This is the risk that asset allocation
decisions, particularly large redemptions, made by the Funds
investment adviser, whose discretionary clients make up
a large percentage of the Funds shareholders, may
adversely impact remaining Fund shareholders.
For
current
yield
information,
please
call
1-800-575-1265
toll
free,
or
contact
your
account
representative.
When
you
consider
this
information,
please
remember
that
the
Funds
performance
in
past
years
is
not
necessarily
an
indication
of
how
the
Fund
will
perform
in
the
future.
Shares of the Fund may be purchased
or sold (redeemed) on any business day (normally any day
when the New York Stock Exchange (NYSE) is open).
Shareholders may redeem shares held directly in the name
of a shareholder on the books of the Fund by submitting
a redemption request to the Funds transfer agent,
ALPS Fund Services, Inc. (Transfer Agent). If
shares are held by a bank, broker or other financial intermediary
with which the Fund or its shareholder servicing agent has
contracted (Financial Intermediary) on behalf
of such shareholder, then shareholders must redeem shares
through such Financial Intermediary.
A repurchase agreement is an agreement
in which the seller (the Lender) of a security agrees to
repurchase from the Fund the security sold at a mutually
agreed upon time and price. As such, it is viewed as the
lending of money to the Lender. The Fund always receives
U.S. Treasury or agency securities (including mortgage-backed
securities) as collateral. Repurchase agreements are subject
to credit risk. If the Lender defaults and the securities
serving as collateral are ineligible securities for the
Fund to purchase, it will liquidate the collateral securities
in a time and manner determined by the Investment Adviser
to be most beneficial to the Fund.
From time to time, the Investment
Adviser may allocate a portion of the assets of its discretionary
clients to the Fund. There is a risk that if a large percentage
of Fund shareholders consists of the Investment Advisers
discretionary clients, such asset allocation decisions,
particularly large redemptions, may adversely impact remaining
Fund shareholders.
Information concerning the Funds
portfolio holdings is available on the Funds website
at www.bbhfunds.com. A complete listing of the Funds
portfolio holdings as of the end of each month is posted
on the website typically within five business days after
the end of the month and remains posted for six months thereafter.
Dividends of net income and net
short-term capital gains, if any, are taxable to shareholders
of the Fund as ordinary income, whether such dividends are
paid in cash or reinvested in additional shares. Any distributions
from the Funds net capital gain (the excess of the
Funds net long-term capital gain over its net short-term
capital loss) are taxable as long-term capital gains, regardless
of how long you have owned your shares.
U.S. individuals with income exceeding
certain thresholds are subject to a 3.8% Medicare contribution
tax on their net investment income, which includes
interest, dividends, and certain capital gains (including
capital gains, if any, realized on the sale or exchange
of shares of the Fund). This 3.8% tax also applies to all
or a portion of the undistributed net investment income
of certain shareholders that are estates and trusts.
If you are neither a citizen nor
a resident of the United States, the Fund will withhold
federal income tax at the rate of 30% (or such lower rate
as may be determined in accordance with any applicable treaty)
on ordinary dividends and other payments that are subject
to such withholding.
If you do not provide the Fund with
your correct taxpayer identification number and any required
certifications, you will be subject to backup withholding
on your distributions and dividends. The backup withholding
rate is currently 28%. Backup withholding will not, however,
be applied to payments that have been subject to the 30%
withholding tax applicable to shareholders who are neither
citizens nor residents of the United States.
The Funds annual and semi-annual
reports to shareholders describe the Funds investments,
performance and list portfolio holdings. The Funds
annual report contains a letter from the Funds Investment
Adviser discussing recent market conditions, economic trends
and Fund strategies that significantly affected the Funds
performance during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION
BBH MONEY MARKET FUND
Regular Shares (Ticker BBMXX)
Institutional Shares (Ticker BBSXX)
140 Broadway, New York, New York 10005
October 29, 2013
BBH Money Market Fund (the “Fund”)
is a separate and diversified series of BBH Trust (the “Trust”). The Fund currently offers two classes
of shares designated as Regular Shares and Institutional Shares.
This Statement of Additional Information
(“SAI”) is not a prospectus and provides new and additional information beyond that contained in the Fund’s
prospectus. This SAI should be read in conjunction with the Fund’s prospectus dated October 29, 2013, as it may be further
amended and/or supplemented from time to time. The Fund’s annual report dated June 30, 2013 is incorporated herein by reference.
You may obtain the Fund’s prospectus and annual report without charge by calling 1-800-575-1265.
OVERVIEW
The Trust is an open-end management investment
company registered under the Investment Company Act of 1940, as amended (the “1940 Act”). The Trust is a
Delaware statutory trust organized on October 28, 2005.
The Trust has a combined Investment Advisory
and Administrative Services Agreement (“Agreement”) with Brown Brothers Harriman & Co. (“BBH&Co.”).
BBH&Co. provides investment advice to registered mutual funds through a separately identifiable department (the “SID”
or the “Investment Adviser”). The SID is registered with the U.S. Securities and Exchange Commission (the “SEC”)
as an investment adviser as that term is defined under the Investment Advisers Act of 1940, as amended (the “Advisers Act”).
BBH&Co. provides administrative services to each series of the Trust.
The Fund is a money market mutual fund. The
investment objective of the Fund is fundamental and may not be changed without the approval of the shareholders. Except
as expressly noted otherwise in the prospectus, the Fund’s investment policies and strategies may be changed without shareholder
approval. Money market mutual funds are designed to be a cost effective and convenient means of making substantial investments
in tax exempt or taxable money market instruments. However, there can be no assurance that the Fund will be able to achieve its
investment objective.
The Fund is a successor to a mutual fund of
the same name (the “Predecessor Fund”), which was a series of a Massachusetts business trust of the same name (the
“Predecessor Trust”). The Fund has the same investment objective and policies as its Predecessor Fund.
Table of Contents
INVESTMENT OBJECTIVE
The investment objective of the
Fund is to provide investors with as high a level of income as is consistent with the preservation of capital and the maintenance
of liquidity.
The following supplements the information
contained in the Fund’s Prospectus concerning the investment objective, policies and strategies of the Fund.
There can
be no assurance that the investment objective of the Fund will be achieved.
DESCRIPTION OF
THE FUND’S STRATEGIES AND INVESTMENTS
Under normal circumstances, the
Fund invests in high quality, U.S. dollar-denominated short-term money market instruments such as U.S. Government securities and
bank obligations of U.S. and non-U.S. banks (i.e. certificates of deposit and fixed time deposits), commercial paper, repurchase
agreements, municipal bonds, bonds issued by U.S. corporations and obligations of certain supranational organizations. In pursuing
its investment objective and implementing its investment strategies, the Fund will comply with Rule 2a-7 (“Rule 2a-7”)
under the Investment Company Act of 1940, as amended (the “1940 Act”).
In choosing securities, the Investment
Adviser seeks to maximize current income within the limits of the Fund’s credit, maturity and diversification policies.
Some of these policies may be stricter than the federal regulations that apply to all money market funds. To preserve the value
of investors’ capital, the Fund seeks to maintain a stable $1.00 per share price.
The Fund adheres to the following operating
policies, which may be changed without shareholder approval:
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Interest
Rate Risk Control. The dollar-weighted average maturity of the Fund will be limited to 60 days. The dollar weighted
average life of the Fund will be limited to 120 days. Both the dollar-weighted average maturity and the dollar
weighted average life are calculated as described in Rule 2a-7.
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Liquidity. The Fund shall hold securities that are sufficiently liquid to meet reasonably foreseeable shareholder redemptions in light of the Fund’s obligations and any commitments the Fund has made to shareholders. The Fund will maintain a minimum of 10% of its total assets in Daily Liquid Assets and a minimum of 30% in Weekly Liquid Assets, both as defined in Rule 2a-7.
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Issuer Diversification. The Fund will not invest more than 3% of its net assets in any one security by a non-government issuer at time of purchase with a time to maturity longer than 7 days. Rule 2a-7 currently allows issuer concentrations of 5%.
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Credit Quality. The Fund will maintain a minimum of 50% of its net assets in securities rated A1+ by Standard & Poor’s (“S&P”), and invest the balance of its assets in securities rated A1. Government securities, repurchase agreements and securities maturing in 7 days or less will be considered A1+ for these purposes.
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The following is a description of the various
types of securities in which the Fund may invest. Other types of securities may become available that are similar to those described
below in which the Fund also may invest, if consistent with its investment objective and policies.
Fixed Income Securities Descriptions and
Techniques
Issuers of fixed income securities pay an interest
rate that may be either a fixed percentage of the principal or adjusted periodically. In addition, the issuer of a fixed income
security must repay the principal amount of the security, normally within a specified time.
A security’s yield measures the annual
income earned on a security as a percentage of its price. A security’s yield will be greater or less than the security’s
interest rate depending upon whether the cost of the security is less (a discount) or more (a premium) than the principal amount.
If the issuer redeems the security before its scheduled
maturity, the price and yield on a discount
or premium security may change based upon the probability of an early redemption. Securities with higher risks generally have
higher yields.
Variable and Floating Rate Instruments
These are securities whose interest rates
are reset daily, weekly or at another periodic date. These securities often have a demand feature, which entitles the investor
to repayment of principal plus accrued interest on short notice. In calculating the weighted average maturity of a variable rate
or floating rate instrument for the Fund, the date of the next interest rate reset is used.
U.S. Government Securities
These securities are issued or guaranteed
by the U.S. government, its agencies or instrumentalities and may or may not be backed by the “full faith and credit”
of the United States. In the case of securities not backed by the full faith and credit of the United States, it may not be possible
to assert a claim against the United States itself in the event the agency or instrumentality issuing or guaranteeing the security
for ultimate repayment does not meet its commitments. Securities that are not backed by the full faith and credit of the United
States include, but are not limited to, securities of the Tennessee Valley Authority, the Federal National Mortgage Association,
the Federal Farm Credit System, the Federal Home Loan Banks and the Federal Home Loan Mortgage Corporation. Securities that are
backed by the full faith and credit of the United States include Treasury bills, Treasury notes, Treasury bonds and pass through
obligations of the Government National Mortgage Association, the Farmers Home Administration and the Export-Import Bank. There
is no percentage limitation with respect to investments in U.S. government securities.
Corporate Debt Securities
Corporate debt securities are fixed income
securities issued by businesses. Notes, bonds, debentures and commercial paper are the most prevalent types of corporate debt securities.
The Fund may also purchase interests in bank loans to companies. The credit risks of corporate debt securities vary widely among
issuers.
In addition, the credit risk of an issuer’s
debt security may vary based on its priority for repayment. For example, higher ranking (senior) debt securities have a higher
priority than lower ranking (subordinated) securities. This means that the issuer might not make payments on subordinated securities
while continuing to make payments on senior securities. In addition, in the event of bankruptcy, holders of senior securities may
receive amounts otherwise payable to the holders of subordinated securities. Some subordinated securities, such as trust preferred
and capital securities notes, also permit the issuer to defer payments under certain circumstances. For example, insurance companies
issue securities known as surplus notes that permit the insurance company to defer any payment that would reduce its capital below
regulatory requirements.
Commercial Paper
Assets of the Fund may be invested in commercial
paper including variable rate demand master notes issued by U.S. corporations or by non-U.S. corporations that are direct parents
or subsidiaries of U.S. corporations. Master notes are demand obligations that permit the investment of fluctuating amounts at
varying market rates of interest pursuant to arrangements between the issuer and a U.S. commercial bank acting as agent for the
payees of such notes. Master notes are callable on demand but are not marketable to third parties. Consequently, the right to
redeem such notes depends on the borrower’s ability to pay on demand. At the date of investment, commercial paper must present
minimal credit risk and be rated within one of the two highest credit-quality rating categories for short-term debt obligations
by at least two nationally recognized statistical rating organizations (“NRSROs”) (or by one, if only one NRSRO has
rated the security) (e.g., Moody’s Investor Service (“Moody’s”) and S&P) or, if unrated, be deemed
by the Investment Adviser to be of comparable quality to securities having such ratings. Any commercial paper issued by a non-U.S.
corporation must be U.S. dollar-denominated and not subject to non-U.S. withholding tax at the time of purchase. Aggregate investments
in liquid non-U.S. commercial paper of non-U.S. issuers cannot exceed 10% of the Fund’s net assets. Since the Fund may contain
commercial paper issued by non-U.S. corporations, it may be subject to additional investment risks with respect to those securities
that are different in some respects from obligations of U.S. issuers, such as currency exchange control regulations, the possibility
of expropriation, seizure or nationalization of non-U.S. deposits, less liquidity and more volatility in non-U.S. securities markets
and the impact of political, social or diplomatic developments or the adoption of other foreign government restrictions which
might adversely affect the payment of principal and interest on securities held by the Fund. If it should become necessary,
greater difficulties might be encountered in
invoking legal processes abroad than would be the case in the United States. There may be less publicly available information about
a non-U.S. issuer, and non-U.S. issuers generally are not subject to uniform accounting and financial reporting standards, practices
and requirements comparable to those applicable to U.S. issuers.
The Fund’s exposure to the commercial
paper of any single financial institution shall be limited to 3% of the Fund’s total assets if that commercial paper has
a remaining maturity of more than seven days.
Zero Coupon Bonds
These are securities issued at a discount
from their face value that pay all interest and principal upon maturity. The difference between the purchase price and par is
a specific compounded interest rate for the investor. In calculating the daily income of the Fund, a portion of the difference
between a zero coupon bond’s purchase price and its face value, is taken into account as income.
U.S. and Non-U.S. Bank Obligations
Assets of the Fund may be invested in U.S.
dollar-denominated negotiable certificates of deposit and fixed time deposits of banks, savings and loan associations and savings
banks organized under the laws of the United States or any state thereof, including obligations of non-U.S. branches of such banks,
or of non-U.S. banks or their U.S. or non-U.S. branches, provided that in each case, such bank has more than $500 million in total
assets, and has an outstanding short-term debt issue rated within the highest credit quality rating category for short-term debt
obligations by at least two NRSROs (or by one, if only one NRSRO has rated the security)(e.g., Moody’s and S&P) or,
if unrated, are of comparable quality to securities within the highest credit-quality rating categories as determined by or under
the direction of the Investment Adviser. There is no additional percentage limitation with respect to investments in negotiable
certificates of deposit and fixed time deposits of U.S. branches of U.S. banks and U.S. branches of non-U.S. banks that are subject
to the same regulation as U.S. banks. Although early withdrawals are not contemplated, fixed time deposits are not readily marketable
and may be subject to early withdrawal penalties, which may vary. Assets of the Fund are not invested in obligations of BBH&Co.,
or the Distributor (defined herewith), or in the obligations of the affiliates of any such organization. Assets of the Fund are
also not invested in fixed time deposits with a maturity of over seven calendar days, or in fixed time deposits with a maturity
from two business days to seven calendar days if more than 10% of the Fund’s net assets would be invested in such deposits.
Since the Fund may invest in U.S. dollar-denominated
certificates of deposit and fixed time deposits that are issued by non-U.S. banks and their non-U.S. branches, the Fund may be
subject to additional investment risks with respect to those securities that are different in some respects from obligations of
U.S. issuers, such as currency exchange control regulations, the possibility of expropriation, seizure or nationalization of non-U.S.
deposits, less liquidity and more volatility in non-U.S. securities markets and the impact of political, social or diplomatic developments
or the adoption of other foreign government restrictions, which might adversely affect the payment of principal and interest on
securities held by the Fund. If it should become necessary, greater difficulties might be encountered in invoking legal processes
abroad than would be the case in the United States. Issuers of non-U.S. bank obligations may be subject to less stringent or different
regulations than are U.S. bank issuers, there may be less publicly available information about a non-U.S. issuer, and non-U.S.
issuers generally are not subject to uniform accounting and financial reporting standards, practices and requirements comparable
to those applicable to U.S. issuers. Income earned or received by the Fund from sources within countries other than the United
States may be reduced by withholding and other taxes imposed by such countries. Tax conventions between certain countries and the
United States, however, may reduce or eliminate such taxes. All such taxes paid by the Fund would reduce its net income available
for distribution to investors; however, the Investment Adviser would consider available yields, net of any required taxes, in selecting
securities of non-U.S. issuers.
Bank instruments, for the purposes of concentration,
include certain instruments issued by: (i) domestic banks; (ii) U.S. branches of foreign banks subject to the same regulation as
U.S. banks; and (iii) foreign branches of domestic banks whose domestic parent is unconditionally liable in the event that the
foreign branch failed to pay on its instruments for any reason.
Municipal Securities
Municipal Bonds.
These are securities
issued by state and local government and regional authorities, which provide interest income that is exempt from federal income
taxes, other than the Alternative Minimum Tax (“AMT”). They generally have maturities of one year or more. These securities
have two principal classifications: general obligations and revenue bonds.
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General
Obligations
.
These
securities are backed
by a municipality’s
pledge of full faith,
credit and taxing
power. Issuers of
general obligation
bonds include states,
counties, cities,
towns and regional
districts.
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Revenue
Obligations
. These
securities are backed
by revenues generated
by a specific project,
facility or tax.
Revenue bonds are
issued to finance
a wide variety of
capital projects
including municipal
water, sewer and
power utilities;
healthcare facilities;
transportation projects;
higher education
or housing facilities;
industrial development
and resource recovery
bonds and lease-backed
bonds (including
certificates of participation
and municipal lease
obligations).
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Constitutional amendments, legislative enactments,
executive orders, administrative regulations, voter initiatives and the issuer’s regional economic conditions may affect
the municipal security’s value, interest payments, repayment of principal and the Fund’s ability to sell it. Revenue
bonds are generally not backed by the taxing power of the issuing municipality. To the extent that a municipal security is not
heavily followed by the investment community or such security issue is relatively small, the security may be difficult to value
or sell at a desirable price. If the Internal Revenue Service determines that an issuer of a municipal security has not complied
with applicable tax requirements, interest from the security could be treated as taxable, which could result in a decline in the
security’s value.
Refunded or Escrowed Bonds.
These
are general or revenue bonds that have been fully secured or collateralized by an “escrow fund” consisting of U.S.
government obligations that can adequately meet interest and principal payments. Refunded bonds often receive a triple A or equivalent
rating. Refunded bonds bear the same interest rate and have a very high credit quality. However, as the original bond approaches
its pre-refunded date, the bond’s price will fall to its pre-refunded price.
Municipal Notes
.
These
are securities issued by state and local government and regional authorities, which provide interest income that is exempt from
federal income taxes, other than AMT. They generally have maturities of less than one year. These securities include tax, revenue
and bond anticipation notes.
Certificates of Participation.
Certificates
of participation are lease financing agreements in the form of a security that is similar to municipal bonds. If a municipality
(lessor) does not have a current need for certain facilities, the facility can be leased to a designated non-profit corporation
(trustee) that would in turn sub-lease the facility to other organizations. The trustee would then sell certificates of participation
in the future sub-lease payments. Similar to bonds, certificates of participation have a face value, a maturity date and set interest
rate. However, unlike municipal bonds, certificates of participation are secured only by ownership of the asset and rights of the
lessor to receive rental payments under the lease financing agreement.
Municipal Lease Obligations
.
These
securities are created to finance the purchase of property of public use. The property is then leased to a state or local government
and these leases secure the municipal lease obligations. However, municipal lease obligations differ from other municipal
securities because each year the lessee’s governing body must appropriate the money to make the lease payments. If the money
is not appropriated, the issuer or the lessee can end the lease without penalty. If the lease is cancelled, investors who own the
municipal lease obligation may not be paid. Since annual appropriations are required to make lease payments, municipal lease obligations
generally are not subject to constitutional limitations on the issuance of public debt, and may allow an issuer to increase government
liabilities beyond constitutional limits. If not enough money is appropriated to make the lease payments, the leased property may
be repossessed as security for holders of the municipal lease obligations. If this happens, there is no assurance that the property’s
private sector or re-leasing value will be enough to make all outstanding payments on the municipal lease obligations or that the
payments will continue to be tax-free.
Supranational Agencies
Obligations of supranational agencies, such
as the World Bank, may be supported by appropriated but unpaid commitments of its member countries, although there is no assurance
that these commitments will be undertaken in the future.
Repurchase Agreements
A repurchase agreement is an agreement
in which the seller (“Lender”) of a security agrees to repurchase from the Fund the security sold at a mutually agreed
upon time and price. As such, it is viewed as the lending of money to the Lender. The resale price normally is in excess of the
purchase price, reflecting an agreed upon interest rate. The rate is effective for the period of time assets of the Fund are invested
in the agreement and is not related to the coupon rate on the underlying security. The period of these repurchase agreements is
usually short, from overnight to one week, and at no time are assets of a Fund invested in a repurchase agreement with a maturity
of more than one year. The securities that are subject to repurchase agreements, however, may have maturity dates in excess of
one year from the effective date of the repurchase agreement. Repurchase agreements are considered by the Staff of the SEC to
be loans by the Fund. Repurchase agreements could involve risks in the event of a default or insolvency of the other party to
the agreement, including possible delays or restrictions upon the Fund’s ability to dispose of the underlying securities.
If the lender defaults, the Fund might incur a loss if the value of the collateral securing the repurchase agreement declines
and might incur disposition costs in connection with liquidating the collateral. In an attempt to reduce the risk of incurring
a loss on a repurchase agreement, the Fund will enter into repurchase agreements only with banks and other recognized financial
institutions, such as securities dealers, deemed creditworthy by the Investment Adviser.
Collateral is marked to the market daily
and has a market value, including accrued interest at least equal to 100% of the dollar amount invested on behalf of the Fund
in each agreement along with accrued interest. If the Lender defaults, the Fund might incur a loss if the value of
the collateral securing the repurchase agreement declines and might incur disposition costs in connection with liquidating the
collateral. In addition, if bankruptcy proceedings are commenced with respect to the Lender, realization upon the collateral
on behalf of the Fund may be delayed or limited in certain circumstances. Repurchase agreements collateralized entirely
by cash or U.S. government securities may be deemed to be collateralized fully pursuant to Rule 2a-7 and may be deemed to be investments
in cash or U.S. government securities.
A repurchase agreement with more than
seven days to maturity may not be entered into for the Fund if, as a result, more than 5% of the market value of the Fund’s
total assets would be invested in such repurchase agreements together with any other investment being held for the Fund for which
market quotations are not readily available.
Collateral for repurchase agreements may be
held by a custodian other than BBH&Co.
Reverse Repurchase Agreements
Reverse repurchase agreements may be entered
into only with a “primary dealer” (as designated by the Federal Reserve Bank of New York) in U.S. government securities.
This is an agreement in which the Fund agrees to repurchase securities sold by it at a mutually agreed upon time and price. As
such, it is viewed as the borrowing of money for the Fund. Proceeds of borrowings under reverse repurchase agreements are invested
for the Fund. This is the speculative factor known as “leverage.” If interest rates rise during the term of a reverse
repurchase agreement utilized for leverage, the value of the securities to be repurchased for the Fund as well as the value of
securities purchased with the proceeds will decline. In these circumstances, the Fund entering into reverse repurchase agreements
may have a negative impact on the ability to maintain the Fund’s net asset value per share (“NAV”) of $1.00.
Proceeds of a reverse repurchase transaction are not invested for a period that exceeds the duration of the reverse repurchase
agreement. A reverse repurchase agreement is not entered into for the Fund if, as a result, more than one-third of the market value
of the Fund’s total assets, less liabilities other than the obligations created by reverse repurchase agreements, is engaged
in reverse repurchase agreements. In the event that such agreements exceed, in the aggregate, one-third of such market value, the
amount of the Fund’s obligations created by reverse repurchase agreements is reduced within three business days thereafter
(not including weekends and holidays) or such longer period as the SEC may prescribe, to an extent that such obligations do not
exceed, in the aggregate, one-third of the market value of the Fund’s assets, as defined above. A segregated account with
BBH&Co., the Fund’s
custodian (the “Custodian”), is
established and maintained for the Fund with liquid assets in an amount at least equal to the Fund’s purchase obligations
under its reverse repurchase agreements. Such a segregated account consists of liquid high grade debt securities marked to the
market daily, with additional liquid assets added when necessary to insure that at all times the value of such account is equal
to the purchase obligations.
When-Issued and Delayed Delivery Securities
Securities may be purchased for the Fund
on a when-issued or delayed delivery basis. For example, delivery and payment may take place a month or more after the date of
the transaction. The purchase price and the interest rate payable on the securities, if any, are fixed on the transaction date.
The securities so purchased are subject to market fluctuation and no income accrues to the Fund until delivery and payment take
place. At the time the commitment to purchase securities on a when-issued or delayed delivery basis is made, the transaction is
recorded and thereafter the value of such securities is reflected each day in determining the Fund’s NAV. The Fund maintains
with the Custodian a separate account with a segregated portfolio of securities in an amount at least equal to these commitments.
At the time of its acquisition, a when-issued or delayed delivery security may be valued at less than the purchase price. Commitments
for such when-issued or delayed delivery securities are made only when there is an intention of actually acquiring the securities.
On delivery dates for such transactions, such obligations are met from maturities or sales of the securities and/or from cash
flow. If the right to acquire a when-issued or delayed delivery security is disposed of prior to its acquisition, the Fund could,
as with the disposition of any other portfolio obligation, incur a gain or loss due to market fluctuation. When-issued or delayed
delivery commitments for the Fund may not be entered into if such commitments exceed in the aggregate 15% of the market value
of the Fund’s total assets, less liabilities other than the obligations created by when-issued or delayed delivery commitments.
Loans of Portfolio Securities
Loans up to 30% of the total value of the
securities of the Fund are permitted. Securities of the Fund may be loaned if such loans are secured continuously by cash or equivalent
collateral or by an irrevocable letter of credit in favor of the Fund at least equal at all times to 100% of the market value
of the securities loaned plus accrued income. While such securities are on loan, the borrower pays the Fund any income accruing
thereon, and cash collateral may be invested for the Fund, thereby earning additional income. All or any portion of interest earned
on invested collateral may be paid to the borrower. Loans are subject to termination by the Fund in the normal settlement time,
currently three business days after notice, or by the borrower on one day’s notice. Borrowed securities are returned when
the loan is terminated. Any appreciation or depreciation in the market price of the borrowed securities which occurs during the
term of the loan inures to the Fund and its shareholders. Reasonable finders’ and custodial fees may be paid in connection
with a loan. In addition, all facts and circumstances, including the creditworthiness of the borrowing financial institution,
are considered before a loan is made and no loan is made in excess of one year. There is the risk that a borrowed security may
not be returned to the Fund. Securities of the Fund are not loaned to BBH&Co. or to any affiliate of the the Fund or BBH&Co.
Investment Company Securities
Subject to applicable statutory and regulatory
limitations, the assets of the Fund may be invested in shares of other investment companies. As a shareholder of another investment
company, the Fund would bear, along with other shareholders, its pro rata portion of the other investment company’s expenses,
including advisory fees. These expenses would be in addition to the advisory and other expenses that the Fund bears directly in
connection with its own operations.
Borrowing
The 1940 Act permits a registered investment
company to borrow money from banks, so long as it maintains asset coverage of 300% for all outstanding borrowings. The Fund must
reduce the amount of its borrowings within three days if its asset coverage falls below 300%. As a general matter, a fund that
borrows money is susceptible to the risk of having to sell portfolio securities at an inopportune time in order to maintain the
300% asset coverage ratio required by the 1940 Act. Borrowing may also exaggerate the impact on the Fund of any increase or decrease
in the value of its investments (which would have a corresponding effect on the Fund’s share value). Money borrowed is also
subject to interest costs.
INVESTMENT POLICIES
Fundamental Investment Policies
The Fund operates under the following investment
policies, which are deemed fundamental and may be changed only with the approval of the Board and the holders of a “majority
of the Fund’s outstanding voting securities” (as defined in the 1940 Act) (see “Additional Information”).
Diversification
With respect to securities comprising 75% of
the value of its total assets, the Fund will not purchase securities of any one issuer (other than cash; cash items; securities
issued or guaranteed by the government of the United States or its agencies or instrumentalities and repurchase agreements collateralized
by such U.S. government securities; and securities of other investment companies) if, as a result, more than 5% of the value of
its total assets would be invested in the securities of that issuer, or the Fund would own more than 10% of the outstanding voting
securities of that issuer.
Concentration
The Fund will not make investments that will
result in the concentration of its investments in the securities of issuers primarily engaged in the same industry. For
purposes of this restriction, the term concentration has the meaning set forth in the 1940 Act, any rule or order thereunder, or
any SEC staff interpretation thereof. Government securities, municipal securities and bank instruments will not be deemed
to constitute an industry.
Underwriting
The Fund may not underwrite the securities
of other issuers, except that the Fund may engage in transactions involving the acquisition, disposition or resale of its portfolio
securities, under circumstances where it may be considered to be an underwriter under the Securities Act of 1933, as amended (the
“1933 Act”).
Investing in Commodities
The Fund may not purchase or sell physical
commodities, provided that the Fund may purchase securities of companies that deal in commodities.
Investing in Real Estate
The Fund may not purchase or sell real estate,
provided that this restriction does not prevent a Fund from investing in issuers which invest, deal, or otherwise engage in transactions
in real estate or interests therein, or investing in securities that are secured by real estate or interests therein. The Fund
may exercise its rights under agreements relating to such securities, including the right to enforce security interests and to
hold real estate acquired by reason of such enforcement until that real estate can be liquidated in an orderly manner.
Borrowing Money and Issuing Senior Securities
The Fund may borrow money, directly or indirectly,
and issue senior securities to the maximum extent permitted under the 1940 Act, any rule or order thereunder, or any SEC staff
interpretation thereof.
Lending
The Fund may not make loans, provided that
this restriction does not prevent the Fund from purchasing debt obligations, entering into repurchase agreements, lending its assets
to broker/dealers or institutional investors and investing in loans, including assignments and participation interests.
Non-Fundamental Investment Policies
The following policies are non-fundamental
and therefore may be changed by the Board without shareholder approval. Shareholders will be notified before any material change
in these limitations becomes effective.
Illiquid Securities
The Fund will not purchase securities for
which there is no readily available market, or enter into repurchase agreements or purchase time deposits that the Fund cannot
dispose of within seven days, if immediately after and as a result, the value of such securities would exceed, in the aggregate,
5% of the Fund’s net assets.
Purchases on Margin
The Fund will not purchase securities on margin,
provided that the Fund may obtain short-term credits necessary for the clearance of purchases and sales of securities.
Pledging Assets
The Fund will not mortgage, pledge, or hypothecate
any of its assets, provided that this shall not apply to the transfer of securities in connection with any permissible borrowing
or to collateral arrangements in connection with permissible activities.
Selling Short
The Fund will not make short sales of securities
or maintain a short position, unless at all times when a short position is open it owns an equal amount of such securities or securities
convertible into or exchangeable, without payment of any further consideration, for securities of the same issue as, and equal
in amount to, the securities sold short, and unless not more than 10% of its net assets (taken at market value) is represented
by such securities, or securities convertible into or exchangeable for such securities, at any one time.
Restricted Securities
The Fund will not purchase securities that
are restricted at the time of purchase, except Rule 144A securities.
For purposes of the above limitations:
|
·
|
the Fund considers certificates
of deposit and demand and time deposits issued by a U.S. branch of a domestic bank or savings association having capital, surplus
and undivided profits in excess of $100,000,000 at the time of investment to be “cash items” and “bank instruments;”
and
|
|
·
|
except with respect to borrowing
money, if a percentage or rating restriction on an investment is adhered to at the time an investment is made or assets are so
utilized, a later change in percentage resulting from changes in the value of the portfolio securities or changes in portfolio
size or a later change in the rating of a portfolio security is not considered a violation of policy. With respect to illiquid
securities, if a percentage limitation is similarly exceeded, the Fund will consider reducing its holdings of illiquid securities
as appropriate.
|
MANAGEMENT
Information pertaining to the Trustees
and officers of the Trust is set forth below. The mailing address for each Trustee, except as otherwise noted, is c/o BBH Trust,
140 Broadway, New York, NY 10005.
Name and Birth Date
|
Position(s)
Held
with the Trust
|
Term
of Office# and
Length of Time
Served
|
Principal
Occupation(s) During
Past 5 Years
|
Number
of
Portfolios in Fund
Complex Overseen
By Trustee^
|
Other
Directorships
held by Trustee During Past 5 Years
|
Independent
Trustees
|
|
|
|
|
|
Joseph V. Shields Jr.
Birth Date: March 17, 1938
|
Chairman
of the Board and Trustee
|
Since
2007 1990-2007 with the Predecessor Trust
|
Managing
Director and Chairman of Wellington Shields & Co. LLC (member of New York Stock Exchange (“NYSE”)).
|
5
|
Chairman
of Capital Management Associates, Inc. (registered investment adviser); Director of Flowers Foods, Inc. (NYSE listed company).
|
Name and Birth Date
|
Position(s)
Held
with the Trust
|
Term
of Office# and
Length of Time
Served
|
Principal
Occupation(s) During
Past 5 Years
|
Number
of
Portfolios in Fund
Complex Overseen
By Trustee^
|
Other
Directorships
held by Trustee During Past 5 Years
|
David P. Feldman
Birth Date: November 16, 1939
|
Trustee
|
Since 2007 1990-2007 with the Predecessor Trust
|
Retired.
|
5
|
Director
of Dreyfus Mutual Funds (59 Funds).
|
Arthur D. Miltenberger
Birth Date: November 8, 1938
|
Trustee
|
Since
2007 1992-2007 with the Predecessor Trust
|
Retired.
|
5
|
None.
|
H. Whitney Wagner
Birth Date: March 3, 1956
|
Trustee
|
Since
2007 2006-2007 with the Predecessor Trust
|
President,
Clear Brook Advisors, a registered investment advisor.
|
5
|
None.
|
Andrew S. Frazier
Birth Date: April 8, 1948
|
Trustee
|
Since
2010
|
Consultant to Western World Insurance Group, Inc. (“WWIG”)
(January 2010 to January 2012)
CEO of WWIG (1992-2009).
|
5
|
Director
of WWIG.
|
Mark M. Collins
Birth Date: November 8, 1956
|
Trustee
|
Since
2011
|
Partner
of Brown Investment Advisory Incorporated, a registered investment advisor.
|
5
|
Chairman
of Dillon Trust Company; Chairman of Keswick Management; Director of Domaine Clarence Dillon, Bordeaux, France; and Director
of Pinnacle Care International.
|
Name and Birth Date
|
Position(s) Held
with the Trust
|
Term of Office# and
Length of Time
Served
|
Principal Occupation(s)
During
Past 5 Years
|
Number
of
Portfolios in Fund
Complex Overseen
By Trustee^
|
Other
Directorships
held by Trustee During Past 5 Years
|
Interested
Trustees
|
|
|
|
|
|
Susan C. Livingston+
50 Post Office Square
Boston, MA 02110-1548
Birth Date:
February
18, 1957
|
Trustee
|
Since
2011
|
Partner
(since 1998) and Senior Client Advocate (since 2010) for BBH&Co., Director of BBH Luxembourg S.C.A. (since 1992); Director
of BBH Trust Company (Cayman) Ltd. (2007 to April 2011); and BBH Investor Services (London) Ltd (2001 to April 2011).
|
5
|
None
|
John A. Gehret+
Birth Date: April 11, 1959
|
Trustee
|
Since
2011
|
Limited
Partner of BBH&Co. (2012-present); General Partner of BBH&Co. (1998 to 2011); President and Principal Executive Officer
of the Trust (2008-2011).
|
5
|
None
|
Name
and Birth Date
|
Position(s) Held
with the Trust
|
Term of Office# and
Length of Time
Served
|
Principal Occupation(s)
During
Past 5 Years
|
Officers
|
|
|
|
Radford W. Klotz
140 Broadway
New York, NY 10005
Birth Date: December 1, 1955
|
President
and Principal Executive Officer
|
Since
2011
|
Partner
of BBH&Co. since 1995; joined BBH&Co. in 1977.
|
Charles H. Schreiber
140 Broadway
New York, NY 10005
Birth Date: December 10, 1957
|
Treasurer
and Principal Financial Officer
|
Since 2007
2006-2007 with the Predecessor Trust
|
Senior
Vice President of BBH&Co. since 2001; joined BBH&Co. in 1999.
|
Mark A. Egert
140 Broadway
New York, NY 10005
Birth Date: May 25, 1962
|
Chief
Compliance Officer (“CCO”)
|
Since
2011
|
Senior
Vice President of BBH&Co. since June 2011; Partner at Crowell & Moring LLP (April 2010 to May 2011); and CCO of Cowen
and Company (January 2005 to April 2010).
|
Suzan Barron
50 Post Office Square
Boston, MA 02110-1548
Birth Date: September 5, 1964
|
Secretary
|
Since
2009
|
Senior
Vice President and Senior Investor Services Counsel, BBH&Co. since 2005.
|
Alexander Tikonoff
50 Post Office Square
Boston, MA 02110-1548
Birth Date: December 23, 1974
|
Assistant
Secretary
|
Since
2009
|
Vice
President and Investor Services Counsel, BBH&Co. since 2012; joined BBH&Co. in August 2000.
|
Mark B. Nixon
140 Broadway
New York, NY 10005
Birth Date: January 14, 1963
|
Assistant
Secretary
|
Since 2007
2006-2007 with the Predecessor Trust
|
Vice
President of BBH&Co. since 2006.
|
Rowena Rothman
140 Broadway
New York, NY 10005
Birth Date:
October 24, 1967
|
Assistant
Treasurer
|
Since
2011
|
Vice
President of BBH&Co. since 2009; Finance and Accounting Consultant at The Siegfried Group (2007-2009).
|
Sue M. Rim-An
140 Broadway
New York, NY 10005
Birth Date: September 10, 1970
|
Anti-Money
Laundering Officer
|
Since
2008
|
Vice
President of BBH&Co. since 2007.
|
#
|
All
officers of the Trust hold office for one year and until their respective successors are chosen and qualified (subject to
the ability of the Trustees to remove any officer in accordance with the Trust’s By-laws). Except for Ms. Livingston
and Messrs. Collins, Frazier and Gehret, the Trustees previously served on the Board of Trustees of the Predecessor Trust.
|
+
|
Ms.
Livingston and Mr. Gehret are “interested persons” of the Trust as defined in the 1940 Act because of their positions
as Partner and Limited Partner of BBH&Co., respectively.
|
|
|
|
|
|
^
|
The
Fund Complex consists of the Trust, which has five series, and each is counted as one “Portfolio” for purposes
of this table.
|
BOARD OF TRUSTEES
Board Leadership Structure
Currently, six of the eight Trustees of the
Board are not “interested persons” as defined in the 1940 Act (“Independent Trustees”). The Board has appointed
Mr. Joseph V. Shields Jr., to serve as Chairman of the Board. There are two primary committees of the Board: the Audit Committee
and the Valuation Committee. The Committee chairs each preside at Committee meetings, participate in formulating agendas for those
meetings, and coordinate with management to serve as a liaison between the Independent Trustees and management on matters within
the scope of the responsibilities of each Committee. The Board has determined that this leadership structure is appropriate given
the specific characteristics and circumstances of the Fund. The Board made this determination in consideration of, among other
things, legal requirements under applicable law, including the 1940 Act, the fact that the Board is comprised of a majority (75%)
of Independent Trustees, the number of funds (and classes) overseen by the Board and the total number of Trustees on the Board.
Board Oversight of Risk Management
The Board is responsible for overseeing
the management and affairs of the Fund and the Trust. The Board has considered and approved contracts, as described herein, under
which certain parties provide essential management and administrative services to the Trust. Like most funds, the day-to-day business
of the Trust, including the day-to-day management of risk, is performed by service providers, such as the Investment Adviser,
distributor and administrator. The Board is responsible for overseeing the Trust’s service providers and, thus, has oversight
responsibility with respect to the risk management performed by those service providers. Risk management seeks to identify and
eliminate or mitigate the potential effects of risks, i.e., events or circumstances that could have material adverse effects on
the business, operations, shareholder services, investment performance or reputation of the Trust or Fund. Under the overall supervision
of the Board, the Audit Committee and the Valuation Committee (discussed in more detail below), the service providers to the Fund
employ a variety of processes, procedures and controls to identify risks relevant to the operations of the Trust and the Fund
to lessen the probability of their occurrence and/or to mitigate the effects of such events or circumstances if they do occur.
Each service provider is responsible for one or more discrete aspects of the Trust’s business (e.g., the Fund’s Investment
Adviser is responsible for the day-to-day management of the Fund’s portfolio investments) and, consequently, for managing
the risks associated with that activity.
The Board oversees the risk management
of the Trust’s operations, in part, by requesting periodic reports from and otherwise communicating with various personnel
of the Trust and its service providers, including the Trust’s CCO and the Trust’s independent registered public accounting
firm. The Board and, with respect to identified risks that relate to its scope of expertise, the Audit Committee and Valuation
Committee, oversee efforts by management and service providers to manage risks to which the Fund may be exposed. The Board receives
reports from the Trust’s service providers regarding operational risks, portfolio valuation and other matters. Annually,
the independent registered public accounting firm reviews with the Audit Committee its audit of the Trust’s financial statements,
focusing on major areas of risk encountered by the Trust and noting any significant deficiencies or material weaknesses in the
Trust’s internal controls.
The Board is responsible for overseeing
the nature, extent and quality of the services provided to the Fund by the Investment Adviser and receives information about those
services at its regular meetings. In addition, on at least an annual basis, in connection with its consideration of whether
to renew the Agreement with the Investment Adviser, the Board meets with the Investment Adviser to review such services. Among
other things, the Board regularly considers the Investment Adviser’s adherence to the Fund’s investment restrictions
and compliance with various Fund policies and procedures and with applicable securities regulations. In the case of the Investment
Adviser, the Agreement combines advisory and administrative services under one fee. As a result, the Board compares the combined
advisory and administration fee earned by BBH&Co. for the Fund against average fees for similar funds taking into account
the administrative portion of such fee. In addition, the Board also considers all fees and other
benefits that are received by the Investment
Adviser and its affiliates from the Fund. The Board also reviews information about the Fund’s performance and investments.
The Board receives regular written reports
on the concentration of the Fund’s portfolio, its exposure to illiquid or hard to value securities, and other commonly considered
portfolio risk factors.
The Trust’s CCO meets regularly
with the Board to review and discuss compliance and other issues. At least annually, the Trust’s CCO provides the Board
with a report reviewing the adequacy and effectiveness of the Trust’s policies and procedures and those of its service providers,
including the Investment Adviser. The Board additionally seeks to monitor legal risk by receiving periodic reports from Fund counsel
on developments in the law and regulations that may affect the operation of the Fund or other aspects of the fund industry in
general.
The Board acknowledges that unique risks
arise when an affiliate acts as a service provider in the way various business units within BBH&Co. act as service providers
to the Fund. The Board monitors affiliation risk in the ways described above, including, but not limited to, receiving reports
on transactions or trading activity involving the Fund and BBH&Co. (or any affiliates) to ensure BBH&Co. is putting the
interests of the Fund ahead of its own. In addition, when evaluating all service contracts between the Fund and BBH&Co., the
Board requests and receives information of the service provided by such BBH&Co. business unit, including comparative fee information,
to ensure the fees negotiated are consistent with fees that would result from an a third party arm’s-length negotiation.
The Board recognizes that not all risks that
may affect the Fund can be identified, that it may not be practical or cost-effective to eliminate or mitigate certain risks,
that it may be necessary to bear certain risks (such as investment-related risks) to achieve the Fund’s goals, and that
the processes, procedures and controls employed to address certain risks may be limited in their effectiveness. Moreover, despite
the periodic reports the Board receives and the Board’s discussions with the service providers to the Fund, it may not be
made aware of all of the relevant information of a particular risk. Most of the Trust’s investment management and business
affairs are carried out by or through the Fund’s Investment Adviser and other service providers each of which has an independent
interest in risk management but whose policies and the methods by which one or more risk management functions are carried out
may differ from the Trust’s and each other’s in the setting of priorities, the resources available or the effectiveness
of relevant controls. As a result of the foregoing and other factors, the Board’s risk management oversight is subject to
substantial limitations.
Individual Trustee Qualifications
The Board has concluded that each of the Trustees
should initially and continue to serve on the Board because of: (i) each Trustee’s ability to review and understand information
about the Fund provided to them by management, to identify and request other information they may deem relevant to the performance
of their duties, to question management regarding material factors bearing on the management of the Fund, and to exercise their
business judgment in a manner that serves the best interests of the Fund’s shareholders; and (ii) the Trustee’s experience,
qualifications, attributes or skills as described below.
The Board has concluded that Mr. Shields should
serve as a Trustee of the Fund because of the experience he has gained as Chairman and CEO of a NYSE member broker-dealer, as CEO
of a registered investment adviser and as Director of an NYSE-listed company and as a Trustee or Director of the Fund and the Predecessor
Fund since 1990.
The Board has concluded that Mr. Feldman should
serve as a Trustee of the Fund because of the experience he has gained as Director of a public company, as a private investor,
and as a Trustee or Director of the Fund and the Predecessor Fund since 1993.
The Board has concluded that Mr. Miltenberger
should serve as a Trustee of the Fund because of the experience he has gained as a trustee of a family of investment trusts, as
a Director of a private company and as a Trustee or Director of the Fund and the Predecessor Fund since 1992.
The Board has concluded that Mr. Wagner should
serve as a Trustee of the Fund because of the experience he has gained as President of a registered investment adviser and as a
Trustee or Director of the Fund and the Predecessor Fund since 2006.
The Board has concluded that Mr. Frazier
should serve as a Trustee of the Fund because of the experience he has gained as President and CEO of a property casualty insurance
business for 19 years.
The Board has concluded that Ms. Livingston
should serve as a Trustee of the Fund because
of the business and financial experience she has gained
as a partner of BBH&Co.
The Board has concluded that Mr. Collins
should serve as a Trustee of the Fund because of his 33 years of extensive experience in investment advisory, corporate finance
and economic policy planning.
The Board has concluded that Mr. Gehret
should serve as a Trustee of the Fund because of the business and financial experience he has gained as a partner of BBH&Co,
and as the former President and Principal Executive Officer of the Trust.
Trustee Committees
The Trustees (except Ms. Livingston and
Messrs. Shields and Gehret) serve on an Audit Committee that selects the independent registered public accounting firm for the
Fund and reviews the Fund’s financial reporting processes, compliance policies, procedures and the Trust’s overall
system of internal controls. The Audit Committee met four times during the fiscal year ended June 30, 2013.
Messrs. Shields, Wagner, Feldman and Frazier
serve on a Valuation Committee for the Fund that meets on an as-needed basis (and in any event not less frequently than monthly)
to determine the “fair value” of any security for which market quotations are not readily available. The Valuation
Committee met 12 times during the fiscal year ended June 30, 2013.
Trustee Equity Ownership as of December
31, 2012
Name
of Trustee
|
Dollar
Range of Equity Securities in the Fund
|
Aggregate
Dollar Range of Equity Securities in All Registered Investment Companies Overseen by Trustee in BBH Trust
|
Joseph
V. Shields, Jr.
|
None
|
None
|
David
P. Feldman
|
None
|
None
|
Arthur
D. Miltenberger
|
None
|
Over
$100,000
|
H.
Whitney Wagner
|
None
|
Over
$100,000
|
Andrew
S. Frazier
|
None
|
Over
$100,000
|
Mark
M. Collins
|
None
|
None
|
Susan
C. Livingston
|
None
|
None
|
John
A. Gehret
|
Over
$100,000
|
Over
$100,000
|
As of September 30, 2013, the Fund’s
Board and officers as a group owned less than 1% of the Fund’s outstanding Shares.
As of September 30, 2013, the following
shareholders owned of record, beneficially, or both, 5% or more of outstanding Regular Shares and Institutional Shares of the
Fund:
Name and Address of Owner*
|
Percent
of Class
|
Brown Brothers Harriman & Co.
Regular Class Shares
140 Broadway
New York, NY 10005-1101
|
99.99%
|
Brown Brothers Harriman & Co.
Institutional Class Shares
140 Broadway
New York, NY 10005-1101
|
100%
|
Shareholders owning more than 25% or more
of outstanding shares may be in control and be able to affect the outcome of certain matter(s) presented for a vote of shareholders.
Compensation
Effective April 1, 2013, each Independent
Trustee receives a base annual fee of $70,000 and such base annual fee is allocated among all series of the Trust in equal amounts. Prior
to April 1, 2013, each Independent Trustee received a base annual fee of $55,000. The Chairman of the Board (Mr. Shields) and
the Chairman of the Audit Committee (Mr. Miltenberger) receive an additional fee of $12,500 and $10,000 per year, respectively.
In addition, each Independent Trustee receives an additional fee of $2,500 for attending each special Board meeting (meetings
of the Board other than the regularly scheduled quarterly Board meetings).
Trustee Compensation for the Fiscal
Year Ended June 30, 2013
Name
of Person, Position
|
Aggregate
Compensation
from the Fund
|
Pension
or
Retirement Benefits
Accrued as Part of
Fund Expenses
|
Estimated
Annual
Benefits upon
Retirement
|
Total
Compensation
from Fund Complex
+
paid to Trustee
|
Joseph
V. Shields, Jr.,
Independent Trustee
|
$16,781.25
|
None
|
None
|
$71,250
|
David
P. Feldman,
Independent Trustee
|
$13,812.50
|
None
|
None
|
$58,750
|
Arthur
D. Miltenberger,
Independent Trustee
|
$16,187.50
|
None
|
None
|
$68,750
|
H.
Whitney Wagner,
Independent Trustee
|
$13,812.50
|
None
|
None
|
$58,750
|
Andrew
S. Frazier
Independent Trustee
|
$13,812.50
|
None
|
None
|
$58,750
|
Mark
M. Collins
Independent Trustee
|
$13,812.50
|
None
|
None
|
$58,750
|
Susan
C. Livingston
Interested Trustee
|
None
|
None
|
None
|
None
|
John
A. Gehret
Interested Trustee
|
None
|
None
|
None
|
None
|
+
|
The
Fund Complex consists of the Trust, which currently consists of five series.
|
|
|
|
|
|
|
Because of the services rendered pursuant
to the Agreement, the Trust requires no employees other than its Officers, and the Officers receive no compensation from the Trust
or the Fund.
CODE OF ETHICS
The Trust, the Investment Adviser and the
distributor each (as described below) have adopted codes of ethics pursuant to Rule 17j-1 under the 1940 Act. The Investment Adviser’s
code of ethics is also maintained pursuant to the Advisers Act. Each code of ethics permits affected personnel to invest in securities,
including securities that may be purchased or held by the Fund. However, the codes of ethics contain provisions reasonably designed
to identify and address potential conflicts of interest between personal investment activities and the interests of the Fund.
Of course, there can be no assurance that the codes of ethics will be effective in identifying and addressing all conflicts of
interest relating to personal securities transactions. The code of ethics of the Trust, the Investment Adviser and the Distributor
are on file with the SEC.
VOTING PROXIES ON FUND PORTFOLIO SECURITIES
Proxy Voting Policy and Procedures
The Fund’s Board has delegated the responsibility
to vote proxies on the securities held in the Fund’s portfolio to the Investment Adviser. In order to mitigate any potential
conflict of interest, the SID (through BBH&Co.) has retained an independent third party proxy agent (“Proxy Agent”)
to recommend how to vote a Fund’s proxy. The Board has also approved the SID’s policies and procedures for voting the
proxies, which are summarized below.
The SID has adopted proxy voting policies and
procedures concerning the voting of proxies of its Fund clients (the “Proxy Policy and Procedures”). Pursuant to the
Proxy Policy and Procedures, the Investment Adviser reviews and analyzes the recommendations of the Proxy Agent and from time to
time may depart from such recommendations based on its own analysis and discretion. The Proxy Policy and Procedures
are reviewed periodically and, accordingly, are subject to change.
The Proxy Agent maintains proxy guidelines,
reviewed at least annually by the Investment Adviser, that present its typical voting posture for routine and non-routine issues.
Generally, the Proxy Agent recommends voting in favor of proposals that maintain or strengthen the shared interests of shareholders
and management; increase shareholder value; maintain or increase shareholder influence over the issuer’s board of directors
and management; and maintain or increase the rights of shareholders. Whether the Proxy Agent or the Investment Adviser
supports or opposes a proposal will depend on the specific circumstances described in the proxy statement and other available information.
For more information on the Proxy Policy
and Procedures, described herein, investors in the Fund may request a copy of the Proxy Voting Policy and Procedures by calling
a toll-free number for Shareholder Inquiries: 1-800-575-1265.
Proxy Voting Report
A report on “Form N-PX” of
how the Fund voted any proxies during the most recent 12-month period ended June 30 is available upon request and without charge
by calling a toll-free number: 1-800-575-1265 or by going to the SEC internet site at http://www.sec.gov.
PORTFOLIO HOLDINGS INFORMATION
The Board has approved a policy related to
the dissemination of Fund information. This policy is designed to provide a framework for disclosing information regarding portfolio
holdings and other Fund information (“Fund Information”) consistent with applicable federal securities laws and general
principles of fiduciary duty relating to Fund shareholders. Additional information concerning the Fund’s portfolio holdings
is available on the Fund’s website at www.bbhfunds.com.
The Fund will file with the SEC a monthly
report of portfolio holdings on Form N-MFP, current as of the last business day of the previous month, no later than the fifth
business day of each month. The SEC will make the information filed on Form N-MFP available to the public 60 days after the end
of the month to which the information pertains.
The Fund is required to disclose its complete
portfolio holdings using Form N-Q, which is filed with the SEC within 60 days of the end of the first and third quarter of each
fiscal year. The Fund is also required to disclose its portfolio holdings using Form N-CSR, which is filed with the SEC within
60 days of the end of the second and fourth quarter of each fiscal year. This information is made available on the Fund’s
website within 70 days after the end of the fiscal quarter. Information concerning the Fund’s portfolio holdings will be
posted on the Fund’s website within five business days after the end of each month and remain posted on the website for
six months thereafter. This information is available at the SEC’s website at www.sec.gov.
In addition, the Trust’s service
providers and vendors which include, without limitation, the Investment Adviser, the distributor, the administrator, the custodian,
an independent registered public accountant, legal counsel, fund accountant, proxy voting service provider, trade execution vendor,
pricing information vendors, rating agencies, printer and mailing agent may all receive early disclosure of portfolio holdings
information as frequently as daily in connection with the services they perform for the Fund. It is generally the policy of the
Fund that neither the Fund nor its service providers or vendors may selectively disclose the Fund’s portfolio holding information.
This means that Fund Information approved for disclosure shall be disclosed or made available to all persons, including individual
investors, potential investors, institutional investors, intermediaries that distribute Fund shares, third party service providers
and vendors, rating and ranking organizations, survey companies and affiliated persons of the Fund on an equal basis. Service
providers and vendors will be subject to a duty of confidentiality with respect to any Fund Information whether imposed by the
provisions of its contract with the Trust or by the nature of its relationship with the Trust.
Fund Information shall be disclosed only after
it has determined that such disclosure will not disadvantage shareholders. Disclosure of Fund Information to select investors is
permissible only when there is a legitimate business purposes for doing so and the recipients are subject to the restrictions listed
below. Such disclosures must be approved by the Fund’s President.
|
·
|
The recipient does not distribute the Fund
Information to third parties, other departments or persons who are likely to use the information for purposes of purchasing or
selling the Fund before the Fund Information becomes public information; and
|
|
·
|
The recipient signs a written confidentiality
agreement.
|
Portfolio holdings may not be disclosed
to any investor, except after: (1) the holdings have been reviewed and approved appropriately, (2) the portfolio holdings have
been posted and are readily available on the Fund’s website, and (3) the availability of the portfolio holdings is disclosed
in the Fund’s SAI.
INVESTMENT ADVISORY AND ADMINISTRATIVE SERVICES
Pursuant to the Agreement with the Trust, subject
to the general supervision of the Trustees and in conformance with the stated policies of the Fund, BBH&Co., through members
of its SID, provides investment advice and portfolio management to the Fund. BBH&Co. also provides administrative services
to the Fund. The Investment Adviser manages the Fund’s investment operations according to the Fund’s principal investment
strategies.
It is the responsibility of the Investment
Adviser to make the day-to-day investment decisions for the Fund, to place the purchase and sale orders for portfolio transactions
of the Fund, and to manage, generally, the investments of the Fund.
The Agreement between BBH&Co. and the
Trust is dated February 1, 2007 and remains in effect as long as the Agreement is specifically approved at least annually: (i)
by a vote of the holders of a “majority of the Fund’s outstanding voting securities” (as defined in the 1940
Act) or by the Fund’s Trustees; and (ii) by a vote of a majority of the Independent Trustees cast in person at a meeting
called for the purpose of voting on such approval. The Agreement terminates automatically if assigned and
is terminable at any time without penalty by a vote of a majority of the Trustees of the Fund, or by a vote of the holders of
a “majority of the Fund’s outstanding voting securities” (as defined in the 1940 Act) on 60 days’ written
notice to BBH&Co. and by BBH&Co. on 90 days’ written notice to the Fund. (See “Additional Information.”)
The investment advisory services of BBH&Co.,
through its SID, to the Fund are not exclusive under the terms of the Agreement. BBH&Co. may render investment
advisory services to others, including other registered investment companies.
Pursuant to a license agreement between
the Trust and BBH&Co., dated December 11, 2006, the Trust, including each series thereof, may use “Brown Brothers Harriman”
in their names. The license agreement may be terminated by BBH&Co. at any time upon written notice to the Trust upon the expiration
or earlier termination of any agreement between the Trust, or any investment company in which a series of the Trust invests all
of its assets, and BBH&Co. Termination of the license agreement would require the Trust to change its name and the names of
the Fund to eliminate all references to Brown Brothers Harriman.
BBH&Co. has been retained by the Trust
to serve as Fund Administrator (the “Administrator”) to the Trust under the terms of the Agreement. In its capacity
as Administrator of the Trust, BBH&Co. administers all aspects of the Trust’s operations subject to the supervision
of the Board, except as set forth above under “Investment Adviser” and below under “Distributor.” In connection
with its responsibilities as Administrator and at its own expense, BBH&Co.: (i) provides the services of persons competent
to perform such supervisory, administrative and clerical functions as are necessary in order to provide effective administration
of the Trust; (ii) oversees the performance of administrative and professional services to the Trust by others, including the
transfer and dividend disbursing agent; (iii) provides adequate office space and communications and other facilities; and (iv)
prepares and/or arranges for the preparation, but does not pay for, the periodic updating of the registration statements and the
Fund’s prospectus, the printing of such documents for the purpose of filings with the SEC and state securities administrators,
and the preparation of tax returns for the Fund and reports to shareholders and the SEC.
The Agreement fee paid to the Investment Adviser
is calculated daily and paid monthly at an annual rate equal to 0.25% on the first $1 billion and 0.20% on amounts over $1 billion
of the Fund’s average daily net assets.
Effective
July 6, 2009, the SID voluntarily began to waive its Investment Advisory and Administrative Fee and credit daily to the Fund an
amount which would maintain the minimum daily yield of the Fund at 1 basis point (0.01%).
The
amount credited each day would be offset by the daily accrual of the Investment Advisory and Administrative Fee. This is a voluntary
waiver that can be changed at any time at the sole discretion of the SID.
The table below sets forth the investment advisory
and administrative services fee paid by the Fund to the Investment Adviser for the past three fiscal years ended June 30
th
.
The figures in the “Net Investment Advisory and Administrative Fees Paid” row represent the actual amounts paid to
the Investment Adviser, which include the effect of any fee waivers.
|
2013
|
2012
|
2011
|
Investment
Advisory and Administrative Fees
|
$4,100,384
|
$4,090,743
|
$4,083,036
|
Investment
Advisory and Administrative Fees Waived
|
$3,564,442
|
$3,375,522
|
$2,492,785
|
Net
Investment Advisory and Administrative Fees Paid
|
$535,942
|
$715,221
|
$1,590,251
|
Conflicts of Interest
Certain conflicts of interest may
arise in connection with a portfolio manager’s management of the Fund’s investments, on the one hand, and the investments
of other accounts for which the portfolio manager is responsible, on the other. For example, it is possible that the various accounts
managed could have different investment strategies that, at times, might conflict with one another to the possible detriment of
the Fund. Alternatively, to the extent that the same investment opportunities might be desirable for more than one account, possible
conflicts could arise in determining how to allocate them. For example, BBH&Co. may act as adviser to private funds with investment
strategies similar to the Fund. Those private funds may pay BBH&Co. a performance fee in addition to the stated investment
advisory fee. In such cases, BBH&Co. may have an incentive to allocate certain investment opportunities to the private fund
rather than the Fund in order to increase the private fund’s performance and thus improve BBH&Co.’s chances of
receiving the performance fee. However, BBH&Co. has implemented policies and procedures to assure that investment opportunities
are allocated equitably between the Fund and other funds and accounts with similar investment strategies.
Other potential conflicts might
include conflicts between the Fund and its affiliated and unaffiliated service providers (e.g. conflicting duties of loyalty).
In addition to providing investment management services through the SID, BBH&Co. provides administrative, custody, shareholder
servicing and fund accounting services to the Fund. BBH&Co. may have conflicting duties of loyalty while servicing the Fund
and/or opportunities to further its own interest to the detriment of the Fund. For example, in negotiating fee arrangements with
affiliated service providers, BBH&Co. may have an incentive to agree to higher fees than it would in the case of unaffiliated
providers. Also, because its advisory fees are calculated by reference to a Fund’s net assets, the Investment Adviser and
its affiliates may have an incentive to seek to overvalue certain assets.
Purchases and sales of securities
for the Fund may be aggregated with orders for other BBH&Co. client accounts. BBH&Co. however is not required to aggregate
orders if portfolio management decisions for different accounts are made separately, or if they determine that aggregating is
not practicable, required or with cases involving client direction.
Prevailing trading activity frequently
may make impossible the receipt of the same price or execution on the entire volume of securities purchased or sold. When this
occurs, the various prices may be averaged, and the Fund will be charged or credited with the average price. Thus, the effect
of the aggregation may operate on some occasions to the disadvantage of the Fund. In addition, under certain circumstances, the
Fund will not be charged the same commission or commission equivalent rates in connection with an aggregated order.
From time to time BBH&Co. may
invest a portion of the assets of its discretionary investment advisory clients in the Fund. That investment by BBH&Co. on
behalf of its discretionary investment advisory clients in the Fund may be significant at times. Increasing the Fund’s assets
may enhance investment flexibility and diversification and may contribute to economies of scale that tend to reduce the Fund’s
expense ratio. BBH&Co. reserves the right to redeem at any time some or all of the shares of the Fund acquired for its discretionary
investment advisory clients’ accounts. A large redemption of shares of the Fund by BBH&Co. on behalf of its discretionary
investment advisory clients could significantly reduce the asset size of the Fund, which might have an adverse effect on the Fund’s
investment flexibility, portfolio diversification and expense ratio.
When market quotations are not readily
available or are believed by BBH&Co. to be unreliable, the Fund’s investments may be valued at fair value by BBH&Co.
pursuant to procedures adopted by the Fund’s Board of Trustees. When determining an asset’s “fair value,”
BBH&Co. seeks to determine the price that the Fund might reasonably expect to receive from the current sale of that asset
in an arm’s-length transaction. The price generally may not be determined based on what the Fund might reasonably expect
to receive for selling an asset at a later time or if it holds the asset to maturity. While fair value determinations will be
based upon all available factors that BBH&Co. deems relevant at the time of the determination, and may be based on analytical
values determined by BBH&Co. using proprietary or third party valuation models, fair value represents only a good faith approximation
of the value of a security. The fair value of one or more securities may not, in retrospect, be the price at which those assets
could have been sold during the period in which the particular fair values were used in determining the Fund’s net asset
value. As a result, the Fund’s sale or redemption of its shares at net asset value, at a time when a holding or holdings
are valued by BBH&Co. (pursuant to Board-adopted procedures) at fair value, may have the effect of diluting or increasing
the economic interest of existing shareholders.
BBH&Co., including the Investment
Adviser, seeks to meet its fiduciary obligation with respect to all clients including the Fund. BBH&Co. has adopted and implemented
policies and procedures that seek to manage conflicts. The Investment Adviser monitors a variety of areas, including compliance
with fund investment guidelines, review of allocation decisions, the investment in only those securities that have been approved
for purchase by an oversight committee, and compliance with the Investment Adviser’s Code of Ethics. With respect to the
allocation of investment opportunities, BBH&Co. has adopted and implemented policies designed to achieve fair and equitable
allocation of investment opportunities among its clients over time. BBH has structured the portfolio managers’ compensation
in a manner it believes is reasonably designed to safeguard the Fund from being negatively affected as a result of any such potential
conflicts.
The Trust also manages these conflicts.
For example, the Trust has designated a CCO and has adopted and implemented policies and procedures designed to manage the conflicts
identified above and other conflicts that may arise in the course of the Fund’s operations in such a way as to safeguard
the Fund from being negatively affected as a result of any such potential conflicts. The Trustees receive regular reports from
the Investment Adviser and the Trust’s CCO on areas of potential conflict.
DISTRIBUTOR
ALPS Distributors,
Inc. (“ALPS” or “Distributor”)
serves as distributor of the Fund’s shares. Its offices
are located at
1290 Broadway, Suite 1100, Denver, CO 80203.
The Distribution Agreement between
the Trust and ALPS, dated as of November 1, 2011, remains in effect so long as the continuance of the agreement is specifically
approved at least annually in conformity with the requirements of the 1940 Act. The Distribution Agreement terminates automatically
in the event of its assignment and may be terminated: (i) with respect to the Fund, at any time, without
penalty, by the Board of the Trust or by a
vote of the holders of a “majority of the outstanding voting securities” (as defined in the 1940 Act) of the Fund on
not more than sixty (60) days’ written notice to ALPS; and (ii) by ALPS on sixty (60) days’ written notice to the Trust.
SHAREHOLDER SERVICING AGENT
BBH&Co.
serves as the shareholder servicing agent (“Shareholder Servicing Agent”) for the Trust. Services to be performed
by BBH&Co. with respect to the Fund’s Regular Class shares, include among other things: answering inquiries from shareholders
of and prospective investors in shares of the Fund regarding account status and history, the manner in which purchases and redemptions
of the Fund’s Regular Class shares may be effected and certain other matters pertaining to the Fund; assisting
shareholders and prospective investors in the Fund in designating and changing dividend options, account designations and addresses;
and providing such other related services as the Trust or a shareholder or prospective investor in the Fund may reasonably request.
For these services, BBH&Co. is entitled to receive, subject to applicable waivers
from the Fund an annual fee, computed daily and payable monthly, equal to 0.25% of the Fund’s
average daily net assets represented by the Regular Class shares owned during the period.
Effective May 1, 2010, BBH&Co. voluntarily
began to waive its Shareholder Servicing Fee for the Regular Shares only when the Investment Advisory and Administrative Fee waiver
is not enough to maintain the minimum daily yield of the Fund at 1 basis point (0.01%). The amount credited each day would be offset
by the daily accrual of the Shareholder Servicing Fee. This is a voluntary waiver that can be changed at any time at the sole discretion
of BBH&Co.
The table below sets forth the shareholder
servicing fee paid by the Fund to the Shareholder Servicing Agent for the past three fiscal years ended June 30
th
. The
figures in the “Net Shareholder Servicing Fees Paid” row represent the actual amounts paid to the Shareholder Servicing
Agent, which include the effect of any fee waivers.
|
2013
|
2012
|
2011
|
Shareholder
Servicing Fees
|
$3,182,440
|
$2,937,399
|
$2,889,074
|
Shareholder
Servicing Fees Waived
|
$1,904,879
|
$1,571,319
|
$234,565
|
Net
Shareholder Servicing Fees Paid
|
$1,277,561
|
$1,366,080
|
$2,654,509
|
FINANCIAL INTERMEDIARIES
From time to time, the Fund and/or its
Shareholder Servicing Agent enters into contracts with banks, brokers and other financial intermediaries (“Financial Intermediaries”)
pursuant to which the Financial Intermediary, which holds Fund shares in its name on behalf of its customers, may provide the following
shareholder services: provides necessary personnel and facilities to establish and maintain certain shareholder accounts and records
enabling it to hold, as agent, its customer’s shares in its name or its nominee name on the shareholder records of the Fund;
assists in processing purchase and redemption transactions; arranges for the wiring of funds; transmits and receives funds in connection
with customer orders to purchase or redeem shares of the Fund; provides periodic statements showing a customer’s account
balance and, to the extent practicable, integrates such information with information concerning other customer transactions otherwise
effected with or through it; furnishes, either separately or on an integrated basis with other reports sent to a customer, monthly
and annual statements and confirmations of all purchases and redemptions of shares in a customer’s account; transmits proxy
statements, annual reports, updated prospectuses and other communications from the Fund to its customers; and receives, tabulates
and transmits to the Fund proxies executed by its customers with respect to meetings of shareholders of the Fund. A Financial Intermediary
may designate other intermediaries to accept purchase and redemption orders for shares. Customer orders are priced at the NAV for
shares next determined after such order has been accepted by such customer’s Financial Intermediary
or its authorized designee. The Fund
will be deemed to have received a purchase or redemption order for shares when the Financial Intermediary or its authorized designee
accepts such order. For these services, the Financial Intermediary receives such fees from the Fund or the Shareholder Servicing
Agent as may be agreed upon from time to time between the parties.
CUSTODIAN AND ACCOUNTING
AGENT
BBH&Co., 140 Broadway, New York, New
York 10005, is the custodian and accounting agent (“Custodian”) for the Fund. As Custodian, it is responsible for
maintaining books and records of the Fund’s portfolio transactions and holding the Fund’s portfolio securities and
cash pursuant to a custodian agreement with the Trust. Cash is held for the Fund in demand deposit accounts at the Custodian.
Subject to the supervision of the Administrator of the Trust, the Custodian maintains the accounting records for the Fund and
each day computes the NAV of the Fund.
TRANSFER AND DIVIDEND DISBURSING AGENT
ALPS Fund Services, Inc., 1290 Broadway,
Suite 1100, Denver, CO 80203, is the transfer and dividend disbursing agent for the Fund and is responsible for maintaining the
books and records detailing ownership of the Fund’s shares.
LEGAL COUNSEL
Bingham McCutchen LLP, 2020 K Street NW, Washington,
DC 20006, serves as legal counsel to the Trust.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
Deloitte & Touche LLP serves as the independent
registered public accounting firm for the Fund. Deloitte & Touche LLP’s principal address is 200 Berkeley Street, Boston,
MA 02116.
NET ASSET VALUE
The NAV of the Fund is normally determined
each day the NYSE is open for regular trading and the Federal Reserve banks are open for business. (As of the date of this SAI,
the NYSE and banks are open every weekday except for the following holidays: New Year’s Day, Martin Luther King, Jr. Day,
Presidents’ Day, Good Friday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day and
Christmas Day and on the preceding Friday or subsequent Monday when one of those holidays fall on a Saturday or Sunday.) This determination
of the NAV of the Fund is made once during each such day as of the close of regular trading on the NYSE by subtracting from the
value of the Fund’s total assets the amount of liabilities, including expenses payable or accrued, and dividing the difference
by the number of shares of the Fund outstanding at the time the determination is made. It is anticipated that the NAV will remain
constant at $1.00 per share and, although no assurance can be given that it will be able to do so on a continuing basis, the Investment
Adviser employs specific investment policies and procedures to accomplish this result.
The Fund’s assets are valued by using
the amortized cost method of valuation. This method involves valuing a security at its cost at the time of purchase and thereafter
assuming a constant amortization to maturity of any discount or premium, regardless of the impact of fluctuating interest rates
on the market value of the instrument. The market value of the securities held fluctuates on the basis of the creditworthiness
of the issuers of such securities and on the levels of interest rates generally. Although the amortized cost method provides certainty
in valuation, it may result in periods when the value so determined is higher or lower than the price the Fund would receive if
the security were sold.
Pursuant to Rule 2a-7 under the 1940 Act,
an investment company may use the amortized cost method of valuation subject to certain conditions and the determination that
such method is in the best interests of the Fund’s shareholders. The use of amortized cost valuations is subject to the
following conditions: (i) as a particular responsibility within the overall duty of care owed to the shareholders and investors,
the Board has established
procedures reasonably designed, taking into
account current market conditions and the Fund’s investment objective of its investors, to stabilize the NAV as computed;
(ii) the procedures include periodic review by the Board, as they deem appropriate and at such intervals as are reasonable in light
of current market conditions, of the relationship between the value of the Fund’s net assets using amortized cost and the
value of the Fund’s net assets based upon available indications of market value with respect to such portfolio securities;
(iii) the Trustees will consider what steps, if any, should be taken if a difference of more than 1/2 of 1% occurs between the
two methods of valuation; (iv) the Board will take such steps as they consider appropriate, such as shortening the average portfolio
maturity, realizing gains or losses, establishing the value of the Fund’s net assets by using available market
quotations or reducing the value of interest in the Fund, to minimize any material dilution or other unfair results, which might
arise from differences between the two methods of valuation; and (iv) the procedures include periodic testing of the Fund’s
ability to maintain a stable NAV based upon certain hypothetical events, including changes in short-term
interest rates, changes in shareholder redemptions, downgrades of or defaults on portfolio securities, and changes of spreads between
yields on appropriate benchmarks.
Such conditions also generally require that:
(i) investments be limited to instruments that the Board determines present minimal credit risks and which are of high quality
as determined by a Designated NRSRO that is not an affiliated person of the issuer of, or any issuer, guarantor or provider of
credit support for, the instrument, or, in the case of any instrument that is not so rated, is of comparable quality as determined
by the Investment Adviser under the general supervision of the Board; (ii) a dollar-weighted average portfolio maturity
of not more than 60 days be maintained and no instrument is purchased with a remaining maturity of more than 397 days; (iii) the
Fund’s available cash will be invested in such a manner as to reduce such maturity to 60 days or less as soon as is reasonably
practicable, if the disposition of a portfolio security results in a dollar-weighted average portfolio maturity of more
than 60 days; (iv) a dollar-weighted average life of not more than 120 days; and (v) no more than 5% of the Fund’s total
assets may be invested in the securities of any one issuer (other than U.S. government securities).
It is expected that the Fund will have a positive
net income at the time of each determination thereof. If for any reason the Fund’s net income is a negative amount, which
could occur, for instance, upon default by an issuer of a portfolio security, the Fund would first offset the negative amount with
respect to each shareholder account from the dividends declared during the month with respect to those accounts. If and to the
extent that negative net income exceeds declared dividends at the end of the month, the Fund would reduce the number of outstanding
Fund shares by treating each shareholder as having contributed to the capital of the Fund that number of full and fractional shares
in his or her account, which represents his or her share of the amount of such excess. Each shareholder would be deemed to have
agreed to such contribution in these circumstances by his or her investment in any of the Fund.
PURCHASES AND REDEMPTIONS
Orders received by a Financial Intermediary
will be priced at the NAV next calculated after that Financial Intermediary, as an agent of the Fund, receives the request in good
order from its clients.
A confirmation of each purchase and redemption
transaction is issued upon execution of that transaction.
The Fund reserves the right to discontinue,
alter or limit the automatic reinvestment privilege at any time, but will provide shareholders prior written notice of any such
discontinuance, alteration or limitation.
A shareholder’s right to receive
payment with respect to any redemption may be suspended or the payment of the redemption proceeds postponed: (i) during periods
when the NYSE is closed for other than weekends and holidays or when regular trading on the NYSE is restricted as determined by
the SEC by rule or regulation; (ii) during periods in which an emergency exists, which causes disposal of, or evaluation of the
NAV of, the Fund’s portfolio securities to be unreasonable or impracticable; (iii)
the Fund’s
Board, including a majority of Independent Trustees, determines that the deviation between the Fund’s amortized cost price
per share and the market-based NAV may result in material dilution or other unfair results;
or (iv) for such other periods
as the SEC may permit.
An investor should be aware that redemptions
from the Fund may not be processed if a completed account application with a certified taxpayer identification number has not been
received.
In the event a shareholder redeems all shares
held in the Fund at any time during the month, all accrued but unpaid dividends are included in the proceeds of the redemption
and future purchases of shares of the Fund by such shareholder would be subject to the Fund’s minimum initial purchase requirements.
The Trust reserves the right to discontinue,
alter or limit the automatic reinvestment privilege at any time, but the Trust will provide shareholders prior written notice of
any such discontinuance, alteration or limitation.
Lost Accounts.
The Fund’s
transfer and dividend disbursing agent will consider your account lost if correspondence to your address of record is returned
as undeliverable on more than two consecutive occasions, unless the transfer agent determines your new address. When an account
is “lost,” all distributions on the account will be reinvested in additional Fund shares. In addition, the amount
of any outstanding checks (unpaid for six months or more) or checks that have been returned to the transfer agent will be reinvested
at the then-current NAV and the checks will be cancelled. However, checks will not be reinvested into accounts with a zero balance.
TAXES
The following is a summary of certain federal
income tax considerations generally affecting the Fund and its shareholders. No attempt is made to present a comprehensive explanation
of the federal, state, local or non-U.S. tax treatment of the Fund or its shareholders, and the discussion here and in the Prospectus
is not intended to be a substitute for careful tax planning. You are urged to consult your own tax adviser.
This discussion of certain federal income
tax consequences is based on the Internal Revenue Code of 1986, as amended (the “Code”), and the regulations issued
thereunder, as in effect on the date of this SAI. New legislation, as well as administrative changes or court decisions, may significantly
change the conclusions expressed herein and may have a retroactive effect with respect to the transactions contemplated herein.
Taxation of the Fund.
The
Fund has elected to be treated and intends to qualify for treatment each year as a “regulated investment company”
(“RIC”) under Subchapter M of the 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 qualify for treatment as a RIC, the Fund must distribute annually to its shareholders at least the sum of 90% of its
taxable net investment income (including the excess of net short-term capital gains over net long-term capital losses) and 90%
of its net tax-exempt interest income (“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 certain 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 interests in qualified publicly traded partnerships (i.e., partnerships that are traded
on an established securities market or tradable on a secondary market, other than partnerships that derive 90% of their income
from interest, dividends, capital gains, and other traditionally permitted mutual fund income); (ii) at the end of each quarter
of the Fund’s taxable year, at least 50% of the 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 of any one
issuer, to an amount not greater than 5% of the value of the Fund’s total assets and that does not represent more than 10%
of the outstanding voting securities of such issuer; and (iii) at the end of each 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, the securities (other than securities of other RICs) of two or more issuers that the Fund controls
and that are determined to be engaged in the same, similar or related trades or businesses, or the securities of one or more qualified
publicly traded partnerships.
If the Fund fails to satisfy the qualifying
income or diversification requirements described above in any taxable year, the Fund may be eligible for relief provisions if the
failures are due to reasonable cause and not willful neglect and if a penalty tax is paid with respect to each failure to satisfy
the applicable requirements. Additionally, relief is provided for certain
de minimis
failures of the diversification requirements
where the Fund corrects the failure
within a specified period. If the Fund
fails to qualify for treatment as a RIC for any year, and the relief provisions are not available, all of its income will be subject
to federal income tax at regular corporate rates without any deduction for distributions to shareholders. In such case, the Fund’s
shareholders would be taxed as if they received ordinary dividends, although corporate shareholders could be eligible for the
dividends-received deduction and non-corporate shareholders may be able to benefit from the lower tax rates applicable to qualified
dividend income. Moreover, if the Fund were to fail to qualify as a RIC in any taxable year, the Fund would be required to pay
out its earnings and profits accumulated in that year in order to qualify for treatment as a RIC in a subsequent year. Under certain
circumstances, the Fund may be able to cure a failure to qualify as a RIC, but in order to do so the Fund may incur significant
Fund-level taxes and may be forced to dispose of certain assets. If the Fund failed to qualify as a RIC for a period greater than
two taxable years, the Fund would generally be required to recognize any net built-in gains with respect to certain of its assets
upon a disposition of such assets within ten years of qualifying as a RIC in a subsequent year. The Board reserves the right not
to maintain the qualification of the Fund for treatment as a RIC if it determines such course of action to be beneficial to shareholders.
The Fund may elect to treat part or all
of any “qualified late year loss” as if it had been incurred in the succeeding taxable year in determining the Fund’s
taxable income, net capital gain, net short-term capital gain, and earnings and profits. A “qualified late year loss”
generally includes net capital loss, net long-term capital loss, or net short-term capital loss incurred after October 31 of the
current taxable year and certain other late-year losses.
If the Fund has a “net capital loss”
(that is, capital losses in excess of capital gains) for a taxable year, the excess of the Fund’s net short-term capital
losses over its net long-term capital gains is treated as a short-term capital loss arising on the first day of the Fund’s
next taxable year, and the excess (if any) of the Fund’s net long-term capital losses over its net short-term capital gains
is treated as a long-term capital loss arising on the first day of the Fund’s next taxable year. Losses may be carried forward
indefinitely.
The Fund will be subject to a nondeductible
4% excise tax on certain undistributed income if it does not distribute to its shareholders in each calendar year at least the
sum of 98% of its ordinary income for the calendar year plus 98.2% of its capital gain net income for the twelve months ended
October 31 of such year, plus certain other amounts. 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 but can make no assurances that such tax
will be completely eliminated.
Taxation of Shareholders – Distributions.
The Fund receives income generally in the form of interest on its investments. Any distributions by the Fund from such
income will be taxable to you as ordinary income, whether you take them in cash or additional shares. The Fund may derive capital
gains and losses in connection with sales or other dispositions of its portfolio of securities. Distributions of net short-term
capital gains will be taxable to you as ordinary income. If the Fund realizes any long-term capital gains, distributions of net
capital gains (the excess of net long-term capital gains over net short-term capital losses) will be taxable to you as long-term
capital gain regardless of how long you have held your shares. Because the Fund’s income is expected to be derived primarily
from interest rather than dividends, no portion of the Fund’s distributions is expected to be eligible for the corporate
dividends-received deduction or to be treated as qualified dividend income, which for non-corporate shareholders is taxed at reduced
rates. In addition, the Fund does not expect to be eligible to pay exempt interest dividends to shareholders, which means distributions
of interest the Fund derives from state and local bonds will be taxable, even though such interest is generally exempt from tax
if such bonds are held directly.
If the Fund invests in certain positions, such
as zero coupon securities, deferred interest securities or, in general, any other securities with original issue discount (or with
market discount if the Fund elects to include market discount in income currently), the Fund must accrue income on such investments
for each taxable year, which generally will be prior to the receipt of the corresponding cash payments. However, the Fund must
distribute, at least annually, all or substantially all of its net investment income, including such accrued income, to avoid U.S.
federal income and excise taxes. Therefore, the Fund may have to dispose of its portfolio securities under disadvantageous circumstances
to generate cash, or may have to leverage itself by borrowing the cash, to satisfy distribution requirements.
The Fund may acquire market discount bonds.
A market discount bond is a security acquired in the secondary market at a price below its redemption value (or its adjusted issue
price if it is also an original issue discount bond). If the Fund invests in a market discount bond, it will be required to treat
any gain recognized on the disposition of such market discount bond as ordinary income (instead of capital gain) to the extent
of the accrued market discount unless the Fund elects to include the market discount in income as it accrues as discussed above.
The Fund may invest in complex securities.
These investments may be subject to numerous special and complex tax 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 defer the Fund’s
ability to recognize losses. In turn, those rules may affect the amount, timing or character of the income distributed to you by
the Fund.
Interest or other income received by the
Fund from investments in foreign securities may be subject to withholding and other taxes imposed by foreign countries. Tax conventions
between certain countries and the United States may reduce or eliminate such taxes in some cases. The Fund does not expect to
satisfy the requirements for passing through to its shareholders any share of foreign taxes paid by the Fund.
The Fund will inform you of the amount
of your ordinary income dividends and capital gain distributions, if any, at the time they are paid and will advise you of their
tax status for federal income tax purposes shortly after the close of each calendar year. If you have not held Fund shares for
a full year, the Fund may report and distribute to you, as ordinary income or capital gain, a percentage of income that is not
equal to the actual amount of such income earned during the period of your investment in the Fund.
U.S. individuals with income exceeding
certain thresholds are subject to a 3.8% Medicare contribution tax on their “net investment income,” including interest,
dividends, and certain capital gains. This 3.8% tax also applies to all or a portion of the undistributed net investment income
of certain shareholders that are estates and trusts.
By law, the Fund must withhold and remit
to the U.S. Treasury a portion of your taxable distributions (as “backup withholding”) if: (i) you do not provide
your correct social security or taxpayer identification number; (ii) you are subject to backup withholding by the Internal Revenue
Service (“IRS”) for failure to properly report payments of interest or dividends; (iii) you have failed to certify
that you are not subject to backup withholding; or (iv) you have failed to certify that you are a U.S. person (including a U.S.
resident alien). The backup withholding rate is currently 28%.
Redemption or Exchange of Fund Shares
Redemptions and exchanges of Fund shares are
generally taxable transactions for federal and state income tax purposes, but a shareholder will not recognize a gain or loss on
a redemption if the Fund maintains a stable NAV of $1.00 per share.
Foreign Shareholders
Foreign shareholders (
i.e
., nonresident
alien individuals and foreign corporations, partnerships, trusts and estates) are generally subject to U.S. withholding tax at
the rate of 30% (or a lower tax treaty rate) on Fund distributions. 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.
The 30% withholding tax will not apply
to distributions of net capital gains, if any, or to redemption proceeds. For Fund taxable years beginning before January 1, 2014,
the 30% withholding tax also will not apply to dividends that the Fund reports as (a) interest-related dividends, to the extent
such dividends are derived from the Fund’s “qualified net interest income,” or (b) short-term capital gain dividends,
to the extent such dividends are derived from the Fund’s “qualified short-term gain.” “Qualified net interest
income” is the Fund’s net income derived from U.S.-source interest and original issue discount, subject to certain
exceptions and limitations. “Qualified short-term gain” generally means the excess of the net short-term capital gain
of the Fund for the taxable year over its net long-term capital loss, if any. In the case of shares held through an intermediary,
the intermediary may withhold even if the
Fund reports the payment as an interest-related
dividend or short-term capital gain dividend. Non-U.S. shareholders should contact their intermediaries with respect to the application
of these rules to their accounts.
Ordinary dividends, redemption payments
and certain capital gain dividends paid after June 30, 2014 to a shareholder that fails to make certain required certifications,
or that is a “foreign financial institution” as defined in Section 1471 of the Code and that does not meet the requirements
imposed on foreign financial institutions by Section 1471, are generally subject to withholding tax at a 30% rate. Under current
IRS guidance, withholding on such payments will begin at different times depending on the type of payment, the type of payee,
and whether the shareholder’s account is opened before or after July 1, 2014. Withholding with respect to ordinary dividends
is currently scheduled to begin on July 1, 2014. Withholding on redemption payments and certain capital gain dividends is currently
scheduled to begin on January 1, 2017. The extent, if any, to which such withholding tax may be reduced or eliminated by an applicable
tax treaty is unclear. A non-U.S. shareholder may be exempt from the withholding described in this paragraph under an applicable
agreement between the U.S. and a foreign government, provided that the shareholder and the applicable foreign government comply
with the terms of such agreement.
A beneficial holder of shares who is a foreign
person may be subject to state and local tax and to the U.S. federal estate tax in addition to the federal income tax consequences
referred to above. If a shareholder is eligible for the benefits of a tax treaty, any effectively connected income or gain will
generally be subject to U.S. federal income tax on a net basis only if it is also attributable to a permanent establishment maintained
by the shareholder in the United States.
Non-U.S. Investors are encouraged to consult
their tax advisor prior to investing in a Fund.
Certain Reporting Regulations
Under U.S. 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, such as the Fund, are not excepted. 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 advisors to determine the applicability of these regulations
in light of their individual circumstances.
State Taxes
Distributions by the Fund to shareholders
and the ownership of Fund shares may be subject to state and local taxes. Rules of state and local taxation of dividend and capital
gains distributions from RICs often differ from the rules for federal income taxation described above. In some states, distributions
paid from interest earned on direct obligations of the U.S. government may be exempt from personal income tax. Shareholders are
urged to consult their tax advisors as to the consequences of these and other state and local tax rules affecting an investment
in Fund shares.
DESCRIPTION OF SHARES
The Trust is an open-end management investment
company organized as a Delaware Trust on October 28, 2005. Its offices are located at 140 Broadway, New York, New York 10005;
its telephone number is (800) 575-1265. The Amended and Restated Agreement and Declaration of Trust currently permits
the Trust to issue an unlimited number of shares with no par value.
Each share of the Fund represents an equal
proportional interest in the Fund with each other share. Upon liquidation of the Fund, shareholders are entitled to share pro rata
in the net assets of the Fund available for distribution to shareholders.
Shareholders of the Fund are entitled to a
full vote for each share held and to a fractional vote for each fractional share held. Separate votes are taken by a single series
of the Trust on matters affecting only that series, and by a single class of a particular series on matters affecting only that
class. Shareholders in the Trust do not have cumulative voting rights, and shareholders owning more than 50% of the outstanding
shares of the Trust may elect all of the Trustees if they choose to do so and in such event, the other shareholders in the Trust
would not be able to elect any Trustee. The Trust is not required and has no current intention to hold meetings of shareholders
annually, but the Trust will hold special meetings of shareholders when in the judgment of the Trustees it is necessary or desirable
to submit matters for a shareholder vote as may be required by the 1940 Act or as may be permitted by the Amended and Restated
Agreement and Declaration of Trust or By-laws. Shareholders have under certain circumstances (e.g., upon application
and submission of certain specified documents to the Trustees by a specified number of shareholders) the right to communicate with
other shareholders in connection with requesting a meeting of shareholders for the purpose of removing one or more Trustees. Shareholders
also have the right to remove one or more Trustees without a meeting by a declaration in writing by a specified number of shareholders. Shares
have no preemptive or conversion rights. The rights of redemption are described in the Prospectus. Shares
are fully paid and non-assessable by the Trust. The Trust’s Amended and Restated Agreement and Declaration of
Trust provide that the Trust may, upon the approval of its Board, require the redemption of all or any part of any outstanding
shares without shareholder consent upon the sending of written notice thereof to each affected shareholder. This might
occur, for example, if the Fund does not reach or fails to maintain an economically viable size.
Share certificates are not issued by the Trust.
The By-laws of the Trust provide that the presence
in person or by proxy of the holders of record of one third of the shares of the Fund outstanding and entitled to vote thereat
shall constitute a quorum at all meetings of Fund shareholders, except as otherwise required by applicable law. The By-laws further
provide that all questions shall be decided by a majority of the votes cast at any such meeting at which a quorum is present, except
as otherwise required by applicable law.
The Trust’s Amended and Restated Agreement
and Declaration of Trust provide that, at any meeting of shareholders of the Fund or each Financial Intermediary may vote any
shares as to which that Financial Intermediary is the agent of record and which are otherwise not represented in person or by proxy
at the meeting, proportionately in accordance with the votes cast by holders of all shares otherwise represented at the meeting
in person or by proxy as to which that Financial Intermediary is the agent of record. Any shares so voted by a Financial Intermediary
are deemed represented at the meeting for all purposes of quorum requirements.
The Amended and Restated Agreement and Declaration
of Trust further provides that obligations of the Trust are not binding upon the Trust’s Trustees individually but only upon
the property of the Trust and that the Trust’s Trustees are not liable for any action or failure to act. Notwithstanding
the foregoing, nothing in the Amended and Restated Agreement and Declaration of Trust protects a Trustee against any liability
to which he or she would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard
of the duties involved in the conduct of his office.
With respect to the Fund, the Trust may, in
the future, seek to achieve the Fund’s investment objective by investing all of the Fund’s investable assets in a no-load,
diversified, open-end management investment company having substantially the same investment objective as those applicable to the
Fund. In such event, the Fund would no longer directly require investment advisory services and therefore, would pay no investment
advisory fees. Further, the administrative services fee paid from the Fund would be reduced. Such an investment would be made only
if the Trustees believe that the aggregate per share expenses of the Fund and such other investment company would be less than
or approximately equal to the expenses which the Fund would incur if the Trust were to continue to retain the services of an investment
adviser for the Fund and the assets of the Fund were to continue to be invested directly in portfolio securities.
It is expected that the investment in another
investment company will have no preference, preemptive, conversion or similar rights, and will be fully paid and non-assessable.
It is expected that the investment company will not be required to hold annual meetings of investors but will hold special meetings
of investors when, in the judgment of its trustees, it is necessary or desirable to submit matters for an investor vote. It is
expected that each investor will be
entitled to a vote in proportion to the share
of its investment in such investment company. Except as described below, whenever the Trust is requested to vote on matters pertaining
to the investment company, the Trust would hold a meeting of the Fund’s shareholders and would cast its votes on each matter
at a meeting of investors in the investment company proportionately as instructed by the Fund’s shareholders.
However, subject to applicable statutory and
regulatory requirements, the Trust would not request a vote of the Fund’s shareholders with respect to: (a) any proposal
relating to the investment company in which the Fund’s assets were invested, which proposal, if made with respect to the
Fund, would not require the vote of the shareholders of the Fund; or (b) any proposal with respect to the investment company that
is identical, in all material respects, to a proposal that has previously been approved by shareholders of the Fund.
PORTFOLIO BROKERAGE TRANSACTIONS
The securities in which the Fund invests are
traded primarily in the over-the-counter market on a net basis and do not normally involve either brokerage commissions or transfer
taxes. Where possible, transactions on behalf of the Fund are entered directly with the issuer or from an underwriter or market
maker for securities involved. Purchases from underwriters of securities may include a commission or concession paid by the issuer
to the underwriter, and purchases from dealers serving as market makers may include a spread between bid and asked price. The policy
of the Fund regarding purchases and sales of securities is that primary consideration is given to obtaining the most favorable
prices and efficient executions of transactions given the market environment at the time.
In effecting securities transactions for the
Fund, the Investment Adviser seeks to obtain the best price and execution of orders. In selecting a broker, the Investment Adviser
considers a number of factors, including: the broker’s ability to execute orders without disturbing the market price; the
broker’s reliability for prompt, accurate confirmations and on-time delivery of securities; the broker’s financial
condition and responsibility; the research and other investment information provided by the broker; and the commissions charged.
Accordingly, the commissions charged by any such broker may be greater than the amount another firm might charge if the Investment
Adviser determines in good faith that the amount of such commissions is reasonable in relation to the value of the brokerage services
and research information provided by such broker.
Portfolio securities are not purchased from
or sold to the Administrator, Distributor or Investment Adviser or any “affiliated person” (as defined in the 1940
Act) of the Administrator, Distributor or Investment Adviser when such entities are acting as principals, except to the extent
permitted by law.
The Trust may
use BBH&Co., an “affiliated person” of the Trust,
as one of its regular brokers in the purchase
and sale of portfolio securities on behalf of the Fund when, in the judgment of the Investment Adviser, BBH&Co. is able to
obtain a price and execution at least as favorable as other qualified brokers. On those occasions when BBH&Co. acts as a broker
to the Fund and deems the purchase or sale of a security to be in the best interests of the Fund as well as other customers, BBH&Co.,
to the extent permitted by applicable laws and regulations, may, but is not obligated to, aggregate the securities to be sold
or purchased for the Fund with those to be sold or purchased for other customers in order to obtain best execution, including
lower brokerage commissions, if appropriate. In such event, allocation of the securities so purchased or sold as well as any expenses
incurred in the transaction are made by BBH&Co. in the manner it considers to be most equitable and consistent with its fiduciary
obligations to its customers, including the Fund. In some instances, this procedure might adversely affect the Fund. For the fiscal
years ended June 30, 2013, 2012 and 2011, no commissions were paid to BBH&Co.
The Trustees review regularly the
reasonableness of commissions and other transaction costs incurred for the Fund in light of facts and circumstances deemed relevant
from time to time and, in that connection, receive reports from the Investment Adviser and published data concerning transaction
costs incurred by institutional investors generally.
BOND, NOTE AND COMMERCIAL PAPER RATINGS
Moody’s
Aaa, Aa and A – Bonds rated Aaa are judged
to be of the “Best Quality.” The rating of Aa is assigned to bonds that are of “high quality by all standards,”
but long-term risks appear somewhat larger than Aaa rated bonds. The Aaa and Aa rated bonds are generally known as “high
grade bonds.” The foregoing ratings for bonds are sometimes presented in parentheses preceded with a “con” indicating
that the bonds are rated conditionally. Issues rated Aaa or Aa may be further modified by the numbers 1, 2 or 3 (3 being the highest)
to show relative strength within the rating category. Bonds for which the security depends upon the completion of some act or upon
the fulfillment of some condition are rated conditionally. These are bonds secured by: (a) earnings of projects under construction;
(b)
earnings of projects unseasoned in operation
experience; (c) rentals that begin when facilities are completed; or (d) payments to which some other limiting condition attaches.
Such parenthetical rating denotes the probable credit stature upon completion of construction or elimination of the basis of the
condition. Bonds rated A are considered as upper medium grade obligations. Principal and interest are considered adequate, but
elements may be present that suggest a susceptibility to impairment sometime in the future.
Standard & Poor’s (“S&P”)
AAA, AA and A - The AAA rating is the highest
rating assigned to debt obligations and indicates an extremely strong capacity to pay principal and interest. Bonds rated AA are
considered “high grade,” are only slightly less marked than those of AAA ratings and have the second strongest capacity
for payment of debt service. Bonds rated A have a strong capacity to pay principal and interest, although they are somewhat susceptible
to adverse effects or changes in circumstances and economic conditions. Bonds rated AA or A may be modified with a plus (+) or
a minus (-) sign to show relative strength within the rating category. The foregoing ratings are sometimes followed by a “p”
indicating that the rating is provisional. A provisional rating assumes the successful completion of the project financed by the
bonds being rated and indicates that payment of debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. Although a provisional rating addresses credit quality subsequent to completion of the project,
it makes no comment on the likelihood of, or the risk of default upon failure of, such completion.
Fitch, Inc. (“Fitch”)
AAA, AA and A - Bonds rated AAA are considered
to be investment grade and of the highest quality. The obligor has an extraordinary ability to pay interest and repay principal,
which is unlikely to be affected by reasonably foreseeable events. Bonds rated AA are considered to be investment grade and of
high quality. The obligor’s ability to pay interest and repay principal, while very strong, is somewhat less than for AAA
rated securities or more subject to possible change over the term of the issue. Bonds rated A are considered to be investment grade
and of good quality. The obligor’s ability to pay interest and repay principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings.
Note and Variable Rate Investment Ratings
Moody’s - MIG-1 and MIG-2. Notes rated
MIG-1 are judged to be of the best quality, enjoying strong protection from established cash flow of funds for their services or
from established and broad-based access to the market for refinancing or both. Notes rated MIG-2 are judged to be of high quality
with ample margins of protection, through not as large as MIG-1.
S&P - SP-1 and SP-2. SP-1 denotes a very
strong or strong capacity to pay principal and interest. Issues determined to possess overwhelming safety characteristics are given
a plus (+) designation (SP-1+). SP-2 denotes a satisfactory capacity to pay principal and interest.
Fitch - F-1+, F-1 and F-2. Notes assigned F-1+
are regarded as having the strongest degree of assurance for timely payment. An F-1 rating reflects an assurance of timely payment
only slightly less in degree than an F-1+ rating. Notes assigned F-2 have a satisfactory degree of assurance for timely payment,
but margins of protection are not as great as for issues rated F-1+ and F-1. The symbol LOC may follow a note rating which indicates
that a letter of credit issued by a commercial bank is attached to the note.
Corporate Commercial Paper Ratings
Moody’s - Commercial Paper ratings are
opinions of the ability of issuers to repay punctually promissory obligations not having an original maturity in excess of nine
months. Prime-1 indicates highest quality repayment capacity of rated issue.
S&P - Commercial Paper ratings are a current
assessment of the likelihood of timely payment of debts having an original maturity of no more than 365 days. Issues rated A-1
have the greatest capacity for timely payment. Issues rated “A-1+” are those with an “overwhelming degree of
credit protection.”
Fitch - Commercial Paper ratings reflect current
appraisal of the degree of assurance of timely payment. F-1+ issues are regarded as having the strongest degree of assurance for
timely payment. An F-1 rating reflects an assurance of timely payment only slightly less in degree than an F-1+ rating. The symbol
LOC may follow either category and indicates that a letter of credit issued by a commercial bank is attached to the commercial
paper.
Other Considerations
The ratings of S&P, Moody’s and Fitch
represent their respective opinions of the quality of the securities they undertake to rate. It should be emphasized, however,
that ratings are general and are not absolute standards of quality. Consequently, securities with the same maturity, coupon and
rating may have different yields and securities of the same maturity and coupon with different ratings may have the same yield.
Among the factors considered by Moody’s
in assigning bond, note and commercial paper ratings are the following: (i) evaluation of the management of the issuer; (ii) economic
evaluation of the issuer’s industry or industries and an appraisal of speculative-type risks which may be inherent in certain
areas; (iii) evaluation of the issuer’s products in relation to competition and customer acceptance; (iv) liquidity; (v)
amount and quality of long-term debt; (vi) trend of earnings over a period of 10 years; (vii) financial strength of a parent company
and the relationships which exist with the issuer; and (viii) recognition by management of obligations that may be present or may
arise as a result of public interest questions and preparations to meet such obligations.
Among the factors considered by S&P in
assigning bond, note and commercial paper ratings are the following: (i) trend of earnings and cash flow with allowances made for
unusual circumstances; (ii) stability of the issuer’s industry; (iii) the issuer’s relative strength and position within
the industry; and (iv) the reliability and quality of management.
Among the factors considered by Fitch in assigning
bond, note and commercial paper ratings are the following: (i) industry profile and operating environment; (ii) company profile;
(iii) management strategy and corporate governance; (iv) ownership or support; and (v) financial profile.
ADDITIONAL INFORMATION
As used in this SAI and the Prospectus, the
term “majority of the outstanding voting securities” (as defined in the 1940 Act) currently means the vote of: (i)
67% or more of the Fund’s shares present at a meeting, if the holders of more than 50% of the Fund’s outstanding voting
securities are present in person or represented by proxy; or (ii) more than 50% of the Fund’s outstanding voting securities,
whichever is less.
Fund shareholders receive semi-annual reports
containing unaudited financial statements and annual reports containing financial statements audited by independent registered
public accounting firm.
With respect to the securities offered
by the Fund, this SAI and the Prospectus do not contain all the information included in the Registration Statement filed with
the SEC under the 1933 Act. Pursuant to the rules and regulations of the SEC, certain portions have been omitted. The Registration
Statement including the exhibits filed therewith may be examined at the office of the SEC in Washington, D.C. or by calling 1-202-551-8090.
Additionally, this information is available on the SEC’s website at http://www.sec.gov. A copy may be obtained, after paying
a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov.
Statements contained in this SAI and the Prospectus
concerning the contents of any contract or other document are not necessarily complete, and in each instance, reference is made
to the copy of such contract or other document filed as an exhibit to the Registration Statement. Each such statement is qualified
in all respects by such reference.
A copy of the Amended and Restated Agreement
and Declaration of Trust establishing the Trust is on file in the office of the Secretary of the State of Delaware.
FINANCIAL STATEMENTS
The Annual Report of the Fund dated June
30, 2013 has been filed with the SEC pursuant to Section 30(b) of the 1940 Act and Rule 30b2-1 thereunder and is hereby incorporated
herein by reference. A copy of the Fund’s Annual Report, which also contains performance information of the Fund, is available,
upon request, without charge, to each person receiving this SAI.