Post-Effective Amendment No. 29 [X]
Amendment No. 31 [X]
Ryan M. Louvar, Esq.
State Street Bank and Trust Company
One Lincoln Street/LCC6
Boston, Massachusetts 02111
(Name and Address of Agent for Service)
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. SHARES OF THE FUND ARE NOT
GUARANTEED OR INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
AGENCY OF THE U.S. GOVERNMENT, NOR ARE SHARES DEPOSITS OR OBLIGATIONS OF ANY
BANK. SUCH SHARES IN THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE LOSS OF
PRINCIPAL.
The investment portfolio, SPDR(R) Lehman High Yield Bond ETF (the "Fund"),
offered by this Prospectus is a series of SPDR(R) Series Trust (the "Trust").
The Fund, using an "indexing" investment approach, seeks to replicate as
closely as possible, before fees and expenses, the price and yield performance
of the Lehman Brothers High Yield Very Liquid Index (the "Index"). For more
information regarding the Index, please refer to the "Additional Index
Information" section of this Prospectus. SSgA Funds Management, Inc. (the
"Adviser") serves as investment adviser to the Fund.
The shares of the Fund (the "Shares") are listed on the American Stock
Exchange (the "Exchange"). The Shares trade on the Exchange at market prices
that may differ to some degree from the Share's net asset values. The Fund
issues and redeems its Shares on a continuous basis, at net asset value, only in
a large specified number of Shares called a "Creation Unit," generally in
exchange for cash or in-kind securities, as the case may be. EXCEPT WHEN
AGGREGATED IN CREATION UNITS, THE SHARES ARE NOT REDEEMABLE SECURITIES OF THE
FUND.
The Fund is designed for investors who seek a relatively low-cost "passive"
approach for investing in a portfolio of securities as represented in the Index.
The Fund may be suitable for long term investment in the market or sector
represented in the Index. Shares of the Fund may also be used as an asset
allocation tool or as a speculative trading instrument. Unlike many conventional
mutual funds, which are only bought and sold at closing net asset values, the
Fund's Shares are listed on the Exchange and trade in a secondary market on an
intraday basis and can be created and redeemed at each day's next calculated net
asset value.
PURCHASE AND REDEMPTION OF CREATION UNITS
The Fund issues Shares and redeems Shares only in Creation Units (200,000
Shares per Creation Unit) at their respective net asset values on a continuous
basis every day except weekends and the following holidays: New Year's Day, Dr.
Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day
(observed), Independence Day, Labor Day, Columbus Day, Veterans Day,
Thanksgiving Day and Christmas Day.
The Fund imposes no restrictions on the frequency of purchases and
redemptions. The Board evaluated the risks of market timing activities by the
Trust's shareholders when they considered that no restriction or policy was
necessary. The Board considered that, unlike traditional mutual funds, the Fund
generally issues its Shares at net asset value per share for cash representing
the mark-to-market value of a basket of securities intended to represent the
Fund's portfolio and redeems its Shares for a basket of securities intended to
represent the Fund's portfolio, plus an amount of cash. Fund Shares may be
purchased and sold on the exchange at prevailing market prices. Given this
structure, the Board determined that it is unlikely that (a) market timing would
be attempted by the Fund's shareholders or (b) any attempts to market time the
Fund by shareholders would result in negative impact to the Fund or its
shareholders.
Investors such as market-makers, large investors and institutions may wish
to deal in Creation Units directly with the Fund. Set forth below is a brief
description of the procedures applicable to creation and redemption of Creation
Units. For more detailed information, see "Purchase and Redemption of Creation
Units" in the SAI.
Creation. In order to create (i.e., purchase) Creation Units of the Fund,
an investor must deposit either (1) cash, calculated based on the Fund's NAV per
share, plus a fixed transaction fee; or (2) a designated portfolio of fixed
income securities constituting a substantial replication, or a representation,
of the fixed
19
income securities included in the Fund's Index (the "Deposit Securities") plus a
cash payment referred to as the "Cash Component" and a fixed transaction fee.
The list of the names and the number of fixed income securities of the Deposit
Securities is made available by the Custodian through the facilities of the
National Securities Clearing Corporation ("NSCC") immediately prior to the
opening of business on the Exchange. The Cash Component represents the
difference between the net asset value of a Creation Unit and the market value
of the Deposit Securities. To purchase a Creation Unit with cash, an investor
must pay the cash equivalent of the Deposit Securities it would otherwise be
required to provide through an in-kind purchase, plus the same Cash Component
required to be paid by an in-kind purchaser. When accepting purchases of
Creation Units for cash, the Fund may incur additional costs associated with the
acquisition of Deposit Securities that would otherwise be provided by an in-kind
purchaser.
Orders to create must be placed in proper form by or through an Authorized
Participant that has entered into a Participant Agreement. The Distributor
maintains a list of the names of Participants that have signed a Participant
Agreement.
The Participant Agreement sets forth the time(s) associated with order
placement and other terms and conditions associated with placing an order. Due
to the rebalancing of the Index or other reasons beyond the Trust's control,
Authorized Participants may be notified that the cut-off time for an order may
be earlier on a particular business day. Such notification will be made as far
in advance as possible.
A fixed transaction fee, in the amount set forth in the table under
"Creation and Redemption Transaction Fees" later in this Prospectus, is
applicable to each creation transaction regardless of the number of Creation
Units created in the transaction. The price of each Creation Unit will equal the
aggregate daily net asset value per Share, plus the Cash Component, and the
transaction fees described later in this Prospectus and, if applicable, any
transfer taxes. Purchasers of Shares in Creation Units are responsible for
payment of the costs of transferring any Deposit Securities to the Fund.
An Authorized Participant may deliver in-kind fixed income securities in
lieu of the cash value representing one or more Deposit Securities. The Fund
intends to comply with the federal securities laws in accepting securities for
deposits. This means that Deposit Securities will be sold in transactions that
would be exempt from registration under the Securities Act.
Shares may be issued in advance of receipt of Deposit Securities subject to
various conditions set forth in the Participant Agreement, including a
requirement to maintain on deposit with the Trust cash at least equal to the
specified
20
percentage, as set forth in the Participant Agreement, of the market value of
the missing Deposit Securities. See "Purchase and Redemption of Creation Units"
in the SAI.
Legal Restrictions on Transactions in Certain Fixed Income Securities
(Purchase). An investor subject to a legal restriction with respect to a
particular security required to be deposited in connection with the creation of
a Creation Unit may, at the Fund's discretion, be permitted to submit a custom
order, as further described in the SAI, and deposit an equivalent amount of cash
in substitution for any security which would otherwise be included in the
Deposit Securities applicable to the creation of a Creation Unit.
Redemption. The Custodian makes available immediately prior to the opening
of business on the Exchange, through the facilities of the NSCC, the cash value
of and the list of the names and the number of shares of the Fund's portfolio
securities that will be applicable that day to redemption requests in proper
form ("Fund Securities"). Redeeming Creation Unit holders will generally receive
in-kind Fund Securities upon redemption, plus cash in an amount equal to the
difference between the net asset value of the Shares being redeemed as next
determined after receipt by the Transfer Agent of a redemption request in proper
form, and the value of the Fund Securities (the "Cash Redemption Amount"), less
the applicable transaction fee and, if applicable, any transfer taxes. Should
the Fund Securities have a value greater than the net asset value of the Shares,
a compensating cash payment to the Fund equal to the differential will be
required to be arranged for by, or on behalf of, the redeeming shareholder by
the Authorized Participant, as the case may be. At the Fund's discretion, an
Authorized Participant may receive the corresponding cash value of the fixed
income securities in lieu of the in-kind securities value representing one or
more Fund Securities. For more detail, see "Purchase and Redemption of Creation
Units" in the SAI.
Orders to redeem Creation Units of the Fund may only be effected by or
through an Authorized Participant at the time(s) and in accordance with the
other terms and conditions set forth in the Participant Agreement. Due to the
rebalancing of the Index or other reasons beyond the Trust's control, Authorized
Participants may be notified that the cut-off time for an order may be earlier
on a particular business day. Such notification will be made as far in advance
as possible.
A fixed transaction fee, in the amount set forth in the table under
"Creation and Redemption Transaction Fees" later in this Prospectus, is
applicable to each redemption transaction regardless of the number of Creation
Units redeemed in the transaction.
21
Legal Restrictions on Transactions in Certain Fixed Income Securities
(Redemption). An investor subject to a legal restriction with respect to a
particular security included in the Fund Securities applicable to the redemption
of a Creation Unit may be paid an equivalent amount of cash at the Fund's
discretion.
Creation and Redemption Transaction Fees:
TRANSACTION
FUND FEE*
---- -----------
SPDR Lehman High Yield Bond ETF................... $500
|
* From time to time, the Fund may waive all or a portion of its applicable
transaction fee. An additional charge of up to three (3) times the
transaction fee may be charged to the extent that cash is used in lieu of
securities to purchase Creation Units and to the extent redemptions are for
cash.
DISTRIBUTIONS
Dividends and Capital Gains. As a Fund shareholder, you are entitled to
your share of the Fund's income and net realized gains on its investments. The
Fund pays out substantially all of its net earnings to its shareholders as
"distributions."
The Fund typically earns interest from debt securities. These amounts, net
of expenses and taxes (if applicable), are passed along to Fund shareholders as
"income dividend distributions." The Fund realizes capital gains or losses
whenever it sells securities. Net long-term capital gains are distributed to
shareholders as "capital gain distributions."
Income dividend distributions, if any, are distributed to shareholders
monthly. Net capital gains are distributed at least annually. Dividends may be
declared and paid more frequently to improve Index tracking or to comply with
the distribution requirements of the Internal Revenue Code.
Distributions in cash may be reinvested automatically in additional whole
Shares only if the broker through whom you purchased Shares makes such option
available.
PORTFOLIO HOLDINGS
A description of the Trust's policies and procedures with respect to the
disclosure of the Fund's portfolio securities is available in the SAI.
22
TAX MATTERS
As with any investment, you should consider how your Fund investment will
be taxed. The tax information in this Prospectus is provided as general
information. You should consult your own tax professional about the tax
consequences of an investment in the Fund.
Unless your investment in the Fund is through a tax-exempt entity or tax
deferred retirement account, such as a 401 (k) plan, you need to be aware of the
possible tax consequences when:
- The Fund makes distributions,
- You sell Shares listed on the Exchange, and
- You create or redeem Creation Units
Taxes on Distributions. The Fund will distribute any net investment income
monthly, and any net realized long-term or short-term capital gains annually.
The Fund may also pay a special distribution at the end of the calendar year to
comply with federal tax requirements. In general, your distributions are subject
to federal income tax when they are paid, whether you take them in cash or
reinvest them in the Fund. The income dividends and short-term capital gains
distributions you receive from the Fund will be taxed as either ordinary income
or qualified dividend income. Distributions from the Fund's net investment
income (other than qualified dividend income and net tax-exempt income),
including any net short-term capital gains, if any, and distributions of income
from securities lending, are taxable to you as ordinary income. In general, your
distributions (other than tax exempt-interest dividends) are subject to Federal
income tax when they are paid, whether you take them in cash or reinvest them in
the Fund. Dividends that are designated as qualified dividend income are
eligible for the reduced maximum rate to individuals of 15% (5% for individuals
in lower tax brackets) to the extent that the Fund receives qualified dividend
income and subject to certain limitations. Long-term capital gains distributions
will result from gains on the sale or exchange of capital assets held by the
Fund for more than one year. Any long-term capital gains distributions you
receive from the Fund are taxable as long-term capital gain regardless of how
long you have owned your shares. Long-term capital gains are currently taxed at
a maximum of 15%. Absent further legislation, the maximum 15% tax rate on
qualified dividend income and long-term capital gains will cease to apply to
taxable years beginning after December 31, 2010.
The extent to which the Fund redeems Creation Units in cash may result in
more capital gains being recognized by the Fund as compared to exchange traded
funds that redeem Creation Units in-kind.
23
If you lend your Fund shares pursuant to securities lending arrangements
you may lose the ability to treat Fund dividends (paid while the shares are held
by the borrower) as tax-exempt income or as qualified dividends. Consult your
financial intermediary or tax adviser.
Exempt-interest dividends from the Fund are taken into account in
determining the taxable portion of any Social Security or railroad retirement
benefits that you receive.
Distributions paid in January, but declared by the Fund in October,
November or December of the previous year may be taxable to you in the previous
year. The Fund will inform you of the amount of your ordinary income dividends,
qualified dividend income and capital gain distributions shortly after the close
of each calendar year.
Distributions in excess of the Fund's current and accumulated earnings and
profits are treated as a tax-free return of capital to the extent of your basis
in the Shares, and as capital gain thereafter. A distribution will reduce the
Fund's net asset value per Share and may be taxable to you as ordinary income or
capital gain even though, from an investment standpoint, the distribution may
constitute a return of capital.
Original Issue Discount. Investments by the Fund in zero coupon or other
discount securities will result in income to the Fund equal to a portion of the
excess face value of the securities over their issue price (the "original issue
discount" or "OID") each year that the securities are held, even though the Fund
receives no cash interest payments. In other circumstances, whether pursuant to
the terms of a security or as a result of other factors outside the control of
the Fund, the Fund may recognize income without receiving a commensurate amount
of cash. Such income is included in determining the amount of income that the
Fund must distribute to maintain its status as a RIC and to avoid the payment of
federal income tax, including the nondeductible 4% excise tax. Because such
income may not be matched by a corresponding cash distribution to the Fund, the
Fund may be required to borrow money or dispose of other securities to be able
to make distributions to its shareholders.
Non-U.S. Investors. If you are not a citizen or permanent resident of the
United States, the Fund's ordinary income dividends will generally be subject to
a 30% U.S. withholding tax, unless a lower treaty rate applies or unless such
income is effectively connected with a U.S. trade or business. Under recently
enacted legislation, the Fund may, under certain circumstances, designate all or
a portion of a dividend as an "interest-related dividend" that if received by a
nonresident alien or foreign entity generally would be exempt from the 30% U.S.
withholding tax, provided that certain other requirements are met. The Fund may
also, under certain circumstances, designate all or a portion of a
24
dividend as a "short-term capital gain dividend" which if received by a
nonresident alien or foreign entity generally would be exempt from the 30% U.S.
withholding tax, unless the foreign person is a nonresident alien individual
present in the United States for a period or periods aggregating 183 days or
more during the taxable year. The provisions contained in the legislation
relating to dividends to foreign persons would apply to dividends with respect
to taxable years of the Fund beginning after December 31, 2004 and before
January 1, 2008.
Taxes on Exchange-Listed Share Sales. Currently, any capital gain or loss
realized upon a sale of Shares is generally treated as long-term capital gain or
loss if the Shares have been held for more than one year and as short-term
capital gain or loss if the Shares have been held for one year or less, except
that any capital loss on the sale of Shares held for six months or less is
treated as long-term capital loss to the extent that capital gain dividends were
paid with respect to such Shares.
Taxes on Creations and Redemptions of Creation Units. A person who
exchanges securities for Creation Units generally will recognize a gain or loss.
The gain or loss will be equal to the difference between the market value of the
Creation Units at the time and the exchanger's aggregate basis in the securities
surrendered and the Cash Component paid. A person who exchanges Creation Units
for securities will generally recognize a gain or loss equal to the difference
between the exchanger's basis in the Creation Units and the aggregate market
value of the securities received and the Cash Redemption Amount. The Internal
Revenue Service, however, may assert that a loss realized upon an exchange of
securities for Creation Units cannot be deducted currently under the rules
governing "wash sales," or on the basis that there has been no significant
change in economic position. Persons exchanging securities should consult their
own tax adviser with respect to whether wash sale rules apply and when a loss
might be deductible.
Under current federal tax laws, any capital gain or loss realized upon a
redemption of Creation Units is generally treated as long-term capital gain or
loss if the Shares have been held for more than one year and as a short-term
capital gain or loss if the Shares have been held for one year or less.
If you create or redeem Creation Units, you will be sent a confirmation
statement showing how many Shares you purchased or sold and at what price.
Backup Withholding. The Fund will be required in certain cases to withhold
at applicable withholding rates and remit to the United States Treasury the
amount withheld on amounts payable to any shareholder who (1) has provided the
Fund either an incorrect tax identification number or no number at all, (2) who
is subject to backup withholding by the Internal Revenue Service for failure to
25
properly report payments of interest or dividends, (3) who has failed to certify
to the Fund that such shareholder is not subject to backup withholding, or (4)
has not certified that such shareholder is a U.S. person (including a U.S.
resident alien).
The foregoing discussion summarizes some of the consequences under current
federal tax law of an investment in the Fund. It is not a substitute for
personal tax advice. Consult your personal tax adviser about the potential tax
consequences of an investment in the Fund under all applicable tax laws.
GENERAL INFORMATION
The Trust was organized as a Massachusetts business trust on June 12, 1998.
If shareholders of the Fund are required to vote on any matters, shareholders
are entitled to one vote for each Share they own. Annual meetings of
shareholders will not be held except as required by the 1940 Act and other
applicable law. See the SAI for more information concerning the Trust's form of
organization.
For purposes of the 1940 Act, Shares of the Trust are issued by the Fund
and the acquisition of Shares by investment companies is subject to the
restrictions of Section 12(d)(1) of the 1940 Act. The Trust has received
exemptive relief from Section 12(d)(1) to allow registered investment companies
to invest in the Fund beyond the limits set forth in Section 12(d)(1), subject
to certain terms and conditions as set forth in an SEC exemptive order issued to
the Trust, including that such investment companies enter into an agreement with
the Trust.
From time to time, the Fund may advertise yield and total return figures.
Yield is a historical measure of dividend income, and total return is a measure
of past dividend income (assuming that it has been reinvested) plus capital
appreciation. Neither yield nor total return should be used to predict the
future performance of the Fund.
Morgan, Lewis & Bockius LLP serves as counsel to the Trust, including the
Fund. Ernst & Young LLP serves as the independent registered public accounting
firm and will audit the Fund's financial statements annually.
26
STATEMENT OF ADDITIONAL INFORMATION
Dated November 28, 2007
This Statement of Additional Information ("SAI") is not a Prospectus. With
respect to each of the Trust's series portfolio listed below, this SAI should be
read in conjunction with the Prospectuses dated November 28, 2007, as it may be
revised from time to time.
SPDR(R) LEHMAN HIGH YIELD BOND ETF
Capitalized terms used herein that are not defined have the same meaning as in
the Prospectus, unless otherwise noted. Copies of the Prospectus may be obtained
without charge by writing to State Street Global Markets, LLC, the Trust's
principal underwriter (referred to herein as "Distributor" or "Principal
Underwriter"), State Street Financial Center, One Lincoln Street, Boston,
Massachusetts 02111.
1
TABLE OF CONTENTS
General Description of the Trust............................
Investment Policies.........................................
Special Considerations and Risks............................
Investment Restrictions.....................................
Exchange Listing and Trading................................
Management of the Trust.....................................
Brokerage Transactions......................................
Book Entry Only System......................................
Purchase and Redemption of Creation Units...................
Determination of Net Asset Value............................
Dividends and Distributions.................................
Taxes.......................................................
Capital Stock and Shareholder Reports.......................
Counsel and Independent Registered Public Accounting Firm...
Local Market Holiday Schedules..............................
Proxy Voting Polices and Procedures......................... and
2
GENERAL DESCRIPTION OF THE TRUST
The Trust is an open-end management investment company. As of the date of this
SAI, the Trust consists of forty-eight (48) investment series. The Trust was
organized as a Massachusetts business trust on June 12, 1998. The Trust is an
open-end management investment company, registered under the Investment Company
Act of 1940, as amended (the "1940 Act") and the offering of the SPDR(R) Lehman
High Yield Bond ETF's (the "Fund") shares is registered under the Securities Act
of 1933, as amended (the "Securities Act"). The shares of the Fund are referred
to herein as "Shares." The investment objective of the Fund is to provide
investment results that, before fees and expenses, correspond generally to the
price and yield performance of a specified market index (the "Index"). SSgA
Funds Management, Inc. (the "Adviser") manages the Fund.
The Fund generally offers and issues Shares at their net asset value only in
aggregations of a specified number of Shares (a "Creation Unit")1. The Fund
offers and issues Shares in exchange only for a cash payment ("Deposit Cash")
equal in value to a basket of securities included in the Index ("Deposit
Securities") together with a specified cash payment ("Cash Component"), as
described in more detail below. The Trust reserves the right to permit or
require the substitution of a "cash in lieu" amount to be added to the Cash
Component to replace any Deposit Security and reserves the right to permit or
require the substitution of Deposit Securities in lieu of Deposit Cash (subject
to applicable legal requirements). The Shares have been approved for listing and
secondary trading on the American Stock Exchange (the "Exchange"). The Shares
will trade on the Exchange at market prices. These prices may differ from the
Shares' net asset values. The Shares are also redeemable only in Creation Unit
aggregations, and generally in exchange for portfolio securities and a specified
cash payment. A Creation Unit of the Fund consists of 200,000 Shares.
With respect to the Fund, the Trust will accept offers to purchase Creation
Units for cash; however, the Trust may from time to time accept in kind
securities in lieu of cash at its discretion. The Trust will accept offers to
redeem Creation Units of the Fund for in kind securities; however, the Trust may
from time to time distribute cash redemption proceeds in lieu of in kind
securities at its discretion. Shares may be issued in advance of receipt of
Deposit Securities subject to various conditions including a requirement to
maintain on deposit with the Trust cash at least equal to a specified percentage
of the market value of the missing Deposit Securities as set forth in the
Participant Agreement (as defined below). See "PURCHASE AND REDEMPTION OF
CREATION UNITS." In each instance of such cash creations or redemptions, the
Trust may impose transaction fees that will be higher than the transaction fees
associated with in-kind creations or redemptions. In all cases, such fees will
be limited in accordance with the requirements of the Securities and Exchange
Commission (the "SEC") applicable to management investment companies offering
redeemable securities.
ADDITIONAL INDEX INFORMATION
Additional Information with respect to the Lehman Brothers Very Liquid High
Yield Index
Index Universes
The High Yield Index consists of two universes: the Returns Universe and
the Statistics Universe.
The Returns Universe is based on a static set of securities that are
index-eligible at the beginning of each month and held constant until the
beginning of the next month. They comprise the fixed universe that is used to
calculate official daily and monthly index-returns. The Returns Universe is
not adjusted for securities that become eligible for inclusion in the High
Yield Index during the month (e.g., because of ratings changes, called bonds,
securities falling below one year in maturity) or for issues that are newly
eligible (e.g. ratings changes, newly issued bonds). Interest and principal
payments earned by the Returns Universe are held in the High Yield Index
without a reinvestment return until month-end, when it is removed from the
Index.
The Statistics Universe is the dynamic set of bonds changing daily to
reflect the latest composition of the market. It is a projection of what the
High Yield Index will look like at month-end, when the composition of the Index
is next reset. The Statistics Universe accounts for changes due to new
issuance, calls or partial redemptions, ratings changes, and the seasoning of
securities. Statistics such as market value, sector weightings and various
averages (e.g., coupon, duration, maturity, yield, price, etc.) are updated and
reported daily. At the end of each month, the latest Statistics Universe
becomes the Returns Universe for the coming month. To ensure that the
Statistics Universe is up to date, Lehman Brothers maintains an extensive
database of call/put features and refunding and sinking schedules on
outstanding bonds and continuously monitors the market for retirement, new
issuance and rating change activity.
Total Return Calculations
The High Yield Index's results are reported for daily, monthly, quarterly,
annual and since-inception reporting periods. Returns are cumulative for the
entire period. Intra-month cash flows contribute to monthly returns, but are
not reinvested during the month and do not earn a reinvestment return.
Intra-month cash flows are reinvested into the returns universe for the
following month so that Index results over two or more months reflect monthly
compounding. Daily, month-to-date and monthly total returns are calculated
based on the sum of price changes, coupon income received or accrued, gain/loss
on repayments of principal and, where applicable, currency value fluctuations
expressed as a percentage of beginning market value. The High Yield Index's
total return is the weighted average of the total returns of the securities
that make up the Index, where the weighting factor is full market value (i.e.,
inclusive of accrued interest) at the start of the period. Cumulative total
returns over periods longer than one month are calculated by multiplicatively
linking monthly returns.
Market Value Weighting
Returns and most summary statistics for the High Yield Index are market
value weighted, accounting for both the market price of index-eligible
securities and the accrued interest. Returns data are weighted by market value
at the beginning of the period. Statistics, such as index average duration and
maturity, are market-value weighted based on end-of-period market value.
Average price and coupon are weighted by end-of-period par value.
Pricing and Settlement
All bonds in the High Yield Index are priced by either Lehman Brothers or
Interactive Data. Bonds may be quoted in a variety of ways, including nominal
spreads over benchmark securities/treasuries, spreads over swap curves or
direct price quotes. In some instances the quote type used is a spread measure
that results in daily security price changes from the movement of the
underlying curve and/or changes in the quoted spread. Bonds in the High Yield
Index are priced on the bid side. The initial price for newly issued corporate
bonds entering the High Yield Index is the offer side; after that, the bid side
price is used. Fallen angels use bid side prices.
The quality of bond pricing is kept at a high level using
multi-contributor verification. This process includes utilizing other
third-party pricing sources plus a variety of statistical techniques to isolate
possible pricing outliers. Significant discrepancies are researched and
corrected, as necessary. Bonds are settled on a T+1 basis.
Bond Ratings
All bonds in the High Yield Index must be rated high-yield (Ba1/BB+/BB+ or
below) using the middle rating of Moody's Investors Service, Inc. (""Moody's''),
Standard & Poor's, Inc. (""S&P'') and Fitch Ratings Ltd. (""Fitch''),
respectively (before July 1, 2005, the lower of Moody's and S&P was used). When
a rating from only two agencies is available, the lower (""most conservative'')
of the two is used to determine eligibility. When a rating from only one agency
is available, that rating is used to determine eligibility. A small number of
unrated bonds is included in the High Yield Index; to be eligible, they must
have previously held a high-yield rating or have been associated with a
high-yield issuer, and must trade accordingly.
(1) Except that under the "Dividend Reinvestment Service" described herein,
however, Shares may be created in less than a Creation Unit and upon
termination of the Fund, Shares may be redeemed in less than a Creation
Unit.
3
INVESTMENT POLICIES
DIVERSIFICATION
The Fund is classified as a non-diversified investment company under the 1940
Act. A "non-diversified" classification means that the Fund is not limited by
the 1940 Act with regard to the percentage of its assets that may be invested in
the securities of a single issuer. This means that the Fund may invest a greater
portion of its assets in the securities of a single issuer. The securities of a
particular issuer may constitute a greater portion of the Index of the Fund and
therefore, the securities may constitute a greater portion of the Fund's
portfolio. This may have an adverse effect on the Fund's performance or subject
the Fund's Shares to greater price volatility than more diversified investment
companies.
Although the Fund is non-diversified for purposes of the 1940 Act, the Fund
intends to maintain the required level of diversification and otherwise conduct
its operations so as to qualify as a "regulated investment company" for purposes
of the Internal Revenue Code, and to relieve the Fund of any liability for
federal income tax to the extent that its earnings are distributed to
shareholders. Compliance with the diversification requirements of the Internal
Revenue Code severely limits the investment flexibility of the Funds and makes
it less likely that the Fund will meet its investment objectives.
CONCENTRATION
In addition, the Fund may concentrate its investments in a particular industry
or group of industries, as described in the Prospectus. The securities of
issuers in particular industries may dominate the Index of the Fund and
consequently the Fund's investment portfolio. This may adversely affect the
Fund's performance or subject its shares to greater price volatility than that
experienced by less concentrated investment companies.
BONDS
The Fund invests a substantial portion of its assets in U.S. registered,
dollar-denominated bonds. A bond is an interest-bearing security issued by a
company, governmental unit or, in some cases, a non-U.S. entity. The issuer of a
bond has a contractual obligation to pay interest at a stated rate on specific
dates and to repay principal (the bond's face value) periodically or on a
specified maturity date.
An issuer may have the right to redeem or "call" a bond before maturity, in
which case the investor may have to reinvest the proceeds at lower market rates.
Most bonds bear interest income at a "coupon" rate that is fixed for the life of
the bond. The value of a fixed rate bond usually rises when market interest
rates fall, and falls when market interest rates rise. Accordingly, a fixed rate
bond's yield (income as a percent of the bond's current value) may differ from
its coupon rate as its value rises or falls. Fixed rate bonds generally are also
subject to inflation risk, which is the risk that the value of the bond or
income from the bond will be worth less in the future as inflation decreases the
value of money. This could mean that, as inflation increases, the "real" value
of the assets of the Fund's fixed rate bonds can decline, as can the value of
the Fund's distributions. Other types of bonds bear income at an interest rate
that is adjusted periodically. Because of their adjustable interest rates, the
value of "floating-rate" or "variable-rate" bonds fluctuates much less in
response to market interest rate movements than the value of fixed rate bonds.
The Fund may treat some of these bonds as having a shorter maturity for purposes
of calculating the weighted average maturity of its investment portfolio. Bonds
may be senior or subordinated obligations. Senior obligations generally have the
first claim on a corporation's earnings and assets and, in the event of
liquidation, are paid before subordinated obligations. Bonds may be unsecured
(backed only by the issuer's general creditworthiness) or secured (also backed
by specified collateral).
In addition, the Fund invests almost exclusively in corporate bonds. The
investment return of corporate bonds reflects interest on the bond and changes
in the market value of the bond. The market value of a corporate bond may be
affected by the credit rating of the corporation, the corporation's performance
and perceptions of the corporation in the market place. There is a risk that the
issuers of the securities may not be able to meet their obligations on interest
or principal payments at the time called for by such a security.
HIGH YIELD SECURITIES
The Fund invests a large percentage of its assets in high yield debt securities.
Investing in high yield securities generally provides greater income and
increased opportunity for capital appreciation than investments in higher
quality securities, but they also typically entail greater price volatility and
credit risk. These high yield securities are regarded as predominantly
speculative with respect to the issuer's 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. In addition, high yield securities are often issued
4
by smaller, less creditworthy companies or by highly leveraged (indebted) firms,
which are generally less able than more financially stable firms to make
scheduled payments of interest and principal. The risks posed by securities
issued under such circumstances are substantial.
Investing in high yield debt securities involves risks that are greater than the
risks of investing in higher quality debt securities. These risks include: (i)
changes in credit status, including weaker overall credit conditions of issuers
and risks of default; (ii) industry, market and economic risk; and (iii) greater
price variability and credit risks of certain high yield securities such as zero
coupon and payment-in-kind securities. While these risks provide the opportunity
for maximizing return over time, they may result in greater volatility of the
value of the Fund than a fund that invests in higher-rated securities.
Furthermore, the value of high yield securities may be more susceptible to real
or perceived adverse economic, company or industry conditions than is the case
for higher quality securities. The market values of certain of these lower-rated
and unrated debt securities tend to reflect individual corporate developments to
a greater extent than do higher-rated securities which react primarily to
fluctuations in the general level of interest rates, and tend to be more
sensitive to economic conditions than are higher-rated securities. Adverse
market, credit or economic conditions could make it difficult at certain times
to sell certain high yield securities held by the Fund.
The secondary market on which high yield securities are traded may be less
liquid than the market for higher grade securities. Less liquidity in the
secondary trading market could adversely affect the price at which the Fund
could sell a high yield security, and could adversely affect the daily net asset
value per share of the Fund. 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 there is less reliable, objective data
available. However, the Index seeks to include primarily high yield securities
that the Index provider believes have greater liquidity than the broader high
yield securities market as a whole.
The use of credit ratings as a principal method of selecting 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.
LENDING PORTFOLIO SECURITIES
The Fund may lend portfolio securities to certain creditworthy borrowers. The
borrowers provide collateral that is maintained in an amount at least equal to
the current market value of the securities loaned. The Fund may terminate a loan
at any time and obtain the return of the securities loaned. The Fund receives
the value of any interest or cash or non-cash distributions paid on the loaned
securities.
With respect to loans that are collateralized by cash, the borrower will be
entitled to receive a fee based on the amount of cash collateral. The Fund is
compensated by the difference between the amount earned on the reinvestment of
cash collateral and the fee paid to the borrower. In the case of collateral
other than cash, the Fund is compensated by a fee paid by the borrower equal to
a percentage of the market value of the loaned securities. Any cash collateral
may be reinvested in certain short-term instruments either directly on behalf of
the lending Fund or through one or more joint accounts or money market funds,
which may include those managed by the Adviser.
The Fund may pay a portion of the interest or fees earned from securities
lending to a borrower as described above, and to one or more securities lending
agents approved by the Board of Trustees who administer the lending program for
the Funds in accordance with guidelines approved by the Fund's Board of
Trustees. In such capacity, the lending agent causes the delivery of loaned
securities from the Fund to borrowers, arranges for the return of loaned
securities to the Fund at the termination of a loan, requests deposit of
collateral, monitors the daily value of the loaned securities and collateral,
requests that borrowers add to the collateral when required by the loan
agreements, and provides recordkeeping and accounting services necessary for the
operation of the program. State Street Bank and Trust Company ("State Street"),
an affiliate of the Trust, has received an order of exemption from the
Securities and Exchange Commission ("SEC") under Sections 17(a) and 12(d)(1)
under the 1940 Act to serve as the lending agent for affiliated investment
companies such as the Trust and to invest the cash collateral received from loan
transactions to be invested in an affiliated cash collateral fund.
Securities lending involves exposure to certain risks, including operational
risk (i.e., the risk of losses resulting from problems in the settlement and
accounting process), "gap" risk (i.e., the risk of a mismatch between the return
on cash collateral reinvestments and the fees the Fund has agreed to pay a
borrower), and credit, legal, counterparty and market risk. In the event a
borrower does not return the Fund's securities as agreed, the Fund may
experience losses if the proceeds received from liquidating the collateral do
not at least
5
equal the value of the loaned security at the time the collateral is liquidated
plus the transaction costs incurred in purchasing replacement securities.
REPURCHASE AGREEMENTS
The Fund may invest in repurchase agreements with commercial banks, brokers or
dealers to generate income from its excess cash balances and to invest
securities lending cash collateral. A repurchase agreement is an agreement under
which the Fund acquires a financial instrument (e.g., a security issued by the
U.S. government or an agency thereof, a banker's acceptance or a certificate of
deposit) from a seller, subject to resale to the seller at an agreed upon price
and date (normally, the next business day). A repurchase agreement may be
considered a loan collateralized by securities. The resale price reflects an
agreed upon interest rate effective for the period the instrument is held by the
Fund and is unrelated to the interest rate on the underlying instrument.
In these repurchase agreement transactions, the securities acquired by the Fund
(including accrued interest earned thereon) must have a total value in excess of
the value of the repurchase agreement and are held by the Custodian until
repurchased. No more than an aggregate of 15% of the Fund's net assets will be
invested in illiquid securities, including repurchase agreements having
maturities longer than seven days and securities subject to legal or contractual
restrictions on resale, or for which there are no readily available market
quotations.
The use of repurchase agreements involves certain risks. For example, if the
other party to the agreement defaults on its obligation to repurchase the
underlying security at a time when the value of the security has declined, the
Fund may incur a loss upon disposition of the security. If the other party to
the agreement becomes insolvent and subject to liquidation or reorganization
under the U.S. Bankruptcy Code or other laws, a court may determine that the
underlying security is collateral for a loan by the Fund not within the control
of the Fund and, therefore, the Fund may not be able to substantiate its
interest in the underlying security and may be deemed an unsecured creditor of
the other party to the agreement.
REVERSE REPURCHASE AGREEMENTS
The Fund may enter into reverse repurchase agreements, which involve the sale of
securities with an agreement to repurchase the securities at an agreed-upon
price, date and interest payment and have the characteristics of borrowing. The
securities purchased with the funds obtained from the agreement and securities
collateralizing the agreement will have maturity dates no later than the
repayment date. Generally the effect of such transactions is that the Fund can
recover all or most of the cash invested in the portfolio securities involved
during the term of the reverse repurchase agreement, while in many cases the
Fund is able to keep some of the interest income associated with those
securities. Such transactions are only advantageous if the Fund has an
opportunity to earn a greater rate of interest on the cash derived from these
transactions than the interest cost of obtaining the same amount of cash.
Opportunities to realize earnings from the use of the proceeds equal to or
greater than the interest required to be paid may not always be available and
the Fund intends to use the reverse repurchase technique only when the Adviser
believes it will be advantageous to the Fund. The use of reverse repurchase
agreements may exaggerate any interim increase or decrease in the value of the
Fund's assets. The Fund's exposure to reverse repurchase agreements will be
covered by securities having a value equal to or greater than such commitments.
Under the 1940 Act, reverse repurchase agreements are considered borrowings.
OTHER SHORT-TERM INSTRUMENTS
In addition to repurchase agreements, the Fund may invest in short-term
instruments, including money market instruments, on an ongoing basis to provide
liquidity or for other reasons. Money market instruments are generally
short-term investments that may include but are not limited to: (i) shares of
money market funds (including those advised by the Adviser); (ii) obligations
issued or guaranteed by the U.S. government, its agencies or instrumentalities
(including government-sponsored enterprises); (iii) negotiable certificates of
deposit ("CDs"), bankers' acceptances, fixed time deposits and other obligations
of U.S. and foreign banks (including foreign branches) and similar institutions;
(iv) commercial paper rated at the date of purchase "Prime-1" by Moody's or
"A-1" by S&P, or if unrated, of comparable quality as determined by the Adviser;
(v) non-convertible corporate debt securities (e.g., bonds and debentures) with
remaining maturities at the date of purchase of not more than 397 days and that
satisfy the rating requirements set forth in Rule 2a-7 under the 1940 Act; and
(vi) short-term U.S. dollar-denominated obligations of foreign banks (including
U.S. branches) that, in the opinion of the Adviser, are of comparable quality to
obligations of U.S. banks which may be purchased by the Fund. Any of these
instruments may be purchased on a current or a forward-settled basis. Money
market instruments also include shares of money market funds. Time deposits are
non-negotiable deposits maintained in banking institutions for specified periods
of time at stated interest rates. Bankers' acceptances are time drafts drawn on
commercial banks by borrowers, usually in connection with international
transactions.
6
INVESTMENT COMPANIES
The Fund may invest in the securities of other investment companies, including
money market funds, subject to applicable limitations under Section 12(d)(1) of
the 1940 Act. Pursuant to Section 12(d)(1), the Fund may invest in the
securities of another investment company (the "acquired company") provided that
the Fund, immediately after such purchase or acquisition, does not own in the
aggregate: (i) more than 3% of the total outstanding voting stock of the
acquired company; (ii) securities issued by the acquired company having an
aggregate value in excess of 5% of the value of the total assets of the Fund; or
(iii) securities issued by the acquired company and all other investment
companies (other than Treasury stock of the Fund) having an aggregate value in
excess of 10% of the value of the total assets of the Fund. To the extent
allowed by law or regulation, the Fund may invest its assets in securities of
investment companies that are money market funds, including those advised by the
Adviser or otherwise affiliated with the Adviser, in excess of the limits
discussed above.
If the Fund invests in, and, thus, is a shareholder of, another investment
company, the Fund's shareholders will indirectly bear the Fund's proportionate
share of the fees and expenses paid by such other investment company, including
advisory fees, in addition to both the management fees payable directly by the
Fund to the Fund's own investment adviser and the other expenses that the Fund
bears directly in connection with the Fund's own operations.
U.S. REGISTERED SECURITIES OF FOREIGN ISSUERS
The Fund may invest in U.S. registered, dollar-denominated bonds of foreign
corporations, governments, agencies and supra-national entities. Investing in
U.S. registered, dollar-denominated, bonds issued by non-U.S. issuers involves
some risks and considerations not typically associated with investing in U.S.
companies. These include differences in accounting, auditing and financial
reporting standards, the possibility of expropriation or confiscatory taxation,
adverse changes in investment or exchange control regulations, political
instability which could affect U.S. investments in foreign countries, and
potential restrictions of the flow of international capital. Foreign companies
may be subject to less governmental regulation than U.S. issuers. Moreover,
individual foreign economies may differ favorably or unfavorably from the U.S.
economy in such respects as growth of gross domestic product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of payment
positions.
FUTURES CONTRACTS, OPTIONS AND SWAP AGREEMENTS
The Fund may utilize exchange-traded futures and options contracts and swap
agreements. The Fund will segregate cash and/or appropriate liquid assets if
required to do so by SEC or CFTC regulation or interpretation.
FUTURES CONTRACTS AND OPTIONS
Futures contracts generally provide for the future sale by one party and
purchase by another party of a specified commodity or security at a specified
future time and at a specified price. Index futures contracts are settled daily
with a payment by one party to the other of a cash amount based on the
difference between the level of the index specified in the contract from one day
to the next. Futures contracts are standardized as to maturity date and
underlying instrument and are traded on futures exchanges.
The Funds are required to make a good faith margin deposit in cash or U.S.
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying commodity
or payment of the cash settlement amount) if it is not terminated prior to the
specified delivery date. Brokers may establish deposit requirements which are
higher than the exchange minimums. Futures contracts are customarily purchased
and sold on margin deposits which may range upward from less than 5% of the
value of the contract being traded.
After a futures contract position is opened, the value of the contract is marked
to market daily. If the futures contract price changes to the extent that the
margin on deposit does not satisfy margin requirements, payment of additional
"variation" margin will be required. Conversely, change in the contract value
may reduce the required margin, resulting in a repayment of excess margin to the
contract holder. Variation margin payments are made to and from the futures
broker for as long as the contract remains open. In such case, the Fund would
expect to earn interest income on its margin deposits. Closing out an open
futures position is done by taking an opposite position ("buying" a contract
which has previously been "sold," or "selling" a contract previously
"purchased") in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract position is opened or closed.
7
The Fund may purchase and sell put and call options. Such options may relate to
particular securities and may or may not be listed on a national securities
exchange and issued by the Options Clearing Corporation. Options trading is a
highly specialized activity that entails greater than ordinary investment risk.
Options on particular securities may be more volatile than the underlying
securities, and therefore, on a percentage basis, an investment in options may
be subject to greater fluctuation than an investment in the underlying
securities themselves.
The Fund intends to use futures and options in accordance with Rule 4.5 of the
Commodity Exchange Act ("CEA"). The Fund may use exchange-traded futures and
options, together with positions in cash and money market instruments, to
simulate full investment in the underlying Index. Exchange-traded futures and
options contracts may not be currently available for the Index. Under such
circumstances, the Adviser may seek to utilize other instruments that it
believes to be correlated to the underlying Index components or a subset of the
components. The Trust, on behalf of the Fund, has filed a notice of eligibility
for exclusion from the definition of the term "commodity pool operator" in
accordance with Rule 4.5 so that the Fund is not subject to registration or
regulation as a commodity pool operator under the CEA.
RESTRICTIONS ON THE USE OF FUTURES AND OPTIONS
In connection with its management of the Fund, the Adviser has claimed an
exclusion from registration as a commodity trading advisor under the Commodity
Exchange Act ("CEA") and, therefore, is not subject to the registration and
regulatory requirements of the CEA. The Fund reserves the right to engage in
transactions involving futures and options thereon to the extent allowed by the
Commodity Futures Trading Commission ("CFTC") regulations in effect from time to
time and in accordance with the Fund's policies. The Fund would take steps to
prevent its futures positions from "leveraging" its securities holdings. When it
has a long futures position, it will maintain with its custodian bank, cash or
equivalents. When it has a short futures position, it will maintain with its
custodian bank assets substantially identical to those underlying the contract
or cash and equivalents (or a combination of the foregoing) having a value equal
to the net obligation of the Fund under the contract (less the value of any
margin deposits in connection with the position).
SWAP AGREEMENTS
The Fund may enter into swap agreements, including interest rate, index, and
total return swap agreements. Swap agreements are contracts between parties in
which one party agrees to make periodic payments to the other party based on the
change in market value or level of a specified rate, index or asset. In return,
the other party agrees to make payments to the first party based on the return
of a different specified rate, index or asset. Swap agreements will usually be
done on a net basis, i.e., where the two parties make net payments with the Fund
receiving or paying, as the case may be, only the net amount of the two
payments. The net amount of the excess, if any, of the Fund's obligations over
its entitlements with respect to each swap is accrued on a daily basis and an
amount of cash or equivalents having an aggregate value at least equal to the
accrued excess is maintained by the Fund.
In the case of a credit default swap ("CDS"), the contract gives one party (the
buyer) the right to recoup the economic value of a decline in the value of debt
securities of the reference issuer if the credit event (a downgrade or default)
occurs. This value is obtained by delivering a debt security of the reference
issuer to the party in return for a previously agreed payment from the other
party (frequently, the par value of the debt security). As the seller of a CDS
contract, the Fund would be required to pay the par (or other agreed upon) value
of a referenced debt obligation to the counterparty in the event of a default or
other credit event by the reference issuer, such as a U.S. or foreign corporate
issuer, with respect to debt obligations. In return, the Fund would receive from
the counterparty a periodic stream of payments over the term of the contract
provided that no event of default has occurred. If no default occurs, the Fund
would keep the stream of payments and would have no payment obligations. As the
seller, the Fund would be subject to investment exposure on the notional amount
of the swap.
CDSs may require initial premium (discount) payments as well as periodic
payments (receipts) related to the interest leg of the swap or to the default of
a reference obligation. The Fund will segregate assets necessary to meet any
accrued payment obligations when it is the buyer of CDS. In cases where the Fund
is a seller of a CDS, if the CDS is physically settled, the Fund will be
required to segregate the full notional amount of the CDS.
RATINGS
An investment-grade rating means the security or issuer is rated
investment-grade by Moody's(R) Investors Service ("Moody's"), Standard &
Poor's(R) ("S&P(R)"), Fitch Inc., Dominion Bond Rating Service Limited, or
another credit rating agency designated as a nationally recognized statistical
rating organization by the SEC, or is unrated but considered to be of equivalent
quality by the
8
Adviser. Bonds rated Baa by Moody's or BBB by S&P or above are considered
"investment grade" securities; bonds rated Baa are considered medium grade
obligations which lack outstanding investment characteristics and have
speculative characteristics, while bonds rated BBB are regarded as having
adequate capacity to pay principal and interest.
Bonds rated lower than Baa3 by Moody's or BBB- by S&P are below investment grade
quality and are obligations of issuers that are considered predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal according to the terms of the obligation and, therefore, carry greater
investment risk, including the possibility of issuer default and bankruptcy and
increased market price volatility. Such securities ("lower rated securities")
are commonly referred to as "junk bonds" and are subject to a substantial degree
of credit risk. Lower rated securities are often issued by smaller, less
creditworthy companies or by highly leveraged (indebted) firms, which are
generally less able than more financially stable firms to make scheduled
payments of interest and principal. The risks posed by securities issued under
such circumstances are substantial. Bonds rated below investment grade tend to
be less marketable than higher-quality bonds because the market for them is less
broad. The market for unrated bonds is even narrower. See "HIGH YIELD
SECURITIES" above for more information relating to the risks associated with
investing in lower rated securities.
SPECIAL CONSIDERATIONS AND RISKS
A discussion of the risks associated with an investment in the Fund is contained
in each Prospectus under the heading "Principal Risks of the Fund." The
discussion below supplements, and should be read in conjunction with, the
Principal Risks of the Fund section of the Prospectus.
GENERAL
Investment in the Fund should be made with an understanding that the value of a
Fund's portfolio securities may fluctuate in accordance with changes in the
financial condition of the issuers of the portfolio securities, the value of
securities generally and other factors.
An investment in the Fund should also be made with an understanding of the risks
inherent in an investment in securities, including the risk that the financial
condition of issuers may become impaired or that the general condition of the
securities markets may deteriorate (either of which may cause a decrease in the
value of the portfolio securities and thus in the value of Shares). Securities
are susceptible to general market fluctuations and to volatile increases and
decreases in value as market confidence in and perceptions of their issuers
change. These investor perceptions are based on various and unpredictable
factors including expectations regarding government, economic, monetary and
fiscal policies, inflation and interest rates, economic expansion or
contraction, and global or regional political, economic and banking crises.
Although most of the securities in the Index are listed on a securities
exchange, the principal trading market for some may be in the over-the-counter
market. The existence of a liquid trading market for certain securities may
depend on whether dealers will make a market in such securities. There can be no
assurance that a market will be made or maintained or that any such market will
be or remain liquid. The price at which securities may be sold and the value of
the Fund's Shares will be adversely affected if trading markets for the Fund's
portfolio securities are limited or absent or if bid/ask spreads are wide.
FUTURES AND OPTIONS TRANSACTIONS
Positions in futures contracts and options may be closed out only on an exchange
which provides a secondary market therefore. However, there can be no assurance
that a liquid secondary market will exist for any particular futures contract or
option at any specific time. Thus, it may not be possible to close a futures or
options position. In the event of adverse price movements, the Fund would
continue to be required to make daily cash payments to maintain its required
margin. In such situations, if the Fund has insufficient cash, it may have to
sell portfolio securities to meet daily margin requirements at a time when it
may be disadvantageous to do so. In addition, the Fund may be required to make
delivery of the instruments underlying futures contracts it has sold.
The Fund will minimize the risk that it will be unable to close out a futures or
options contract by only entering into futures and options for which there
appears to be a liquid secondary market.
The risk of loss in trading futures contracts or uncovered call options in some
strategies (e.g., selling uncovered index futures contracts) is potentially
unlimited. The Fund does not plan to use futures and options contracts, when
available, in this way. The risk of a futures position may still be large as
traditionally measured due to the low margin deposits required. In many cases, a
relatively
9
small price movement in a futures contract may result in immediate and
substantial loss or gain to the investor relative to the size of a required
margin deposit. The Fund, however, intends to utilize futures and options
contracts in a manner designed to limit their risk exposure to that which is
comparable to what they would have incurred through direct investment in
securities.
Utilization of futures transactions by the Fund involves the risk of imperfect
or even negative correlation to the benchmark Index if the index underlying the
futures contracts differs from the benchmark Index. There is also the risk of
loss by the Fund of margin deposits in the event of bankruptcy of a broker with
whom the Fund has an open position in the futures contract or option.
Certain financial futures exchanges limit the amount of fluctuation permitted in
futures contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a futures contract may vary either up or
down from the previous day's settlement price at the end of a trading session.
Once the daily limit has been reached in a particular type of contract, no
trades may be made on that day at a price beyond that limit. The daily limit
governs only price movement during a particular trading day and therefore does
not limit potential losses, because the limit may prevent the liquidation of
unfavorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses.
RISKS OF SWAP AGREEMENTS
Swap agreements are subject to the risk that the swap counterparty will default
on its obligations. If such a default occurs, the Fund will have contractual
remedies pursuant to the agreements related to the transaction, but such
remedies may be subject to bankruptcy and insolvency laws which could affect the
Fund's rights as a creditor.
The use of interest-rate and index swaps is a highly specialized activity that
involves investment techniques and risks different from those associated with
ordinary portfolio security transactions. These transactions generally do not
involve the delivery of securities or other underlying assets or principal.
TAX RISKS
As with any investment, you should consider how your investment in shares of the
Fund will be taxed. The tax information in the Prospectus and this SAI is
provided as general information. You should consult your own tax professional
about the tax consequences of an investment in Shares of the Fund.
Unless your investment in Shares is made through a tax-exempt entity or
tax-deferred retirement account, such as an individual retirement account, you
need to be aware of the possible tax consequences when the Fund makes
distributions or you sell Fund Shares.
CONTINUOUS OFFERING
The method by which Creation Units of Shares are created and traded may raise
certain issues under applicable securities laws. Because new Creation Units of
Shares are issued and sold by the Trust on an ongoing basis, at any point a
"distribution," as such term is used in the Securities Act, may occur.
Broker-dealers and other persons are cautioned that some activities on their
part may, depending on the circumstances, result in their being deemed
participants in a distribution in a manner which could render them statutory
underwriters and subject them to the prospectus delivery and liability
provisions of the Securities Act.
For example, a broker-dealer firm or its client may be deemed a statutory
underwriter if it takes Creation Units after placing an order with the
Distributor, breaks them down into constituent Shares, and sells such Shares
directly to customers, or if it chooses to couple the creation of a supply of
new Shares with an active selling effort involving solicitation of secondary
market demand for Shares. A determination of whether one is an underwriter for
purposes of the Securities Act must take into account all the facts and
circumstances pertaining to the activities of the broker-dealer or its client in
the particular case, and the examples mentioned above should not be considered a
complete description of all the activities that could lead to a categorization
as an underwriter.
Broker-dealer firms should also note that dealers who are not "underwriters" but
are effecting transactions in Shares, whether or not participating in the
distribution of Shares, are generally required to deliver a prospectus. This is
because the prospectus delivery exemption in Section 4(3) of the Securities Act
is not available in respect of such transactions as a result of Section 24(d) of
the 1940 Act. Firms that incur a prospectus-delivery obligation with respect to
Shares of the Fund are reminded that under Securities Act Rule 153, a
prospectus-delivery obligation under Section 5(b)(2) of the Securities Act owed
to an exchange member in connection with a sale on the Exchange is satisfied by
the fact that the Fund's prospectus is available at the Exchange upon request.
The prospectus delivery mechanism provided in Rule 153 is only available with
respect to transactions on an exchange.
10
INVESTMENT RESTRICTIONS
The Trust has adopted the following investment restrictions as fundamental
policies with respect to the Fund. These restrictions cannot be changed with
respect to the Fund without the approval of the holders of a majority of the
Fund's outstanding voting securities. For purposes of the 1940 Act, a majority
of the outstanding voting securities of the Fund means the vote, at an annual or
a special meeting of the security holders of the Trust, of the lesser of (1) 67%
or more of the voting securities of the Fund present at such meeting, if the
holders of more than 50% of the outstanding voting securities of the Fund are
present or represented by proxy, or (2) more than 50% of the outstanding voting
securities of the Fund. Except with the approval of a majority of the
outstanding voting securities, the Fund may not:
1. Concentrate its investments (i.e., hold 25% or more of its total assets in
the stocks of a particular industry or group of industries), except that the
Fund will concentrate to approximately the same extent that its underlying Index
concentrates in the stocks of such particular industry or group of industries.
For purposes of this limitation, securities of the U.S. government (including
its agencies and instrumentalities), repurchase agreements collateralized by
U.S. government securities, and securities of state or municipal governments and
their political subdivisions are not considered to be issued by members of any
industry.
2. Lend any funds or other assets except through the purchase of all or a
portion of an issue of securities or obligations of the type in which it is
permitted to invest (including participation interests in such securities or
obligations) and except that the Fund may lend its portfolio securities in an
amount not to exceed 33% of the value of its total assets;
3. Issue senior securities or borrow money, except borrowings from banks for
temporary or emergency purposes in an amount up to 10% of the value of the
Fund's total assets (including the amount borrowed), valued at market, less
liabilities (not including the amount borrowed) valued at the time the borrowing
is made, and the Fund will not purchase securities while borrowings in excess of
5% of the Fund's total assets are outstanding, provided, that for purposes of
this restriction, short-term credits necessary for the clearance of transactions
are not considered borrowings (this limitation on purchases does not apply to
acceptance by the Fund of a deposit principally of securities included in the
Index for creation of Creation Units);
4. Pledge, hypothecate, mortgage or otherwise encumber its assets, except to
secure permitted borrowings as set forth above in restriction 2. (The deposit of
underlying securities and other assets in escrow and collateral arrangements
with respect to initial or variation margin for futures contracts or options
contracts will not be deemed to be pledges of the Fund's assets);
5. Purchase, hold or deal in real estate, or oil, gas or mineral interests or
leases, but the Fund may purchase and sell securities that are issued by
companies that invest or deal in such assets;
6. Act as an underwriter of securities of other issuers, except to the extent
the Fund may be deemed an underwriter in connection with the sale of securities
in its portfolio;
7. Purchase securities on margin, except for such short-term credits as are
necessary for the clearance of transactions, except that the Fund may make
margin deposits in connection with transactions in options, futures and options
on futures;
8. Sell securities short;
9. Invest in commodities or commodity contracts, except that the Fund may
transact in exchange traded futures contracts on securities, indexes and options
on such futures contracts and make margin deposits in connection with such
contracts;
In addition to the investment restrictions adopted as fundamental policies as
set forth above, the Fund observes the following restrictions, which may be
changed by the Board of Trustees without a shareholder vote. The Fund will not:
1. Invest in the securities of a company for the purpose of exercising
management or control, or in any event purchase and hold more than 10% of the
securities of a single issuer, provided that the Trust may vote the investment
securities owned by the Fund in accordance with its views;
2. Hold illiquid assets in excess of 15% of its net assets. An illiquid asset is
any asset which may not be sold or disposed of in the ordinary course of
business within seven days at approximately the value at which the Fund has
valued the investment; or
11
3. Under normal circumstances, invest less than 80% of its total assets in
securities that comprise its Index. Prior to any change in a Fund's 80%
investment policy, the Fund will provide shareholders with 60 days written
notice.
4. Under normal circumstances, invest less than 80% of its assets in bonds that
are rated below investment grade. Prior to any change in the Fund's 80%
investment policy, the Fund will provide shareholders with 60 days written
notice.
If a percentage limitation is adhered to at the time of investment or contract,
a later increase or decrease in percentage resulting from any change in value or
total or net assets will not result in a violation of such restriction, except
that the percentage limitations with respect to the borrowing of money and
illiquid securities will be observed continuously.
EXCHANGE LISTING AND TRADING
A discussion of exchange listing and trading matters associated with an
investment in the Fund is contained in the Prospectus under the "DETERMINATION
OF NET ASSET VALUE" and "BUYING AND SELLING THE FUNDS." The discussion below
supplements, and should be read in conjunction with, such sections of the
Prospectus.
The Shares of the Fund are approved for listing and trading on the Exchange,
subject to notice of issuance. The Shares trade on the Exchange at prices that
may differ to some degree from their net asset value. There can be no assurance
that the requirements of the Exchange necessary to maintain the listing of
Shares of the Fund will continue to be met.
The Exchange may, but is not required to, remove the Shares of the Fund from
listing if: (1) following the initial twelve-month period beginning upon the
commencement of trading of the Fund, there are fewer than 50 beneficial holders
of the Shares for 30 or more consecutive trading days; (2) the value of the
underlying Index or portfolio of securities on which the Fund is based is no
longer calculated or available; (3) the "indicative optimized portfolio value"
("IOPV") of the Fund is no longer calculated or available; or (4) such other
event shall occur or condition exists that, in the opinion of the Exchange,
makes further dealings on the Exchange inadvisable. In addition, the Exchange
will remove the Shares from listing and trading upon termination of the Trust or
the Fund.
As in the case of other publicly traded securities, brokers' commissions on
transactions will be based on negotiated commission rates at customary levels.
MANAGEMENT OF THE TRUST
The following information supplements and should be read in conjunction with the
section in the Prospectus entitled "MANAGEMENT."
TRUSTEES AND OFFICERS OF THE TRUST
The Board has responsibility for the overall management and operations of the
Trust, including general supervision of the duties performed by the Adviser and
other service providers. The Board currently consists of four Trustees, one of
whom is considered to be an "interested person" (as defined in the 1940 Act) of
the Trust.
12
TRUSTEES AND OFFICERS
NUMBER OF
PORTFOLIOS
TERM OF PRINCIPAL IN FUND
OFFICE AND OCCUPATION(s) COMPLEX OTHER
NAME, ADDRESS POSITION(s) LENGTH OF DURING PAST OVERSEEN DIRECTORSHIPS
AND DATE OF BIRTH WITH FUNDS TIME SERVED 5 YEARS BY TRUSTEE HELD BY TRUSTEE
--------------------------- ----------- -------------- ---------------------- ---------- --------------------------
INDEPENDENT TRUSTEES
DAVID M. KELLY Independent Unlimited Retired. 66 Chicago Stock
c/o SPDR Series Trust Trustee Elected: Exchange
State Street Financial September 2000 (Public Governor/
Center Director);
One Lincoln Street Penson Worldwide Inc.
Boston, MA 02111-2900 (Director);
10/10/38 Custodial Trust Co.
(Director);
SPDR Index
Shares Funds
(Trustee).
FRANK NESVET Independent Unlimited Chief Executive 66 SPDR Index
c/o SPDR Series Trust Trustee, Elected: Officer, Libra Shares Funds,
State Street Financial Chairman September 2000 Group, Inc. (Trustee); The
Center (1998-present) (a Massachusetts Health
One Lincoln Street financial services & Education Tax
Boston, MA 02111-2900 consulting company). Exempt Trust
9/24/43 (Trustee).
HELEN F. PETERS Independent Unlimited Professor of 66 Federal Home Loan
c/o SPDR Series Trust Trustee, Elected: Finance, Carroll Bank of Boston
State Street Financial Chair of September 2000 School of (Director); BJ's
Center Audit Management, Wholesale Clubs
One Lincoln Street Committee Boston College (Director);
Boston, MA 02111-2900 (2003-present); SPDR Index
3/22/48 Dean, Boston Shares Funds
College (August (Trustee).
2000-2003).
INTERESTED TRUSTEE
JAMES E. ROSS* Interested Unlimited President, SSgA 75 SPDR Index
SSgA Funds Management, Inc. Trustee, Elected Funds Management, Shares Funds (Trustee);
State Street Financial President President: Inc. (2005-present); Select Sector SPDR
Center May 2005, Principal, SSgA Funds Trust (Trustee); State
One Lincoln Street elected Management, Inc. Street Master Funds
Boston, MA 02111 Trustee: (2001-present); (Trustee); and
6/24/65 November 2005 Senior Managing State Street Institutional
Director, State Street Investment Trust
Global Advisors (Trustee).
(2006-present);
Principal, State
Street Global
Advisors
(2000-2006).
OFFICERS
MICHAEL P. RILEY Vice Unlimited Principal, State N/A N/A
SSgA Funds Management, Inc. President Elected: Street Global
State Street Financial February 2005 Advisors
Center (2005-present);
One Lincoln Street Assistant
Boston, MA 02111 Vice
3/22/69 President, State
Street Bank and
Trust Company
(2000-2004).
|
13
NUMBER OF
PORTFOLIOS
TERM OF PRINCIPAL IN FUND
OFFICE AND OCCUPATION(s) COMPLEX OTHER
NAME, ADDRESS POSITION(s) LENGTH OF DURING PAST OVERSEEN DIRECTORSHIPS
AND DATE OF BIRTH WITH FUNDS TIME SERVED 5 YEARS BY TRUSTEE HELD BY TRUSTEE
--------------------------- ----------- -------------- ---------------------- ---------- --------------------------
GARY L. FRENCH Treasurer Unlimited Senior Vice N/A N/A
State Street Bank and Elected: President,
Trust Company May 2005 State Street Bank
Two Avenue de Lafayette and Trust Company
Boston, MA 02111 (2002-present);
07/04/51 Managing Director,
Deutsche Bank
(2001-2002).
|
* Mr. Ross is an Interested Trustee because of his employment with the
Adviser and ownership interest in an affiliate of the Adviser.
14
NUMBER OF
PORTFOLIOS
TERM OF PRINCIPAL IN FUND OTHER
OFFICE AND OCCUPATION(s) COMPLEX DIRECTORSHIPS
NAME, ADDRESS POSITION(s) LENGTH OF DURING PAST OVERSEEN HELD BY
AND DATE OF BIRTH WITH FUNDS TIME SERVED 5 YEARS BY TRUSTEE TRUSTEE
----------------- ----------- ------------ ------------------------ ---------- -------------
MARY MORAN ZEVEN Secretary Unlimited Senior Vice President N/A N/A
State Street Bank and Trust Company Elected: and Senior Managing
Two Avenue de Lafayette August 2001 Counsel, State Street
Boston, MA 02111 Bank and Trust Company
2/27/61 (2002-present).
RYAN M. LOUVAR Assistant Unlimited Vice President and N/A N/A
State Street Bank and Trust Company Secretary Elected: Counsel, State Street
Two Avenue de Lafayette October 2006 Bank and Trust
Boston, MA 02111 Company (2005-
2/18/72 present); Counsel,
BISYS Group, Inc.
(2000-2005) (a financial
services company).
MARK E. TUTTLE Assistant Unlimited Vice President and N/A N/A
State Street Bank and Trust Company Secretary Elected: Assistant Counsel, State
Two Avenue de Lafayette August 2007 Street Bank and Trust
Boston, MA 02111 Company (2007-
3/25/70 present); Assistant
Counsel, BISYS Group,
Inc. (2006-2007)
(a financial; services
company); Compliance
Manager, BISYS Group,
Inc. (2005-2006);
Sole Practitioner,
Mark E. Tuttle Attorney
at Law (2004-2005);
Paralegal, John Hancock
Financial Services, Inc.
(2000-2004).
MATTHEW FLAHERTY Assistant Unlimited Assistant Vice N/A N/A
State Street Bank and Trust Treasurer Elected: President, State
Company May 2005 Street Bank and
Two Avenue de Lafayette Trust
Boston, MA 02111 (1994-present).*
2/19/71
CHAD C. HALLETT Assistant Unlimited Vice President, N/A N/A
State Street Bank and Trust Treasurer Elected: State Street Bank and
Company May 2006 Trust Company
Two Avenue de Lafayette (2001-Present).*
Boston, MA 02111
1/28/69
|
* Served in various capacities during noted time period
15
NUMBER OF
PORTFOLIOS
TERM OF PRINCIPAL IN FUND OTHER
OFFICE AND OCCUPATION(s) COMPLEX DIRECTORSHIPS
NAME, ADDRESS POSITION(s) LENGTH OF DURING PAST OVERSEEN HELD BY
AND DATE OF BIRTH WITH FUNDS TIME SERVED 5 YEARS BY TRUSTEE TRUSTEE
----------------- ----------- ----------- ----------------------- ---------- -------------
JULIE B. PIATELLI Chief Unlimited Principal and Senior N/A N/A
SSgA Funds Management, Inc. Compliance Elected: Compliance Officer,
State Street Financial Center Officer August 2007 SSgA Funds
One Lincoln Street Management, Inc.
Boston, MA 02111 (2004-present);
8/5/67 Vice President, State
Street Global Advisors
(2004-present); Senior
Manager,
PricewaterhouseCoopers,
LLP (1999-2004)
|
REMUNERATION OF TRUSTEES AND OFFICERS
No officer, director or employee of the Adviser, its parent or subsidiaries,
other than the Chief Compliance Officer, receives any compensation from the
Trust for serving as an officer or Trustee of the Trust. Commencing August 11,
2007, the Trust and SPDR Index Shares Funds ("SIS Trust") pay, in the aggregate,
each Independent Trustee an annual fee of $60,000 plus $3,000 per in-person
meeting attended. An Independent Trustee will receive $1,000 for each telephonic
or video conference meeting attended. The Chair of the Board receives an
additional annual fee of $25,000 and the Chair of the Audit Committee receives
an additional annual fee of $9,000. The Trust also reimburses each Independent
Trustee for travel and other out-of-pocket expenses incurred by him/her in
connection with attending such meetings. Trustee fees are allocated between the
Trust and SIS Trust and each of their respective series in such a manner as
deemed equitable, taking into consideration the relative net assets of the
series. Previously, the Trust paid each Independent Trustee an annual fee of
$12,000 plus $4,500 per in person meeting attended. An Independent Trustee
received $500 for each meeting attended via telephone or video conference.
The table below shows the compensation that the Independent Trustees received
during the Trust's fiscal year ended June 30, 2007.
PENSION OR TOTAL
RETIREMENT COMPENSATION
BENEFITS ESTIMATED FROM THE
ACCRUED ANNUAL TRUST AND
AGGREGATE AS PART BENEFITS FUND COMPLEX
NAME OF COMPENSATION OF TRUST UPON PAID TO
INDEPENDENT TRUSTEE FROM THE TRUST EXPENSES RETIREMENT TRUSTEES(1)
------------------- -------------- ----------- ---------- ------------
David M. Kelly $ 34,500 $ 0 N/A $ 60,900
Frank Nesvet $ 34,500 $ 0 N/A $ 65,400
Helen F. Peters $ 34,500 $ 0 N/A $ 65,400
|
(1) The Fund Complex includes the Trust and SIS Trust.
STANDING COMMITTEES
Audit Committee. The Board of Trustees has an Audit Committee consisting of all
Trustees who are not "interested persons" (as defined in the 1940 Act) of the
Trust. Ms. Peters serves as Chair. The Audit Committee meets with the Trust's
independent auditors to review and approve the scope and results of their
professional services; to review the procedures for evaluating the adequacy of
the Trust's accounting controls; to consider the range of audit fees; and to
make recommendations to the Board regarding the engagement of the Trust's
independent auditors. The Audit Committee met four (4) times during the fiscal
year ended June 30, 2007.
Trustee Committee. The Board of Trustees has established a Trustee Committee
consisting of all Trustees who are not "interested persons" (as defined in the
1940 Act) of the Trust. Mr. Nesvet serves as Chair. The responsibilities of the
Trustee Committee are to: 1) nominate Independent Trustees; 2) review on a
periodic basis the governance structures and procedures of the Funds; 3) review
proposed resolutions and conflicts of interest that may arise in the business of
the Funds and may have an impact on the investors of the Funds; 4) review
matters that are referred to the Committee by the Chief Legal Officer or other
counsel to the Trust; and 5)
16
provide general oversight of the Funds on behalf of the investors of the Funds.
The Trustee Committee met three (3) times during the fiscal year ended June 30,
2007.
Pricing Committee. The Board of Trustees also has established a Pricing and
Investment Committee that is composed of Officers of the Trust, investment
management personnel of the Adviser and senior operations and administrative
personnel of State Street. The Pricing and Investment Committee is responsible
for the valuation and revaluation of any portfolio investments for which market
quotations or prices are not readily available. The Pricing and Investment
Committee meets only when necessary. The Board of Trustees met four (4) times
during the fiscal year ended June 30, 2007 to review and ratify fair value
pricing determinations of the Pricing Committee. The Pricing Committee reports
to the Board on a quarterly basis.
OWNERSHIP OF FUND SHARES
The following table sets forth information describing the dollar range of equity
securities beneficially owned by each Trustee in the Trust as of December 31,
2006:
AGGREGATE DOLLAR RANGE OF
EQUITY SECURITIES IN ALL
REGISTERED INVESTMENT
COMPANIES OVERSEEN
DOLLAR RANGE OF EQUITY BY TRUSTEE IN FAMILY
NAME OF TRUSTEE SECURITIES IN THE TRUST OF INVESTMENT COMPANIES
-------------------- ----------------------- ---------------------------
INDEPENDENT TRUSTEES
David M. Kelly None None
Frank Nesvet None None
Helen F. Peters None None
INTERESTED TRUSTEE
James Ross None None
|
As of December 31, 2006, the Trustees who are not interested persons (as defined
in the 1940 Act) of the Trust or their immediate family members did not own
beneficially or of record any securities in the Adviser, the Distributor or any
person controlling, controlled by, or under common control with the Adviser or
the Distributor.
CODES OF ETHICS
The Trust, the Adviser and the Distributor each have adopted a code of ethics as
required by applicable law, which is designed to prevent affiliated persons of
the Trust, the Adviser and the Distributor from engaging in deceptive,
manipulative or fraudulent activities in connection with securities held or to
be acquired by the Funds (which may also be held by persons subject to the codes
of ethics).
There can be no assurance that the codes of ethics will be effective in
preventing such activities. Each code of ethics, filed as exhibits to this
registration statement, may be examined at the office of the SEC in Washington,
D.C. or on the Internet at the SEC's website at http://www.sec.gov.
PROXY VOTING POLICIES
The Board of Trustees believes that the voting of proxies on securities held by
the Fund is an important element of the overall investment process. As such, the
Board has delegated the responsibility to vote such proxies to the Adviser. The
Adviser's proxy voting policy is attached to this SAI as Appendix B. Information
regarding how the Fund voted proxies relating to their portfolio securities
during the most recent 12-month period ended June 30 is available (1) without
charge by calling 1-866-787-2257; and (2) on the SEC's website at
http://www.sec.gov.
DISCLOSURE OF PORTFOLIO HOLDINGS POLICY
The Trust has adopted a policy regarding the disclosure of information about the
Trust's portfolio holdings. The Board of Trustees of the Trust must approve all
material amendments to this policy. The Fund's portfolio holdings are publicly
disseminated each day the Fund is open for business through financial reporting
and news services including publicly accessible Internet web sites. In addition,
a basket composition file, which includes the security names and share
quantities to deliver in exchange for Fund Shares, together with estimates and
actual cash components, is publicly disseminated daily prior to the opening of
the AMEX via the National Securities
17
Clearing Corporation (NSCC). The basket represents one creation unit of the
Funds. The Trust, the Adviser or State Street will not disseminate non-public
information concerning the Trust.
THE INVESTMENT ADVISER
SSgA Funds Management, Inc. (the "Adviser") acts as investment adviser to the
Trust and, subject to the supervision of the Board, is responsible for the
investment management of the Fund. The Adviser's principal address is State
Street Financial Center, One Lincoln Street, Boston, Massachusetts 02111. The
Adviser, a Massachusetts corporation, is a wholly owned subsidiary of State
Street Corporation, a publicly held bank holding company. State Street Global
Advisors ("SSgA"), consisting of the Adviser and other investment advisory
affiliates of State Street Corporation, is the investment management arm of
State Street Corporation.
The Adviser serves as investment adviser to the Fund pursuant to an Investment
Advisory Agreement between the Trust and the Adviser. The Investment Advisory
Agreement, with respect to the Fund, continues in effect for two years from its
effective date, and thereafter is subject to annual approval by (1) the Board of
Trustees or (2) vote of a majority of the outstanding voting securities (as
defined in the 1940 Act) of the Fund, provided that in either event such
continuance also is approved by a majority of the Board of Trustees who are not
interested persons (as defined in the 1940 Act) of the Trust by a vote cast in
person at a meeting called for the purpose of voting on such approval. The
Investment Advisory Agreement with respect to the Fund is terminable without
penalty, on 60 days notice, by the Board of Trustees or by a vote of the holders
of a majority (as defined in the 1940 Act) of the Fund's outstanding voting
securities. The Investment Advisory Agreement is also terminable upon 60 days
notice by the Adviser and will terminate automatically in the event of its
assignment (as defined in the 1940 Act).
Under the Investment Advisory Agreement, the Adviser, subject to the supervision
of the Board and in conformity with the stated investment policies of the Fund,
manages the investment of the Fund's assets. The Adviser is responsible for
placing purchase and sale orders and providing continuous supervision of the
investment portfolio of the Fund. Pursuant to the Investment Advisory Agreement,
the Trust has agreed to indemnify the Adviser for certain liabilities, including
certain liabilities arising under the federal securities laws, unless such loss
or liability results from willful misfeasance, bad faith or gross negligence in
the performance of its duties or the reckless disregard of its obligations and
duties.
A discussion regarding the basis for Board of Trustees' approval or continuation
of the Investment Advisory Agreements regarding the Fund will be available in
the Trust's Semi-Annual Report to Shareholders dated December 31, 2007.
For the services provided to the Fund under the Investment Advisory Agreement,
the Fund pays the Adviser monthly fees based on a percentage of the Fund's
average daily net assets as set forth in the Fund's Prospectus. From time to
time, the Adviser may waive all or a portion of its fee. The Adviser pays all
expenses of the Fund other than the management fee, distribution fees pursuant
to the Distribution and Service Plan, if any, brokerage, taxes, interest, fees
and expenses of the Independent Trustees (including any Trustee's counsel fees),
litigation expenses and other extraordinary expenses.
PORTFOLIO MANAGERS
The Adviser manages the Funds using a team of investment professionals. Key
professionals primarily involved in the day-to-day portfolio management for each
of the following Funds include:
FUND PORTFOLIO MANAGERS
------------------------------- ---------------------------------------------
SPDR Lehman High Yield Bond ETF Michael Brunell, John Kirby, Elya Schwartzman
|
The following table lists the number and types of accounts managed by each of
the key professionals involved in the day-to-day portfolio management for the
Fund and assets under management in those accounts. The total number of accounts
and assets have been allocated to each respective manager. Therefore, some
accounts and assets have been counted twice.
18
OTHER ACCOUNTS MANAGED AS OF SEPTEMBER 30, 2007
REGISTERED POOLED TOTAL
INVESTMENT ASSETS INVESTMENT ASSETS ASSETS ASSETS
PORTFOLIO COMPANY MANAGED VEHICLE MANAGED OTHER MANAGED MANAGED
MANAGER ACCOUNTS (BILLIONS)* ACCOUNTS (BILLIONS)* ACCOUNTS (BILLIONS)* (BILLIONS)*
---------------- ---------- ----------- ---------- ----------- -------- ----------- -----------
Michael Brunell 13 $ 0.97 21 $ 3.88 59 $ 43.56 $ 48.41
John Kirby 13 $ 0.97 21 $ 3.88 59 $ 43.56 $ 48.41
Elya Schwartzman 13 $ 0.97 21 $ 3.88 59 $ 43.56 $ 48.41
|
* There are no performance fees associated with these portfolios.
The dollar range of equity securities beneficially owned by the portfolio
managers listed above as of September 30, 2007.
PORTFOLIO DOLLAR RANGE OF EQUITY
MANAGER SECURITIES BENEFICIALLY OWNED
---------------- -----------------------------
Michael Burnell None
John Kirby None
Elya Schwartzman None
|
A portfolio manager that has responsibility for managing more than one account
may be subject to potential conflicts of interest because he or she is
responsible for other accounts in addition to the Fund. Those conflicts could
include preferential treatment of one account over others in terms of: (a) the
portfolio manager's execution of different investment strategies for various
accounts; or (b) the allocation of resources or of investment opportunities. The
Adviser has adopted policies and procedures designed to address these potential
material conflicts. For instance, portfolio managers are normally responsible
for all accounts within a certain investment discipline, and do not, absent
special circumstances, differentiate among the various accounts when allocating
resources. Additionally, the Adviser and its advisory affiliates have processes
and procedures for allocating investment opportunities among portfolios that are
designed to provide a fair and equitable allocation among the portfolio
manager's accounts with the same strategy.
Portfolio managers may manage numerous accounts for multiple clients. These
accounts may include registered investment companies, other types of pooled
accounts (e.g., collective investment funds), and separate accounts (i.e.,
accounts managed on behalf of individuals or public or private institutions).
Portfolio managers make investment decisions for each account based on the
investment objectives and policies and other relevant investment considerations
applicable to that portfolio. A potential conflict of interest may arise as a
result of the portfolio managers' responsibility for multiple accounts with
similar investment guidelines. Under these circumstances, a potential investment
may be suitable for more than one of the portfolio managers' accounts, but the
quantity of the investment available for purchase is less than the aggregate
amount the accounts would ideally devote to the opportunity. Similar conflicts
may arise when multiple accounts seek to dispose of the same investment. The
portfolio manager may also manage accounts whose objectives and policies differ
from that of the Fund. These differences may be such that under certain
circumstances, trading activity appropriate for one account managed by the
portfolio manager may have adverse consequences for another account managed by
the portfolio manager. For example, an account may sell a significant position
in a security, which could cause the market price of that security to decrease,
while the Fund maintained its position in that security.
A potential conflict may arise when the portfolio manager is responsible for
accounts that have different advisory fees - the difference in fees could create
an incentive for the portfolio manager to favor one account over another, for
example, in terms of access to investment opportunities. This conflict may be
heightened if an account is subject to a performance-based fee. Another
potential conflict may arise when the portfolio manager has an investment in one
or more accounts that participate in transactions with other accounts. His or
her investment(s) may create an incentive for the portfolio manager to favor one
account over another. The Adviser has adopted policies and procedures reasonably
designed to address these potential material conflicts. For instance, portfolio
managers are normally responsible for all accounts within a certain investment
discipline, and do not, absent special circumstances, differentiate among the
various accounts when allocating resources. Additionally, the Adviser and its
advisory affiliates have processes and procedures for allocating investment
opportunities among portfolios that are designed to provide a fair and equitable
allocation.
The compensation of the Adviser's investment professionals is based on a number
of factors. The first factor considered is external market. Through a
compensation survey process, the Adviser seeks to understand what its
competitors are paying people to perform similar roles. This data is then used
to determine a competitive baseline in the areas of base pay, bonus, and long
term incentive (i.e. equity). The second factor taken into consideration is the
size of the pool available for this compensation. The Adviser is a part of State
Street Corporation, and therefore works within its corporate environment on
determining the overall level of its incentive compensation pool. Once
determined, this pool is then allocated to the various locations and departments
of the Adviser and its affiliates. The discretionary determination of the
allocation amounts to these locations and departments is influenced by the
19
competitive market data, as well as the overall performance of the group. The
pool is then allocated on a discretionary basis to individual employees based on
their individual performance. There is no fixed formula for determining these
amounts, nor is anyone's compensation directly tied to the investment
performance or asset value of a product or strategy. The same process is
followed in determining incentive equity allocations.
20
THE ADMINISTRATOR, CUSTODIAN AND TRANSFER AGENT
State Street serves as Administrator for the Trust pursuant to an Administrative
Services Agreement. Under the Administrative Services Agreement, State Street is
obligated on a continuous basis to provide such administrative services as the
Board of Trustees of the Trust reasonably deems necessary for the proper
administration of the Trust and the Fund. State Street will generally assist in
all aspects of the Trust's and the Fund's operations; supply and maintain office
facilities (which may be in State Street's own offices), statistical and
research data, data processing services, clerical, accounting, bookkeeping and
record keeping services (including without limitation the maintenance of such
books and records as are required under the 1940 Act and the rules thereunder,
except as maintained by other agents), internal auditing, executive and
administrative services, and stationery and office supplies; prepare reports to
shareholders or investors; prepare and file tax returns; supply financial
information and supporting data for reports to and filings with the SEC and
various state Blue Sky authorities; supply supporting documentation for meetings
of the Board of Trustees; provide monitoring reports and assistance regarding
compliance with the Declaration of Trust, by-laws, investment objectives and
policies and with federal and state securities laws; arrange for appropriate
insurance coverage; and negotiate arrangements with, and supervise and
coordinate the activities of, agents and others to supply services.
Pursuant to the Administrative Services Agreement, the Trust has agreed to
indemnify the Administrator for certain liabilities, including certain
liabilities arising under the federal securities laws, unless such loss or
liability results from gross negligence or willful misconduct in the performance
of its duties.
State Street, One Lincoln Street, Boston, Massachusetts 02111, also serves as
Custodian for the Funds pursuant to a Custodian Agreement. As Custodian, State
Street holds the Fund's assets, calculates the net asset value of the Shares and
calculates net income and realized capital gains or losses.
State Street also serves as Transfer Agent of the Fund pursuant to a Transfer
Agency Agreement. State Street may be reimbursed by the Fund for its
out-of-pocket expenses. State Street and the Trust will comply with the
self-custodian provisions of Rule 17f-2 under the 1940 Act.
As compensation for its services under the Administrative Services Agreement,
the Custodian Agreement, and Transfer Agency Agreement, State Street shall
receive a fee for its services, calculated based on the average aggregate net
assets of the Fund, as follows: 0.06% on the first $200 million, 0.04% on the
next $200 million, and 0.025% thereafter, calculated on a Trust basis (i.e., the
first break point will be calculated by multiplying the number of funds times
$200M). After the first year of operations, a $125,000 minimum fee applies. The
greater of the minimum fee or the asset based fee will be charged. The Advisory
Agreement provides that the Adviser will pay certain operating expenses of the
Trust, including the fees due to State Street under each of the Administrative
Services Agreement, the Custodian Agreement and the Transfer Agency Agreement.
THE DISTRIBUTOR
State Street Global Markets, LLC is the principal underwriter and Distributor of
Shares. Its principal address is State Street Financial Center, One Lincoln
Street, Boston, Massachusetts 02111. Investor information can be obtained by
calling 1-866-787-2257. The Distributor has entered into a Distribution
Agreement with the Trust pursuant to which it distributes Shares of the Fund.
The Distribution Agreement will continue for two years from its effective date
and is renewable annually thereafter. Shares will be continuously offered for
sale by the Trust through the Distributor only in Creation Units, as described
in the Prospectus and below under "PURCHASE AND REDEMPTION OF CREATION UNITS."
Shares in less than Creation Units are not distributed by the Distributor. The
Distributor will deliver the Prospectus to persons purchasing Creation Units and
will maintain records of both orders placed with it and confirmations of
acceptance furnished by it. The Distributor is a broker-dealer registered under
the Securities Exchange Act of 1934 (the "Exchange Act") and a member of the
Financial Industry Regulatory Authority ("FINRA"). The Distributor has no role
in determining the investment policies of the Trust or which securities are to
be purchased or sold by the Trust.
The Fund has adopted a Distribution and Service (Rule 12b-1) Plan (a "Plan")
pursuant to which payments of up to 0.25% may be made. No payments pursuant to
the Plan will be made during the next twelve (12) months of operation. Under its
terms, the Plan remains in effect from year to year, provided such continuance
is approved annually by vote of the Board, including a majority of the
"Independent Trustees" (Trustees who are not interested persons of the Fund (as
defined in the 1940 Act) and have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan). The Plan may
not be amended to increase materially the amount to be spent for the services
provided by the Distributor without approval by the shareholders of the Fund to
which the Plan applies, and all material amendments of the Plan also require
Board approval (as described above). The Plan may be terminated at any time,
without penalty, by vote of a majority of the Independent Trustees, or, by a
vote of a majority of the
21
outstanding voting securities of the Fund (as such vote is defined in the 1940
Act). Pursuant to the Distribution Agreement, the Distributor will provide the
Board with periodic reports of any amounts expended under the Plan and the
purpose for which such expenditures were made.
The Distribution Agreement provides that it may be terminated at any time,
without the payment of any penalty, as to the Fund: (i) by vote of a majority of
the Independent Trustees or (ii) by vote of a majority (as defined in the 1940
Act) of the outstanding voting securities of the Fund, on at least 60 days
written notice to the Distributor. The Distribution Agreement is also terminable
upon 60 days' notice by the Distributor and will terminate automatically in the
event of its assignment (as defined in the 1940 Act).
Pursuant to agreements entered into with such persons, the Distributor will make
payments under the Plan to certain broker-dealers or other persons ("Investor
Services Organizations") that enter into agreements with the Distributor in the
form approved by the Board of Trustees to provide distribution assistance and
shareholder support, account maintenance and educational and promotional
services (which may include compensation and sales incentives to the registered
brokers or other sales personnel of the broker-dealer or other financial entity
that is a party to an investor services agreement) ("Investor Services
Agreements"). No such Investor Services Agreements will be entered into during
the first twelve months of operation. Each Investor Services Agreement will be a
"related agreement" under the Plan. No Investor Services Agreement will provide
for annual fees of more than 0.25% of the Fund's average daily net assets per
annum attributable to Shares subject to such agreement.
Subject to an aggregate limitation of 0.25% of the Fund's average net assets per
annum, the fees paid by the Fund under the Plan will be compensation for
distribution, investor services or marketing services for the Fund. To the
extent the Plan fees aggregate less than 0.25% per annum of the average daily
net assets of the Fund, the Fund may also reimburse the Distributor and other
persons for their respective costs incurred in printing prospectuses and
producing advertising or marketing material prepared at the request of the Fund.
The aggregate payments under the Plan will not exceed, on an annualized basis,
0.25% of average daily net assets of the Fund.
The continuation of the Distribution Agreement, any Investor Services Agreements
and any other related agreements is subject to annual approval of the Board,
including by a majority of the Independent Trustees, as described above.
Each of the Investor Services Agreements will provide that it may be terminated
at any time, without the payment of any penalty, (i) by vote of a majority of
the Independent Trustees or (ii) by vote of a majority of the outstanding voting
securities (as defined in the 1940 Act) of the Fund, on at least 60 days'
written notice to the other party. Each of the Distribution Agreement and the
Investor Services Agreements is also terminable upon 60 days' notice by the
Distributor and will terminate automatically in the event of its assignment (as
defined in the 1940 Act). Each Investor Services Agreement is also terminable by
the applicable Investor Service Organization upon 60 days' notice to the other
party thereto.
The fees and expenses payable under the Distribution Agreement and the Investor
Services Agreements will be made in accordance with the daily net assets of the
Fund.
The Distributor may also enter into agreements with securities dealers
("Soliciting Dealers") who will solicit purchases of Creation Unit aggregations
of Fund Shares. Such Soliciting Dealers may also be Participating Parties (as
defined in the "Book Entry Only System" section below), DTC Participants (as
defined below) and/or Investor Services Organizations.
Pursuant to the Distribution Agreement, the Trust has agreed to indemnify the
Distributor, and may indemnify Soliciting Dealers entering into agreements with
the Distributor, for certain liabilities, including certain liabilities arising
under the federal securities laws, unless such loss or liability results from
willful misfeasance, bad faith or gross negligence in the performance of its
duties or the reckless disregard of its obligations and duties under the
Distribution Agreement or other agreement, as applicable.
BROKERAGE TRANSACTIONS
The policy of the Trust regarding purchases and sales of securities for the Fund
is that primary consideration will be given to obtaining the most favorable
prices and efficient executions of transactions. Consistent with this policy,
when securities transactions are effected on a stock exchange, the Trust's
policy is to pay commissions which are considered fair and reasonable without
necessarily determining that the lowest possible commissions are paid in all
circumstances. The Trust believes that a requirement always to seek the lowest
possible commission cost could impede effective portfolio management and
preclude the Fund and the Adviser from obtaining a high quality of brokerage and
research services. In seeking to determine the reasonableness of brokerage
commissions paid in any transaction, the Adviser relies upon its experience and
knowledge regarding commissions generally charged by various
22
brokers and on its judgment in evaluating the brokerage and research services
received from the broker effecting the transaction. Such determinations are
necessarily subjective and imprecise, as in most cases an exact dollar value for
those services is not ascertainable. The Trust has adopted policies and
procedures that prohibit the consideration of sales of the Fund's Shares as a
factor in the selection of a broker or dealer to execute its portfolio
transactions.
The Adviser owes a fiduciary duty to its clients to seek to provide best
execution on trades effected. In selecting a broker/dealer for each specific
transaction, the Adviser chooses the broker/dealer deemed most capable of
providing the services necessary to obtain the most favorable execution. Best
execution is generally understood to mean the most favorable cost or net
proceeds reasonably obtainable under the circumstances. The full range of
brokerage services applicable to a particular transaction may be considered when
making this judgment, which may include, but is not limited to: liquidity,
price, commission, timing, aggregated trades, capable floor brokers or traders,
competent block trading coverage, ability to position, capital strength and
stability, reliable and accurate communications and settlement processing, use
of automation, knowledge of other buyers or sellers, arbitrage skills,
administrative ability, underwriting and provision of information on a
particular security or market in which the transaction is to occur. The specific
criteria will vary depending upon the nature of the transaction, the market in
which it is executed, and the extent to which it is possible to select from
among multiple broker/dealers. The Adviser will also use electronic crossing
networks (ECNs) when appropriate.
The Adviser does not presently participate in any soft dollar arrangements. It
may aggregate trades with clients of SSgA, whose commission dollars may be used
to generate soft dollar credits. Although the Adviser's clients' commissions are
not used for soft dollars, the clients may benefit from the soft dollar
products/services received by SSgA.
The Adviser assumes general supervision over placing orders on behalf of the
Trust for the purchase or sale of portfolio securities. If purchases or sales of
portfolio securities of the Trust and one or more other investment companies or
clients supervised by the Adviser are considered at or about the same time,
transactions in such securities are allocated among the several investment
companies and clients in a manner deemed equitable and consistent with its
fiduciary obligations to all by the Adviser. In some cases, this procedure could
have a detrimental effect on the price or volume of the security so far as the
Trust is concerned. However, in other cases, it is possible that the ability to
participate in volume transactions and to negotiate lower brokerage commissions
will be beneficial to the Trust. The primary consideration is prompt execution
of orders at the most favorable net price.
The Funds will not deal with affiliates in principal transactions unless
permitted by exemptive order or applicable rule or regulation.
Securities of "Regular Broker-Dealer." The Fund is required to identify any
securities of its "regular brokers and dealers" (as such term is defined in the
1940 Act) which they may hold at the close of their most recent fiscal year.
"Regular brokers or dealers" of the Trust are the ten brokers or dealers that,
during the most recent fiscal year: (i) received the greatest dollar amounts of
brokerage commissions from the Trust's portfolio transactions; (ii) engaged as
principal in the largest dollar amounts of portfolio transactions of the Trust;
or (iii) sold the largest dollar amounts of the Trust's shares. The Fund is new
and has not engaged in transactions prior to the date of this SAI.
Portfolio turnover may vary from year to year, as well as within a year. High
turnover rates are likely to result in comparatively greater brokerage expenses.
The portfolio turnover rate for the Fund is expected to be under 50%. The
overall reasonableness of brokerage commissions is evaluated by the Adviser
based upon its knowledge of available information as to the general level of
commissions paid by other institutional investors for comparable services.
23
BOOK ENTRY ONLY SYSTEM
The following information supplements and should be read in conjunction with the
section in the Prospectus entitled "BUYING AND SELLING THE FUND."
Depository Turst Company ("DTC") acts as securities depositary for the Shares.
Shares of the Fund are represented by securities registered in the name of DTC
or its nominee, Cede & Co., and deposited with, or on behalf of, DTC. Except in
the limited circumstance provided below, certificates will not be issued for
Shares.
DTC, a limited-purpose trust company, was created to hold securities of its
participants (the "DTC Participants") and to facilitate the clearance and
settlement of securities transactions among the DTC Participants in such
securities through electronic book-entry changes in accounts of the DTC
Participants, thereby eliminating the need for physical movement of securities
certificates. DTC Participants include securities brokers and dealers, banks,
trust companies, clearing corporations and certain other organizations, some of
whom (and/or their representatives) own DTC. More specifically, DTC is owned by
a number of its DTC Participants and by the New York Stock Exchange ("NYSE"),
the AMEX and the FINRA. Access to the DTC system is also available to others
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a DTC Participant, either directly or
indirectly (the "Indirect Participants").
Beneficial ownership of Shares is limited to DTC Participants, Indirect
Participants and persons holding interests through DTC Participants and Indirect
Participants. Ownership of beneficial interests in Shares (owners of such
beneficial interests are referred to herein as "Beneficial Owners") is shown on,
and the transfer of ownership is effected only through, records maintained by
DTC (with respect to DTC Participants) and on the records of DTC Participants
(with respect to Indirect Participants and Beneficial Owners that are not DTC
Participants). Beneficial Owners will receive from or through the DTC
Participant a written confirmation relating to their purchase of Shares.
CONVEYANCE OF ALL NOTICES, STATEMENTS AND OTHER COMMUNICATIONS TO BENEFICIAL
OWNERS IS EFFECTED AS FOLLOWS. Pursuant to the Depositary Agreement between the
Trust and DTC, DTC is required to make available to the Trust upon request and
for a fee to be charged to the Trust a listing of the Shares of the Fund held by
each DTC Participant. The Trust shall inquire of each such DTC Participant as to
the number of Beneficial Owners holding Shares, directly or indirectly, through
such DTC Participant. The Trust shall provide each such DTC Participant with
copies of such notice, statement or other communication, in such form, number
and at such place as such DTC Participant may reasonably request, in order that
such notice, statement or communication may be transmitted by such DTC
Participant, directly or indirectly, to such Beneficial Owners. In addition, the
Trust shall pay to each such DTC Participant a fair and reasonable amount as
reimbursement for the expenses attendant to such transmittal, all subject to
applicable statutory and regulatory requirements.
Share distributions shall be made to DTC or its nominee, Cede & Co., as the
registered holder of all Shares. DTC or its nominee, upon receipt of any such
distributions, shall credit immediately DTC Participants' accounts with payments
in amounts proportionate to their respective beneficial interests in Shares of
the Fund as shown on the records of DTC or its nominee. Payments by DTC
Participants to Indirect Participants and Beneficial Owners of Shares held
through such DTC Participants will be governed by standing instructions and
customary practices, as is now the case with securities held for the accounts of
customers in bearer form or registered in a "street name," and will be the
responsibility of such DTC Participants.
The Trust has no responsibility or liability for any aspects of the records
relating to or notices to Beneficial Owners, or payments made on account of
beneficial ownership interests in such Shares, or for maintaining, supervising
or reviewing any records relating to such beneficial ownership interests or for
any other aspect of the relationship between DTC and the DTC Participants or the
relationship between such DTC Participants and the Indirect Participants and
Beneficial Owners owning through such DTC Participants.
DTC may determine to discontinue providing its service with respect to Shares at
any time by giving reasonable notice to the Trust and discharging its
responsibilities with respect thereto under applicable law. Under such
circumstances, the Trust shall take action either to find a replacement for DTC
to perform its functions at a comparable cost or, if such a replacement is
unavailable, to issue and deliver printed certificates representing ownership of
Shares, unless the Trust makes other arrangements with respect thereto
satisfactory to the Exchange.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
24
As of October 31, 2007, the Fund had not yet commenced operations. Therefore the
Fund does not have any shareholders who beneficially own of record 5% or more of
the outstanding shares of the Fund.
An Authorized Participant (as defined below) may hold of record more than 25% of
the outstanding shares of the Fund. From time to time, Authorized Participants
may be a beneficial and/or legal owner of the Fund, may be affiliated with an
index provider, may be deemed to have control of the Fund and/or may be able to
affect the outcome of matters presented for a vote of the shareholders of the
Fund. Authorized Participants may execute an irrevocable proxy granting the
Distributor or another affiliate of State Street (the "Agent") power to vote or
abstain from voting such Authorized Participant's beneficially or legally owned
shares of the Fund. In such cases, the Agent shall mirror vote (or abstain from
voting) such shares in the same proportion as all other beneficial owners of the
Fund.
The Trustees and Officers of the Trust, as a group, own less than 1% of the
Trust's voting securities as of the date of this SAI.
PURCHASE AND REDEMPTION OF CREATION UNITS
PURCHASE (CREATION). The Trust issues and sells Shares of the Fund only: (i) in
Creation Units on a continuous basis through the Principal Underwriter, without
a sales load, at their net asset value next determined after receipt, on any
Business Day (as defined below), of an order in proper form pursuant to the
terms of the Authorized Participant Agreement ("Participant Agreement"); or (ii)
pursuant to the Dividend Reinvestment Service (as defined below).
A "Business Day" with respect to the Fund is any day except weekends and the
following holidays: New Year's Day, Dr. Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day (observed), Independence Day, Labor Day, Columbus
Day, Veterans Day, Thanksgiving Day and Christmas Day.
FUND DEPOSIT. The consideration for purchase of a Creation Unit of the Fund
generally consists of a cash payment equal in value to the Deposit Securities,
the "Deposit Cash", together with the Cash Component. When accepting purchases
of Creation Units for cash, the Fund may incur additional costs associated with
the acquisition of Deposit Securities that would otherwise be provided by an
in-kind purchaser.
The Deposit Cash and the Cash Component constitute the "Fund Deposit," which
represents the minimum initial and subsequent investment amount for a Creation
Unit of the Fund. The Cash Component is an amount equal to the difference
between the net asset value of the Shares (per Creation Unit) and the market
value of the Deposit Securities or Deposit Cash, as applicable. If the Cash
Component is a positive number (i.e., the net asset value per Creation Unit
exceeds the market value of the Deposit Securities or Deposit Cash), the Cash
Component shall be such positive amount. If the Cash Component is a negative
number (i.e., the net asset value per Creation Unit is less than the market
value of the Deposit Securities or Deposit Cash), the Cash Component shall be
such negative amount and the creator will be entitled to receive cash in an
amount equal to the Cash Component. The Cash Component serves the function of
compensating for any differences between the net asset value per Creation Unit
and the market value of the Deposit Securities or Deposit Cash. Computation of
the Cash Component excludes any stamp duty or other similar fees and expenses
payable upon transfer of beneficial ownership of the Deposit Securities, if
applicable, which shall be the sole responsibility of the Authorized Participant
(as defined below).
The Custodian, through NSCC, makes available on each Business Day, immediately
prior to the opening of business on the Exchange (currently 9:30 a.m., Eastern
time), the list of the names and the required number of shares of each Deposit
Security or the required amount of Deposit Cash, as applicable, to be included
in the current Fund Deposit (based on information at the end of the previous
Business Day) for the Fund. Such Fund Deposit is subject to any applicable
adjustments as described below, in order to effect purchases of Creation Units
of a the Fund until such time as the next-announced composition of the Deposit
Securities or the required amount of Deposit Cash, as applicable, is made
available.
The identity and number of shares of the Deposit Securities or the amount of
Deposit Cash, as applicable, required for a Fund Deposit for the Fund changes as
rebalancing adjustments, interest payments and corporate action events are
reflected from time to time by the Adviser with a view to the investment
objective of the Fund. The composition of the Deposit Securities may also change
in response to adjustments to the weighting or composition of the Component
Stocks of the index.
The Trust reserves the right to permit or require the substitution of a "cash in
lieu" amount to be added to the Cash Component to replace any Deposit Security
which: (i) may not be available in sufficient quantity for delivery, (ii) may
not be eligible for transfer
25
through the systems of DTC for corporate securities and municipal securities or
the Federal Reserve System for U.S. Treasury securities; (iii) may not be
eligible for trading by an Authorized Participant (as defined below) or the
investor for which it is acting; (iv) would be restricted under the securities
laws or where the delivery of the Deposit Security to the Authorized Participant
would result in the disposition of the Deposit Security by the Authorized
Participant becoming restricted under the securities laws, or (v) in certain
other situations (collectively, "custom orders"). The Trust also reserves the
right to: (i) permit or require the substitution of Deposit Securities in lieu
of Deposit Cash; and (ii) include or remove Deposit Securities from the basket
in anticipation of index rebalancing changes. The adjustments described above
will reflect changes, known to the Adviser on the date of announcement to be in
effect by the time of delivery of the Fund Deposit, in the composition of the
subject index being tracked by the Fund or resulting from certain corporate
actions.
PROCEDURES FOR PURCHASE OF CREATION UNITS. To be eligible to place orders with
the Principal Underwriter to purchase a Creation Unit of a Fund, an entity must
be (i) a "Participating Party", i.e., a broker-dealer or other participant in
the clearing process through the Continuous Net Settlement System of the NSCC
(the "Clearing Process"), a clearing agency that is registered with the SEC; or
(ii) a DTC Participant (see "BOOK ENTRY ONLY SYSTEM"). In addition, each
Participating Party or DTC Participant (each, an "Authorized Participant") must
execute a Participant Agreement that has been agreed to by the Principal
Underwriter and the Transfer Agent, and that has been accepted by the Trust,
with respect to purchases and redemptions of Creation Units. Each Authorized
Participant will agree, pursuant to the terms of a Participation Agreement, on
behalf of itself or any investor on whose behalf it will act, to certain
conditions, including that it will pay to the Trust, an amount of cash
sufficient to pay the Cash Component together with the Creation Transaction Fee
(defined below).
All orders to purchase Shares directly from the Fund, including custom orders,
must be placed for one or more Creation Units and in the manner and by the time
set forth in the Participant Agreement and the order form. The date on which an
order to purchase Creation Units (or an order to redeem Creation Units, as set
forth below) is referred to as the "Order Placement Date."
An Authorized Participant may require an investor to make certain
representations or enter into agreements with respect to the order (e.g., to
provide for payments of cash, when required). Investors should be aware that
their particular broker may not have executed a Participant Agreement and that,
therefore, orders to purchase Shares directly from the Fund in Creation Units
have to be placed by the investor's broker through an Authorized Participant
that has executed a Participant Agreement. In such cases there may be additional
charges to such investor. At any given time, there may be only a limited number
of broker-dealers that have executed a Participant Agreement and only a small
number of such Authorized Participants may have international capabilities.
On days when the Exchange or the bond markets close earlier than normal, the
Fund may require orders to create Creation Units to be placed earlier in the
day. Orders must be transmitted by an Authorized Participant by telephone or
other transmission method acceptable to the Distributor pursuant to procedures
set forth in the Participant Agreement. Those placing orders through an
Authorized Participant should allow sufficient time to permit proper submission
of the purchase order to the Principal Underwriter by the cut-off time on such
Business Day. Economic or market disruptions or changes, or telephone or other
communication failure may impede the ability to reach the Distributor or an
Authorized Participant.
ADDITIONAL PROCEDURES FOR PURCHASE OF CREATION UNITS. Fund Deposits must be
delivered by an Authorized Participant through the Federal Reserve System (for
cash and U.S. government securities) and/or through DTC (for corporate
securities and municipal securities). The Fund Deposit transfer must be ordered
by the DTC Participant in a timely fashion so as to ensure the delivery of the
requisite number of Deposit Securities or Deposit Cash, as applicable, through
DTC to the account of the Fund by no later than 3:00 p.m., Eastern time, on the
Settlement Date. The "Settlement Date" for the Fund is generally the third
business day after the Order Placement Date. All questions as to the number of
Deposit Securities or Deposit Cash to be delivered, as applicable, and the
validity, form and eligibility (including time of receipt) for the deposit of
any tendered securities or cash, as applicable, will be determined by the Trust,
whose determination shall be final and binding. The amount of cash represented
by the Cash Component must be transferred directly to the Custodian through the
Federal Reserve Bank wire transfer system in a timely manner so as to be
received by the Custodian no later than 3:00 p.m., Eastern time, on the
Settlement Date. If the Cash Component and the Deposit Securities or Deposit
Cash, as applicable, are not received by 3:00 p.m., Eastern time, on the
Settlement Date, the creation order may be cancelled. Upon written notice to the
Distributor, such canceled order may be resubmitted the following Business Day
using a Fund Deposit as newly constituted to reflect the then current NAV of the
Fund. The delivery of Creation Units so created generally will occur no later
than the third Business Day following the day on which the purchase order is
deemed received by the Distributor.
The order shall be deemed to be received on the Business Day on which the order
is placed provided that the order is placed in proper form prior to the
applicable cut-off time and the federal funds in the appropriate amount are
deposited with by 3:00 p.m., Eastern time,
26
with the Custodian on the Settlement Date. If the order is not placed in proper
form as required, or federal funds in the appropriate amount are not received by
3:00 p.m. Eastern time on the Settlement Date, then the order may be deemed to
be rejected and the Authorized Participant shall be liable to the Fund for
losses, if any, resulting therefrom.
ISSUANCE OF A CREATION UNIT. Except as provided herein, Creation Units will not
be issued until the transfer of good title to the Trust of the Deposit
Securities or payment of Deposit Cash, as applicable, and the payment of the
Cash Component have been completed.
Creation Units may be purchased in advance of receipt by the Trust of all or a
portion of the applicable Deposit Securities as described below. In these
circumstances, the initial deposit will have a value greater than the net asset
value of the Shares on the date the order is placed in proper form since in
addition to available Deposit Securities, cash must be deposited in an amount
equal to the sum of (i) the Cash Component, plus (ii) as additional amount of
cash equal to a percentage of the market value as set forth in the Participant
Agreement, of the undelivered Deposit Securities (the "Additional Cash
Deposit"), which shall be maintained in a separate non-interest bearing
collateral account. An additional amount of cash shall be required to be
deposited with the Trust, pending delivery of the missing Deposit Securities to
the extent necessary to maintain the Additional Cash Deposit with the Trust in
an amount at least equal to the applicable percentage, as set forth in the
Participant Agreement, of the daily marked to market value of the missing
Deposit Securities. The Participant Agreement will permit the Trust to buy the
missing Deposit Securities at any time. Authorized Participants will be liable
to the Trust for the costs incurred by the Trust in connection with any such
purchases. These costs will be deemed to include the amount by which the actual
purchase price of the Deposit Securities exceeds the market value of such
Deposit Securities on the day the purchase order was deemed received by the
Principal Underwriter plus the brokerage and related transaction costs
associated with such purchases. The Trust will return any unused portion of the
Additional Cash Deposit once all of the missing Deposit Securities have been
properly received by the Custodian or purchased by the Trust and deposited into
the Trust. In addition, a Transaction Fee as set forth below under "Creation
Transaction Fees" will be charged in all cases. The delivery of Creation Units
so created generally will occur no later than the Settlement Date.
ACCEPTANCE OF ORDERS OF CREATION UNITS. The Trust reserves the absolute right to
reject an order for Creation Units transmitted to it by the Principal
Underwriter in respect of the Fund if (a) the order is not in proper form; (b)
the Deposit Securities or Deposit Cash, as applicable, delivered by the
Participant are not as disseminated through the facilities of the NSCC for that
date by the Custodian; (c) the investor(s), upon obtaining the Shares ordered,
would own 80% or more of the currently outstanding Shares of the Fund; (d)
acceptance of the Deposit Securities would have certain adverse tax consequences
to the Fund; (e) the acceptance of the Fund Deposit would, in the opinion of
counsel, be unlawful; (f) the acceptance of the Fund Deposit would otherwise, in
the discretion of the Trust or the Adviser, have an adverse effect on the Trust
or the rights of beneficial owners; (g) the acceptance or receipt of the order
for a Creation Unit would, in the opinion of counsel to the Trust, be unlawful;
or (h) in the event that circumstances outside the control of the Trust, the
Custodian, the Transfer Agent and/or the Adviser make it for all practical
purposes not feasible to process orders for Creation Units. Examples of such
circumstances include acts of God or public service or utility problems such as
fires, floods, extreme weather conditions and power outages resulting in
telephone, telecopy and computer failures; market conditions or activities
causing trading halts; systems failures involving computer or other information
systems affecting the Trust, the Principal Underwriter, the Custodian, the
Transfer Agent, DTC, NSCC, Federal Reserve System, or any other participant in
the creation process, and other extraordinary events. The Principal Underwriter
shall notify a prospective creator of a Creation Unit and/or the Authorized
Participant acting on behalf of the creator of a Creation Unit of its rejection
of the order of such person. The Trust, the Transfer Agent, the Custodian and
the Principal Underwriter are under no duty, however, to give notification of
any defects or irregularities in the delivery of Fund Deposits nor shall either
of them incur any liability for the failure to give any such notification. The
Trust, the Transfer Agent, the Custodian and the Principal Underwriter shall not
be liable for the rejection of any purchase order for Creation Units.
All questions as to the number of shares of each security in the Deposit
Securities and the validity, form, eligibility and acceptance for deposit of any
securities to be delivered shall be determined by the Trust, and the Trust's
determination shall be final and binding.
CREATION TRANSACTION FEE. A purchase (i.e., creation) transaction fee is imposed
for the transfer and other transaction costs associated with the purchase of
Creation Units, and investors will be required to pay a fixed creation
transaction fee regardless of the number of Creation Units created in the
transaction, as set forth in the Fund's Prospectus, as may be revised from time
to time. The Fund may adjust the creation transaction fee from time to time
based upon actual experience. An additional charge for cash purchases, custom
orders, or partial cash purchases for the Fund may be imposed. Investors who use
the services of a broker or other such intermediary may be charged a fee for
such services. Investors are responsible for the costs of transferring the
securities constituting the Deposit Securities to the account of the Trust.
27
REDEMPTION. Shares may be redeemed only in Creation Units at their net asset
value next determined after receipt of a redemption request in proper form by
the Fund through the Transfer Agent and only on a Business Day. EXCEPT UPON
LIQUIDATION OF THE FUND, THE TRUST WILL NOT REDEEM SHARES IN AMOUNTS LESS THAN
CREATION UNITS. Investors must accumulate enough Shares in the secondary market
to constitute a Creation Unit in order to have such Shares redeemed by the
Trust. There can be no assurance, however, that there will be sufficient
liquidity in the public trading market at any time to permit assembly of a
Creation Unit. Investors should expect to incur brokerage and other costs in
connection with assembling a sufficient number of Shares to constitute a
redeemable Creation Unit.
With respect to the Fund, the Custodian, through the NSCC, makes available
immediately prior to the opening of business on the Exchange (currently 9:30 am,
Eastern time) on each Business Day, the list of the names and share quantities
of the Fund's portfolio securities that will be applicable (subject to possible
amendment or correction) to redemption requests received in proper form (as
defined below) on that day ("Fund Securities").
Redemption proceeds for a Creation Unit generally consist of Fund Securities --
as announced by the Custodian on the Business Day of the request for redemption
received in proper form plus cash in an amount equal to the difference between
the net asset value of the Shares being redeemed, as next determined after a
receipt of a request in proper form, and the value of the Fund Securities (the
"Cash Redemption Amount"), less a fixed redemption transaction fee as set forth
below. In the event that the Fund Securities have a value greater than the net
asset value of the Shares, a compensating cash payment equal to the differential
is required to be made by or through an Authorized Participant by the redeeming
shareholder. Notwithstanding the foregoing, at the Trust's discretion with
respect to the Fund, an Authorized Participant may receive the corresponding
cash value of the securities in lieu of the in-kind securities value
representing one or more Fund Securities.
REDEMPTION TRANSACTION FEE. A redemption transaction fee is imposed for the
transfer and other transaction costs associated with the redemption of Creation
Units, and investors will be required to pay a fixed redemption transaction fee
regardless of the number of Creation Units created in the transaction, as set
forth in the Fund's Prospectus, as may be revised from time to time. The
redemption transaction fee is the same no matter how many Creation Units are
being redeemed pursuant to any one redemption request. The Fund may adjust the
redemption transaction fee from time to time based upon actual experience. An
additional charge for cash redemptions, custom orders, or partial cash
redemptions (when cash redemptions are available) for the Fund may be imposed.
Investors who use the services of a broker or other such intermediary may be
charged a fee for such services. Investors are responsible for the costs of
transferring the Fund Securities from the Trust to their account or on their
order.
PROCEDURES FOR REDEMPTION OF CREATION UNITS. To be eligible to place redemption
orders for Creation Units of the Fund, an entity must be a DTC Participant that
has executed a Participant Agreement and have the ability to transact through
the Federal Reserve System. Orders to redeem Creation Units must be submitted in
proper form to the Transfer Agent prior to the time as set forth in the
Participant Agreement and the order form. A redemption request is considered to
be in "proper form" if (i) such order is accompanied or followed by the
requisite number of Shares of the Fund specified in such order, which delivery
must be made through DTC to the Custodian no later than 3:00 p.m., Eastern time,
on the Settlement Date; and (ii) all other procedures set forth in the
Participant Agreement are properly followed. On days when the Exchange or the
bond markets close earlier than normal, the Fund may require orders to redeem
Creation Units to be placed earlier in the day. After the Trust has deemed an
order for redemption received, the Trust will initiate procedures to transfer
the requisite Fund Securities and the Cash Redemption Amount to the Authorized
Participant on behalf of the redeeming beneficial owner by the Settlement Date.
The calculation of the value of the Fund Securities and the Cash Redemption
Amount to be delivered upon redemption will be made by the Custodian according
to the procedures set forth under "Determination of Net Asset Value", computed
on the Business Day on which a redemption order is deemed received by the Trust.
Therefore, if a redemption order in proper form is submitted to the Principal
Underwriter by a DTC Participant by the specified time on the Order Placement
Date, and the requisite number of Shares of the Fund are delivered to the
Custodian prior to 3:00 p.m. Eastern time on the Settlement Date, then the value
of the Fund Securities and the Cash Redemption Amount to be delivered will be
determined by the Custodian on such Order Placement Date. If the requisite
number of shares of the Fund are not delivered by 3:00 p.m. Eastern time on the
Settlement Date, the Fund will not release the underlying securities for
delivery unless collateral is posted in such percentage amount of missing shares
as set forth in the Participant Agreement (marked to market daily).
ADDITIONAL REDEMPTION PROCEDURES. If it is not possible to effect deliveries of
the Fund Securities, the Trust may in its discretion exercise its option to
redeem such shares in cash, and the redeeming investor will be required to
receive its redemption
28
proceeds in cash. In addition, an investor may request a redemption in cash that
the Fund may, in its sole discretion, permit. In either case, the investor will
receive a cash payment equal to the net asset value of its shares based on the
net asset value of shares of the Fund next determined after the redemption
request is received in proper form (minus a redemption transaction fee and
additional charge for requested cash redemptions specified above, to offset the
Trust's brokerage and other transaction costs associated with the disposition of
Fund Securities). The Fund may also, in its sole discretion, upon request of a
shareholder, provide such redeemer a portfolio of securities that differs from
the exact composition of the Fund Securities but does not differ in net asset
value.
Redemptions of shares for Fund Securities will be subject to compliance with
applicable federal and state securities laws and the Fund (whether or not it
otherwise permits cash redemptions) reserves the right to redeem Creation Units
for cash to the extent that the Trust could not lawfully deliver specific Fund
Securities upon redemptions or could not do so without first registering the
Fund Securities under such laws. An Authorized Participant or an investor for
which it is acting subject to a legal restriction with respect to a particular
security included in the Fund Securities applicable to the redemption of
Creation Units may be paid an equivalent amount of cash. The Authorized
Participant may request the redeeming investor of the Shares to complete an
order form or to enter into agreements with respect to such matters as
compensating cash payment. Further, an Authorized Participant that is not a
"qualified institutional buyer," ("QIB") as such term is defined under Rule 144A
of the Securities Act, will not be able to receive Fund Securities that are
restricted securities eligible for resale under Rule 144A. An Authorized
Participant may be required by the Trust to provide a written confirmation with
respect to QIB status in order to receive Fund Securities.
REQUIRED EARLY ACCEPTANCE OF ORDERS. Notwithstanding the foregoing, as described
in the Participant Agreement and the applicable order form, Authorized
Participants may be notified that the cut-off time for an order may be earlier
on a particular business day.
DETERMINATION OF NET ASSET VALUE
The following information supplements and should be read in conjunction with the
section in each Prospectus entitled "DETERMINATION OF NET ASSET VALUE."
Net asset value per Share for the Fund is computed by dividing the value of the
net assets of the Fund (i.e., the value of its total assets less total
liabilities) by the total number of Shares outstanding, rounded to the nearest
cent. Expenses and fees, including the management fees, are accrued daily and
taken into account for purposes of determining net asset value. The net asset
value of the Fund is calculated by the Custodian and determined at the close of
the regular trading session on the NYSE (ordinarily 4:00 p.m. Eastern time) on
each day that such exchange is open, provided that fixed-income assets may be
valued as of the announced closing time for trading in fixed-income instruments
on any day that the SIFMA announces an early closing time.
In calculating the Fund's net asset value per Share, the Fund's investments are
generally valued using market valuations. A market valuation generally means a
valuation (i) obtained from an exchange, a pricing service, or a major market
maker (or dealer), (ii) based on a price quotation or other equivalent
indication of value supplied by an exchange, a pricing service, or a major
market maker (or dealer) or (iii) based on amortized cost. In the case of shares
of other funds that are not traded on an exchange, a market valuation means such
fund's published net asset value per share. The Adviser may use various pricing
services, or discontinue the use of any pricing service, as approved by the
Board of Trustees from time to time. A price obtained from a pricing service
based on such pricing service's valuation matrix may be considered a market
valuation. Any assets or liabilities denominated in currencies other than the
U.S. dollar are converted into U.S. dollars at the current market rates on the
date of valuation as quoted by one or more sources.
In the event that current market valuations are not readily available or such
valuations do not reflect current market value, the Trust's procedures require
the Pricing Committee to determine a security's fair value if a market price is
not readily available. In determining such value the Pricing Committee may
consider, among other things, (i) price comparisons among multiple sources, (ii)
a review of corporate actions and news events, and (iii) a review of relevant
financial indicators (e.g., movement in interest rates, market indices, and
prices from the Fund's index provider). In these cases, the Fund's net asset
value may reflect certain portfolio securities' fair values rather than their
market prices. Fair value pricing involves subjective judgments and it is
possible that the fair value determination for a security is materially
different than the value that could be realized upon the sale of the security.
29
DIVIDENDS AND DISTRIBUTIONS
The following information supplements and should be read in conjunction with the
section in each Prospectus entitled "DISTRIBUTIONS."
GENERAL POLICIES
Dividends from net investment income, if any, are declared and paid monthly by
the Fund. Distributions of net realized securities gains, if any, generally are
declared and paid once a year, but the Trust may make distributions on a more
frequent basis for the Funds to improve index tracking or to comply with the
distribution requirements of the Internal Revenue Code, in all events in a
manner consistent with the provisions of the 1940 Act.
Dividends and other distributions on Shares are distributed, as described below,
on a pro rata basis to Beneficial Owners of such Shares. Dividend payments are
made through DTC Participants and Indirect Participants to Beneficial Owners
then of record with proceeds received from the Trust.
The Trust makes additional distributions to the extent necessary (i) to
distribute the entire annual taxable income of the Trust, plus any net capital
gains and (ii) to avoid imposition of the excise tax imposed by Section 4982 of
the Internal Revenue Code. Management of the Trust reserves the right to declare
special dividends if, in its reasonable discretion, such action is necessary or
advisable to preserve the status of the Fund as a regulated investment company
("RIC") or to avoid imposition of income or excise taxes on undistributed
income.
DIVIDEND REINVESTMENT SERVICE
Broker-dealers may make available the DTC book-entry Dividend Reinvestment
Service (the "Service") for use by Beneficial Owners of the Fund through DTC
Participants for reinvestment of their dividend distributions. If the Service is
available and used, dividend distributions of both income and realized gains
will be automatically reinvested in additional whole Shares of the Fund at NAV
per share. Shares will be issued at NAV under the Service regardless of whether
the Shares are then trading in the secondary market at a premium or discount to
net asset value. Broker dealers, at their own discretion, may also offer a
dividend reinvestment program under which Shares are purchased in the secondary
market at current market prices. Investors should consult their broker dealer
for further information regarding the Service or other dividend reinvestment
programs.
TAXES
The following information also supplements and should be read in conjunction
with the section in the Prospectus entitled "TAX MATTERS."
The Fund intends to qualify for and to elect treatment as a separate RIC under
Subchapter M of the Internal Revenue Code. As such, the Fund should not be
subject to federal income tax on its net investment income and capital gains, if
any, to the extent that it timely distributes such income and capital gains to
its shareholders. In order to be taxable as a RIC, the Fund must distribute
annually to its shareholders at least 90% of its net investment income
(generally net investment income plus the excess of net short-term capital gains
over net long-term capital losses) and at least 90% of its net tax exempt
interest income, for each tax year, if any, to its shareholders ("Distribution
Requirement") and also must meet several additional requirements. Among these
requirements are the following: (i) at least 90% of the Fund's gross income each
taxable year must be derived from dividends, interest, payments with respect to
securities loans, gains from the sale or other disposition of stock, securities
or foreign currencies, or other income derived with respect to its business of
investing in such stock, securities or currencies, and net income derived from
an interest in qualified publicly traded partnerships; (ii) at the end of each
fiscal quarter of the Fund's taxable year, at least 50% of the market value of
its total assets must be represented by cash and cash items, U.S. government
securities, securities of other RICs and other securities, with such other
securities limited, in respect to any one issuer, to an amount not greater than
5% of the value of the Fund's total assets or more than 10% of the outstanding
voting securities of such issuer, and (iii) at the end of each fiscal quarter of
the Fund's taxable year, not more than 25% of the value of its total assets is
invested in the securities (other than U.S. government securities or securities
of other RICs) of any one issuer or the securities of two or more issuers
engaged in the same, similar, or related trades or businesses if the Fund owns
at least 20% of the voting power of such issuers, or the securities of one or
more qualified publicly traded partnerships.
30
The Fund is treated as a separate corporation for federal income tax purposes.
The Fund therefore is considered to be a separate entity in determining its
treatment under the rules for RICs described herein and in the Prospectus.
Losses in one Fund do not offset gains in another and the requirements (other
than certain organizational requirements) for qualifying RIC status are
determined at the Fund level rather than at the Trust level.
If the Fund fails to qualify as a RIC for any taxable year, it will be taxable
at regular corporate rates. In such an event, all distributions (including
capital gains distributions) will be taxable as ordinary dividends to the extent
of the Fund's current and accumulated earnings and profits, subject to the
dividends-received deduction for corporate shareholders and the lower tax rates
applicable to qualified dividend income distributed to individuals. The Board of
Trustees reserves the right not to maintain the qualification of the Fund as a
regulated investment company if it determines such course of action to be
beneficial to shareholders.
Although the Fund intends to distribute substantially all of its net investment
income and its capital gains for each taxable year, the Fund will be subject to
federal income tax to the extent any such income or gains are not distributed.
If the Fund's distributions exceed its taxable income and capital gains realized
during a taxable year, all or a portion of the distributions made in the taxable
year may be recharacterized as a return of capital to shareholders. A return of
capital distribution generally will not be taxable but will reduce the
shareholder's cost basis and result in a higher capital gain or lower capital
loss when those shares on which the distribution was received are sold.
The Fund will be subject to a 4% excise tax on certain undistributed income if
it does not distribute to its shareholders in each calendar year at least 98% of
its ordinary income for the calendar year plus 98% of its capital gain net
income for the twelve months ended October 31 of such year. The Fund intends to
declare and distribute dividends and distributions in the amounts and at the
times necessary to avoid the application of this 4% excise tax.
As a result of tax requirements, the Trust on behalf of the Fund has the right
to reject an order to create Shares if the purchaser (or group of purchasers)
would, upon obtaining the Shares so ordered, own 80% or more of the outstanding
Shares of a given Fund and if, pursuant to section 351 of the Internal Revenue
Code, the respective Fund would have a basis in the Deposit Securities different
from the market value of such securities on the date of deposit. The Trust also
has the right to require information necessary to determine beneficial Share
ownership for purposes of the 80% determination.
The Fund may invest in complex securities. These investments may be subject to
numerous special and complex rules. These rules could affect whether gains and
losses recognized by the Fund are treated as ordinary income or capital gain,
accelerate the recognition of income to the Fund and/or defer the Fund's ability
to recognize losses. In turn, these rules may affect the amount, timing or
character of the income distributed to you by the Fund.
The Fund is required for federal income tax purposes to mark-to-market and
recognize as income for each taxable year its net unrealized gains and losses on
certain futures contracts as of the end of the year as well as those actually
realized during the year. Gain or loss from futures and options contracts on
broad-based indexes required to be marked to market will be 60% long-term and
40% short-term capital gain or loss. Application of this rule may alter the
timing and character of distributions to shareholders. The Fund may be required
to defer the recognition of losses on futures contracts, options contracts and
swaps to the extent of any unrecognized gains on offsetting positions held by
the Fund. It is anticipated that any net gain realized from the closing out of
futures or options contracts will be considered gain from the sale of securities
and therefore will be qualifying income for purposes of the 90% requirement. The
Fund distributes to shareholders at least annually any net capital gains which
have been recognized for federal income tax purposes, including unrealized gains
at the end of the Fund's fiscal year on futures or options transactions. Such
distributions are combined with distributions of capital gains realized on a
Fund's other investments and shareholders are advised on the nature of the
distributions.
As a result of entering into swap contracts, the Fund may make or receive
periodic net payments. The Fund may also make or receive a payment when a swap
is terminated prior to maturity through an assignment of the swap or other
closing transaction. Periodic net payments, if positive, will generally
constitute taxable ordinary income and, if negative, will reduce net tax-exempt
income, while termination of a swap will generally result in capital gain or
loss (which will be a long-term capital gain or loss if the Fund has been a
party to the swap for more than one year). The tax treatment of many types of
credit default swaps is uncertain and may affect the amount, timing or character
of the income distributed to you by the Fund.
Investments by the Fund in zero coupon or other discount securities will result
in income to the Fund equal to a portion of the excess face value of the
securities over their issue price (the "original issue discount" or "OID") each
year that the securities are held, even
31
though the Fund receives no cash interest payments. In other circumstances,
whether pursuant to the terms of a security or as a result of other factors
outside the control of the Fund, the Fund may recognize income without receiving
a commensurate amount of cash. Such income is included in determining the amount
of income that the Fund must distribute to maintain its status as a RIC and to
avoid the payment of federal income tax, including the nondeductible 4% excise
tax. Because such income may not be matched by a corresponding cash distribution
to the Fund, the Fund may be required to borrow money or dispose of other
securities to be able to make distributions to its shareholders.
Any market discount recognized on a bond is taxable as ordinary income. A market
discount bond is a bond acquired in the secondary market at a price below
redemption value or adjusted issue price if issued with original issue discount.
Absent an election by the fund to include the market discount in income as it
accrues, gain on the Fund's disposition of such an obligation will be treated as
ordinary income rather than capital gain to the extent of the accrued market
discount.
Special rules apply if the Fund holds inflation-indexed bonds (TIPs). Generally,
all stated interest on such bonds is taken into income by the Fund under its
regular method of accounting for interest income. The amount of positive
inflation adjustment, which results in an increase in the inflation-adjusted
principal amount of the bond, is treated as OID. The OID is included in the
Fund's gross income ratably during the period ending with the maturity of the
bond, under the general OID inclusion rules. The amount of the Fund's OID in a
taxable year with respect to a bond will increase the Fund's taxable income for
such year without a corresponding receipt of cash, until the bond matures. As a
result, the Fund may need to use other sources of cash to satisfy its
distributions for such year. The amount of negative inflation adjustments, which
results in a decrease in the inflation-adjusted principal amount of the bond,
reduces the amount of interest (including stated interest, OID, and market
discount, if any) otherwise includable in the Fund's income with respect to the
bond for the taxable year.
The Fund intends to distribute annually to its shareholders substantially all of
its investment company taxable income, all of its net tax-exempt income and any
net realized long-term capital gains in excess of net realized short-term
capital losses (including any capital loss carryovers). The Fund will report to
shareholders annually the amount of dividends received from ordinary income, the
amount of distributions received from capital gains and the portion of dividends
which may qualify for the dividends received deduction, if any. A portion of the
dividends received from the Fund may be treated as qualified dividend income
(eligible for the reduced maximum rate to individuals of 15% (5% for individuals
in lower tax brackets)) to the extent that the Fund receives qualified dividend
income. Qualified dividend income includes, in general, subject to certain
holding period requirements and other requirements, dividend income from certain
U.S. and foreign corporations. Eligible foreign corporations include those
incorporated in possessions of the United States, those incorporated in certain
countries with comprehensive tax treaties with the United States and those whose
stock is tradable on an established securities market in the United States. The
Fund may derive capital gains and losses in connection with the sale or other
disposition of its portfolio securities. Distributions from net short-term
capital gains will be taxable to shareholders as ordinary income. Distributions
from net long-term gains will be taxable to you at long-term capital gains
rates, regardless of how long you have held your Shares in the Fund. Long-term
capital gains are currently taxed at a maximum rate of 15%. Absent further
legislation, the maximum 15% rate on qualified dividend income and long-term
capital gains will cease to apply to taxable years beginning after December 31,
2010.
In general, a sale of shares results in capital gain or loss, and for individual
shareholders, is taxable at a federal rate dependent upon the length of time the
shares were held. A redemption of a shareholder's Fund Shares is normally
treated as a sale for tax purposes. Fund Shares held for a period of one year or
less at the time of such sale or redemption will, for tax purposes, generally
result in short-term capital gains or losses and those held for more than one
year will generally result in long-term capital gains or losses. Under current
law, the maximum tax rate on long-term capital gains available to non-corporate
shareholders generally is 15%. As noted above, without future legislation, the
maximum tax rate on long-term capital gains would return to 20% in 2011.
Gain or loss on the sale or redemption of Shares in the Fund is measured by the
difference between the amount received and the adjusted tax basis of the Shares.
Shareholders should keep records of investments made (including Shares acquired
through reinvestment of dividends and distribution) so they can compute the tax
basis of their Shares.
A loss realized on a sale or exchange of Shares of a Fund may be disallowed if
other substantially identical Shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a sixty-one (61) day period
beginning thirty (30) days before and ending thirty (30) days after the date
that the Shares are disposed of. In such a case, the basis of the Shares
acquired must be adjusted to reflect the disallowed loss. Any loss upon the sale
or exchange of Shares held for six (6) months or less is treated as long-term
capital loss to the extent of any capital gain dividends received by the
shareholders.
Distribution of ordinary income and capital gains may also be subject to
foreign, state and local taxes depending on a shareholder's circumstances.
32
Distributions reinvested in additional Shares of the Fund through the means of
the service (see "DIVIDEND REINVESTMENT SERVICE") will nevertheless be taxable
dividends to Beneficial Owners acquiring such additional Shares to the same
extent as if such dividends had been received in cash.
Dividends paid by the Fund to shareholders who are nonresident aliens or foreign
entities will be subject to a 30% United States withholding tax unless a reduced
rate of withholding or a withholding exemption is provided under applicable
treaty law to the extent derived from investment income and short-term capital
gain (other than "qualified short-term capital gain" described below) or unless
such income is effectively connected with a U.S. trade or business carried on
through a permanent establishment in the United States. Nonresident shareholders
are urged to consult their own tax advisors concerning the applicability of the
United States withholding tax and the proper withholding form(s) to be submitted
to the Fund. A non-U.S. shareholder who fails to provide an appropriate IRS Form
W-8 may be subject to backup withholding at the appropriate rate.
Under recently enacted legislation, the Fund may, under certain circumstances,
designate all or a portion of a dividend as an "interest-related dividend" that
if received by a nonresident alien or foreign entity generally would be exempt
from the 30% U.S. withholding tax, provided that certain other requirements are
met. The Fund may also, under certain circumstances, designate all or a portion
of a dividend as a "qualified short-term capital gain dividend" which if
received by a nonresident alien or foreign entity generally would be exempt from
the 30% U.S. withholding tax, unless the foreign person is a nonresident alien
individual present in the United States for a period or periods aggregating 183
days or more during the taxable year. In the case of shares held through an
intermediary, the intermediary may withhold even if the Fund designates the
payment as qualified net interest income or qualified short-term capital gain.
Non-U.S. shareholders should contact their intermediaries with respect to the
application of these rules to their accounts. The provisions contained in the
legislation relating to dividends to foreign persons would apply to dividends
with respect to taxable years of the Fund beginning after December 31, 2004 and
before January 1, 2008.
The Fund will be required in certain cases to withhold at applicable withholding
rates and remit to the United States Treasury the amount withheld on amounts
payable to any shareholder who (1) has provided the Fund either an incorrect tax
identification number or no number at all, (2) who is subject to backup
withholding by the Internal Revenue Service for failure to properly report
payments of interest or dividends, (3) who has failed to certify to the Fund
that such shareholder is not subject to backup withholding, or (4) has not
certified that such shareholder is a U.S. person (including a U.S. resident
alien).
Under promulgated Treasury regulations, if a shareholder recognizes a loss on
disposition of the Fund's Shares of $2 million or more for an individual
shareholder or $10 million or more for a corporate shareholder, the shareholder
must file with the IRS a disclosure statement on Form 8886. Direct shareholders
of portfolio securities are in many cases excepted from this reporting
requirement, but under current guidance, shareholders of a RIC are not excepted.
Future guidance may extend the current exception from this reporting requirement
to shareholders of most or all regulated investment companies. In addition,
pursuant to recently enacted legislation, significant penalties may be imposed
for the failure to comply with the reporting requirements. The fact that a loss
is reportable under these regulations does not affect the legal determination of
whether the taxpayer's treatment of the loss is proper. Shareholders should
consult their tax advisers to determine the applicability of these regulations
in light of their individual circumstances.
The foregoing discussion is a summary only and is not intended as a substitute
for careful tax planning. Purchasers of Shares should consult their own tax
advisors as to the tax consequences of investing in such Shares, including under
state, local and other tax laws. Finally, the foregoing discussion is based on
applicable provisions of the Internal Revenue Code, regulations, judicial
authority and administrative interpretations in effect on the date hereof.
Changes in applicable authority could materially affect the conclusions
discussed above, and such changes often occur.
CAPITAL STOCK AND SHAREHOLDER REPORTS
The Fund issues shares of beneficial interest, par value $.01 per Share. The
Board of Trustees may designate additional Funds.
Each Share issued by the Trust has a pro rata interest in the assets of the
Fund. Shares have no preemptive, exchange, subscription or conversion rights and
are freely transferable. Each Share is entitled to participate equally in
dividends and distributions declared by the Board with respect to the Fund, and
in the net distributable assets of such Fund on liquidation.
33
Each Share has one vote with respect to matters upon which a shareholder vote is
required consistent with the requirements of the 1940 Act and the rules
promulgated thereunder. Shares of the Trust vote together as a single class
except that if the matter being voted on affects only a particular fund of the
Trust it will be voted on only by that fund and if a matter affects a particular
fund differently from other funds, that fund will vote separately on such
matter. Under Massachusetts law, the Trust is not required to hold an annual
meeting of shareholders unless required to do so under the 1940 Act. The policy
of the Trust is not to hold an annual meeting of shareholders unless required to
do so under the 1940 Act. All Shares of the Trust (regardless of the fund) have
noncumulative voting rights for the election of Trustees. Under Massachusetts
law, Trustees of the Trust may be removed by vote of the shareholders.
Under Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for obligations of the
Trust. However, the Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Trust, requires that Trust
obligations include such disclaimer, and provides for indemnification and
reimbursement of expenses out of the Trust's property for any shareholder held
personally liable for the obligations of the Trust. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust itself would be unable to meet its
obligations. Given the above limitations on shareholder personal liability, and
the nature of each fund's assets and operations, the risk to shareholders of
personal liability is believed to be remote.
Shareholder inquiries may be made by writing to the Trust, c/o the Distributor,
State Street Global Markets, LLC at State Street Financial Center, One Lincoln
Street, Boston, Massachusetts 02111.
COUNSEL AND INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Morgan, Lewis & Bockius LLP serves as counsel to the Trust. Ernst & Young LLP,
200 Clarendon Street, Boston, Massachusetts 02116, serves as the independent
registered public accounting firm of the Trust. Ernst & Young LLP performs
annual audits of the Fund's financial statements and provides other audit, tax
and related services.
LOCAL MARKET HOLIDAY SCHEDULES
The Trust generally intends to effect deliveries of portfolio securities on a
basis of "T" plus three business days (i.e., days on which the AMEX and NYSE are
open) in the relevant foreign market of the Fund. The ability of the Trust to
effect in-kind redemptions within three business days of receipt of a redemption
request is subject, among other things, to the condition that, within the time
period from the date of the request to the date of delivery of the securities,
there are no days that are local market holidays on the relevant business days.
For every occurrence of one or more intervening holidays in the local market
that are not holidays observed in the United States, the redemption settlement
cycle may be extended by the number of such intervening local holidays. In
addition to holidays, other unforeseeable closings in a foreign market due to
emergencies may also prevent the Trust from delivering securities within three
business days.
The securities delivery cycles currently practicable for transferring portfolio
securities to redeeming investors, coupled with local market holiday schedules,
may require a delivery process longer than seven calendar days, in certain
circumstances, during the calendar years 2007 and 2008. Although certain
holidays may occur on different dates in subsequent years, the number of days
required to deliver redemption proceeds in any given year is not expected to
exceed the maximum number of days listed below. The proclamation of new
holidays, the treatment by market participants of certain days as "informal
holidays" (e.g., days on which no or limited securities transactions occur, as a
result of substantially shortened trading hours), the elimination of existing
holidays, or changes in local securities delivery practices, could affect the
information set forth herein at some time in the future.
The remaining dates in the calendar year 2007 and the beginning of 2008 on which
the regular holidays affecting the relevant securities markets in the countries
listed below fall are as follows:
AUSTRIA JAPAN
December 24, 2007 December 24, 2007
December 25, 2007 December 31, 2007
December 26, 2007 January 1, 2008
December 31, 2007 January 2, 2008
January 1, 2008 January 3, 2008
January 7, 2008
34
|
AUSTRALIA MEXICO
December 24, 2007 December 12, 2007
December 25, 2007 December 25, 2007
December 26, 2007 January 1, 2008
December 31, 2007
January 1, 2008
BELGIUM NETHERLANDS
December 25, 2007 December 25, 2007
December 26, 2007 December 26, 2007
January 1, 2008 January 1, 2008
CANADA POLAND
December 25, 2007 December 25, 2007
December 26, 2007 December 26, 2007
January 1, 2008 January 1, 2008
DENMARK SOUTH AFRICA
December 24, 2007 December 17, 2007
December 25, 2007 December 25, 2007
December 26, 2007 December 26, 2007
December 31, 2007 January 1, 2008
January 1, 2008
SPAIN
FRANCE December 25, 2007
December 25, 2007 December 26, 2007
December 26, 2007 December 31, 2007
January 1, 2008 January 1, 2008
GERMANY SWEDEN
December 24, 2007 December 24, 2007
December 25, 2007 December 25, 2007
December 26, 2007 December 26, 2007
December 31, 2007 December 31, 2007
January 1, 2008 January 1, 2008
GREECE TAIWAN
December 25, 2007 January 1, 2008
December 26, 2007
January 1, 2008 UNITED KINGDOM
December 25, 2007
ITALY December 26, 2007
December 24, 2007 January 1, 2008
December 25, 2007
December 26, 2007
December 31, 2007
January 1, 2008
|
REDEMPTION. The longest redemption cycle for the above Funds is a function of
the longest redemption cycles among the countries whose stocks comprise a Fund.
A redemption request over certain holidays may result in a settlement period
that will exceed 7 calendar days. In the calendar year 2006, the dates of the
regular holidays affecting the Australian, Japanese, Danish and Swedish
securities markets presented the worst-case redemption cycle for the Fund as R +
8 calendar days was the maximum number of calendar days necessary to satisfy a
redemption request.
35
PROXY VOTING POLICY [SSGA LOGO]
Funds Management, Inc.
INTRODUCTION
SSgA Funds Management, Inc. ("FM") seeks to vote proxies for which it has
discretionary authority in the best interests of its clients. This entails
voting proxies in a way which FM believes will maximize the monetary value of
each portfolio's holdings with respect to proposals that are reasonably
anticipated to have an impact on the current or potential value of a security.
Absent unusual circumstances or specific client instructions, we vote proxies on
a particular matter in the same way for all clients, regardless of their
investment style or strategies. FM takes the view that voting in a manner
consistent with maximizing the value of our clients' holdings will benefit our
direct clients (e.g. investment funds) and, indirectly, the ultimate owners and
beneficiaries of those clients (e.g. fund shareholders).
Oversight of the proxy voting process is the responsibility of the State Street
Global Advisors ("SSgA") Investment Committee. The SSgA Investment Committee
reviews and approves amendments to the FM Proxy Voting Policy and delegates
authority to vote in accordance with this policy to the FM Proxy Review
Committee, a subcommittee of the SSgA Investment Committee. FM retains the final
authority and responsibility for voting. In addition to voting proxies, FM:
1) describes its proxy voting procedures to its clients in Part II of its
Form ADV;
2) provides the client with this written proxy policy, upon request;
3) discloses to its clients how they may obtain information on how FM
voted the client's proxies;
4) matches proxies received with holdings as of record date;
5) reconciles holdings as of record date and rectifies any discrepancies;
6) generally applies its proxy voting policy consistently and keeps
records of votes for each client;
7) documents the reason(s) for voting for all non-routine items; and
8) keeps records of such proxy voting available for inspection by the
client or governmental agencies.
PROCESS
The FM Manager of Corporate Governance is responsible for monitoring proxy
voting on behalf of our clients and executing the day to day implementation of
this Proxy Voting Policy. As stated above, oversight of the proxy voting process
is the responsibility of the SSgA Investment Committee.
In order to facilitate our proxy voting process, FM retains Institutional
Shareholder Services ("ISS"), a firm with expertise in the proxy voting and
corporate governance fields. ISS assists in the proxy voting process, including
acting as our voting agent (i.e. actually processing the proxies), advising us
as to current and emerging governance issues that we may wish to address,
interpreting this policy and applying it to individual proxy items, and
providing analytical information concerning specific issuers and proxy items as
well as governance trends and developments. This Policy does not address all
issues as to which we may receive proxies nor does it seek to describe in detail
all factors that we may consider relevant to any particular proposal. To assist
ISS in interpreting and applying this Policy, we meet with ISS at least
annually, provide written guidance on certain topics generally on an annual
basis and communicate more regularly as necessary to discuss how specific issues
should be addressed. This guidance permits ISS to apply this Policy without
consulting us as to each proxy but in a manner that is consistent with our
investment view and not their own governance opinions. If an issue raised by a
proxy is not addressed by this Policy or our prior guidance to ISS, ISS refers
the proxy to us for direction on voting. On issues that we do not believe affect
the economic value of our portfolio holdings or are considered by us to be
routine matters as to which we have not provided specific guidance, we have
agreed with ISS to act as our voting agent in voting such proxies in accordance
with its own recommendations which, to the extent possible, take into account
this Policy and FM's general positions on similar matters. The Manager of
Corporate Governance is responsible, working with ISS, for submitting proxies in
a
36
timely manner and in accordance with our policy. The Manager of Corporate
Governance works with ISS to establish and update detailed procedures to
implement this policy.
From time to time, proxy votes will be solicited which fall into one of the
following categories:
(i) proxies which involve special circumstances and require additional
research and discussion (e.g. a material merger or acquisition, or a
material governance issue with the potential to become a significant
precedent in corporate governance); or
(ii) proxies which are not directly addressed by our policies and which
are reasonably anticipated to have an impact on the current or
potential value of a security or which we do not consider to be
routine.
These proxies are identified through a number of methods, including but not
limited to notification from ISS, concerns of clients, review by internal proxy
specialists, and questions from consultants. The role of third parties in
identifying special circumstances does not mean that we will depart from our
guidelines; these third parties are all treated as information sources. If they
raise issues that we determine to be prudent before voting a particular proxy or
departing from our prior guidance to ISS, we will weigh the issue along with
other relevant factors before making an informed decision. In all cases, we vote
proxies as to which we have voting discretion in a manner that we determine to
be in the best interest of our clients. As stated above, if the proposal has a
quantifiable effect on shareholder value, we seek to maximize the value of a
portfolio's holdings. With respect to matters that are not so quantifiable, we
exercise greater judgment but still seek to maximize long-term value by
promoting sound governance policies. The goal of the Proxy Voting Committee is
to make the most informed decision possible.
In instances of special circumstances or issues not directly addressed by our
policies or guidance to ISS, the FM Manager of Corporate Governance will refer
the item to the Chairman of the Investment Committee for a determination of the
proxy vote. The first determination is whether there is a material conflict of
interest between the interests of our client and those of FM or its affiliates
(as explained in greater detail below under "Potential Conflicts"). If the
Manager of Corporate Governance and the Chairman of the Investment Committee
determine that there is a material conflict, the process detailed below under
"Potential Conflicts" is followed. If there is no material conflict, we examine
the proposals that involve special circumstances or are not addressed by our
policy or guidance in detail in seeking to determine what vote would be in the
best interests of our clients. At this point, the Chairman of the Investment
Committee makes a voting decision in our clients' best interest. However, the
Chairman of the Investment Committee may determine that a proxy involves the
consideration of particularly significant issues and present the proxy item to
the Proxy Review Committee and/or to the entire Investment Committee for a final
decision on voting the proxy. The Investment Committee will use the same
rationale for determining the appropriate vote.
FM reviews proxies of non-US issuers in the context of these guidelines.
However, FM also endeavors to show sensitivity to local market practices when
voting these proxies, which may lead to different votes. For example, in certain
foreign markets, items are put to vote which have little or no effect on
shareholder value, but which are routinely voted on in those jurisdictions; in
the absence of material effect on our clients, we will follow market practice.
FM votes in all markets where it is feasible to do so. Note that certain
custodians utilized by our clients do not offer proxy voting in every foreign
jurisdiction. In such a case, FM will be unable to vote such a proxy.
VOTING
For most issues and in most circumstances, we abide by the following general
guidelines. However, it is important to remember that these are simply
guidelines. As discussed above, in certain circumstances, we may determine that
it would be in the best interests of our clients to deviate from these
guidelines.
I. Generally, FM votes for the following ballot items:
Board of Directors
- Elections of directors who (i) we determine to be adequately
independent of management and (ii) do not simultaneously serve on an
unreasonable (as determined by FM) number of other boards (other than
those affiliated with the issuer). Factors that we consider in
evaluating independence include whether the nominee is an employee of
or related to an
37
employee of the issuer or its auditor, whether the nominee provides
professional services to the issuer, or whether the nominee receives
non-board related compensation from the issuer
- Directors' compensation, provided the amounts are not excessive
relative to other issuers in the market or industry. In making such a
determination, we review whether the compensation is overly dilutive to
existing shareholders.
- Proposals to limit directors' liability and/or expand indemnification
of directors, provided that a director shall only be eligible for
indemnification and liability protection if he or she has not acted in
bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office
- Discharge of board members' duties*, in the absence of pending
litigation, governmental investigation, charges of fraud or other
indicia of significant concern
- The establishment of annual elections of the board of directors unless
the board is composed by a majority of independent directors, the
board's key committees (auditing, nominating and compensation) are
composed of independent directors, and there are no other material
governance issues or performance issues.
- Mandates requiring a majority of independent directors on the Board of
Directors
- Mandates that Audit, Compensation and Nominating Committee members
should all be independent directors
- Mandates giving the Audit Committee the sole responsibility for the
selection and dismissal of the auditing firm and any subsequent result
of audits are reported to the audit committee
- Elimination of cumulative voting
- Establishment of confidential voting
Auditors
- Approval of auditors, unless the fees paid to auditors are excessive;
auditors' fees will be deemed excessive if the non-audit fees for the
prior year constituted 50% or more of the total fees paid to the
auditors
- Auditors' compensation, provided the issuer has properly disclosed
audit and non-audit fees relative to market practice and that non-audit
fees for the prior year constituted no more than 50% of the total fees
paid to the auditors
- Discharge of auditors*
- Approval of financial statements, auditor reports and allocation of
income
- Requirements that auditors attend the annual meeting of shareholders
- Disclosure of Auditor and Consulting relationships when the same or
related entities are conducting both activities
- Establishment of a selection committee responsible for the final
approval of significant management consultant contract awards where
existing firms are already acting in an auditing function
Capitalization
* Common for non-US issuers; request from the issuer to discharge from liability
the directors or auditors with respect to actions taken by them during the
previous year.
38
- Dividend payouts that are greater than or equal to country and industry
standards; we generally support a dividend which constitutes 30% or
more of net income
- Authorization of share repurchase programs, unless the issuer does not
clearly state the business purpose for the program, a definitive number
of shares to be repurchased, and the time frame for the repurchase
- Capitalization changes which eliminate other classes of stock and/or
unequal voting rights
- Changes in capitalization authorization for stock splits, stock
dividends, and other specified needs which are no more than 50% of the
existing authorization for U.S. companies and no more than 100% of
existing authorization for non-U.S. companies.
- Elimination of pre-emptive rights for share issuance of less than a
certain percentage (country specific - ranging from 5% to 20%) of the
outstanding shares, unless even such small amount could have a material
dilutive effect on existing shareholders (e.g. in illiquid markets)
Anti-Takeover Measures
- Elimination of shareholder rights plans ("poison pill")
- Amendment to a shareholder rights plans ("poison pill") where the terms
of the new plans are more favorable to shareholders' ability to accept
unsolicited offers (i.e. if one of the following conditions are met:
(i) minimum trigger, flip-in or flip-over of 20%, (ii) maximum term of
three years, (iii) no "dead hand," "slow hand," "no hand" or similar
feature that limits the ability of a future board to redeem the pill,
and (iv) inclusion of a shareholder redemption feature (qualifying
offer clause), permitting ten percent of the shares to call a special
meeting or seek a written consent to vote on rescinding the pill if the
board refuses to redeem the pill 90 days after a qualifying offer is
announced)
- Adoption or renewal of a non-US issuer's shareholder rights plans
("poison pill") if the following conditions are met: (i) minimum
trigger, flip-in or flip-over of 20%, (ii) maximum term of three years,
(iii) no "dead hand," "slow hand," "no hand" or similar feature that
limits the ability of a future board to redeem the pill, and (iv)
inclusion of a shareholder redemption feature (qualifying offer
clause), permitting ten percent of the shares to call a special meeting
or seek a written consent to vote on rescinding the pill if the board
refuses to redeem the pill 90 days after a qualifying offer is
announced
- Reduction or elimination of super-majority vote requirements, unless
management of the issuer was concurrently seeking to or had previously
made such reduction or elimination o Mandates requiring shareholder
approval of a shareholder rights plans ("poison pill")
- Repeals of various anti-takeover related provisions
Executive Compensation/Equity Compensation
- Stock purchase plans with an exercise price of not less that 85% of
fair market value
- Stock option plans which are incentive based and not excessively
dilutive. In order to assess the dilutive effect, we divide the number
of shares required to fully fund the proposed plan, the number of
authorized but unissued shares, and the issued but unexercised shares
by fully diluted share count. We review that number in light of certain
factors, including the industry of the issuer, in order to make our
determination as to whether the dilution is excessive.
- Other stock-based plans which are not excessively dilutive, using the
same process set forth in the preceding bullet
- Expansions to reporting of financial or compensation-related
information, within reason
39
- Proposals requiring the disclosure of executive retirement benefits if
the issuer does not have an independent compensation committee
Routine Business Items
- General updating of or corrective amendments to charter not otherwise
specifically addressed herein, unless such amendments would reasonably
be expected to diminish shareholder rights (e.g. extension of
directors' term limits, amending shareholder vote requirement to amend
the charter documents, insufficient information provided as to the
reason behind the amendment)
- Change in Corporation Name
- Mandates that amendments to bylaws or charters have shareholder
approval
Other
- Adoption of anti-"greenmail" provisions, provided that the proposal:
(i) defines greenmail; (ii) prohibits buyback offers to large block
holders (holders of at least 1% of the outstanding shares and in
certain cases, a greater amount, as determined by the Proxy Review
Committee) not made to all shareholders or not approved by
disinterested shareholders; and (iii) contains no anti-takeover
measures or other provisions restricting the rights of shareholders
- Repeals or prohibitions of "greenmail" provisions
- "Opting-out" of business combination provision
II. Generally, FM votes against the following items:
Board of Directors
- Establishment of classified boards of directors, unless 80% of the
board is independent
- Proposals requesting re-election of insiders or affiliated directors
who serve on audit, compensation, or nominating committees
- Limits to tenure of directors
- Requirements that candidates for directorships own large amounts of
stock before being eligible to be elected
- Restoration of cumulative voting in the election of directors
- Removal of a director, unless we determine the director (i) is not
adequately independent of management or (ii) simultaneously serves on
an unreasonable (as determined by FM) number of other boards (other
than those affiliated with the issuer). Factors that we consider in
evaluating independence include whether the director is an employee of
or related to an employee of the issuer or its auditor, whether the
director provides professional services to the issuer, or whether the
director receives non-board related compensation from the issuer
Elimination of Shareholders' Right to Call Special Meetings
- Proposals that relate to the "transaction of other business as properly
comes before the meeting", which extend "blank check" powers to those
acting as proxy
- Approval of Directors who have failed to act on a shareholder proposal
that has been approved by a majority of outstanding shares
40
- Directors at companies where prior non-cash compensation was improperly
"backdated" or "springloaded" where one of the following scenarios
exists:
- (i) it is unknown whether the Compensation Committee had
knowledge of such backdating at the time, (ii) the Compensation
Committee was not independent at the time, and (iii) the director
seeking reelection served on the Compensation Committee at the
time; or
- (i) it is unknown whether the Compensation Committee had
knowledge of such backdating at the time, (ii) the Compensation
Committee was independent at the time, and (iii) sufficient
controls have not been implemented to avoid similar improper
payments going forward; or
- (i) the Compensation Committee had knowledge of such backdating
at the time, and (ii) the director seeking reelection served on
the Compensation Committee at the time; or
- (i) the Compensation Committee did not have knowledge of such
backdating at the time, and (ii) sufficient controls have not
been implemented to avoid similar improper payments going forward
Capitalization
- Capitalization changes that add "blank check" classes of stock (i.e.
classes of stock with undefined voting rights) or classes that dilute
the voting interests of existing shareholders
- Capitalization changes that exceed 100% of the issuer's current
authorized capital unless management provides an appropriate rationale
for such change
Anti-Takeover Measures
- Anti-takeover and related provisions that serve to prevent the majority
of shareholders from exercising their rights or effectively deter
appropriate tender offers and other offers
- Adjournment of Meeting to Solicit Additional Votes
- Shareholder rights plans that do not include a shareholder redemption
feature (qualifying offer clause), permitting ten percent of the shares
to call a special meeting or seek a written consent to vote on
rescinding the pill if the board refuses to redeem the pill 90 days
after a qualifying offer is announced
- Adoption or renewal of a US issuer's shareholder rights plan ("poison
pill")
Executive Compensation/Equity Compensation
- Excessive compensation (i.e. compensation plans which are deemed by FM
to be overly dilutive)
- Retirement bonuses for non-executive directors and auditors
- Proposals requiring the disclosure of executive retirement benefits if
the issuer has an independent compensation -- committee
Routine Business Items
- Amendments to bylaws which would require super-majority shareholder
votes to pass or repeal certain provisions
- Reincorporation in a location which has more stringent anti-takeover
and related provisions
- Proposals asking the board to adopt any form of majority voting, unless
the majority standard indicated is based on a majority of shares
outstanding.
41
Other
- Requirements that the company provide costly, duplicative, or redundant
reports, or reports of a non-business nature
- Restrictions related to social, political, or special interest issues
which affect the ability of the company to do business or be
competitive and which have significant financial or best-interest
impact
- Proposals which require inappropriate endorsements or corporate actions
- Proposals asking companies to adopt full tenure holding periods for
their executives
III. FM evaluates Mergers and Acquisitions on a case-by-case basis. Consistent
with our proxy policy, we support management in seeking to achieve their
objectives for shareholders. However, in all cases, FM uses its discretion in
order to maximize shareholder value. FM generally votes as follows:
- Against offers with potentially damaging consequences for minority
shareholders because of illiquid stock, especially in some non-US
markets
- Against offers when we believe that reasonable prospects exist for an
enhanced bid or other bidders
- Against offers where, at the time of voting, the current market price
of the security exceeds the bid price
- For proposals to restructure or liquidate closed end investment funds
in which the secondary market price is substantially lower than the net
asset value
- For offers made at a premium where no other higher bidder exists
PROTECTING SHAREHOLDER VALUE
We at FM agree entirely with the United States Department of Labor's position
that "where proxy voting decisions may have an effect on the economic value of
the plan's underlying investment, plan fiduciaries should make proxy voting
decisions with a view to enhancing the value of the shares of stock" (IB 94-2).
Our proxy voting policy and procedures are designed with the intent that our
clients receive the best possible returns on their investments. We meet directly
with corporation representatives and participate in conference calls and
third-party inquiries in order to ensure our processes are as fully informed as
possible. However, we use each piece of information we receive - whether from
clients, consultants, the media, the issuer, ISS or other sources -- as one part
of our analysis in seeking to carry out our duties as a fiduciary and act in the
best interest of our clients. We are not unduly influenced by the identity of
any particular source, but use all the information to form our opinion as to the
best outcome for our clients.
Through our membership in the Council of Institutional Investors as well as our
contact with corporate pension plans, public funds, and unions, we are also able
to communicate extensively with other shareholders regarding events and issues
relevant to individual corporations, general industry, and current shareholder
concerns.
In addition, FM monitors "target" lists of underperforming companies prepared by
various shareholder groups, including: California Public Employee Retirement
System, The City of New York - Office of the Comptroller, International
Brotherhood of Teamsters, and Council of Institutional Investors. Companies, so
identified, receive an individual, systematic review by the FM Manager of
Corporate Governance and the Proxy Review Committee, as necessary.
As an active shareholder, FM's role is to support corporate policies that serve
the best interests of our clients. Though we do not seek involvement in the
day-to-day operations of an organization, we recognize the need for
conscientious oversight of and input into management decisions that may affect a
company's value. To that end, our monitoring of corporate management and
industry events is substantially more detailed than that of the typical
shareholder. We have demonstrated our willingness to vote against
management-sponsored initiatives and to support shareholder proposals when
appropriate. To date we have not filed proposals or initiated letter-
42
writing or other campaigns, but have used our active participation in the
corporate governance process -- especially the proxy voting process -- as the
most effective means by which to communicate our and our clients' legitimate
shareholder concerns. Should an issue arise in conjunction with a specific
corporation that cannot be satisfactorily resolved through these means, we shall
consider other approaches.
POTENTIAL CONFLICTS
As discussed above under Process, from time to time, FM will review a proxy
which may present a potential conflict of interest. As a fiduciary to its
clients, FM takes these potential conflicts very seriously While FM's only goal
in addressing any such potential conflict is to ensure that proxy votes are cast
in the clients' best interests and are not affected by FM's potential conflict,
there are a number of courses FM may take. Although various relationships could
be deemed to give rise to a conflict of interest, we have determined that two
categories of relationships present a sufficiently serious concern to warrant an
alternative process: customers of FM or its affiliates which are among the top
100 clients of FM and its affiliates based upon revenue; and the 10 largest
broker-dealers used by SSgA, based upon revenue (a "Material Relationship").
When the matter falls clearly within the polices set forth above or the guidance
previously provided by FM to ISS and the proxy is to be voted in accordance with
that guidance, we do not believe that such decision represents a conflict of
interest and no special procedures are warranted.
In circumstances where either (i) the matter does not fall clearly within the
policies set forth above or the guidance previously provided to ISS, or (ii) FM
determines that voting in accordance with such policies or guidance is not in
the best interests of its clients, the Manager of Corporate Governance will
compare the name of the issuer against a list of the top 100 revenue generating
clients of State Street Corporation and its affiliates and a list of the top 10
broker-dealer relationships to determine if a Material Relationship exists.
(These lists are updated quarterly.) If the issuer's name appears on either list
and the pre-determined policy is not being followed, FM will employ the services
of a third party, wholly independent of FM, its affiliates and those parties
involved in the proxy issue, to determine the appropriate vote. However, in
certain circumstances the Proxy Review Committee may determine that the use of a
third party fiduciary is not necessary or appropriate, either because the matter
involved does not involve a material issue or because the issue in question
affects the underlying value of the portfolio position and it is appropriate for
FM, notwithstanding the potential conflict of interest, to vote the security in
a manner that it determines will maximize the value to its client. In such
situations, the Proxy Committee, or if a broader discussion is warranted, the
SSgA Investment Committee, shall make a decision as to the voting of the proxy.
The basis for the voting decision, including the basis for the determination
that the decision is in the best interests of FM's clients, shall be formalized
in writing as a part of the minutes to the Investment Committee.
RECORDKEEPING
In accordance with applicable law, FM shall retain the following documents for
not less than five years from the end of the year in which the proxies were
voted, the first two years in FM's office:
1) FM's Proxy Voting Policy and any additional procedures created pursuant
to such Policy;
2) a copy of each proxy statement FM receives regarding securities held by
its clients (note: this requirement may be satisfied by a third party
who has agreed in writing to do so or by obtaining a copy of the proxy
statement from the EDGAR database);
3) a record of each vote cast by FM (note: this requirement may be
satisfied by a third party who has agreed in writing to do so);
4) a copy of any document created by FM that was material in making its
voting decision or that memorializes the basis for such decision; and
5) a copy of each written request from a client, and response to the
client, for information on how FM voted the client's proxies.
DISCLOSURE OF CLIENT VOTING INFORMATION
Any client who wishes to receive information on how its proxies were voted
should contact its FM client service officer.
43