection with such proceeding if that person acted in good faith and reasonably believed his or her conduct to be in the best interests of the Trust. Indemnification will not be provided in certain circumstances, however, including instances of willful misfeasance, bad faith, gross negligence, and reckless disregard of the duties involved in the conduct of the particular office involved.
Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the 1933 Act), may be permitted to the Trustees, officers and controlling persons of the Registrant pursuant to the foregoing provisions or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the 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 the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the 1933 Act and will be governed by the final adjudication of such issue.
Item 31. Business and Other Connections of Investment Adviser
The list required by this Item 31 of officers and directors of Metropolitan West Asset Management, LLC, together with the information as to any other business, profession, vocation, or employment of substantial nature engaged in by such officers and directors during the past two years, is incorporated by reference to Schedules A and D of Form ADV filed by Metropolitan West Asset Management, LLC pursuant to the Investment Advisers Act of 1940, as amended (SEC File Nos. 801-53332).
Item 32. Principal Underwriters
Item 32(a) | TCW Funds Distributors LLC (the Distributor) serves as principal underwriter for the following other investment companies registered under the Investment Company Act of 1940, as amended: |
1. | TCW Funds, Inc. |
2. | TCW Alternative Funds |
Item 32(b)
The directors and officers of TCW Funds Distributors LLC are as follows: |
Name and Principal Business Address* |
Positions and Offices With Underwriter |
Positions and Offices With the Registrant | ||
David B. Lippman | Director, President & Chief Executive Officer | President and Principal Executive Officer | ||
David S. DeVito | Director | Chief Financial Officer | ||
Vincent J. Bencivenga | Managing Director & Assistant Secretary | None |
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Jeffery A. Engelsman | Director, Anti-Money Laundering Compliance Officer | Chief Compliance Officer, Anti-Money Laundering Compliance Officer | ||
Meredith S. Jackson | Director | Senior Vice President, General Counsel and Secretary | ||
Joseph T. Magpayo | Managing Director | None | ||
Brian H. Waters | Chief Compliance Officer & Secretary | None | ||
James G. Krause | Chief Financial Officer & Senior Vice President | None |
* | The principal business address is 865 South Figueroa Street, Los Angeles, CA 90017. |
Item 32(c) | Not applicable. |
Item 33. 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, will be kept by the Registrants Transfer Agent, BNY Mellon Investment Servicing (US) Inc., 760 Moore Road, King of Prussia, PA 19406, except those records relating to portfolio transactions and the basic organizational and Trust documents of the Registrant (see Subsections (2)(iii), (4), (5), (6), (7), (9), (10) and (11) of Rule 31a-1(b)), which will be kept by the Registrant at 865 South Figueroa Street, Los Angeles, California 90017 or at a third-party unaffiliated record keeper at 1925 East Vernon Ave., Los Angeles, California, 90058, or those records relating to the Registrants Distributor, which will be kept by the Distributor at 865 South Figueroa Street, Los Angeles, CA 90017.
Item 34. Management Services
There are no management-related service contracts not discussed in Parts A and B.
Item 35. Undertakings
Registrant has undertaken to comply with Section 16(a) of the Investment Company Act of 1940, as amended, which requires the prompt convening of a meeting of shareholders to elect trustees to fill existing vacancies in the Registrants Board of Trustees in the event that less than a majority of the Trustees have been elected to such position by shareholders. Registrant has also undertaken promptly to call a meeting of shareholders for the purpose of voting upon the question of removal of any Trustee or Trustees when requested in writing to do so by the record holders of not less than 10 percent of the Registrants outstanding shares and to assist its shareholders in communicating with other shareholders in accordance with the requirements of Section 16(c) of the Investment Company Act of 1940, as amended.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, as amended, the Registrant has duly caused this Post-Effective Amendment No. 56 to be signed on its behalf by the undersigned, thereto duly authorized, in the City of Los Angeles and State of California on the 13th day of April, 2018.
Metropolitan West Funds | ||
By: | /s/ David B. Lippman | |
David B. Lippman | ||
President and Principal Executive Officer |
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective Amendment No. 56 to the Registration Statement of Metropolitan West Funds has been signed below by the following persons in the capacities indicated on the 13th day of April, 2018.
Signature |
Capacity | Date | ||
/s/ David B. Lippman David B. Lippman |
President and Principal Executive Officer |
April 13, 2018 | ||
/s/ Patrick Moore Patrick Moore |
Trustee |
April 13, 2018 | ||
/s/ Laird Landmann Laird Landmann |
Trustee |
April 13, 2018 | ||
/s/ David DeVito David DeVito |
Chief Financial Officer |
April 13, 2018 | ||
/s/ Martin Luther King III* Martin Luther King III |
Trustee |
April 13, 2018 | ||
/s/ Andrew Tarica* Andrew Tarica |
Trustee |
April 13, 2018 | ||
/s/ Ronald J. Consiglio* Ronald J. Consiglio |
Trustee |
April 13, 2018 | ||
/s/ Peter McMillan* Peter McMillan |
Trustee |
April 13, 2018 | ||
/s/ Robert G. Rooney* Robert G. Rooney |
Trustee |
April 13, 2018 | ||
/s/ Patrick Haden* Patrick Haden |
Trustee |
April 13, 2018 | ||
*by /s/ David A. Hearth David A. Hearth, Attorney-in-Fact pursuant to Power of Attorney |
April 13, 2018 |
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METROPOLITAN WEST FUNDS
INDEX OF EXHIBITS
Item 28. Exhibits
(e)(9) | Distribution Agreement with TCW Funds Distributors LLC. | |
(i)(9) | Consent of Counsel. |
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AGREEMENT
THIS DISTRIBUTION AGREEMENT (this Agreement) is made and entered into as of this 1st day of January, 2018 by and between Metropolitan West Funds, a Delaware statutory trust (the Client), and TCW Funds Distributors LLC, a Delaware limited liability company (the Distributor).
WHEREAS, the Client is registered under the Investment Company Act of 1940, as amended (the 1940 Act), as an open-end management investment company, and is authorized to issue shares of beneficial interest (Shares) in separate series, with each such series representing interests in a separate portfolio of securities and other assets;
WHEREAS, the Client desires to retain the Distributor as principal underwriter in connection with the offering of the Shares of each series listed on Exhibit A hereto (as amended from time to time) (each a Fund and collectively the Funds);
WHEREAS, the Distributor is registered as a broker-dealer under the Securities Exchange Act of 1934, as amended (the 1934 Act), and is a member of the Financial Industry Regulatory Authority (FINRA);
WHEREAS, this Agreement has been approved by a vote of the Clients Board of Trustees (the Board) and the Trustees who are not interested persons of the Trust, as such term is defined in Section 2(a)(19) of the 1940 Act (the Independent Trustees), in conformity with Section 15(c) of the 1940 Act; and
WHEREAS, the Distributor is willing to act as principal underwriter for the Client on the terms and conditions hereinafter set forth.
NOW THEREFORE, in consideration of the promises and mutual covenants herein contained, and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto, intending to be legally bound, do hereby agree as follows:
1. Appointment of Distributor. The Client hereby appoints the Distributor as its exclusive agent for the sale and distribution of Shares of the Funds, on the terms and conditions set forth in this Agreement, and the Distributor hereby accepts such exclusive appointment and agrees to perform the services and duties set forth in this Agreement.
2. | Services and Duties of the Distributor. |
A. The Distributor agrees to act as agent of the Client for distribution of the Shares of the Funds, upon the terms and at the current offering price (plus sales charge, if any) described in the Prospectus. As used in this Agreement, the term Prospectus shall mean each current prospectus, including the statement of additional information, as amended or supplemented, relating to any of the Funds and included in the currently effective registration statement(s) or post-effective amendment(s) thereto (the Registration Statement) of the Client under the Securities Act of 1933 (the 1933 Act) and the 1940 Act.
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B. During the continuous public offering of Shares of the Funds, the Distributor shall use commercially reasonable efforts to distribute the Shares. All orders for Shares shall be made through financial intermediaries or directly to the applicable Fund or its designated agent. Such purchase orders shall be deemed effective at the time and in the manner set forth in the Prospectus. The Client or its designated agent will confirm orders and subscriptions upon receipt, will make appropriate book entries and, upon receipt of payment therefor, will issue the appropriate number of Shares in uncertificated form.
C. The Distributor shall maintain membership with the National Securities Clearing Corporation and any other similar successor organization to sponsor a participant number for the Funds so as to enable the Shares to be traded through FundSERV. The Distributor shall not be responsible for any operational matters associated with FundSERV or Networking transactions.
D. The Distributor acknowledges and agrees that it is not authorized to provide any information or make any representations regarding the Funds other than as contained in the Prospectus and any sales literature and advertising materials specifically approved by the Client.
E. The Distributor agrees, on a reasonably prompt basis, to review all proposed advertising materials and sales literature for compliance with applicable laws and regulations, and shall file with appropriate regulators those advertising materials and sales literature it believes are in compliance with such laws and regulations. The Distributor agrees to furnish to the Client any comments provided by regulators with respect to such materials.
F. The Client agrees to redeem or repurchase Shares tendered by shareholders of the Funds in accordance with the Clients obligations in the Prospectus and the Registration Statement. The Client reserves the right to suspend such repurchase right upon written notice to the Distributor.
G. The Distributor may, in its discretion, and shall, at the request of the Client, enter into agreements with such qualified broker-dealers and other financial intermediaries as it may select, in order that such broker-dealers and other intermediaries also may sell Shares of the Funds. The form of any dealer agreement shall be approved by the Client (the Standard Dealer Agreement). The Distributor shall not be obligated to make any payments to any broker-dealers, other financial intermediaries or other third parties, unless (i) The Distributor has received a corresponding payment from one or more of the following sources: (x) the applicable Funds plan of distribution adopted pursuant to Rule 12b-1 under the 1940 Act, (y) a recordkeeping or sub-transfer agency fee from the applicable Fund, or (z) the Adviser (defined below), and (ii) such corresponding payment methodology, allocation, procedure or arrangement has been approved by the Board. The Distributor shall include in the forms of agreement with selling broker-dealers a provision for the forfeiture by them of any sales charge or discount with respect to Shares sold by them and redeemed, repurchased or tendered for redemption within seven business days after the date of confirmation of such purchases.
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H. The Distributor shall devote its best efforts to effect sales of Shares of the Funds but shall not be obligated to sell any certain number of Shares.
I. The Distributor shall prepare reports for the Board regarding its activities under this Agreement as from time to time shall be reasonably requested by the Board, including reports regarding the use of 12b-1 payments received by the Distributor, if any.
J. The Distributor may enter into agreements (Subcontracts) with qualified third parties to carry out some or all of the Distributors obligations under this Agreement, with the prior written consent of the Client, such consent not to be unreasonably withheld; provided that execution of a Subcontract shall not relieve the Distributor of any of its responsibilities hereunder.
K. The services furnished by the Distributor hereunder are not to be deemed exclusive and the Distributor shall be free to furnish similar services to others so long as its services under this Agreement are not impaired thereby.
L. Notwithstanding anything herein to the contrary, the Distributor shall not be required to register as a broker or dealer in any specific jurisdiction or to maintain its registration in any jurisdiction in which it is now registered.
3. | Representations, Warranties and Covenants of the Client. |
A. The Client hereby represents and warrants to the Distributor, which representations and warranties shall be deemed to be continuing throughout the term of this Agreement, that:
(i) | it is duly organized and in good standing under the laws of its jurisdiction of organization and is registered as an open-end management investment company under the 1940 Act; |
(ii) | this Agreement has been duly authorized, executed and delivered by the Client and, when executed and delivered, will constitute a valid and legally binding obligation of the Client, enforceable in accordance with its terms, subject to bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting the rights and remedies of creditors and secured parties; |
(iii) | it is conducting its business in compliance in all material respects with all applicable laws and regulations, both state and federal, and has obtained all regulatory approvals necessary to carry on its business as now conducted; there is no statute, rule, regulation, order or judgment binding on it and no provision of its charter, bylaws/operating agreement or any contract binding it or affecting its property which would prohibit its execution or performance of this Agreement; |
(iv) | the Shares are validly authorized and, when issued in accordance with the description in the Prospectus, will be fully paid and nonassessable; |
3
(v) | the Registration Statement and the Prospectus included therein have been prepared in conformity with the requirements of the 1933 Act and the 1940 Act and the rules and regulations thereunder; |
(vi) | the Registration Statement and the Prospectus and any advertising materials and sales literature prepared by the Client or its agent do not and shall not contain any untrue statement of material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and that all statements or information furnished to the Distributor pursuant to this Agreement shall be true and correct in all material respects; and |
(vii) | the Client owns, possesses, licenses or has other rights to use all patents, patent applications, trademarks and service marks, trademark and service mark registrations, trade names, copyrights, licenses, inventions, trade secrets, technology, know-how and other intellectual property (collectively, Intellectual Property) necessary for or used in the conduct of the Clients business and for the offer, issuance, distribution and sale of the Fund Shares in accordance with the terms of the Prospectus and this Agreement, and such Intellectual Property does not and will not breach or infringe the terms of any Intellectual Property owned, held or licensed by any third party. |
B. The Client shall take, or cause to be taken, all necessary action to register the Shares under the federal and all applicable state securities laws and to maintain an effective Registration Statement for such Shares in order to permit the sale of Shares as herein contemplated. The Client authorizes the Distributor to use the Prospectus, in the form furnished to the Distributor from time to time, in connection with the sale of Shares.
C. The Client agrees to advise the Distributor promptly in writing:
(i) | of any material correspondence or other communication by the Securities and Exchange Commission (SEC) or its staff relating to the Funds, including requests by the SEC for amendments to the Registration Statement or the Prospectus; |
(ii) | in the event of the issuance by the SEC of any stop-order suspending the effectiveness of the Registration Statement then in effect or the initiation of any proceeding for that purpose; |
(iii) | of the happening of any event which makes untrue any statement of a material fact made in the Prospectus or which requires the making of a change in such Prospectus in order to make the statements therein not misleading; |
(iv) | of all actions taken by the SEC with respect to any amendments to any Registration Statement or Prospectus which may from time to time be filed with the SEC; |
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(v) | in the event that it determines to suspend the sale of Shares at any time in response to conditions in the securities markets or otherwise or to suspend the redemption of Shares of any Fund at any time as permitted by the 1940 Act or the rules of the SEC; and |
(vi) | of the commencement of any litigation or proceedings against the Client or any of its officers or directors in connection with the issue and sale of any of the Shares. |
D. The Client shall file such reports and other documents as may be required under applicable federal and state laws and regulations, including state blue sky laws, and shall notify the Distributor in writing of the states in which the Shares may be sold and of any changes to such information.
E. The Client agrees to file from time to time such amendments to its Registration Statement and the Prospectus as may be necessary in order that its Registration Statement and the Prospectus will not contain any untrue statement of material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading.
F. The Client shall fully cooperate in the efforts of the Distributor to sell and arrange for the sale of Shares. In addition, the Client shall keep the Distributor fully informed of its affairs and shall provide to the Distributor from time to time copies of all information, financial statements, and other papers that the Distributor may reasonably request for use in connection with the distribution of Shares, including, without limitation, certified copies of any financial statements prepared for the Client by its independent public accountants and such reasonable number of copies of the most current Prospectus, statement of additional information and annual and interim reports to shareholders as the Distributor may request. The Client shall forward a copy of any SEC filings, including the Registration Statement, to the Distributor within [one] business day after any such filings. The Client represents that it will not use or authorize the use of any advertising or sales material unless and until such materials have been approved and authorized for use by the Distributor.
G. The Client shall provide, and cause each other agent or service provider to the Client, including the Clients transfer agent and investment adviser, to provide, to the Distributor in a timely and accurate manner all such information (and in such reasonable medium) that the Distributor may reasonably request that may be necessary for the Distributor to perform its duties under this Agreement.
H. The Client shall not file any amendment to the Registration Statement or the Prospectus that amends any provision therein which pertains to the Distributor, the distribution of the Shares or the applicable sales loads or public offering price without giving the Distributor reasonable advance notice thereof; provided, however, that nothing contained in this Agreement shall in any way limit the Clients right to file at any time such amendments to the Registration Statement or the Prospectus, of whatever character, as the Client may deem advisable, such right being in all respects absolute and unconditional.
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I. The Client has adopted policies and procedures pursuant to Title V of the Gramm-Leach-Bliley Act, as may be modified from time to time. In this regard, the Client (and relevant agents) shall have in place and maintain physical, electronic and procedural safeguards reasonably designed to protect the security, confidentiality and integrity of, and to prevent the unauthorized access to or use of, records and information relating to the Client and the owners of the Shares.
4. | Representations, Warranties and Covenants of the Distributor. |
A. The Distributor hereby represents and warrants to the Client, which representations and warranties shall be deemed to be continuing throughout the term of this Agreement, that:
(i) | it is duly organized and existing under the laws of the jurisdiction of its organization, with full power to carry on its business as now conducted, to enter into this Agreement and to perform its obligations hereunder; |
(ii) | this Agreement has been duly authorized, executed and delivered by the Distributor and, when executed and delivered, will constitute a valid and legally binding obligation of the Distributor, enforceable in accordance with its terms, subject to bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting the rights and remedies of creditors and secured parties; |
(iii) | it is conducting its business in compliance in all material respects with all applicable laws and regulations, both state and federal, and has obtained all regulatory approvals necessary to carry on its business as now conducted; there is no statute, rule, regulation, order or judgment binding on it and no provision of its charter, operating agreement or any contract binding it or affecting its property which would prohibit its execution or performance of this Agreement; and |
(iv) | it is registered as a broker-dealer under the 1934 Act and is a member in good standing of FINRA. |
B. In connection with all matters relating to this Agreement, the Distributor will comply with the applicable requirements of the 1933 Act, the 1934 Act, the 1940 Act, the regulations of FINRA and all other applicable federal or state laws and regulations.
C. The Distributor shall promptly notify the Client of the commencement of any litigation or proceedings against the Distributor or any of its managers, officers or directors in connection with the issue and sale of any of the Shares.
5. | Compensation. |
A. In consideration of the Distributors services in connection with the distribution of Shares of each Fund and Class thereof, the Distributor shall receive the compensation set forth in Exhibit B.
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B. Except as specified in Section 5A, the Distributor shall be entitled to no compensation or reimbursement of expenses for services provided by the Distributor pursuant to this Agreement. The Distributor may receive compensation from Metropolitan West Asset Management, LLC (the Adviser) related to its services hereunder or for additional services all as may be agreed to between the Adviser and the Distributor.
6. | Expenses. |
A. The Client shall bear all costs and expenses in connection with registration of the Shares with the SEC and the applicable states, as well as all costs and expenses in connection with the offering of the Shares and communications with shareholders of its Funds, including but not limited to (i) fees and disbursements of its counsel and independent public accountants; (ii) costs and expenses of the preparation, filing, printing and mailing of Registration Statements and Prospectuses and amendments thereto, as well as related advertising and sales literature, (iii) costs and expenses of the preparation, printing and mailing of annual and interim reports, proxy materials and other communications to shareholders of the Funds; and (iv) fees required in connection with the offer and sale of Shares in such jurisdictions as shall be selected by the Client pursuant to Section 3(D) hereof.
B. The Distributor shall bear the expenses of registration or qualification of the Distributor as a dealer or broker under federal or state laws and the expenses of continuing such registration or qualification. The Distributor does not assume responsibility for any expenses not expressly assumed hereunder.
7. | Indemnification. |
A. The Client shall indemnify, defend and hold the Distributor, its affiliates and each of their respective members, managers, directors, officers, employees, representatives and any person who controls or previously controlled the Distributor within the meaning of Section 15 of the 1933 Act (collectively, the Distributor Indemnitees), free and harmless from and against any and all losses, claims, demands, liabilities, damages and expenses (including the costs of investigating or defending any alleged losses, claims, demands, liabilities, damages or expenses and any reasonable counsel fees incurred in connection therewith) (collectively, Losses) that any Distributor Indemnitee may incur under the 1933 Act, the 1934 Act, the 1940 Act any other statute (including Blue Sky laws) or any rule or regulation thereunder, or under common law or otherwise, arising out of or relating to (i) the Distributor serving as distributor of the Funds pursuant to this Agreement; (ii) the Clients breach of any of its obligations, representations, warranties or covenants contained in this Agreement; (iii) the Clients failure to comply with any applicable securities laws or regulations; (iv) any claim that the Registration Statement, the Prospectus, shareholder reports, sales literature and advertising materials or other information filed or made public by the Client (as from time to time amended) include or included an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading under the 1933 Act, or any other statute or the common law; or (v) any violation of any rule of FINRA or of the SEC or any other jurisdiction wherein Shares of the Funds are sold; provided, however, that the Clients
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obligation to indemnify any of the Distributor Indemnitees shall not be deemed to cover any Losses arising out of any untrue or alleged untrue statement or omission or alleged omission made in the Registration Statement, the Prospectus, annual or interim report, or any such advertising materials or sales literature in reliance upon and in conformity with information relating to the Distributor and furnished to the Client or its counsel by the Distributor in writing and acknowledging the purpose of its use. In no event shall anything contained herein be so construed as to protect the Distributor against any liability to the Client or its shareholders to which the Distributor would otherwise be subject by reason of willful misfeasance, bad faith, or gross negligence in the performance of its duties under this Agreement or by reason of its reckless disregard of its obligations under this Agreement.
The Clients agreement to indemnify the Distributor Indemnitees is expressly conditioned upon the Client being notified of such action or claim of loss brought against a Distributor Indemnitee, within a reasonable time after the summons or other first legal process giving information of the nature of the claim shall have been served upon such Distributor Indemnitee, unless the failure to give notice does not prejudice the Client. The failure so to notify the Client of any such action or claim shall not relieve the Client from any liability which the Client may have to the person against whom such action is brought by reason of any such untrue or alleged untrue statement or omission or alleged omission otherwise than on account of the Clients indemnification agreement contained in this Section 7(A).
B. The Client shall be entitled to participate at its own expense in the defense or, if it so elects, to assume the defense of any suit brought to enforce any such Losses, but if the Client elects to assume the defense, such defense shall be conducted by counsel chosen by the Client and approved by the Distributor, which approval shall not be unreasonably withheld. In the event the Client elects to assume the defense of any such suit and retain such counsel, the Distributor Indemnitee(s) in such suit shall bear the fees and expenses of any additional counsel retained by them. If the Client does not elect to assume the defense of any such suit, or in case the Distributor does not, in the exercise of reasonable judgment, approve of counsel chosen by the Client or, if under prevailing law or legal codes of ethics, the same counsel cannot effectively represent the interests of both the Client and the Distributor Indemnitee(s), the Client will reimburse the Distributor Indemnitee(s) in such suit, for the fees and expenses of any counsel retained by Distributor and them. The Clients indemnification agreement contained in these Sections 7(A) and 7(B) shall remain operative and in full force and effect regardless of any investigation made by or on behalf of the Distributor Indemnitee(s), and shall survive the delivery of any Shares and the termination of this Agreement. This agreement of indemnity will inure exclusively to the Distributors benefit and to the benefit of each Distributor Indemnitee.
C. The Client shall advance attorneys fees and other expenses incurred by a Distributor Indemnitee in defending any claim, demand, action or suit that is the subject of a claim for indemnification pursuant to this Section 7 to the maximum extent permissible under applicable law, subject to an undertaking in writing by the Distributor Indemnitee to repay any such advancement if the Distributor Indemnitee is ultimately determined not to be entitled to indemnification under the Agreement or applicable law.
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D. The Distributor shall indemnify, defend and hold the Client, its affiliates, and each of their respective directors, officers, employees, representatives, and any person who controls or previously controlled the Client within the meaning of Section 15 of the 1933 Act (collectively, the Client Indemnitees), free and harmless from and against any and all Losses that any Client Indemnitee may incur under the 1933 Act, the 1934 Act, the 1940 Act, any other statute (including Blue Sky laws) or any rule or regulation thereunder, or under common law or otherwise, arising out of or based upon (i) the Distributors breach of any of its obligations, representations, warranties or covenants contained in this Agreement; (ii) the Distributors failure to comply with any applicable securities laws or regulations; or (iii) any claim that the Registration Statement, the Prospectus, sales literature and advertising materials or other information filed or made public by the Client (as from time to time amended) include or included an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements not misleading, insofar as such statement or omission was made in reliance upon, and in conformity with, information furnished to the Client or its counsel by the Distributor in writing. In no event shall anything contained herein be so construed as to protect the Client against any liability to the Distributor to which the Client would otherwise be subject by reason of willful misfeasance, bad faith, or gross negligence in the performance of its duties under this Agreement or by reason of its reckless disregard of its obligations under this Agreement.
The Distributors agreement to indemnify the Client Indemnitees is expressly conditioned upon the Distributors being notified of any action or claim of loss brought against a Client Indemnitee, within a reasonable time after the summons or other first legal process giving information of the nature of the claim shall have been served upon such Client Indemnitee, unless the failure to give notice does not prejudice the Distributor. The failure so to notify the Distributor of any such action or claim shall not relieve the Distributor from any liability which the Distributor may have to the person against whom such action is brought by reason of any such untrue or alleged untrue statement or omission or alleged omission otherwise than on account of the Distributors indemnification agreement contained in this Section 7(D).
E. The Distributor shall be entitled to participate at its own expense in the defense or, if it so elects, to assume the defense of any suit brought to enforce any such Losses, but if the Distributor elects to assume the defense, such defense shall be conducted by counsel chosen by the Distributor and approved by the Client Indemnitee, which approval shall not be unreasonably withheld. In the event the Distributor elects to assume the defense of any such suit and retain such counsel, the Client Indemnitee(s) in such suit shall bear the fees and expenses of any additional counsel retained by them. If the Distributor does not elect to assume the defense of any such suit, or in case the Client does not, in the exercise of reasonable judgment, approve of counsel chosen by the Distributor or, if under prevailing law or legal codes of ethics, the same counsel cannot effectively represent the interests of both the Distributor and the Client Indemnitee(s), the Distributor will reimburse the Client Indemnitee(s) in such suit, for the fees and expenses of any counsel retained by the Client and them. The Distributors indemnification agreement contained in these Sections 7(D) and (E) shall remain operative and in full force and effect regardless of any investigation made by or on behalf of the Client Indemnitee(s), and shall survive the delivery of any Shares and the termination of this Agreement. This Agreement of indemnity will inure exclusively to the Clients benefit and to the benefit of each Client Indemnitee.
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F. The Distributor shall advance attorneys fees and other expenses incurred by a Client Indemnitee in defending any claim, demand, action or suit that is the subject of a claim for indemnification pursuant to this Section 7 to the maximum extent permissible under applicable law, subject to an undertaking in writing by the Client Indemnitee to repay any such advancement if the Client Indemnitee is ultimately determined not to be entitled to indemnification under the Agreement or applicable law.
G. No person shall be obligated to provide indemnification under this Section 7 if such indemnification would be impermissible under the 1940 Act, the 1933 Act, the 1934 Act or the rules of the FINRA; provided, however, in such event indemnification shall be provided under this Section 7 to the maximum extent so permissible.
8. | Dealer Agreement Indemnification. |
A. The Distributor acknowledges and agrees that certain large and significant broker-dealers, such as (without limitation) Merrill Lynch, UBS and Morgan Stanley (all such brokers referred to herein as the Brokers), require that the Distributor enter into dealer agreements (the Non-Standard Dealer Agreements) that contain certain representations, undertakings and indemnification that are not included in the Standard Dealer Agreement.
B. To the extent that the Distributor is requested or required by the Client to enter into any Non-Standard Dealer Agreement, the Client shall indemnify, defend and hold the Distributor Indemnitees free and harmless from and against any and all Losses that any Distributor Indemnitee may incur arising out of or relating to (a) the Distributors actions or failures to act pursuant to any Non-Standard Dealer Agreement; (b) any representations made by the Distributor in any Non-Standard Dealer Agreement to the extent that the Distributor is not required to make such representations in the Standard Dealer Agreement; or (c) any indemnification provided by the Distributor under a Non-Standard Dealer Agreement to the extent that such indemnification is beyond the indemnification the Distributor provides to intermediaries in the Standard Dealer Agreement. In no event shall anything contained herein be so construed as to protect the Distributor Indemnitees against any liability to the Client or its shareholders to which the Distributor Indemnitees would otherwise be subject by reason of willful misfeasance, bad faith, or gross negligence in the performance of the Distributors obligations or duties under the Non-Standard Dealer Agreement or by reason of the Distributors reckless disregard of its obligations or duties under the Non-Standard Dealer Agreement.
9. Limitations on Damages. Neither party hereto shall be liable for any consequential, special or indirect losses or damages suffered by the other party, whether or not the likelihood of such losses or damages was known by the party.
10. Force Majeure. Neither party hereto shall be liable for losses, delays, failure, errors, interruption or loss of data occurring directly or indirectly by reason of circumstances beyond its reasonable control, including, without limitation, acts of nature (including fire, flood, earthquake,
10
storm, hurricane or other natural disaster); action or inaction of civil or military authority; acts of foreign enemies; war; terrorism; riot; insurrection; sabotage; epidemics; labor disputes; civil commotion; or interruption, loss or malfunction of utilities, transportation, computer or communications capabilities; provided, however, that in each specific case such circumstance shall be beyond the reasonable control of the party seeking to apply this force majeure clause.
11. | Duration and Termination. |
A. This Agreement shall become effective with respect to each Fund listed on Exhibit A hereof as of the date hereof and, with respect to each Fund not in existence on that date, on the date an amendment to Exhibit A to this Agreement relating to that Fund is executed, and shall remain effective for an initial term of up to two years, unless terminated sooner pursuant to Section 11B below. Thereafter, if not terminated, this Agreement shall continue automatically in effect as to each Fund for successive one-year periods, provided such continuance is specifically approved at least annually by (i) the vote of the Board, including a majority of the Independent Trustees who have no direct or indirect financial interest in the operation of this Agreement, cast in person at a meeting called for the purpose of voting on such approval; or (ii) the vote of a majority of the outstanding voting securities (as defined in the 1940 Act) of a Fund, in accordance with Section 15 of the 1940 Act.
B. Notwithstanding the foregoing, this Agreement may be terminated, without the payment of any penalty, with respect to a particular Fund (i) through a failure to renew this Agreement at the end of a term or (ii) upon mutual consent of the parties. Further, this Agreement may be terminated upon no less than 60 days prior written notice, by either the Client through a vote of the Board, including a majority of the Independent Trustees who have no direct or indirect financial interest in the operation of this Agreement or through a vote of a majority of the outstanding voting securities of a Fund, or by the Distributor.
C. This Agreement will automatically terminate in the event of its assignment.
12. | Anti-Money Laundering Compliance. |
A. Each of the Distributor and the Client acknowledges that it is a financial institution subject to the USA PATRIOT Act of 2001 and the Bank Secrecy Act (collectively, the AML Acts), which require, among other things, that financial institutions adopt compliance programs to guard against money laundering. Each of the Distributor and the Client represents and warrants to the other that it is in compliance with and will continue to comply with the AML Acts and applicable regulations in all relevant respects.
B. The Distributor shall include specific contractual provisions regarding anti-money laundering compliance obligations in agreements entered into by the Distributor with any broker-dealer or other financial intermediary that is authorized to effect transactions in Shares of the Funds.
11
C. Each of the Distributor and the Client agrees that it will take such further steps, and cooperate with the other as may be reasonably necessary, to facilitate compliance with the AML Acts, including but not limited to the provision of copies of its written procedures, policies and controls related thereto (AML Operations). The Distributor undertakes that it will grant to the Client, the Clients anti-money laundering officer and appropriate regulatory agencies reasonable access to copies of Distributors AML Operations, and related books and records, to the extent they pertain to the Distributors services hereunder. It is expressly understood and agreed that the Client and the Clients anti-money laundering officer shall have no access to any of the Distributors AML Operations, books or records pertaining to other clients or services of the Distributor.
13. Privacy. In accordance with Regulation S-P, the Distributor will not disclose any non-public personal information, as defined in Regulation S-P, received from the Client or any Fund regarding any Fund shareholder; provided, however, that the Distributor may disclose such information to any party as necessary in the ordinary course of business to carry out the purposes for which such information was disclosed to the Distributor. The Distributor shall have in place and maintain physical, electronic and procedural safeguards reasonably designed to protect the security, confidentiality and integrity of, and to prevent unauthorized access to or use of, records and information relating to consumers and customers of the Funds.
The Client represents to the Distributor that it has adopted a privacy policy as required by Regulation S-P and agrees to provide to the Distributor a copy of such privacy policy annually. The Distributor agrees to use reasonable precautions to protect, and prevent the unintentional disclosure of, such non-public personal information.
14. Confidentiality. During the term of this Agreement, the Distributor and the Client may have access to Confidential Information relating to such matters as either partys business, trade secrets, systems, procedures, manuals, products, contracts, personnel, and clients. As used in this Agreement, Confidential Information means information belonging to the Distributor or the Client which is of value to such party and the disclosure of which could result in a competitive or other disadvantage to either party, including, without limitation, financial information, business practices and policies, know-how, trade secrets, market or sales information or plans, customer lists, business plans, and all provisions of this Agreement. Confidential Information does not include: (i) information that was known to the receiving party before receipt thereof from or on behalf of the disclosing party; (ii) information that is disclosed to the receiving party by a third person who has a right to make such disclosure without any obligation of confidentiality to the party seeking to enforce its rights under this Section 14; (iii) information that is or becomes generally known in the trade without violation of this Agreement by the receiving party; or (iv) information that is independently developed by the receiving party or its employees or affiliates without reference to the disclosing partys information.
Each party will protect the others Confidential Information with at least the same degree of care it uses with respect to its own Confidential Information, and will not use the other partys Confidential Information other than in connection with its obligations hereunder. Notwithstanding the foregoing, a party may disclose the others Confidential Information if (i) required by law, regulation or legal process or if requested by any agency; (ii) it is advised by counsel that it may incur liability for failure to make such disclosure; or (iii) requested to by the other party; provided that in the event of (i) or (ii) the disclosing party shall give the other party reasonable prior notice of such disclosure to the extent reasonably practicable and cooperate with the other party (at such other partys expense) in any efforts to prevent such disclosure.
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15. Notices. Any notice required or permitted to be given by any party to the others shall be in writing and shall be deemed to have been given on the date delivered personally or by courier service or 3 days after sent by registered or certified mail, postage prepaid, return receipt requested or on the date sent and confirmed received by facsimile transmission to the other partys address as set forth below:
Notices to the Distributor shall be sent to:
TCW Funds Distributors LLC
Attn: []
865 South Figueroa Street, Suite 1800
Los Angeles, California 90017
Fax: []
Notices to the Client shall be sent to:
Attention: Patrick W. Dennis, Vice President and Assistant Secretary
Metropolitan West Funds
865 South Figueroa Street, Suite 1800
Los Angeles, California 90017
Fax: []
16. Modifications. The terms of this Agreement shall not be waived, altered, modified, amended or supplemented in any manner whatsoever except by a written instrument signed by the Distributor and the Client. If required under the 1940 Act, any such amendment must be approved by the Board, including a majority of the Independent Trustees who have no direct or indirect financial interest in the operation of this Agreement, by a vote cast in person at a meeting for the purpose of voting on such amendment.
17. Governing Law. This Agreement shall be construed in accordance with the laws of the State of Delaware, without regard to the conflicts of law principles thereof.
18. Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto and supersedes all prior communications, understandings and agreements relating to the subject matter hereof, whether oral or written.
19. Survival. The provisions of Sections 7, 8, 13 and 14 of this Agreement shall survive any termination of this Agreement.
20. Miscellaneous. The captions in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. Any provision of this Agreement which may be determined by competent authority to be prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors.
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21. Counterparts. This Agreement may be executed by the parties hereto in any number of counterparts, and all of the counterparts taken together shall be deemed to constitute one and the same document.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by a duly authorized officer on one or more counterparts as of the date first above written.
TCW FUNDS DISTRIBUTORS LLC | ||
By: /s/ Joseph Magpayo | ||
Name: Joseph Magpayo | ||
Title: Managing Director | ||
METROPOLITAN WEST FUNDS | ||
By: /s/ Patrick W. Dennis | ||
Name: Patrick W. Dennis | ||
Title: Vice President and Assistant Secretary |
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EXHIBIT A
Fund Names
MetWest Ultra Short Bond Fund
MetWest Low Duration Bond Fund
MetWest Intermediate Bond Fund
MetWest Total Return Bond Fund
MetWest High Yield Bond Fund
MetWest Unconstrained Bond Fund
MetWest Strategic Income Fund
MetWest AlphaTrak 500 Fund
MetWest Floating Rate Income Fund
15
EXHIBIT B
Compensation
SALES LOADS:
1. With respect to Class M, Class I, Administrative Class Shares and Class P Shares, the Distributor shall not be entitled to any front-end sales load or contingent deferred sales charge.
2. With respect to any future Class of Shares, the Distributor shall be entitled to such sales loads or charges as the applicable Fund and the Distributor shall agree at the time such Class of Shares is established.
12b-1 PAYMENTS:
Attached to this Exhibit B are all plans of distribution under Rule 12b-1 under the 1940 Act approved by the Funds and in effect (collectively, the Distribution Plan). If the Funds have a Distribution Plan approved by the Board that authorizes them to compensate and reimburse the Distributor for distribution services, then the Funds shall be responsible for all compensation and reimbursements pursuant to this Agreement, or such portions thereof as are authorized under the Distribution Plan.
Notes:
➣ | Fees will be calculated and payable monthly. |
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[Attach 12b-1 Plan]
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Paul Hastings LLP
101 California Street
Forty-Eighth Floor
San Francisco, CA 94111
telephone (415) 856-7000
facsimile (415) 856-7100
www.paulhastings.com
April 13, 2018
VIA EDGAR
Metropolitan West Funds
865 South Figueroa Street
Los Angeles, California 90017
Re: | Metropolitan West Funds - File Nos. 333-18737 and 811-07989 |
Ladies and Gentlemen:
We hereby consent to the inclusion of our law firms name as counsel to the Registrant, as shown in Post-Effective Amendment No. 56 to the Registrants Registration Statement on Form N-1A.
Very truly yours,
/s/ David A. Hearth |
David A. Hearth |
for PAUL HASTINGS LLP |
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