As
filed with the Securities and Exchange Commission on March 13, 2013
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Securities Act File No. 33-26305
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Investment Company Act File No. 811-05742
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SECURITIES AND EXCHANGE COMMISSION
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Washington, D.C. 20549
__________________
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FORM N-1A
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REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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S
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Pre-Effective Amendment No.
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Post-Effective Amendment
No. 282
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and/or
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REGISTRATION STATEMENT UNDER THE
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INVESTMENT COMPANY ACT OF 1940
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S
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Amendment No. 284
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(Check appropriate box or boxes)
__________________
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BLACKROCK FUNDS
SM
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(Exact Name of Registrant as Specified in Charter)
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100 Bellevue Parkway, Wilmington, Delaware 19809
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(Address of Principal Executive Office)
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Registrant’s Telephone Number, including Area Code (800) 441-7762
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John M. Perlowski
BlackRock Funds
55 East 52
nd
Street
New York, New York 10055
United States of America
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(Name and Address of Agent for Service)
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Copies to:
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Counsel for the Fund:
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John A. MacKinnon, Esq.
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Benjamin Archibald, Esq.
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Sidley Austin LLP
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BlackRock Advisors, LLC
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787 Seventh Avenue
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55 East 52
nd
Street
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New York, New York 10019-6018
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New York, New York 10055
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__________________
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It is proposed that this filing will become effective (check appropriate box)
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immediately upon filing pursuant
to paragraph (b)
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on (date) pursuant to paragraph (b)
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£
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60 days after filing pursuant to paragraph (a)(1)
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£
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on (date) pursuant to paragraph (a)(1)
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75 days after filing pursuant to paragraph
(a)(2)
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£
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on (date) pursuant to paragraph (a)(2) of rule 485.
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If appropriate, check the following box:
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£
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This post-effective amendment designates a new effective date for a previously filed post-effective amendment.
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Title of Securities Being Registered: Shares of Beneficial Interest, par value $0.001 per share.
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MARCH 13, 2013
PROSPECTUS
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BlackRock
Funds
SM
| Investor and Institutional Shares
>
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BlackRock Disciplined Small Cap Core
Fund
Investor A: BDSAX Investor C: BDSCX Institutional: BDSIX
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This Prospectus contains information
you should know before investing, including information about risks. Please read it before you invest and keep it for future
reference.
The Securities and Exchange
Commission has not approved or disapproved these securities or passed upon the adequacy of this Prospectus. Any representation to the contrary is a
criminal offense.
Not FDIC Insured No Bank Guarantee May Lose Value
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Fund Overview
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Key facts and details about the Fund, including investment objective,
principal strategies, risk factors, fee and expense information,
and
historical performance
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3
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3
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4
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4
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5
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5
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6
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6
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6
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6
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Details About the Fund
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7
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9
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Account Information
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Information about account services, sales charges & waivers,
shareholder transactions, and distribution and other
payments
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13
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15
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18
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19
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25
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26
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26
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27
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Management of the Fund
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Information about BlackRock and the Portfolio Managers
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29
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30
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30
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31
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32
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33
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Financial Highlights
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34
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General Information
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35
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35
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36
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Glossary
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37
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For More Information
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Inside Back Cover
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Back Cover
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Fund Overview
The investment objective of BlackRock Disciplined Small Cap Core
Fund (the Fund), a series of BlackRock Funds
SM
(the Trust), is to seek capital appreciation over the long
term.
Fees and Expenses of the
Fund
This table describes the fees and expenses that you may pay if you
buy and hold shares of the Fund. You may qualify for sales charge discounts if you and your family invest, or agree to invest in the future, at least
$25,000 in the fund complex advised by BlackRock Advisors, LLC (BlackRock) or its affiliates. More information about these and other
discounts is available from your financial professional and in the Details About the Share Classes section on page 15 of the
Funds prospectus and in the Purchase of Shares section on page II-58 of the Funds statement of additional
information.
Shareholder Fees
(fees paid directly
from your investment)
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Investor A
Shares
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Investor C
Shares
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Institutional
Shares
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Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price)
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5.25
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%
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None
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None
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Maximum Deferred Sales Charge (Load) (as a percentage of
offering price or redemption proceeds,
whichever is lower)
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None
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1
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1.00
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%
2
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None
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Annual Fund Operating
Expenses
(expenses that you pay each year as a
percentage of the value of your investment)
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Investor A
Shares
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Investor C
Shares
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Institutional
Shares
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Management Fee
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0.45
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%
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0.45
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%
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0.45
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%
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Distribution and/or Service (12b-1) Fees
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0.25
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%
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1.00
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%
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None
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Other Expenses
3
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0.61
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%
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0.62
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%
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0.51
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%
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Total Annual Fund Operating Expenses
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1.31
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%
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2.07
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%
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0.96
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%
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Fee Waivers and/or Expense Reimbursements
4
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(0.36
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)%
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(0.37
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)%
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(0.26
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)%
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Total Annual Fund Operating Expenses After Fee Waivers
and/or Expense
Reimbursements
4
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0.95
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%
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1.70
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%
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0.70
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%
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1
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A contingent deferred sales charge
(CDSC) of 1.00% is assessed on certain redemptions of Investor A Shares made within 18 months after purchase where no initial
sales charge was paid at time of purchase as part of an investment of $1,000,000 or more.
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2
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There is no CDSC on Investor C Shares after one
year.
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3
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Other Expenses are based on estimated amounts for
the current year.
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As described in the Management of the
Fund section of the Funds prospectus on pages 29-33, BlackRock has contractually agreed to waive and/or
reimburse fees or expenses in order to limit Total Annual Fund Operating Expenses After Fee Waivers and/or Expense Reimbursements (excluding Dividend
Expense, Interest Expense, Acquired Fund Fees and Expenses and certain other Fund expenses) as a percentage of average daily net assets to
0.95% (for Investor A Shares), 1.70% (for Investor C Shares) and 0.70% (for Institutional Shares) until
December 1, 2014. The Fund may have to repay some of these waivers and reimbursements to BlackRock in the following two years. The
agreement may be terminated upon 90 days notice by a majority of the non-interested trustees of the Trust or by a vote of a majority of the
outstanding voting securities of the Fund.
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3
Example:
This Example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated
and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the
Funds operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would
be:
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1 Year
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3 Years
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Investor A Shares
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$617
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$885
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Investor C Shares
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$273
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$613
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Institutional Shares
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$ 72
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$280
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You would pay the following expenses if you did not redeem your
shares:
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1 Year
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3 Years
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Investor C Shares
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$173
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$613
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Portfolio Turnover:
The Fund pays transaction costs, such as commissions, when it buys
and sells securities (or turns over its portfolio). A higher portfolio turnover may indicate higher transaction costs and may result in
higher taxes when shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the example,
affect the Funds performance.
Principal Investment Strategies
of the Fund
Under normal circumstances, the Fund seeks to invest at least 80%
of its net assets plus any borrowings for investment purposes in equity securities or other financial instruments that are components of, or have
market capitalizations similar to, the securities included in the Russell 2000
®
Index. The companies included in the Russell
2000
®
Index have market capitalizations that range from approximately $101 million to $2.6
billion as of June 30, 2012. The Fund primarily seeks to buy common stock and may also invest in preferred stock and convertible
securities. From time to time the Fund may invest in shares of companies through new issues or initial public offerings
(IPOs).
The Fund may use derivatives, including options, futures, indexed
securities, inverse securities, swaps and forward contracts both to seek to increase the return of the Fund and to hedge (or protect) the value of its
assets against adverse movements in currency exchange rates, interest rates and movements in the securities markets. In order to effectively manage
cash flows into or out of the Fund, the Fund may buy and sell financial futures contracts or options on such contracts. Derivatives are financial
instruments whose value is derived from another security, a commodity (such as oil or gas), a currency or an index, including but not limited to the
Russell 2000
®
Index. The use of options, futures, indexed securities, inverse securities, swaps and forward contracts can be effective
in protecting or enhancing the value of the Funds assets.
Principal Risks of Investing in
the Fund
Risk is inherent in all investing. The value of your investment in
the Fund, as well as the amount of return you receive on your investment, may fluctuate significantly from day to day and over time. You may lose part
or all of your investment in the Fund or your investment may not perform as well as other similar investments. The following is a summary description
of principal risks of investing in the Fund.
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Convertible Securities Risk
The market value
of a convertible security performs like that of a regular debt security; that is, if market interest rates rise, the value of a convertible security
usually falls. In addition, convertible securities are subject to the risk that the issuer will not be able to pay interest or dividends when due, and
their market value may change based on changes in the issuers credit rating or the markets perception of the issuers
creditworthiness. Since it derives a portion of its value from the common stock into which it may be converted, a convertible security is also subject
to the same types of market and issuer risks that apply to the underlying common stock.
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Derivatives Risk
The Funds use of
derivatives may reduce the Funds returns and/or increase volatility. Volatility is defined as the characteristic of a security, an index or a
market to fluctuate significantly in price within a short time period. Derivatives are also subject to counterparty risk, which is the risk that the
other party in the transaction will not fulfill its contractual obligation. A risk of the Funds use of derivatives is that the fluctuations in
their values
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4
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may not correlate perfectly with the overall securities markets.
The possible lack of a liquid secondary market for derivatives and the resulting inability of the Fund to sell or otherwise close a derivatives
position could expose the Fund to losses and could make derivatives more difficult for the Fund to value accurately. Derivatives may give rise to a
form of leverage and may expose the Fund to greater risk and increase its costs. Recent legislation calls for new regulation of the derivatives
markets. The extent and impact of the regulation is not yet known and may not be known for some time. New regulation may make derivatives more costly,
may limit the availability of derivatives, or may otherwise adversely affect the value or performance of derivatives.
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Equity Securities Risk
Stock markets are
volatile. The price of equity securities fluctuates based on changes in a companys financial condition and overall market and economic
conditions.
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High Portfolio Turnover Risk
High portfolio
turnover (more than 100%) may result in increased transaction costs to the Fund and potentially higher capital gains or losses for shareholders. The
effects of higher than normal portfolio turnover may adversely affect Fund performance.
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Investment Style Risk
Under certain market
conditions, growth investments have performed better during the later stages of economic expansion and value investments have performed better during
periods of economic recovery. Therefore, these investment styles may over time go in and out of favor. At times when the investment style used by the
Fund is out of favor, the Fund may underperform other equity funds that use different investment styles.
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Leverage Risk
Some transactions may give rise
to a form of leverage. These transactions may include, among others, derivatives, and may expose the Fund to greater risk and increase its costs. The
use of leverage may cause the Fund to liquidate portfolio positions when it may not be advantageous to do so to satisfy its obligations or to meet any
required asset segregation requirements. Increases and decreases in the value of the Funds portfolio will be magnified when the Fund uses
leverage.
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Liquidity Risk
Liquidity risk exists when
particular investments are difficult to purchase or sell. The Funds investments in illiquid securities may reduce the returns of the Fund because
it may be difficult to sell the illiquid securities at an advantageous time or price. To the extent that the Funds principal investment
strategies involve derivatives or securities with substantial market and/or credit risk, the Fund will tend to have the greatest exposure to liquidity
risk. Liquid investments may become illiquid after purchase by the Fund, particularly during periods of market turmoil. Illiquid investments may be
harder to value, especially in changing markets, and if the Fund is forced to sell these investments to meet redemption requests or for other cash
needs, the Fund may suffer a loss. In addition, when there is illiquidity in the market for certain securities, the Fund, due to limitations on
illiquid investments, may be subject to purchase and sale restrictions.
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Market Risk and Selection Risk
Market risk is
the risk that one or more markets in which the Fund invests will go down in value, including the possibility that the markets will go down sharply and
unpredictably. Selection risk is the risk that the securities selected by Fund management will underperform the markets, the relevant indices or the
securities selected by other funds with similar investment objectives and investment strategies. This means you may lose money.
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New Issues Risk
New
Issues are IPOs of equity securities of U.S. and non-U.S. issuers. Securities issued in IPOs have no trading history,
and information about the companies may be available for very limited periods. In addition, the prices of securities sold in IPOs may be highly
volatile or may decline shortly after the initial public offering.
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Preferred Securities Risk
Preferred
securities may pay fixed or adjustable rates of return. Preferred securities are subject to issuer-specific and market risks applicable generally to
equity securities.
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Small Cap Securities Risk
Small cap companies
may have limited product lines or markets. They may be less financially secure than larger, more established companies. They may depend on a more
limited management group than larger capitalized companies.
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Because the Fund has not commenced operations as of the date of
this prospectus, it does not have performance information an investor would find useful in evaluating the risks of investing in the Fund. The
Funds primary benchmark is the Russell 2000
®
Index.
The Funds investment manager is BlackRock Advisors, LLC
(previously defined as BlackRock). The Funds sub-adviser is BlackRock Fund Advisors (the Sub-Adviser). Where applicable,
BlackRock refers also to the Sub-Adviser.
5
Name
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Portfolio Manager
of the Fund
Since
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Title
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Travis Cooke, CFA
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2013
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Managing Director of BlackRock, Inc.
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Ali Jahansouz
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2013
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Vice President of BlackRock, Inc.
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Purchase and Sale of Fund
Shares
You may purchase or redeem shares of the Fund each day the New
York Stock Exchange is open. To purchase or sell shares you should contact your financial intermediary or financial professional, or, if you hold your
shares through the Fund, you should contact the Fund by phone at (800) 441-7762, by mail (c/o BlackRock Funds, P.O. Box 9819, Providence, Rhode Island
02940-8019), or by the Internet at www.blackrock.com/funds. The Funds initial and subsequent investment minimums generally are as follows,
although the Fund may reduce or waive the minimums in some cases:
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Investor A and
Investor C
Shares
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Institutional
Shares
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Minimum Initial Investment
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$1,000 for all accounts except:
· $250
for certain fee-based programs.
· $100 for retirement plans.
· $50, if establishing an Automatic Investment Plan.
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$2 million for institutions and individuals.
Institutional Shares are available to clients of
registered investment advisors who have $250,000 invested in the Fund.
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Minimum Additional Investment
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$50 for all accounts except certain retirement plans and payroll deduction programs may have a
lower minimum.
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No subsequent minimum.
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The Funds dividends and distributions may be subject to
Federal income taxes and may be taxed as ordinary income or capital gains, unless you are a tax-exempt investor or are investing through a retirement
plan, in which case you may be subject to Federal income tax upon withdrawal from such tax-deferred arrangements.
Payments to Broker/Dealers and
Other Financial Intermediaries
If you purchase shares of the Fund through a broker-dealer or
other financial intermediary, the Fund and BlackRock Investments, LLC, the Funds distributor, or its affiliates may pay the intermediary for the
sale of Fund shares and related services. These payments may create a conflict of interest by influencing the broker-dealer or other financial
intermediary and your individual financial professional to recommend the Fund over another investment. Ask your individual financial professional or
visit your financial intermediarys website for more information.
6
Details About the Fund
Included in this prospectus are sections that tell you about
buying and selling shares, management information, shareholder features of BlackRock Disciplined Small Cap Core Fund (the Fund), a series
of BlackRock Funds
SM
(the Trust), and your rights as a shareholder.
Investment Objective
The investment objective of the Fund is to seek capital
appreciation over the long term.
Should the Trusts Board of Trustees (the Board)
determine that the investment objective of the Fund should be changed, shareholders will be given at least 30 days notice before any such change
is made. However, such change can be effected without shareholder approval.
Investment Process
The Fund seeks to pursue its investment objective by investing in
small cap securities in a disciplined manner, by using proprietary return forecast models that incorporate quantitative
analysis. These forecast models are designed to identify aspects of mispricing across stocks which the Fund can seek to
capture by over- and under-weighting particular equities while seeking to control incremental risk. The Funds manager then constructs and
rebalances the portfolio by integrating its investment insights with the model-based optimization process.
The Fund has no stated minimum holding period for investments and
may buy or sell securities whenever Fund management sees an appropriate opportunity. The Fund may engage in active and frequent trading of its
investments.
Principal Investment Strategies
Under normal circumstances, the Fund seeks to invest at least 80% of its net assets plus any borrowings for
investment purposes in equity securities or other financial instruments that are components of, or have market
capitalizations similar to, the securities included in the Russell 2000
®
Index. The companies included in the
Russell 2000
®
Index have market capitalizations that range from approximately $101 million to $2.6 billion as
of June 30, 2012. The Fund primarily seeks to buy common stock and may also invest in preferred stock and convertible
securities. From time to time the Fund may invest in shares of companies through new issues or initial public
offerings (IPOs). The Fund is not required to sell a companys securities solely because that companys
market capitalization rises above the market capitalization range of the Russell 2000
®
Index. A
companys market capitalization may go up or down due to market fluctuations.
The Fund may use derivatives, including options, futures, indexed
securities, inverse securities, swaps and forward contracts both to seek to increase the return of the Fund and to hedge (or protect) the value of its
assets against adverse movements in currency exchange rates, interest rates and movements in the securities markets. In order to manage cash
flows into or out of the Fund effectively, the Fund may buy and sell financial futures contracts or options on such contracts. Derivatives are
financial instruments whose value is derived from another security, a commodity (such as oil or gas), a currency or an index, including but not limited
to the Russell 2000
®
Index. The use of options, futures, indexed securities, inverse securities, swaps and forward contracts can be
effective in protecting or enhancing the value of the Funds assets.
The Fund is classified as diversified under the Investment Company
Act of 1940, as amended (the Investment Company Act).
Other Strategies Applicable to the Fund
In addition to the principal strategies discussed above, the Fund
may also invest or engage in the following investments/strategies:
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Borrowing
The
Fund may borrow from banks in amounts aggregating not more than 33
1
⁄
3
%
of the value of its total assets. The Fund may also borrow an additional 5% of its total assets without regard to the foregoing
limitation for temporary purposes such as clearance of portfolio transactions and share redemptions.
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7
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Foreign Securities
The Fund may invest in
equity securities of companies located outside the United States.
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Illiquid/Restricted Securities
The Fund may
invest up to 15% of its net assets in illiquid securities that it cannot sell within seven days at approximately current value. The Fund may also
invest in restricted securities, which are securities that cannot be offered for public resale unless registered under the applicable securities laws
or that have a contractual restriction that prohibits or limits their resale (
i.e.
, Rule 144A securities). They may include private placement
securities that have not been registered under the applicable securities laws. Restricted securities may not be listed on an exchange and may have no
active trading market and therefore may be considered to be illiquid. Rule 144A securities are restricted securities that can be resold to qualified
institutional buyers but not to the general public and may be considered to be liquid securities.
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Indexed and Inverse Securities
The Fund may
invest in securities that provide a return based on fluctuations in a stock or other financial index. For example, the Fund may invest in a security
that increases in value with the price of a particular securities index. In some cases, the return of the security may be inversely related to the
price of the index. This means that the value of the security will rise as the price of the index falls and vice versa. Although these types of
securities can make it easier for the Fund to access certain markets or hedge risks of other assets held by the Fund, these securities are subject to
the risks related to the underlying index or other assets.
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Investment Companies
The Fund has the ability
to invest in other investment companies, such as exchange-traded funds, unit investment trusts, and open-end and closed-end funds. The Fund may invest
in affiliated investment companies including affiliated money market funds and affiliated exchange traded funds.
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Money Market Securities
As part of its normal
operations, the Fund may hold high quality money market securities pending investments or when it expects to need cash to pay redeeming shareholders.
The Fund also may invest in these securities in order to achieve its investment goal. Money market securities are short term securities consisting
primarily of short term U.S. Government securities, U.S. Government agency securities, securities issued by U.S. Government sponsored enterprises and
U.S. Government instrumentalities, bank obligations, commercial paper, including asset backed commercial paper, corporate notes and repurchase
agreements.
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Repurchase Agreements and Purchase and Sale
Contracts
The Fund may enter into certain types of repurchase agreements or purchase and sale contracts. Under a repurchase agreement,
the seller agrees to repurchase a security at a mutually agreed-upon time and price. A purchase and sale contract is similar to a repurchase agreement,
but purchase and sale contracts also provide that the purchaser receives any interest on the security paid during the period.
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Reverse Repurchase Agreements
The Fund may
enter into reverse repurchase agreements with the same parties with whom it may enter into repurchase agreements. Under a reverse repurchase agreement,
the Fund sells securities to another party and agrees to repurchase them at a particular date and price. The Fund may enter into a reverse repurchase
agreement when it is anticipated that the interest income to be earned from the investment of the proceeds of the transaction is greater than the
interest expense of the transaction.
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Securities Lending
The Fund may lend
securities with a value up to 33
1
⁄
3
% of its total assets to financial
institutions that provide cash or securities issued or guaranteed by the U.S. Government as collateral.
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Temporary Defensive Strategies
It is possible
that in extreme market conditions, the Fund temporarily may invest some or all of its assets in cash or cash equivalents, including high quality money
market securities. Such a temporary defensive strategy would be inconsistent with the Funds principal investment strategies. The reason for
acquiring money market securities may be to avoid market losses. However, if market conditions improve, this strategy could result in reducing the
potential gain from the market upswing, thus reducing the Funds opportunity to achieve its investment goal.
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Warrants
The Fund may purchase warrants,
which are privileges issued by corporations enabling the owners to subscribe to and purchase a specified number of shares of the corporation at a
specified price during a specified period of time. Subscription rights normally have a short life span to expiration.
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When-Issued and Delayed Delivery Securities and Forward
Commitments
The purchase or sale of securities on a when-issued basis or on a delayed delivery basis or through a forward commitment
involves the purchase or sale of securities by the Fund at an established price with payment and delivery taking place in the future. The Fund enters
into these transactions to obtain what is considered an advantageous price to the Fund at the time of entering into the transaction.
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8
ABOUT THE PORTFOLIO MANAGEMENT TEAM OF
THE FUND
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The
Fund is managed by a team of financial professionals. Travis Cooke, CFA, and Ali Jahansouz are the portfolio managers and are jointly and primarily
responsible for the day-to-day management of the Fund. Please see Management of the Fund Portfolio Manager Information for
additional information about the portfolio management team.
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This section contains a discussion of the general risks of
investing in the Fund. The Investment Objective and Policies section in the Statement of Additional Information (the SAI) also
includes more information about the Fund, its investments and the related risks. As with any fund, there can be no guarantee that the Fund will meet
its objective or that the Funds performance will be positive for any period of time. An investment in the Fund is not a deposit in any bank and
is not insured or guaranteed by the Federal Deposit Insurance Corporation or by any bank or governmental agency.
Principal Risks of Investing in the Fund
Convertible Securities Risk
The market value of a convertible security performs like that of a regular debt security;
that is, if market interest rates rise, the value of a convertible security usually falls. In addition, convertible securities are subject to the risk
that the issuer will not be able to pay interest or dividends when due, and their market value may change based on changes in the issuers credit
rating or the markets perception of the issuers creditworthiness. Since it derives a portion of its value from the common stock into which
it may be converted, a convertible security is also subject to the same types of market and issuer risks that apply to the underlying common
stock.
Derivatives Risk
The Funds use of
derivatives may reduce the Funds returns and/or increase volatility. Volatility is defined as the characteristic of a security, an index or a
market to fluctuate significantly in price within a short time period. A risk of the Funds use of derivatives is that the fluctuations in their
values may not correlate perfectly with the overall securities markets. Derivatives are also subject to counterparty risk, which is the risk that the
other party in the transaction will not fulfill its contractual obligation. In addition, some derivatives are more sensitive to interest rate changes
and market price fluctuations than other securities. The possible lack of a liquid secondary market for derivatives and the resulting inability of the
Fund to sell or otherwise close a derivatives position could expose the Fund to losses and could make derivatives more difficult for the Fund to value
accurately. The Fund could also suffer losses related to its derivatives positions as a result of unanticipated market movements, which losses are
potentially unlimited. Finally, BlackRock may not be able to predict correctly the direction of securities prices, interest rates and other economic
factors, which could cause the Funds derivatives positions to lose value. When a derivative is used as a hedge against a position that the Fund
holds, any loss generated by the derivative generally should be substantially offset by gains on the hedged investment, and vice versa. While hedging
can reduce or eliminate losses, it can also reduce or eliminate gains. Hedges are sometimes subject to imperfect matching between the derivative and
the underlying security, and there can be no assurance that the Funds hedging transactions will be effective. The income from certain derivatives
may be subject to Federal income tax. Swap agreements involve the risk that the party with whom the Fund has entered into the swap will default on its
obligation to pay the Fund and the risk that the Fund will not be able to meet its obligations to pay the other party to the agreement. Credit default
swaps involve special risks in addition to those mentioned above because they are difficult to value, are highly susceptible to liquidity and credit
risk, and generally pay a return to the party that has paid the premium only in the event of an actual default by the issuer of the underlying
obligation (as opposed to a credit downgrade or other indication of financial difficulty). Recent legislation calls for new regulation of the
derivatives markets. The extent and impact of the regulation is not yet known and may not be known for some time. New regulation may make derivatives
more costly, may limit the availability of derivatives, or may otherwise adversely affect the value or performance of derivatives.
Equity Securities Risk
Common and preferred
stocks represent equity ownership in a company. Stock markets are volatile. The price of equity securities will fluctuate and can decline and reduce
the value of a portfolio investing in equities. The value of equity securities purchased by the Fund could decline if the financial condition of the
companies the Fund invests in decline or if overall market and economic conditions deteriorate. They may also decline due to factors that affect a
particular industry or industries, such as labor shortages or an increase in production costs and competitive conditions within an industry. In
addition, they may decline due to general market conditions that are not specifically related to a company or industry, such as real or perceived
adverse economic conditions, changes in the general outlook for corporate earnings, changes in interest or currency rates or generally adverse investor
sentiment.
9
High Portfolio Turnover Risk
The Fund may
engage in active and frequent trading of its portfolio securities. High portfolio turnover (more than 100%) may result in increased transaction costs
to the Fund, including brokerage commissions, dealer mark-ups and other transaction costs on the sale of the securities and on reinvestment in other
securities. The sale of Fund portfolio securities may result in the realization and/or distribution to shareholders of higher capital gains or losses
as compared to a fund with less active trading policies. These effects of higher than normal portfolio turnover may adversely affect Fund
performance.
Investment Style Risk
Under certain market
conditions, growth investments have performed better during the later stages of economic expansion and value investments have performed better during
periods of economic recovery. Therefore, these investment styles may over time go in and out of favor. At times when the investment style used by the
Fund is out of favor, the Fund may underperform other equity funds that use different investment styles.
Leverage Risk
Some transactions may give rise
to a form of economic leverage. These transactions may include, among others, derivatives, and may expose the Fund to greater risk and increase its
costs. As an open-end investment company registered with the Securities and Exchange Commission (the SEC), the Fund is subject to the
federal securities laws, including the Investment Company Act, the rules thereunder, and various SEC and SEC staff interpretive positions. In
accordance with these laws, rules and positions, the Fund must set aside liquid assets (often referred to as asset
segregation), or engage in other SEC- or staff-approved measures, to cover open positions with respect to certain kinds of
instruments. The use of leverage may cause the Fund to liquidate portfolio positions when it may not be advantageous to do so to satisfy its
obligations or to meet any required asset segregation requirements. Increases and decreases in the value of the Funds portfolio will be magnified
when the Fund uses leverage.
Liquidity Risk
Liquidity risk exists when
particular investments are difficult to purchase or sell. The Funds investments in illiquid securities may reduce the returns of the Fund because
it may be difficult to sell the illiquid securities at an advantageous time or price. To the extent that the Funds principal investment
strategies involve derivatives or securities with substantial market and/or credit risk, the Fund will tend to have the greatest exposure to liquidity
risk. Liquid investments may become illiquid after purchase by the Fund, particularly during periods of market turmoil. Illiquid investments may be
harder to value, especially in changing markets, and if the Fund is forced to sell these investments to meet redemption requests or for other cash
needs, the Fund may suffer a loss. In addition, when there is illiquidity in the market for certain securities, the Fund, due to limitations on
illiquid investments, may be subject to purchase and sale restrictions.
Market Risk and Selection Risk
Market risk is
the risk that one or more markets in which the Fund invests will go down in value, including the possibility that the markets will go down sharply and
unpredictably. Selection risk is the risk that the securities selected by Fund management will underperform the markets, the relevant indices or the
securities selected by other funds with similar investment objectives and investment strategies. This means you may lose money.
New Issues Risk
New
Issues are IPOs of equity securities of U.S. and non-U.S. issuers. Investments in companies that have recently gone public have the
potential to produce substantial gains for the Fund. However, there is no assurance that the Fund will have access to profitable IPOs and therefore
investors should not rely on these past gains as an indication of future performances. The investment performance of the Fund during periods when it is
unable to invest significantly or at all in IPOs may be lower than during periods when the Fund is able to do so. In addition, as the Fund increases in
size, the impact of IPOs on the Funds performance will generally decrease. Securities issued in IPOs are subject to many of the same risks as
investing in companies with smaller market capitalizations. Securities issued in IPOs have no trading history, and information about the companies may
be available for very limited periods. In addition, the prices of securities sold in IPOs may be highly volatile or may decline shortly after the
initial public offering. When an initial public offering is brought to the market, availability may be limited and the Fund may not be able to buy any
shares at the offering price, or, if it is able to buy shares, it may not be able to buy as many shares at the offering price as it would
like.
Preferred Securities Risk
Preferred
securities may pay fixed or adjustable rates of return. Preferred securities are subject to issuer-specific and market risks applicable generally to
equity securities. In addition, a companys preferred securities generally pay dividends only after the company makes required payments to holders
of its bonds and other debt. For this reason, the value of preferred securities will usually react more strongly than bonds and other debt to actual or
perceived changes in the companys financial condition or prospects. Preferred securities of smaller companies may be more vulnerable to adverse
developments than preferred stock of larger companies.
Small Cap Securities Risk
Small cap companies
may have limited product lines or markets. They may be less financially secure than larger, more established companies. They may depend on a small
number of key personnel. If a product fails or there are other adverse developments, or if management changes, the Funds investment in a
small
10
cap company may lose substantial value. In addition, it is
more difficult to get information on smaller companies, which tend to be less well known, have shorter operating histories, do not have significant
ownership by large investors and are followed by relatively few securities analysts.
The securities of small cap companies generally trade in lower
volumes and are subject to greater and more unpredictable price changes than larger cap securities or the market as a whole. In addition, small cap
securities may be particularly sensitive to changes in interest rates, borrowing costs and earnings. Investing in small cap securities requires a
longer term view.
Other Risks of Investing in the Fund
The Fund may also be subject to certain other risks associated
with its investments and investment strategies, including:
Borrowing Risk
Borrowing may exaggerate
changes in the net asset value of Fund shares and in the return on the Funds portfolio. Borrowing will cost the Fund interest expense and other
fees. The costs of borrowing may reduce the Funds return. Borrowing may cause the Fund to liquidate positions when it may not be advantageous to
do so to satisfy its obligations.
Expense Risk
Fund expenses are subject to a
variety of factors, including fluctuations in the Funds net assets. Accordingly, actual expenses may be greater or less than those indicated. For
example, to the extent that the Funds net assets decrease due to market declines or redemptions, the Funds expenses will increase as a
percentage of Fund net assets. During periods of high market volatility, these increases in the Funds expense ratio could be
significant.
Foreign Securities Risk
Because the Fund
may invest in companies located in countries other than the United States, the Fund may be exposed to risks associated with foreign
investments.
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The value of holdings traded outside the United States (and any
hedging transactions in foreign currencies) will be affected by changes in currency exchange rates;
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The costs of non-U.S. securities transactions tend to be higher
than those of U.S. transactions;
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Foreign holdings may be adversely affected by foreign
government action;
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International trade barriers or economic sanctions against
certain non-U.S. countries may adversely affect these holdings;
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The economies of certain countries may compare unfavorably with
the U.S. economy; and
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Foreign securities markets may be smaller than the U.S.
markets, which may make trading more difficult.
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Indexed and Inverse Securities Risk
Certain
indexed and inverse securities have greater sensitivity to changes in interest rates or index levels than other securities, and the Funds
investment in such instruments may decline significantly in value if interest rates or index levels move in a way Fund management does not
anticipate.
Investment in Other Investment Companies Risk
As with other investments, investments in other investment companies are subject to market and selection risk. In addition, if the Fund acquires shares
of investment companies, including ones affiliated with the Fund, shareholders bear both their proportionate share of expenses in the Fund (including
management and advisory fees) and, indirectly, the expenses of the investment companies. To the extent the Fund is held by an affiliated fund, the
ability of the Fund itself to hold other investment companies may be limited.
Money Market Securities Risk
If market
conditions improve while the Fund has invested some or all of its assets in high quality money market securities, this strategy could result in
reducing the potential gain from the market upswing, thus reducing the Funds opportunity to achieve its investment objective.
Repurchase Agreements and Purchase and Sale Contracts
Risks
If the other party to a repurchase agreement or purchase and sale contract defaults on its obligation under the agreement, the
Fund may suffer delays and incur costs or lose money in exercising its rights under the agreement. If the seller fails to repurchase the security in
either situation and the market value of the security declines, the Fund may lose money.
Reverse Repurchase Agreements Risk
Reverse
repurchase agreements involve the risk that the other party to the reverse repurchase agreement may fail to return the securities in a timely manner or
at all. The Fund could lose money if it is unable to recover the securities and the value of the collateral held by the Fund, including the value of
the investments made with cash collateral, is less than the value of securities. These events could also trigger adverse tax consequences for the
Fund.
11
Securities Lending Risk
Securities lending
involves the risk that the borrower may fail to return the securities in a timely manner or at all. As a result, the Fund may lose money and there may
be a delay in recovering the loaned securities. The Fund could also lose money if it does not recover the securities and/or the value of the collateral
falls, including the value of investments made with cash collateral. These events could trigger adverse tax consequences for the Fund.
Warrants Risk
If the price of the underlying
stock does not rise above the exercise price before the warrant expires, the warrant generally expires without any value and the Fund loses any amount
it paid for the warrant. Thus, investments in warrants may involve substantially more risk than investments in common stock. Warrants may trade in the
same markets as their underlying stock; however, the price of the warrant does not necessarily move with the price of the underlying
stock.
When-Issued and Delayed Delivery Securities and Forward
Commitments Risk
When-issued and delayed delivery securities and forward commitments involve the risk that the security the Fund buys
will lose value prior to its delivery. There also is the risk that the security will not be issued or that the other party to the transaction will not
meet its obligation. If this occurs, the Fund loses both the investment opportunity for the assets it set aside to pay for the security and any gain in
the securitys price.
12
Account Information
How to Choose the Share Class
that Best Suits Your Needs
The Fund currently offers multiple share classes (Investor A,
Investor C and Institutional Shares in this prospectus), each with its own sales charge and expense structure, allowing you to invest in the way that
best suits your needs. Each share class represents an ownership interest in the same investment portfolio of the Fund. When you choose your class of
shares, you should consider the size of your investment and how long you plan to hold your shares. Either your financial professional or your selected
securities dealer, broker, investment adviser, service provider or industry professional (financial intermediary) can help you determine
which share class is best suited to your personal financial goals. Investor A and Investor C Shares are sometimes referred to herein collectively as
Investor Shares.
For example, if you select Institutional Shares of the Fund, you
will not pay any sales charge. However, only certain investors may buy Institutional Shares. If you select Investor A Shares of the Fund, you generally
pay a sales charge at the time of purchase and an ongoing service fee of 0.25% per year. You may be eligible for a sales charge reduction or
waiver.
If you select Investor C Shares of the Fund, you will
invest the full amount of your purchase price, but you will be subject to a distribution fee of 0.75% per year and a service fee of 0.25% per year
under a plan adopted pursuant to Rule 12b-1 under the Investment Company Act. Because these fees are paid out of the Funds assets on an ongoing
basis, over time these fees increase the cost of your investment and may cost you more than paying other types of sales charges. In addition, you may
be subject to a deferred sales charge when you sell Investor C Shares of the Fund. Classes with lower expenses will have higher net asset values and
dividends relative to other share classes.
The Funds shares are distributed by BlackRock Investments,
LLC (the Distributor), an affiliate of BlackRock.
13
The table below summarizes key features of each of the share
classes offered by this prospectus.
Share Classes at a Glance
1
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Investor A Shares
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Investor C Shares
2,3
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Institutional Shares
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Availability
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Generally available through financial intermediaries.
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Generally available through financial intermediaries.
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Limited to certain investors, including:
·
Current Institutional shareholders that meet certain requirements.
· Certain
retirement plans.
· Participants in certain programs sponsored by BlackRock or its
affiliates or other financial intermediaries.
· Certain employees and affiliates of
BlackRock or its affiliates.
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Minimum Investment
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$1,000 for all accounts except:
· $250 for
certain fee-based programs.
· $100 for retirement plans.
· $50, if establishing an Automatic Investment Plan.
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$1,000 for all accounts except:
· $250 for
certain fee-based programs.
· $100 for retirement plans.
· $50, if establishing an Automatic Investment Plan.
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$2 million for institutions and individuals.
Institutional Shares are available to clients of registered
investment advisors who have $250,000 invested in the Fund.
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Initial Sales Charge?
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Yes. Payable at time of purchase. Lower sales charges are available for larger
investments.
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No. Entire purchase price is invested in shares of the Fund.
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No. Entire purchase price is invested in shares of the Fund.
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Deferred Sales Charge?
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No. (May be charged for purchases of $1 million or more that are redeemed within eighteen
months.)
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Yes. Payable if you redeem within one year of purchase.
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No.
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Distribution and Service
(12b-1) Fees?
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No Distribution Fee.
0.25% Annual Service Fee.
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0.75% Annual Distribution Fee.
0.25% Annual Service Fee.
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No.
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Redemption Fees?
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No.
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No.
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No.
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Conversion to Investor A Shares?
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N/A
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No.
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No.
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Advantage
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Makes sense for investors who are eligible to have the sales charge reduced or eliminated or who have a
long-term investment horizon because there are no ongoing distribution fees.
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No up-front sales charge so you start off owning more shares. These shares may make sense for investors who
have a shorter investment horizon relative to Investor A Shares.
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No up-front sales charge so you start off owning more shares.
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Disadvantage
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You pay a sales charge up-front, and therefore you start off owning fewer shares.
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You pay ongoing distribution fees each year you own shares, which means that over the long term you can
expect higher total fees per share than Investor A Shares and, as a result, lower total performance.
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Limited availability.
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1
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Please see Details About the Share
Classes for more information about each share class.
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2
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If you establish a new account directly with the
Fund and do not have a financial intermediary associated with your account, you may only invest in Investor A Shares. Applications without a financial
intermediary that select Investor C Shares will not be accepted.
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3
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The Fund will not accept a purchase order of
$500,000 or more for Investor C Shares. Your financial intermediary may set a lower maximum for Investor C Shares.
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The following pages will cover the additional details of each
share class, including the Institutional Share requirements, the sales charge table for Investor A Shares, reduced sales charge information, Investor C
Share CDSC information, and sales charge waivers. More information about existing sales charge reductions and waivers is available free of charge in a
clear and prominent format via hyperlink at www.blackrock.com and in the SAI, which is available on the website or on request.
14
Details About the Share
Classes
Investor A Shares Initial Sales Charge
Option
The following table shows the front-end sales charges that you may
pay if you buy Investor A Shares. The offering price for Investor A Shares includes any front-end sales charge. The front-end sales charge expressed as
a percentage of the offering price may be higher or lower than the charge described below due to rounding. Similarly, any contingent deferred sales
charge paid upon certain redemptions of Investor A Shares expressed as a percentage of the applicable redemption amount may be higher or lower than the
charge described below due to rounding. You may qualify for a reduced front-end sales charge. Purchases of Investor A Shares at certain fixed dollar
levels, known as breakpoints, cause a reduction in the front-end sales charge. Once you achieve a breakpoint, you pay that sales charge on
your entire purchase amount (and not just the portion above the breakpoint). If you select Investor A Shares, you will pay a sales charge at the time
of purchase as shown in the following table.
Your Investment
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Sales Charge
as a % of
Offering
Price
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Sales Charge
as a % of Your
Investment
1
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Dealer
Compensation
as a %
of
Offering Price
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Less than $25,000
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5.25%
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5.54%
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5.00
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%
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$25,000 but less than $50,000
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4.75%
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4.99%
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4.50
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%
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$50,000 but less than $100,000
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4.00%
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4.17%
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3.75
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%
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$100,000 but less than $250,000
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3.00%
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3.09%
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2.75
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%
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$250,000 but less than $500,000
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2.50%
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2.56%
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2.25
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%
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$500,000 but less than $750,000
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2.00%
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2.04%
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1.75
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%
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$750,000 but less than $1,000,000
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1.50%
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1.52%
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1.25
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%
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$1,000,000 and over
2
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0.00%
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0.00%
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2
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1
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Rounded to the nearest one-hundredth
percent.
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2
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If you invest $1,000,000 or more in Investor A
Shares, you will not pay an initial sales charge. In that case, BlackRock compensates the financial intermediary from its own resources. However, if
you redeem your shares within 18 months after purchase, you may be charged a deferred sales charge of 1.00% of the lesser of the original
cost of the shares being redeemed or your redemption proceeds. Such deferred sales charge may be waived in connection with certain fee-based
programs.
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No initial sales charge applies to Investor A Shares that you buy
through reinvestment of Fund dividends or capital gains.
Sales Charges Reduced or Eliminated for Investor A
Shares
There are several ways in which the sales charge can be reduced or
eliminated. Purchases of Investor A Shares at certain fixed dollar levels, known as breakpoints, cause a reduction in the front-end sales
charge (as described above in the Investor A Shares Initial Sales Charge Option section). Additionally, the front-end sales charge
can be reduced or eliminated through one or a combination of the following: a Letter of Intent, right of accumulation, the reinstatement privilege
(described under Account Services and Privileges), or a waiver of the sales charge (described below).
Reductions or eliminations through the Letter of Intent or right
of accumulation will apply to the value of all qualifying holdings in shares of mutual funds sponsored and advised by BlackRock or its affiliates
(BlackRock Funds) owned by (a) the investor, or (b) the investors spouse and any children and a trust, custodial account or fiduciary
account for the benefit of any such individuals. For this purpose, the value of an investors holdings means the offering price of the newly
purchased shares (including any applicable sales charge) plus the current value (including any sales charges paid) of all other shares the investor
already holds taken together.
Qualifying
Holdings:
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Investor Shares, Institutional Shares
(in most BlackRock Funds) and investments in the BlackRock CollegeAdvantage 529 Program
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Qualifying Holdings may include shares held in accounts held at a
financial intermediary, including personal accounts, certain retirement accounts, UGMA/UTMA accounts, Joint Tenancy accounts, trust accounts and
Transfer on Death accounts, as well as shares purchased by a trust of which the investor is a beneficiary. For purposes of the right of accumulation
and Letter of Intent the investor may not combine with the investors other holdings shares held in pension, profit sharing or other employee
benefit plans if those shares are held in the name of a nominee or custodian.
In order to receive a reduced sales charge, at the time an
investor purchases shares of the Fund, the investor should inform the financial intermediary and/or BlackRock Funds of any other shares of the Fund or
any other BlackRock Fund that qualify for a reduced sales charge. Failure by the investor to notify the financial intermediary or BlackRock Funds may
result in the investor not receiving the sales charge reduction to which the investor is otherwise entitled.
15
The financial intermediary or BlackRock Funds may request
documentation including account statements and records of the original cost of the shares owned by the investor, the investors spouse
and/or children showing that the investor qualifies for a reduced sales charge. The investor should retain these records because
depending on where an account is held or the type of account the Fund and/or the investors financial professional, financial intermediary
or BlackRock Funds may not be able to maintain this information.
For more information, see the SAI or contact your financial
intermediary.
Letter of Intent
An investor may qualify for a reduced front-end sales charge
immediately by signing a Letter of Intent stating the investors intention to buy a specified amount of Investor A, Investor C and/or
Institutional Shares and/or make an investment through the BlackRock CollegeAdvantage 529 Program in one or more BlackRock Funds within the next 13
months that would, if bought all at once, qualify the investor for a reduced sales charge. The initial investment must meet the minimum initial
purchase requirement. The 13-month Letter of Intent period commences on the day that the Letter of Intent is received by the Fund, and the investor
must tell the Fund that later purchases are subject to the Letter of Intent. Purchases submitted prior to the date the Letter of Intent is received by
the Fund are not counted toward the sales charge reduction. During the term of the Letter of Intent, the Fund will hold Investor A Shares representing
up to 5% of the indicated amount in an escrow account for payment of a higher sales load if the full amount indicated in the Letter of Intent is not
purchased. If the full amount indicated is not purchased within the 13-month period, and the investor does not pay the higher sales load within 20
days, the Fund will redeem enough of the Investor A Shares held in escrow to pay the difference.
Right of Accumulation
Investors have a right of accumulation under which the
current value of (i) an investors existing BlackRock Funds Investor A and A1, Investor B, B1, B2 and B3, Investor C, C1, C2 and C3 and
Institutional Shares and/or (ii) the investment in the BlackRock CollegeAdvantage 529 Program by the investor or by or on behalf of the investors
spouse and children may be combined with the amount of the current purchase in determining whether an investor qualifies for a breakpoint and a reduced
front-end sales charge. Financial intermediaries may value current holdings of their customers differently for purposes of determining whether an
investor qualifies for a breakpoint and a reduced front-end sales charge, although customers of the same financial intermediary will be treated
similarly. In order to use this right, the investor must alert BlackRock to the existence of any previously purchased shares.
Other Front-End Sales Charge Waivers
The following persons may also buy Investor A Shares without
paying a sales charge:
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Authorized qualified employee benefit plans or savings
plans;
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n
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Rollovers of current investments through authorized qualified
employee benefit plans or savings plans, provided the shares are transferred to the same BlackRock Fund as either a direct rollover or,
subsequent to distribution, the rolled-over proceeds are contributed to a BlackRock individual retirement account (IRA) through an account
directly with the Fund;
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n
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Persons investing through an authorized payroll deduction
plan;
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n
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Persons investing through an authorized investment plan for
organizations that operate under Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the Internal Revenue
Code);
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n
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Registered investment advisers, trust companies and bank trust
departments exercising discretionary investment authority with respect to amounts to be invested in the Fund;
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n
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Persons participating in a fee-based program (such as a wrap
account) under which they (i) pay advisory fees to a broker-dealer or other financial institution or (ii) pay fees to a broker-dealer or other
financial institution for providing transaction processing and other administrative services, but not investment advisory services;
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n
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Financial intermediaries who have entered into an agreement with
the Distributor and have been approved by the Distributor to offer Fund shares to self-directed investment brokerage accounts that may or may not
charge a transaction fee;
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n
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Persons associated with the Fund, the Funds manager, the
Funds sub-adviser, transfer agent, Distributor, fund accounting agents, Barclays PLC (Barclays) and their respective
affiliates (to the extent permitted by these firms) including: (a) officers, directors and partners; (b) employees and retirees; (c) employees of firms
who have entered into selling agreements to distribute shares of BlackRock-advised funds; (d) immediate family members of such persons; and (e) any
trust, pension, profit-sharing or other benefit plan for any of the persons set forth in (a) through (d); and
|
n
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|
Certain state sponsored 529 college savings plans.
|
16
Investor A Shares at Net Asset Value
If you invest $1,000,000 or more in Investor A Shares, you will
not pay any initial sales charge. However, if you redeem your Investor A Shares within 18 months after purchase, you may be charged a deferred sales
charge of 1.00% of the lesser of the original cost of the shares being redeemed or your redemption proceeds. For a discussion on waivers
see Contingent Deferred Sales Charge Waivers.
If you are eligible to buy both Investor A and Institutional
Shares, you should buy Institutional Shares since Investor A Shares are subject to a front end sales charge and an annual 0.25% service fee, while
Institutional Shares are not. The Distributor normally pays the annual Investor A Shares service fee to dealers as a shareholder servicing fee on a
monthly basis.
Investor C Shares Deferred Sales Charge
Option
If you select Investor C Shares, you do not pay an initial sales
charge at the time of purchase. However, if you redeem your Investor C Shares within one year after purchase, you may be required to pay a deferred
sales charge of 1.00%. The charge will apply to the lesser of the original cost of shares being redeemed or the proceeds of your redemption. When you
redeem Investor C Shares, the redemption order is processed so that the lowest deferred sales charge is charged. Investor C Shares that are not subject
to the deferred sales charge are redeemed first. In addition, you will not be charged a deferred sales charge when you redeem shares that you acquire
through reinvestment of Fund dividends or capital gains. Any CDSC paid on the redemptions of Investor C Shares expressed as a percentage of the
applicable redemption amount may be higher or lower than the charge described due to rounding.
Investor C Shares do not offer a conversion
privilege.
You will also pay ongoing distribution fees of 0.75% and ongoing
service fees of 0.25% for Investor C Shares each year. Because these fees are paid out of the Funds assets on an ongoing basis, over time these
fees increase the cost of your investment and may cost you more than paying other types of sales charges. The Distributor uses the money that it
receives from the deferred sales charges and the distribution fees to cover the costs of marketing, advertising and compensating the financial
intermediary who assists you in purchasing Fund shares.
The Distributor currently pays dealers a sales concession of 1.00%
of the purchase price of Investor C Shares from its own resources at the time of sale. The Distributor pays the annual Investor C Shares distribution
fee and the annual Investor C Shares service fee as an ongoing concession and as a shareholder servicing fee, respectively, to dealers for Investor C
Shares held for over a year and normally retains the Investor C Shares distribution fee and service fee during the first year after purchase. For
certain qualified employee benefit plans, the Distributor will pay the full Investor C Shares distribution fee and service fee to dealers beginning in
the first year after purchase in lieu of paying the sales concession.
Contingent Deferred Sales Charge Waivers
The deferred sales charge relating to Investor Shares may be
reduced or waived in certain circumstances, such as:
n
|
|
Redemptions of shares purchased through authorized qualified
employee benefit plans or savings plans and rollovers of current investments in the Fund through such plans;
|
n
|
|
Exchanges pursuant to the exchange privilege, as described in
How to Exchange Shares or Transfer your Account;
|
n
|
|
Redemptions made in connection with
minimum required distributions from IRA or 403(b)(7) accounts due to the shareholder reaching the age of 70
1
⁄
2
;
|
n
|
|
Certain post-retirement withdrawals
from an IRA or other retirement plan if you are over 59
1
⁄
2
years old;
|
n
|
|
Redemptions made with respect to certain retirement plans
sponsored by the Fund, BlackRock or an affiliate;
|
n
|
|
Redemptions resulting from shareholder death as long as the waiver
request is made within one year of death or, if later, reasonably promptly following completion of probate (including in connection with the
distribution of account assets to a beneficiary of the decedent);
|
n
|
|
Withdrawals resulting from shareholder disability (as defined in
the Internal Revenue Code) as long as the disability arose subsequent to the purchase of the shares;
|
n
|
|
Involuntary redemptions made of shares in accounts with low
balances;
|
n
|
|
Certain redemptions made through the Systematic Withdrawal Plan
offered by the Fund, BlackRock or an affiliate;
|
n
|
|
Redemptions related to the payment of BNY Mellon Investment
Servicing Trust Company custodial IRA fees; and
|
n
|
|
Redemptions when a shareholder can demonstrate hardship, in the
absolute discretion of the Fund.
|
More information about existing sales charge reductions and
waivers is available free of charge in a clear and prominent format via hyperlink at www.blackrock.com and in the SAI, which is available on the
website or on request.
17
Institutional Shares
Institutional Shares are not subject to any sales charge. Only
certain investors are eligible to buy Institutional Shares. Your financial intermediary can help you determine whether you are eligible to buy
Institutional Shares. The Fund may permit a lower initial investment for certain investors if their purchase, combined with purchases by other
investors received together by the Fund, meets the minimum investment requirement.
Eligible Institutional investors include the
following:
n
|
|
Investors who currently own Institutional Shares of the Fund may
make additional purchases of Institutional Shares of the Fund directly from the Fund;
|
n
|
|
Institutional and individual retail investors with a minimum
investment of $2 million who purchase directly from the Fund;
|
n
|
|
Certain qualified retirement plans;
|
n
|
|
Investors in selected fee-based programs;
|
n
|
|
Clients of registered investment advisers who have $250,000
invested in the Fund;
|
n
|
|
Trust department clients of PNC Bank and Bank of America, N.A. and
their affiliates for whom they (i) act in a fiduciary capacity (excluding participant directed employee benefit plans); (ii) otherwise have investment
discretion; or (iii) act as custodian for at least $2 million in assets;
|
n
|
|
Unaffiliated banks, thrifts or trust companies that have
agreements with the Distributor;
|
n
|
|
Holders of certain Merrill Lynch & Co., Inc. (Merrill
Lynch) sponsored unit investment trusts (UITs) who reinvest dividends received from such UITs in shares of the Fund; and
|
n
|
|
Employees, officers and directors/trustees of BlackRock Inc.,
BlackRock Funds, Merrill Lynch, The PNC Financial Services Group, Inc. (PNC), Barclays or their respective affiliates.
|
Distribution and Shareholder
Servicing Plan
The Trust, on behalf of the Fund, has adopted a plan (the
Plan) with respect to the Investor Shares that allows the Fund to pay distribution fees for the sale of its shares under Rule 12b-1 of the
Investment Company Act, and shareholder servicing fees for certain services provided to its shareholders.
Plan Payments
Under the Plan, Investor C Shares pay a fee (distribution
fees) to the Distributor and/or its affiliates, including PNC and its affiliates, for distribution and sales support services. The distribution
fees may be used to pay the Distributor for distribution services and to pay the Distributor and affiliates of BlackRock and PNC for sales support
services provided in connection with the sale of Investor C Shares. The distribution fees may also be used to pay brokers, dealers, financial
institutions and industry professionals (including BlackRock, PNC and their respective affiliates) (each a Financial Intermediary) for
sales support services and related expenses. All Investor C Shares pay a maximum distribution fee per year that is a percentage of the average daily
net asset value of the Fund attributable to Investor C Shares. Institutional and Investor A Shares do not pay a distribution fee.
Under the Plan, the Trust also pays shareholder servicing fees
(also referred to as shareholder liaison services fees) on behalf of the Fund to Financial Intermediaries for providing support services to their
customers who own Investor Shares. The shareholder servicing fee payment is calculated as a percentage of the average daily net asset value of Investor
Shares of the Fund. All Investor Shares pay this shareholder servicing fee. Institutional Shares do not pay a shareholder servicing
fee.
In return for the shareholder servicing fee, Financial
Intermediaries (including BlackRock) may provide one or more of the following services to their customers who own Investor Shares:
n
|
|
Responding to customer questions on the services performed by the
Financial Intermediary and investments in Investor Shares;
|
n
|
|
Assisting customers in choosing and changing dividend options,
account designations and addresses; and
|
n
|
|
Providing other similar shareholder liaison services.
|
The shareholder servicing fees payable pursuant to the Plan are
paid to compensate Financial Intermediaries for the administration and servicing of shareholder accounts and are not costs which are primarily intended
to result in the sale of the Funds shares. Because the fees paid by the Fund under the Plan are paid out of Fund assets on an ongoing basis, over
time these fees will increase the cost of your investment and may cost you more than paying other
18
types of sales charges. In addition, the distribution fees
paid by Investor C Shares may over time cost investors more than the front-end sales charge on Investor A Shares. For more information on the Plan,
including a complete list of services provided thereunder, see the SAI.
Other Payments by the Fund
In addition to, rather than in lieu of, fees that the Fund may pay
to a Financial Intermediary pursuant to the Plan and fees that the Fund pays to its transfer agent, BNY Mellon Investment Servicing (US) Inc. (the
Transfer Agent), BlackRock, on behalf of the Fund, may enter into non-Plan agreements with a Financial Intermediary pursuant to which the
Fund will pay a Financial Intermediary for administrative, networking, recordkeeping, sub-transfer agency and shareholder services. These non-Plan
payments are generally based on either (1) a percentage of the average daily net assets of Fund shareholders serviced by a Financial Intermediary or
(2) a fixed dollar amount for each account serviced by a Financial Intermediary. The aggregate amount of these payments may be
substantial.
Other Payments by BlackRock
The Plan permits BlackRock, the Distributor and their affiliates
to make payments relating to distribution and sales support activities out of their past profits or other sources available to them (and not as an
additional charge to the Fund). From time to time, BlackRock, the Distributor or their affiliates also may pay a portion of the fees for
administrative, networking, recordkeeping, sub-transfer agency and shareholder services described above at its or their own expense and out of its or
their legitimate profits. BlackRock, the Distributor and their affiliates may compensate affiliated and unaffiliated Financial Intermediaries for the
sale and distribution of shares of the Fund or for these other services to the Fund and shareholders. These payments would be in addition to the Fund
payments described in this prospectus and may be a fixed dollar amount, may be based on the number of customer accounts maintained by the Financial
Intermediary, or may be based on a percentage of the value of shares sold to, or held by, customers of the Financial Intermediary. The aggregate amount
of these payments by BlackRock, the Distributor and their affiliates may be substantial. Payments by BlackRock may include amounts that are sometimes
referred to as revenue sharing payments. In some circumstances, these revenue sharing payments may create an incentive for a Financial
Intermediary, its employees or associated persons to recommend or sell shares of the Fund to you. Please contact your Financial Intermediary for
details about payments it may receive from the Fund or from BlackRock, the Distributor or their affiliates. For more information, see the
SAI.
How to Buy, Sell, Exchange and
Transfer Shares
The chart on the following pages summarizes how to buy, sell,
exchange and transfer shares through your financial intermediary. You may also buy, sell, exchange and transfer shares through BlackRock if your
account is held directly with BlackRock. To learn more about buying, selling, exchanging or transferring shares through BlackRock, call
(800) 441-7762. Because the selection of a mutual fund involves many considerations, your financial intermediary may help you with this
decision.
The Fund may reject any purchase order, modify or waive the
minimum initial or subsequent investment requirements for any shareholders and suspend and resume the sale of any share class of the Fund at any time
for any reason. In addition, the Fund may waive certain requirements regarding the purchase, sale, exchange or transfer of shares described
below.
Under certain circumstances, if no activity occurs in an account
within a time period specified by state law, a shareholders shares in the Fund may be transferred to that state.
19
How to Buy Shares
|
|
Your Choices
|
|
Important Information for You
to Know
|
Initial Purchase
|
|
First, select the share class appropriate for you
|
|
Refer to the Share Classes at a Glance table in this prospectus (be sure to read this prospectus carefully). When you
place your initial order, you must indicate which share class you select (if you do not specify a share class and do not qualify to purchase
Institutional Shares, you will receive Investor A Shares).
|
|
|
|
|
Certain factors, such as the amount of your investment, your time frame for investing and your
financial goals, may affect which share class you choose. Your financial intermediary can help you determine which share class is appropriate for
you.
|
|
|
Next, determine the amount of your investment
|
|
Refer to the minimum initial investment in the Share Classes at a Glance table of this prospectus. Be sure to note the
maximum investment amounts in Investor C Shares.
|
|
|
|
|
See Account Information Details About the Share Classes for information on a
lower initial investment requirement for certain Fund investors if their purchase, combined with purchases by other investors received together by the
Fund, meets the minimum investment requirement.
|
|
|
Have your financial intermediary submit your purchase order
|
|
The price of your shares is based on the next calculation of the Funds net asset value after your order is placed. Any purchase
orders placed prior to the close of business on the New York Stock Exchange (the Exchange) (generally 4:00 p.m. Eastern time) will be
priced at the net asset value determined that day. Certain financial intermediaries, however, may require submission of orders prior to that time.
Purchase orders placed after that time will be priced at the net asset value determined on the next business day. A broker-dealer or financial
institution maintaining the account in which you hold shares may charge a separate account, service or transaction fee on the purchase or sale of Fund
shares that would be in addition to the fees and expenses shown in the Funds Fees and Expenses table.
|
|
|
|
|
The Fund may reject any order to buy shares and may suspend the sale of shares at any time.
Financial intermediaries may charge a processing fee to confirm a purchase.
|
|
|
Or contact BlackRock (for accounts held directly with BlackRock)
|
|
To purchase shares directly from BlackRock, call (800) 441-7762 and request a new account
application. Mail the completed application along with a check payable to BlackRock Funds to the Transfer Agent at the address on the
application.
|
Add to Your
Investment
|
|
Purchase additional shares
|
|
For Investor A and Investor C Shares, the minimum investment for additional purchases is generally
$50 for all accounts except that certain retirement plans and payroll deduction programs may have a lower minimum for additional purchases.
Institutional Shares have no minimum for additional purchases.
|
|
|
Have your financial intermediary submit your purchase order for additional
shares
|
|
To purchase additional shares you may contact your financial intermediary. For more details on
purchasing by Internet see below.
|
|
|
Or contact BlackRock (for accounts held directly with BlackRock)
|
|
Purchase by Telephone:
Call (800) 441-7762 and speak with one of our representatives. The Fund has the right to reject any
telephone request for any reason.
|
|
|
|
|
Purchase in Writing:
You may send a written request to BlackRock at the address on the back cover of this
prospectus.
|
|
|
|
|
Purchase by VRU:
Investor Shares may also be purchased by use of the Funds
automated voice response unit service (VRU) at (800) 441-7762.
|
20
How to Buy Shares (continued)
|
|
Your Choices
|
|
Important Information for You
to Know
|
Add to Your Investment
(continued)
|
|
Or contact BlackRock (for accounts held directly with BlackRock) (continued)
|
|
Purchase by Internet:
You may purchase your shares and view activity in your account by logging onto the BlackRock website at
www.blackrock.com/funds. Purchases made on the Internet using the Automated Clearing House Network (ACH) will have a trade date that
is the day after the purchase is made. Certain institutional clients purchase orders for Institutional Shares placed by wire prior to the close
of business on the Exchange will be priced at the net asset value determined that day. Contact your financial intermediary or BlackRock for further
information. The Fund limits Internet purchases in shares of the Fund to $25,000 per trade. Different maximums may apply to certain institutional
investors.
|
|
|
|
|
Please read the On-Line Services Disclosure Statement and User Agreement, the Terms and Conditions page and the Consent to Electronic
Delivery Agreement (if you consent to electronic delivery), before attempting to transact online.
|
|
|
|
|
The Fund employs reasonable procedures to confirm that transactions entered over the Internet are
genuine. By entering into the User Agreement with the Fund in order to open an account through the website, the shareholder waives any right to reclaim
any losses from the Fund or any of its affiliates incurred through fraudulent activity.
|
|
|
Acquire additional shares by reinvesting dividends and capital gains
|
|
All dividends and capital gains distributions are automatically reinvested without a sales charge.
To make any changes to your dividend and/or capital gains distributions options, please call (800) 441-7762, or contact your financial intermediary (if
your account is not held directly with BlackRock).
|
|
|
Participate in the Automatic Investment Plan (AIP)
|
|
BlackRocks Automatic Investment Plan (AIP) allows you to invest a specific amount on a periodic basis from your
checking or savings account into your investment account.
|
|
|
|
|
Refer to the Account Services and Privileges section of this prospectus for additional
information.
|
How to Pay for
Shares
|
|
Making payment for purchases
|
|
Payment for an order must be made in Federal funds or other immediately available funds by the time specified by your financial
intermediary, but in no event later than 4:00 p.m. (Eastern time) on the third business day (in the case of Investor Shares) or the first business day
(in the case of Institutional Shares) following BlackRocks receipt of the order. If payment is not received by this time, the order will be
canceled and you and your financial intermediary will be responsible for any loss to the Fund.
|
|
|
|
|
For shares purchased directly from the Fund, a check payable to BlackRock Funds which bears the name of the Fund you are purchasing
must accompany a completed purchase application.
|
|
|
|
|
There is a $20 fee for each purchase check that is returned due to insufficient funds. The Fund
does not accept third-party checks. You may also wire Federal funds to the Fund to purchase shares, but you must call (800) 441-7762 before doing so to
confirm the wiring instructions.
|
21
How to Sell Shares
|
|
Your Choices
|
|
Important Information for You
to Know
|
Full or Partial Redemption of Shares
|
|
Have your financial intermediary submit your sales order
|
|
You can make redemption requests through your financial intermediary. Shareholders should indicate whether they are redeeming
Investor A, Investor C or Institutional Shares. The price of your shares is based on the next calculation of the Funds net asset value after your
order is placed. For your redemption request to be priced at the net asset value on the day of your request, you must submit your request to your
financial intermediary prior to that days close of business on the Exchange (generally 4:00 p.m. Eastern time). Certain financial intermediaries,
however, may require submission of orders prior to that time. Any redemption request placed after that time will be priced at the net asset value at
the close of business on the next business day.
|
|
|
|
|
Financial intermediaries may charge a fee to process a redemption of shares. Shareholders should
indicate which class of shares they are redeeming. The Fund may reject an order to sell shares under certain circumstances.
|
|
|
Selling shares held directly with BlackRock
|
|
Methods of Redeeming
Redeem by Telephone:
You may sell Investor Shares held directly with BlackRock by telephone request if
certain conditions are met and if the amount being sold is less than (i) $100,000 for payments by check or (ii) $250,000 for payments through ACH or
wire transfer. Certain redemption requests, such as those in excess of these amounts, must be in writing with a medallion signature guarantee. For
Institutional Shares, certain redemption requests may require written instructions with a medallion signature guarantee. Call (800) 441-7762 for
details. You can obtain a medallion signature guarantee stamp from a bank, securities dealer, securities broker, credit union, savings and loan
association, national securities exchange or registered securities association. A notary public seal will not be acceptable.
|
|
|
|
|
The Fund, its administrators and the Distributor will employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. The Fund and its service providers will not be liable for any loss, liability, cost or expense for acting upon telephone
instructions that are reasonably believed to be genuine in accordance with such procedures. The Fund may refuse a telephone redemption request if it
believes it is advisable to do so.
|
|
|
|
|
During periods of substantial economic or market change, telephone redemptions may be difficult to complete. Please find alternate
redemption methods below.
|
|
|
|
|
Redeem by VRU:
Investor Shares may also be redeemed by use of the Funds automated VRU service. Payment for Investor
Shares redeemed by VRU may be made for non-retirement accounts in amounts up to $25,000, either through check, ACH or wire.
|
|
|
|
|
Redeem by Internet:
You may redeem in your account by logging onto the BlackRock website at www.blackrock.com/funds. Proceeds
from Internet redemptions may be sent via check, ACH or wire to the bank account of record. Payment for Investor Shares redeemed by Internet may be
made for non-retirement accounts in amounts up to $25,000, either through check, ACH or wire. Different maximums may apply to investors in
Institutional Shares.
|
|
|
|
|
Redeem in Writing:
You may sell shares held with BlackRock by writing to BlackRock, P.O.
Box 9819, Providence, Rhode Island 02940-8019, or for overnight delivery, 4400 Computer Drive, Westborough, Massachusetts 01588. All shareholders on
the account must sign the letter. A medallion signature guarantee will generally be required but may be waived in certain limited circumstances. You
can obtain a medallion signature guarantee stamp from a bank, securities dealer, securities broker, credit union, savings and loan association,
national securities exchange or registered securities association. A notary public seal will not be acceptable. If you hold stock certificates, return
the certificates with the letter. Proceeds from redemptions may be sent via check, ACH or wire to the bank account of record.
|
22
How to Sell Shares (continued)
|
|
Your Choices
|
|
Important Information for You
to Know
|
Full or Partial Redemption of Shares (continued)
|
|
Selling shares held directly with BlackRock (continued)
|
|
Payment of Redemption Proceeds
Redemption proceeds may be paid by check or, if the Fund has verified banking information
on file, through ACH or by wire transfer.
|
|
|
|
|
Payment by Check:
BlackRock will normally mail redemption proceeds within seven days following receipt of a properly completed
request. Shares can be redeemed by telephone and the proceeds sent by check to the shareholder at the address on record. Shareholders will pay $15 for
redemption proceeds sent by check via overnight mail. You are responsible for any additional charges imposed by your bank for this
service.
|
|
|
|
|
Payment by Wire Transfer:
Payment for redeemed shares for which a redemption order is received before 4:00 p.m. (Eastern time)
on a business day is normally made in Federal funds wired to the redeeming shareholder on the next business day, provided that the Funds
custodian is also open for business. Payment for redemption orders received after 4:00 p.m. (Eastern time) or on a day when the Funds custodian
is closed is normally wired in Federal funds on the next business day following redemption on which the Funds custodian is open for business. The
Fund reserves the right to wire redemption proceeds within seven days after receiving a redemption order if, in the judgment of the Fund, an earlier
payment could adversely affect the Fund.
|
|
|
|
|
If a shareholder has given authorization for expedited redemption, shares can be redeemed by Federal wire transfer to a single
previously designated bank account. Shareholders will pay $7.50 for redemption proceeds sent by Federal wire transfer. You are responsible for any
additional charges imposed by your bank for this service. No charge for wiring redemption payments with respect to Institutional Shares is imposed by
the Fund.
|
|
|
|
|
The Fund is not responsible for the efficiency of the Federal wire system or the shareholders firm or bank. To change the name
of the single, designated bank account to receive wire redemption proceeds, it is necessary to send a written request to the Fund at the address on the
back cover of this prospectus.
|
|
|
|
|
Payment by ACH:
Redemption proceeds may be sent to the shareholders bank account (checking or savings) via ACH. Payment
for redeemed shares for which a redemption order is received before 4:00 p.m. (Eastern time) on a business day is normally sent to the redeeming
shareholder the next business day with receipt at the receiving bank within the next two business days (4872 hours), provided that the
Funds custodian is also open for business. Payment for redemption orders received after 4:00 p.m. (Eastern time) or on a day when the Funds
custodian is closed is normally sent on the next business day following redemption on which the Funds custodian is open for
business.
|
|
|
|
|
The Fund reserves the right to send redemption proceeds within seven days after receiving a redemption order if, in the judgment of
the Fund, an earlier payment could adversely affect the Fund. No charge for sending redemption payments via ACH is imposed by the
Fund.
|
|
|
|
|
* * *
|
|
|
|
|
If you make a redemption request before the Fund has collected payment for the purchase of shares,
the Fund may delay mailing your proceeds. This delay will usually not exceed ten days.
|
23
How to Exchange Shares or Transfer your
Account
|
|
Your Choices
|
|
Important Information for You
to Know
|
Exchange Privilege
|
|
Selling shares of one fund to purchase shares of another BlackRock Fund (exchanging)
|
|
Investor and Institutional Shares of the Fund are generally exchangeable for shares of the same class of another BlackRock
Fund.
You can exchange $1,000 or more of Investor A or Investor C Shares from one fund into the same class of another fund which offers that class
of shares (you can exchange less than $1,000 of Investor Shares if you already have an account in the fund into which you are exchanging). Investors
who currently own Institutional Shares of the Fund may make exchanges into Institutional Shares of other BlackRock Funds except for investors holding
shares through certain client accounts at financial intermediaries that are omnibus with the Fund and do not meet applicable minimums. There is no
required minimum amount with respect to exchanges of Institutional Shares.
|
|
|
|
|
You may only exchange into a share class and fund that are open to new investors or in which you have a current account if the fund
is closed to new investors.
|
|
|
|
|
Some of the BlackRock Funds impose a different deferred sales charge schedule. The CDSC will continue to be measured from the date of
the original purchase. The CDSC schedule applicable to your original purchase will apply to the shares you receive
in the exchange and any subsequent exchange.
|
|
|
|
|
To exercise the exchange privilege, you may contact your financial intermediary. Alternatively, if your account is held directly with
BlackRock, you may: (i) call (800) 441-7762 and speak with one of our representatives, (ii) make the exchange via the Internet by accessing your
account online at www.blackrock.com/funds, or (iii) send a written request to the Fund at the address on the back cover of this prospectus. Please
note, if you indicated on your New Account Application that you did not want the Telephone Exchange Privilege, you will not be able to place exchanges
via the telephone until you update this option either in writing or by calling (800) 441-7762. The Fund has the right to reject any telephone request
for any reason.
|
|
|
|
|
Although there is currently no limit on the number of exchanges that you can make, the exchange
privilege may be modified or terminated at any time in the future. The Fund may suspend or terminate your exchange privilege at any time for any
reason, including if the Fund believes in its sole discretion that you are engaging in market timing activities. See Short-Term Trading
Policy below. For Federal income tax purposes, a share exchange is a taxable event, and a capital gain or loss may be realized. Please consult
your tax adviser or other financial professional before making an exchange request.
|
Transfer Shares to Another Financial Intermediary
|
|
Transfer to a participating financial intermediary
|
|
You may transfer your shares of the Fund only to another financial intermediary that has entered into an agreement with the
Distributor. Certain shareholder services may not be available for the transferred shares. All future trading of these assets must be coordinated by
the receiving firm.
|
|
|
|
|
If your account is held directly with BlackRock, you may call (800) 441-7762 with any questions;
otherwise please contact your financial intermediary to accomplish the transfer of shares.
|
|
|
Transfer to a non-participating financial intermediary
|
|
You must either:
· Transfer your shares to an account with the Fund; or
· Sell your shares,
paying any applicable deferred sales charge.
|
|
|
|
|
If your account is held directly with BlackRock, you may call (800) 441-7762 with any questions;
otherwise please contact your financial intermediary to accomplish the transfer of shares.
|
24
Account Services and
Privileges
The following table provides examples of account services and
privileges available in your BlackRock account. Certain of these account services and privileges are only available to shareholders of Investor Shares
whose accounts are held directly with BlackRock. If your account is held directly with BlackRock, please call (800) 441-7762 or visit
www.blackrock.com/funds for additional information as well as forms and applications. Otherwise, please contact your financial intermediary for
assistance in requesting one or more of the following services and privileges.
|
Automatic
Investment
Plan (AIP)
|
|
Allows systematic investments on a periodic basis from your checking or savings
account.
|
|
BlackRocks AIP allows you to invest a specific amount on a periodic basis from your checking
or savings account into your investment account. You may apply for this option upon account opening or by completing the Automatic Investment Plan
application. The minimum investment amount for an automatic investment plan is $50 per portfolio.
|
Dividend Allocation Plan
|
|
Automatically invests your distributions into another BlackRock Fund of your choice pursuant to
your instructions without any fees or sales charges.
|
|
Dividend and capital gains distributions may be reinvested in your account to purchase additional
shares or paid in cash. Using the Dividend Allocation Plan, you can direct your distributions to your bank account (checking or savings), to purchase
shares of another fund at BlackRock without any fees or sales charges, or by check to special payee. Please call (800) 441-7762 for details. The fund
into which you request your distributions be invested must be open to new purchases.
|
EZ Trader
|
|
Allows an investor to purchase or sell Investor Shares by telephone or over the Internet through ACH.
|
|
(NOTE: This option is offered to shareholders whose accounts are held directly with BlackRock. Please speak with your financial
intermediary if your account is held elsewhere).
Prior to establishing an EZ Trader account, please contact your bank to confirm that it is a member
of the ACH system. Once confirmed, complete an application, making sure to include the appropriate bank information, and return the application to the
address listed on the form.
|
|
|
|
|
Prior to placing a telephone or internet purchase or sale order, please call (800) 441-7762 to
confirm that your bank information has been updated on your account. Once this is established, you may place your request to sell shares with the Fund
by telephone or Internet. Proceeds will be sent to your pre-designated bank account.
|
Systematic Exchange Plan
|
|
This feature can be used by investors to systematically exchange money from one fund to up to four
other funds.
|
|
A minimum of $10,000 in the initial BlackRock Fund is required and investments in any additional
funds must meet minimum initial investment requirements.
|
Systematic Withdrawal Plan (SWP)
|
|
This feature can be used by investors who want to receive regular distributions from their accounts.
|
|
To start an SWP, a shareholder must have a current investment of $10,000 or more in a BlackRock Fund.
Shareholders can elect to
receive cash payments of $50 or more at any interval they choose. Shareholders may sign up by completing the SWP Application Form which may be obtained
from BlackRock. Shareholders should realize that if withdrawals exceed income the invested principal in their account will be
depleted.
|
|
|
|
|
To participate in the SWP, shareholders must have their dividends reinvested. Shareholders may change or cancel the SWP at any time,
with a minimum of 24 hours notice. If a shareholder purchases additional Investor A Shares of a fund at the same time he or she redeems shares through
the SWP, that investor may lose money because of the sales charge involved. No CDSC will be assessed on redemptions of Investor Shares made through the
SWP that do not exceed 12% of the accounts net asset value on an annualized basis. For example, monthly, quarterly, and semi-annual SWP
redemptions of Investor Shares will not be subject to the CDSC if they do not exceed 1%, 3% and 6%, respectively, of an accounts net asset value
on the redemption date. SWP redemptions of Investor Shares in excess of this limit will still pay any applicable CDSC.
|
|
|
|
|
Ask your financial intermediary for details.
|
25
|
|
Reinstatement Privilege
|
|
|
|
|
|
|
|
If you redeem Investor A or Institutional Shares, and within 60 days buy new Investor A Shares of
the same or another BlackRock Fund (equal to all or a portion of the redemption amount), you will not pay a sales charge on the new purchase amount.
This right may be exercised once a year and within 60 days of the redemption, provided that the Investor A Share class of that fund is currently open
to new investors or the shareholder has a current account in that closed fund. Shares will be purchased at the net asset value calculated at the close
of trading on the day the request is received. To exercise this privilege, the Fund must receive written notification from the shareholder of record or
the financial intermediary of record at the time of purchase. Investors should consult a tax advisor concerning the tax consequences of exercising this
reinstatement privilege.
|
The Fund may:
n
|
|
Suspend the right of redemption if trading is halted or restricted
on the Exchange or under other emergency conditions described in the Investment Company Act;
|
n
|
|
Postpone the date of payment upon redemption if trading is halted
or restricted on the Exchange or under other emergency conditions described in the Investment Company Act or if a redemption request is made before the
Fund has collected payment for the purchase of shares;
|
n
|
|
Redeem shares for property other than cash if conditions exist
which make cash payments undesirable in accordance with its rights under the Investment Company Act; and
|
n
|
|
Redeem shares involuntarily in certain cases, such as when the
value of a shareholder account falls below a specified level.
|
Note on Low Balance Accounts.
Because of the high cost of
maintaining smaller shareholder accounts, BlackRock has set a minimum balance of $500 in each Fund position you hold within your account (Fund
Minimum), and may take one of two actions if the balance in the Fund falls below the Fund Minimum.
First, the Fund may redeem the shares in your account (without
charging any deferred sales charge) if the net asset value of your account falls below $250 for any reason, including market fluctuation. You will be
notified that the value of your account is less than $250 before the Fund makes an involuntary redemption. The notification will provide you with a 90
calendar day period to make an additional investment in order to bring the value of your account to at least $250 before the Fund makes an involuntary
redemption or to the Fund Minimum in order not to be assessed an annual low balance fee of $20, as set forth below. This involuntary redemption may not
apply to accounts of authorized qualified employee benefit plans, selected fee-based programs, accounts established under the Uniform Gifts or
Transfers to Minors Acts, and certain intermediary accounts.
Second, the Fund charges an annual $20 low balance fee on all Fund
accounts that have a balance below the Fund Minimum for any reason, including market fluctuation. The low balance fee will be assessed on Fund accounts
in all BlackRock Funds, regardless of the Funds minimum investment amount. The fee will be deducted from the Fund account only once per calendar
year. You will be notified that the value of your account is less than the Fund Minimum before the fee is imposed. You will then have a 90 calendar day
period to make an additional investment to bring the value of your account to the Fund Minimum before the Fund imposes the low balance fee. This low
balance fee does not apply to accounts of authorized qualified employee benefit plans, selected fee-based programs or accounts established under the
Uniform Gifts or Transfers to Minors Acts.
Participation in Fee-Based
Programs
If you participate in certain fee-based programs offered by
BlackRock or an affiliate of BlackRock, or by financial intermediaries that have agreements with the Distributor or in certain fee-based programs in
which BlackRock participates, you may be able to buy Institutional Shares, including by exchange from other share classes. Sales charges on the shares
being exchanged may be reduced or waived under certain circumstances. You generally cannot transfer shares held through a fee-based program into
another account. Instead, you will have to redeem your shares held through the program and purchase shares of another class, which may be subject to
distribution and service fees. This may be a taxable event, and you will pay any applicable sales charges.
26
Shareholders that participate in a fee-based program generally
have two options at termination. The program can be terminated and the shares liquidated, or the program can be terminated and the shares held in an
account. In general, when a shareholder chooses to continue to hold the shares, whatever share class was held in the program can be held after
termination. Shares that have been held for less than specified periods within the program may be subject to a fee upon redemption. Shareholders that
held Investor A or Institutional Shares in the program are eligible to purchase additional shares of the respective share class of the Fund, but may be
subject to upfront sales charges with respect to Investor A Shares. Additional purchases of Institutional Shares are permitted only if you have an
existing position at the time of purchase or are otherwise eligible to purchase Institutional Shares.
Details about these features and the relevant charges are included
in the client agreement for each fee-based program and are available from your financial intermediary.
Short-Term Trading Policy
The Board has determined that the interests of long-term
shareholders and the Funds ability to manage its investments may be adversely affected when shares are repeatedly bought, sold or exchanged in
response to short-term market fluctuations also known as market timing. The Fund is not designed for market timing organizations or
other entities using programmed or frequent purchases and sales or exchanges. The exchange privilege is not intended as a vehicle for short-term
trading. Excessive purchase and sale or exchange activity may interfere with portfolio management, increase expenses and taxes and may have an adverse
effect on the performance of the Fund and its returns to shareholders. For example, large flows of cash into and out of the Fund may require the
management team to allocate a significant amount of assets to cash or other short-term investments or sell securities, rather than maintaining such
assets in securities selected to achieve the Funds investment objective. Frequent trading may cause the Fund to sell securities at less favorable
prices, and transaction costs, such as brokerage commissions, can reduce the Funds performance.
The Funds investment in non-U.S. securities is subject to
the risk that an investor may seek to take advantage of a delay between the change in value of the Funds portfolio securities and the
determination of the Funds net asset value as a result of different closing times of U.S. and non-U.S. markets by buying or selling Fund shares
at a price that does not reflect their true value. A similar risk exists for funds that invest in securities of small capitalization companies,
securities of issuers located in emerging markets or high yield securities (junk bonds) that are thinly traded and therefore may have
actual values that differ from their market prices. This short-term arbitrage activity can reduce the return received by long-term shareholders. The
Fund will seek to eliminate these opportunities by using fair value pricing, as described in Valuation of Fund Investments
below.
The Fund discourages market timing and seeks to prevent frequent
purchases and sales or exchanges of Fund shares that it determines may be detrimental to the Fund or long-term shareholders. The Board has approved the
policies discussed below to seek to deter market timing activity. The Board has not adopted any specific numerical restrictions on purchases, sales and
exchanges of Fund shares because certain legitimate strategies will not result in harm to the Fund or shareholders.
If as a result of its own investigation, information provided by a
financial intermediary or other third party, or otherwise, the Fund believes, in its sole discretion, that your short-term trading is excessive or that
you are engaging in market timing activity, it reserves the right to reject any specific purchase or exchange order. If the Fund rejects your purchase
or exchange order, you will not be able to execute that transaction, and the Fund will not be responsible for any losses you therefore may suffer. For
transactions placed directly with the Fund, the Fund may consider the trading history of accounts under common ownership or control for the purpose of
enforcing these policies. Transactions placed through the same financial intermediary on an omnibus basis may be deemed part of a group for the purpose
of this policy and may be rejected in whole or in part by the Fund. Certain accounts, such as omnibus accounts and accounts at financial
intermediaries, however, include multiple investors and such accounts typically provide the Fund with net purchase or redemption and exchange requests
on any given day where purchases, redemptions and exchanges of shares are netted against one another and the identity of individual purchasers,
redeemers and exchangers whose orders are aggregated may not be known by the Fund. While the Fund monitors for market timing activity, the Fund may be
unable to identify such activities because the netting effect in omnibus accounts often makes it more difficult to locate and eliminate market timers
from the Fund. The Distributor has entered into agreements with respect to financial professionals and other financial intermediaries that maintain
omnibus accounts with the Fund pursuant to which such financial professionals and other financial intermediaries undertake to cooperate with the
Distributor in monitoring purchase, exchange and redemption orders by their customers in order to detect and prevent short-term or excessive trading in
the Funds shares through such accounts. Identification of market timers may also be limited by operational systems and technical limitations. In
the event that a financial intermediary is determined by the Fund to
27
be engaged in market timing or other improper trading
activity, the Funds Distributor may terminate such financial intermediarys agreement with the Distributor, suspend such financial
intermediarys trading privileges or take other appropriate actions.
There is no assurance that the methods described above will
prevent market timing or other trading that may be deemed abusive.
The Fund may from time to time use other methods that it believes
are appropriate to deter market timing or other trading activity that may be detrimental to the Fund or long-term shareholders.
28
Management of the Fund
BlackRock manages the Funds investments and its business
operations subject to the oversight of the Board. While BlackRock is ultimately responsible for the management of the Fund, it is able to draw upon the
trading, research and expertise of its asset management affiliates for portfolio decisions and management with respect to certain portfolio securities.
BlackRock is an indirect, wholly-owned subsidiary of BlackRock, Inc.
BlackRock, a registered investment adviser, was organized in 1994
to perform advisory services for investment companies. BlackRock Fund Advisors (the Sub-Adviser), the sub-adviser to the Fund and an
affiliate of BlackRock, is a registered investment adviser organized in 1984. BlackRock and its affiliates had approximately $3.792
trillion in investment company and other portfolio assets under management as of December 31, 2012.
BlackRock serves as manager to the Fund pursuant to a management
agreement (the Management Agreement). Pursuant to the Management Agreement, BlackRock is entitled to fees computed daily and payable
monthly.
The maximum annual management fees that can be paid to BlackRock
(as a percentage of average daily net assets) are calculated as follows:
Average Daily Net
Assets
|
|
|
|
Management
Fee Rate
|
First $1 billion
|
|
|
|
0.45%
|
$1 billion $3 billion
|
|
|
|
0.42%
|
$3 billion $5 billion
|
|
|
|
0.41%
|
$5 billion $10 billion
|
|
|
|
0.39%
|
Greater than $10 billion
|
|
|
|
0.38%
|
BlackRock has agreed to cap net expenses (excluding (i) interest,
taxes, dividends tied to short sales, brokerage commissions, and other expenditures which are capitalized in accordance with generally accepted
accounting principles; (ii) expenses incurred directly or indirectly by the Fund as a result of investments in other investment companies and pooled
investment vehicles; (iii) other expenses attributable to, and incurred as a result of, the Funds investments; and (iv) other extraordinary
expenses (including litigation expenses) not incurred in the ordinary course of the Funds business, if any) of each share class of the Fund at
the levels shown below and in the Funds fees and expenses table in the Fund Overview section of this prospectus. Items (i), (ii),
(iii) and (iv) in the preceding sentence are referred to in this prospectus as Dividend Expense, Interest Expense, Acquired Fund Fees and
Expenses and certain other Fund expenses. To achieve these expense caps, BlackRock has agreed to waive and/or reimburse fees or expenses if the
Funds operating expenses exceed a certain limit.
|
|
|
|
Contractual Caps
1
on Total
Annual
Fund Operating Expenses
2
(excluding Dividend Expense,
Interest Expense, Acquired Fund
Fees and Expenses and
certain
other Fund expenses)
|
Investor A Shares
|
|
|
|
0.95%
|
Investor C Shares
|
|
|
|
1.70%
|
Institutional Shares
|
|
|
|
0.70%
|
1
|
|
As a percentage of average daily net
assets
|
2
|
|
The contractual cap is in effect until
December 1, 2014. The contractual agreement may be terminated upon 90 days notice by a majority of the non-interested trustees of
the Trust or by a vote of a majority of the outstanding voting securities of the Fund.
|
29
With respect to this contractual agreement, if during the
Funds fiscal year the operating expenses of a share class, that at any time during the prior two fiscal years received a waiver or reimbursement
from BlackRock, are less than the expense limit for that share class, the share class is required to repay BlackRock up to the lesser of (a) the amount
of fees waived or expenses reimbursed during those prior two fiscal years under the agreement and (b) the amount by which the expense limit for that
share class exceeds the operating expenses of the share class for the current fiscal year, provided that (i) the Fund has more than $50 million in
assets and (ii) BlackRock or an affiliate serves as the Funds manager or administrator.
BlackRock has voluntarily agreed to waive its management fees
by the amount of advisory fees the Fund pays to BlackRock indirectly through its investment in affiliated money market
funds.
BlackRock entered into a sub-advisory agreement with the
Sub-Adviser, with respect to the Fund, under which BlackRock pays the Sub-Adviser for services it provides a fee equal to a percentage of the
management fee paid to BlackRock under the Management Agreement. The Sub-Adviser is responsible for the day-to-day management of the Funds
portfolio.
A discussion of the basis for the approval by the Board of the
Management Agreement with BlackRock and the sub-advisory agreement between BlackRock and the Sub-Adviser will be included in the Funds annual
shareholder report for the fiscal period ending May 31, 2013.
From time to time, a manager, analyst, or other employee of
BlackRock or its affiliates may express views regarding a particular asset class, company, security, industry, or market sector. The views expressed by
any such person are the views of only that individual as of the time expressed and do not necessarily represent the views of BlackRock or any other
person within the BlackRock organization. Any such views are subject to change at any time based upon market or other conditions and BlackRock
disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for the Fund
are based on numerous factors, may not be relied on as an indication of trading intent on behalf of the Fund.
Portfolio Manager
Information
Information regarding the portfolio managers of the Fund is set
forth below. Further information regarding the portfolio managers, including other accounts managed, compensation, ownership of Fund shares, and
possible conflicts of interest, is available in the Funds SAI.
Portfolio Manager
|
|
|
|
Primary Role
|
|
Since
|
|
Title and Recent Biography
|
Travis Cooke, CFA
|
|
|
|
Responsible for the day-to-day management of the Funds portfolio, including setting the Funds
overall investment strategy and overseeing the management of the Fund.
|
|
2013
|
|
Managing Director of BlackRock, Inc. since 2012; Director of Blackrock, Inc. from 2009 to 2011, Principal of
Barclays Global Investors from 2002 to 2009.
|
Ali Jahansouz
|
|
|
|
Responsible for the day-to-day management of the Funds portfolio, including setting the Funds
overall investment strategy and overseeing the management of the Fund.
|
|
2013
|
|
Vice President of BlackRock, Inc. since 2010; Associate of BlackRock, Inc. from 2007 to
2009.
|
Prior Performance of
BlackRock
Travis Cooke, CFA, and Ali Jahansouz are jointly and primarily
responsible for the day-to-day management of the Funds portfolio. Messrs. Cooke and Jahansouz are members of the portfolio management team that
is responsible for managing a commingled trust fund (the CTF Fund) with investment objectives, policies and strategies substantially
similar in all material respects to those of the Fund. Although there have been personnel changes within the portfolio management team since 1990, the
portfolio management team has been responsible for the management of the CTF Fund since its inception on July 31, 1990 and will be responsible for the
portfolio management of the Fund.
The following table sets forth performance data relating to the
historical performance of a class of shares of the CTF Fund. The data provided, which is net of all actual fees and expenses of the CTF Fund and net of
payments received by the CTF Fund from litigation settlements relating to its portfolio securities, illustrates the past performance of the portfolio
management team in managing a substantially similar account as measured against the Russell 2000
®
Index. The CTF Fund is not subject to
the same types of expenses to which the Fund is subject, nor the specific tax restrictions and investment limitations imposed by the Investment Company
Act or Subchapter M of the Internal
30
Revenue Code. Consequently, the performance results for the
CTF Fund expressed below could have been adversely affected if the CTF Fund had been regulated as an investment company under the Federal securities
laws. The CTF Fund is a separate fund and its historical performance is not indicative of the potential performance of the Fund.
Sales charges are not reflected in the returns shown. If they
were, returns would be less than those shown. Share prices and investment returns will fluctuate reflecting market conditions as well as changes in
company-specific fundamentals of portfolio securities.
As of 12/31/12
Average Annual Total
Returns
|
|
|
|
1 Year
|
|
3 Years
|
|
5 Years
|
|
10 Years
|
CTF Fund
|
|
|
|
|
22.58
|
%
|
|
|
16.10
|
%
|
|
|
5.96
|
%
|
|
|
9.95
|
%
|
Russell 2000
®
Index
1
(Reflects no deduction for fees, expenses or
taxes)
|
|
|
|
|
16.35
|
%
|
|
|
12.25
|
%
|
|
|
3.56
|
%
|
|
|
9.72
|
%
|
1
|
|
The Russell 2000
®
Index is an index
that measures the performance of approximately 2,000 of the smallest companies in the Russell 3000
®
Index.
|
The investment activities of BlackRock and its affiliates
(including BlackRock, Inc. and PNC and their affiliates, directors, partners, trustees, managing members, officers and employees (collectively, the
Affiliates)) in the management of, or their interest in, their own accounts and other accounts they manage, may present conflicts of
interest that could disadvantage the Fund and its shareholders. BlackRock and its Affiliates provide investment management services to other funds and
discretionary managed accounts that follow an investment program similar to that of the Fund. BlackRock and its Affiliates are involved worldwide with
a broad spectrum of financial services and asset management activities and may engage in the ordinary course of business in activities in which their
interests or the interests of their clients may conflict with those of the Fund. One or more Affiliates act or may act as an investor, investment
banker, research provider, investment manager, financier, advisor, market maker, trader, prime broker, lender, agent and principal, and have other
direct and indirect interests, in securities, currencies and other instruments in which the Fund directly and indirectly invests. Thus, it is likely
that the Fund will have multiple business relationships with and will invest in, engage in transactions with, make voting decisions with respect to, or
obtain services from entities for which an Affiliate performs or seeks to perform investment banking or other services. One or more Affiliates may
engage in proprietary trading and advise accounts and funds that have investment objectives similar to those of the Fund and/or that engage in and
compete for transactions in the same types of securities, currencies and other instruments as the Fund. The trading activities of these Affiliates are
carried out without reference to positions held directly or indirectly by the Fund and may result in an Affiliate having positions that are adverse to
those of the Fund. No Affiliate is under any obligation to share any investment opportunity, idea or strategy with the Fund. As a result, an Affiliate
may compete with the Fund for appropriate investment opportunities. The results of the Funds investment activities, therefore, may differ from
those of an Affiliate and of other accounts managed by an Affiliate, and it is possible that the Fund could sustain losses during periods in which one
or more Affiliates and other accounts achieve profits on their trading for proprietary or other accounts. The opposite result is also possible. In
addition, the Fund may, from time to time, enter into transactions in which an Affiliate or its other clients have an adverse interest. Furthermore,
transactions undertaken by Affiliate-advised clients may adversely impact the Fund. Transactions by one or more Affiliate-advised clients or BlackRock
may have the effect of diluting or otherwise disadvantaging the values, prices or investment strategies of the Fund. The Funds activities may be
limited because of regulatory restrictions applicable to one or more Affiliates, and/or their internal policies designed to comply with such
restrictions. In addition, the Fund may invest in securities of companies with which an Affiliate has or is trying to develop investment banking
relationships or in which an Affiliate has significant debt or equity investments. The Fund also may invest in securities of companies for which an
Affiliate provides or may some day provide research coverage. An Affiliate may have business relationships with and purchase or distribute or sell
services or products from or to distributors, consultants or others who recommend the Fund or who engage in transactions with or for the Fund, and may
receive compensation for such services. The Fund may also make brokerage and other payments to Affiliates in connection with the Funds portfolio
investment transactions.
Under a securities lending program approved by the Board, the
Trust, on behalf of the Fund, has retained an Affiliate of BlackRock to serve as the securities lending agent for the Fund to the extent that the Fund
participates in the securities lending program. For these services, the lending agent may receive a fee from the Fund, including a fee based on the
returns earned on the Funds investment of the cash received as collateral for the loaned securities. In addition, one or more Affiliates may be
among the entities to which the Fund may lend its portfolio securities under the securities lending program.
31
The activities of Affiliates may give rise to other conflicts of
interest that could disadvantage the Fund and its shareholders. BlackRock has adopted policies and procedures designed to address these potential
conflicts of interest. See the SAI for further information.
Valuation of Fund
Investments
When you buy shares, you pay the net asset value, plus any
applicable sales charge. This is the offering price. Shares are also redeemed at their net asset value, minus any applicable deferred sales charge. The
Fund calculates the net asset value of each class of its shares (generally by using market quotations) each day the Exchange is open as of the close of
business on the Exchange, based on prices at the time of closing. The Exchange generally closes at 4:00 p.m. Eastern time. The net asset value used in
determining your share price is the next one calculated after your purchase or redemption order is placed.
Generally, Institutional Shares will have the highest net asset
value because that class has the lowest expenses. Investor A Shares will have a higher net asset value than Investor C Shares. Also, dividends paid on
Investor A and Institutional Shares will generally be higher than dividends paid on Investor C Shares because Investor A and Institutional Shares have
lower expenses.
The Funds assets and liabilities are valued primarily on the
basis of market quotations. Equity investments and other instruments for which market quotations are readily available are valued at market value,
which is generally determined using the last reported sale price on the exchange or market on which the security or instrument is primarily traded at
the time of valuation. The Fund values fixed income portfolio securities and non-exchange traded derivatives using market prices provided directly from
one or more broker-dealers, market makers, or independent third-party pricing services which may use matrix pricing and valuation models to derive
values, each in accordance with valuation procedures approved by the Board. Short-term debt securities with remaining maturities of 60 days or less may
be valued on the basis of amortized cost.
Foreign currency exchange rates are generally determined as of the
close of business on the Exchange. Foreign securities owned by the Fund may trade on weekends or other days when the Fund does not price its shares. As
a result, the Funds net asset value may change on days when you will not be able to purchase or redeem the Funds shares. Generally, trading
in foreign securities, U.S. government securities, money market instruments and certain fixed income securities is substantially completed each day at
various times prior to the close of business of the Exchange. The values of such securities used in computing the net asset value of the
Funds shares are determined as of such times.
When market quotations are not readily available or are not
believed by BlackRock to be reliable, the Funds investments are valued at fair value. Fair value determinations are made by BlackRock in
accordance with procedures approved by the Board. BlackRock may conclude that a market quotation is not readily available or is unreliable if a
security or other asset or liability does not have a price source due to its lack of liquidity, if BlackRock believes a market quotation from a
broker-dealer or other source is unreliable, where the security or other asset or other liability is thinly traded (
e.g.
, municipal securities,
certain small cap and emerging growth companies and certain non-U.S. securities) or where there is a significant event subsequent to the most recent
market quotation. For this purpose, a significant event is deemed to occur if BlackRock determines, in its business judgment prior to or at
the time of pricing the Funds assets or liabilities, that it is likely that the event will cause a material change to the last closing market
price of one or more assets or liabilities held by the Fund. For instance, significant events may occur between the foreign market close and the close
of business on the Exchange that may not be reflected in the computation of the Funds net assets. If such event occurs, those instruments may be
fair valued. Similarly, foreign securities whose values are affected by volatility that occurs in U.S. markets on a trading day after the close of
foreign securities markets may be fair valued.
For certain foreign securities, a third-party vendor supplies
evaluated, systematic fair value pricing based upon the movement of a proprietary multi-factor model after the relevant foreign markets have closed.
This systematic fair value pricing methodology is designed to correlate the prices of foreign securities following the close of the local markets to
the price that might have prevailed as of the Funds pricing time.
Fair value represents 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 Funds net asset value.
The Fund may accept orders from certain authorized financial
intermediaries or their designees. The Fund will be deemed to receive an order when accepted by the intermediary or designee, and the order will
receive the net asset value next computed by the Fund after such acceptance. If the payment for a purchase order is not made by a designated later
time, the order will be canceled and the financial intermediary could be held liable for any losses.
32
Dividends, Distributions and
Taxes
BUYING A DIVIDEND
|
|
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Unless your investment is in a tax deferred account, you may want to avoid buying shares shortly before the Fund pays a dividend. The reason? If
you buy shares when the Fund has declared but not yet distributed ordinary income or capital gains, you will pay the full price for the
shares and then receive a portion of the price back in the form of a taxable dividend. Before investing you may want to consult your tax
adviser.
|
|
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|
The Fund will distribute net investment income, if any, and net
realized capital gain, if any, at least annually. The Fund may also pay a special distribution at the end of the calendar year to comply with Federal
tax requirements. Dividends may be reinvested automatically in shares of the Fund at net asset value without a sales charge or may be taken in cash. If
you would like to receive dividends in cash, contact your financial professional, financial intermediary or the Fund. Although this cannot be predicted
with any certainty, the Fund anticipates that a significant amount of its dividends, if any, will consist of capital gains. Capital gains may be
taxable to you at different rates depending on how long the Fund held the assets sold.
You will pay tax on dividends from the Fund whether you receive
them in cash or additional shares. If you redeem Fund shares or exchange them for shares of another fund, you generally will be treated as having sold
your shares and any gain on the transaction may be subject to tax. Certain dividend income received by the Fund, including
dividends received from qualifying foreign corporations and long-term capital gains, are eligible for taxation at a reduced rate
that applies to non-corporate shareholders. To the extent the Fund makes any distributions derived from long-term capital gains and
qualifying dividend income, such distributions will be eligible for taxation at the reduced rate.
A 3.8% Medicare tax will be imposed on the net investment
income (which includes, but is not limited to, interest, dividends and net gain from investments) of U.S. individuals with income exceeding
$200,000, or $250,000 if married and filing jointly, and of trusts and estates, for taxable years beginning after December 31,
2012.
If you are neither a tax resident nor a citizen of the United
States or if you are a foreign entity, the Funds ordinary income dividends (which include distributions of net short-term capital gain) will
generally be subject to a 30% U.S. withholding tax, unless a lower treaty rate applies.
A 30% withholding tax will be imposed on dividends paid
after December 31, 2013 and redemption proceeds paid after December 31, 2016 to (i) certain foreign financial institutions and investment
funds, unless they agree to collect and disclose to the Internal Revenue Service information regarding their direct and indirect U.S. account holders
and (ii) certain other foreign entities unless they certify certain information regarding their direct and indirect U.S. owners. Under some
circumstances, a foreign shareholder may be eligible for refunds or credits of such taxes.
Dividends and interest received by the Fund may give rise to
withholding and other taxes imposed by foreign countries. Tax conventions between certain countries and the United States may reduce or eliminate such
taxes.
By law, your dividends and redemption proceeds will be subject to
a 28% withholding tax if you have not provided a taxpayer identification number or social security number or the number you have provided is
incorrect.
This section summarizes some of the consequences under current
Federal tax law of an investment in the Fund. It is not a substitute for personal tax advice. Consult your personal tax adviser about the potential tax
consequences of an investment in the Fund under all applicable tax laws.
33
The Fund has not yet commenced operations and therefore financial
highlight information is not available.
34
General Information
Electronic Access to Annual Reports, Semi-Annual Reports and
Prospectuses
Electronic copies of most financial reports and prospectuses are
available on BlackRocks website. Shareholders can sign up for e-mail notifications of quarterly statements, annual and semi-annual reports and
prospectuses by enrolling in the Funds electronic delivery program. To enroll:
Shareholders Who Hold Accounts with Investment Advisers, Banks
or Brokerages:
Please contact your financial professional. Please note that not all investment advisers, banks or brokerages may offer this
service.
Shareholders Who Hold Accounts Directly With
BlackRock:
n
|
|
Access the BlackRock website at
http://www.blackrock.com/edelivery; and
|
Delivery of Shareholder Documents
The Fund delivers only one copy of shareholder documents,
including prospectuses, shareholder reports and proxy statements, to shareholders with multiple accounts at the same address. This practice is known as
householding and is intended to eliminate duplicate mailings and reduce expenses. Mailings of your shareholder documents may be householded
indefinitely unless you instruct us otherwise. If you do not want the mailing of these documents to be combined with those for other members of your
household, please contact the Fund at (800) 441-7762.
Anti-Money Laundering Requirements
The Fund is subject to the USA PATRIOT Act (the Patriot
Act). The Patriot Act is intended to prevent the use of the U.S. financial system in furtherance of money laundering, terrorism or other illicit
activities. Pursuant to requirements under the Patriot Act, the Fund may request information from shareholders to enable it to form a reasonable belief
that it knows the true identity of its shareholders. This information will be used to verify the identity of investors or, in some cases, the status of
financial professionals; it will be used only for compliance with the requirements of the Patriot Act.
The Fund reserves the right to reject purchase orders from persons
who have not submitted information sufficient to allow the Fund to verify their identity. The Fund also reserves the right to redeem any amounts in the
Fund from persons whose identity it is unable to verify on a timely basis. It is the Funds policy to cooperate fully with appropriate regulators
in any investigations conducted with respect to potential money laundering, terrorism or other illicit activities.
BlackRock Privacy Principles
BlackRock is committed to maintaining the privacy of its current
and former fund investors and individual clients (collectively, Clients) and to safeguarding their nonpublic personal information. The
following information is provided to help you understand what personal information BlackRock collects, how we protect that information and why in
certain cases we share such information with select parties.
If you are located in a jurisdiction where specific laws, rules or
regulations require BlackRock to provide you with additional or different privacy-related rights beyond what is set forth below, then BlackRock will
comply with those specific laws, rules or regulations.
BlackRock obtains or verifies personal nonpublic information from
and about you from different sources, including the following: (i) information we receive from you or, if applicable, your financial intermediary, on
applications, forms or other documents; (ii) information about your transactions with us, our affiliates, or others; (iii) information we receive from
a consumer reporting agency; and (iv) from visits to our website.
35
BlackRock does not sell or disclose to nonaffiliated third parties
any nonpublic personal information about its Clients, except as permitted by law, or as is necessary to respond to regulatory requests or to service
Client accounts. These nonaffiliated third parties are required to protect the confidentiality and security of this information and to use it only for
its intended purpose.
We may share information with our affiliates to service your
account or to provide you with information about other BlackRock products or services that may be of interest to you. In addition, BlackRock restricts
access to nonpublic personal information about its Clients to those BlackRock employees with a legitimate business need for the information. BlackRock
maintains physical, electronic and procedural safeguards that are designed to protect the nonpublic personal information of its Clients, including
procedures relating to the proper storage and disposal of such information.
Statement of Additional
Information
If you would like further information about the Fund, including
how it invests, please see the SAI.
For a discussion of the Funds policies and procedures
regarding the selective disclosure of its portfolio holdings, please see the SAI. The Fund makes its top ten holdings available on a monthly basis at
www.blackrock.com generally within 5 business days after the end of the month to which the information applies.
36
This glossary contains an explanation of some of the common terms
used in this prospectus. For additional information about the Fund, please see the SAI.
Acquired Fund Fees and Expenses
fees and
expenses charged by other investment companies and pooled investment vehicles in which the Fund invests a portion of its assets.
Annual Fund Operating Expenses
expenses that
cover the costs of operating the Fund.
Distribution Fees
fees used to support the
Funds marketing and distribution efforts, such as compensating financial professionals and other financial intermediaries, advertising and
promotion.
Interest Expense
the cost of borrowing money
to buy additional securities.
Management Fees
fees paid to BlackRock for
portfolio management services.
Other Expenses
include accounting, transfer
agency, custody, professional and registration fees.
Russell 2000
®
Index
an index
that measures the performance of approximately 2,000 of the smallest companies in the Russell 3000
®
Index.
Service Fees
fees used to compensate
securities dealers and other financial intermediaries for certain shareholder servicing activities.
Shareholder Fees
fees paid directly by a
shareholder, including sales charges that you may pay when you buy or sell shares of the Fund.
37
[This page intentionally left blank]
For More Information
Fund and Service
Providers
THE FUND
BlackRock Funds
SM
BlackRock Disciplined Small Cap Core Fund
100 Bellevue Parkway
Wilmington, Delaware 19809
Written Correspondence:
P.O.
Box 9819
Providence, Rhode Island 02940-8019
Overnight Mail:
4400 Computer
Drive
Westborough, Massachusetts 01588
(800) 441-7762
MANAGER AND
CO-ADMINISTRATOR
BlackRock Advisors, LLC
100 Bellevue
Parkway
Wilmington, Delaware 19809
SUB-ADVISER
BlackRock Fund Advisors
1 University
Square Drive
Princeton, New Jersey 08540-6455
CO-ADMINISTRATOR
BNY Mellon Investment Servicing (US)
Inc.
301 Bellevue Parkway
Wilmington, Delaware 19809
TRANSFER AGENT
BNY Mellon Investment Servicing (US)
Inc.
301 Bellevue Parkway
Wilmington, Delaware 19809
INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
Deloitte & Touche LLP
200
Berkeley Street
Boston, Massachusetts 02116
ACCOUNTING SERVICES
PROVIDER
BNY Mellon Investment Servicing (US)
Inc.
301 Bellevue Parkway
Wilmington, Delaware 19809
DISTRIBUTOR
BlackRock Investments, LLC
40 East
52nd Street
New York, New York 10022
CUSTODIAN
The Bank of New York Mellon
One Wall
Street
New York, New York 10286
COUNSEL
Sidley Austin LLP
787 Seventh
Avenue
New York, New York 10019-6018
This prospectus contains important
information you should know before investing, including information about risks. Read it carefully and keep it for future reference. More information
about the Fund is available at no charge upon request. This information includes:
Annual/Semi-Annual Reports
These reports contain additional
information about the Funds investments. The annual report describes the Funds performance, lists portfolio holdings, and discusses recent
market conditions, economic trends and Fund investment strategies that significantly affected the Funds performance for the last fiscal
year.
Statement of Additional Information
A Statement of Additional
Information (SAI), dated March 13, 2013, has been filed with the Securities and Exchange Commission (SEC). The
SAI, which includes additional information about the Fund, may be obtained free of charge, along with the Funds annual and semi-annual reports,
by calling (800) 441-7762. The SAI, as supplemented from time to time, is incorporated by reference into this prospectus.
BlackRock Investor Services
Representatives are available to
discuss account balance information, mutual fund prospectuses, literature, programs and services available. Hours: 8:00 a.m. to 6:00 P.M. (Eastern
time), on any business day. Call: (800) 441-7762.
Purchases and Redemptions
Call your financial professional or
BlackRock Investor Services at (800) 441-7762.
World Wide Web
General fund information and
specific fund performance, including the SAI and annual/semi-annual reports, can be accessed free of charge at www.blackrock.com/prospectus. Mutual
fund prospectuses and literature can also be requested via this website.
Written Correspondence
BlackRock Funds
SM
P.O. Box 9819
Providence, RI 02940-8019
Overnight Mail
BlackRock Funds
SM
4400 Computer Drive
Westborough, MA 01588
Internal Wholesalers/Broker Dealer Support
Available to support investment
professionals 8:30 a.m. to 6:00 P.M. (Eastern time), on any business day. Call: (800) 882-0052.
Portfolio Characteristics and Holdings
A description of the Funds
policies and procedures related to disclosure of portfolio characteristics and holdings is available in the SAI.
For information about portfolio
holdings and characteristics, BlackRock fund shareholders and prospective investors may call (800) 882-0052.
Securities and Exchange Commission
You may also view and copy public
information about the Fund, including the SAI, by visiting the EDGAR database on the SECs website (http://www.sec.gov) or the SECs Public
Reference Room in Washington, D.C. Copies of this information can be obtained, for a duplicating fee, by electronic request at the following e-mail
address: publicinfo@sec.gov, or by writing to the Public Reference Room of the SEC, Washington, D.C. 20549. Information about obtaining documents on
the SECs website without charge can be obtained by calling the SEC directly at (800) SEC-0330.
You should rely only on the
information contained in this prospectus. No one is authorized to provide you with information that is different from information contained in this
prospectus.
The Securities and Exchange
Commission has not approved or disapproved these securities or passed upon the adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
BLACKROCK FUNDS
SM
INVESTMENT COMPANY ACT FILE NO. 811-05742
© BlackRock Advisors, LLC
STATEMENT OF ADDITIONAL
INFORMATION
BlackRock Funds
SM
BlackRock Disciplined Small Cap Core
Fund
100 Bellevue Parkway, Wilmington, Delaware 19809 Phone
No. (800) 441-7762
This Statement of Additional
Information of BlackRock Disciplined Small Cap Core Fund (the Fund), a series of BlackRock Funds
SM
(the Trust), is
not a prospectus and should be read in conjunction with the Prospectus of the Fund, dated March 13, 2013, which has been filed with the
Securities and Exchange Commission (the Commission) and can be obtained, without charge, by calling (800) 441-7762 or by writing to the
Fund at the above address. The Funds Prospectus is incorporated by reference into this Statement of Additional Information, and Part I of this
Statement of Additional Information and the portions of Part II of this Statement of Additional Information that relate to the Fund have been
incorporated by reference into the Funds Prospectus. The portions of Part II of this Statement of Additional Information that do not relate to
the Fund do not form a part of the Funds Statement of Additional Information, have not been incorporated by reference into the Funds
Prospectus and should not be relied upon by investors in the Fund.
References to the Investment
Company Act of 1940, as amended (the Investment Company Act), or other applicable law, will include any rules promulgated thereunder and
any guidance, interpretations or modifications by the Commission, Commission staff or other authority with appropriate jurisdiction, including court
interpretations, and exemptive, no-action or other relief or permission from the Commission, Commission staff or other authority.
BlackRock Advisors, LLC Manager
BlackRock Investments,
LLC Distributor
Class
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Ticker Symbol
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Investor A Shares
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BDSAX
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Investor C Shares
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BDSCX
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Institutional Shares
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BDSIX
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The date of this Statement of Additional Information is
March 13, 2013
PART I: INFORMATION ABOUT BLACKROCK DISCIPLINED SMALL CAP CORE FUND
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I-1
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I-3
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I-5
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I-17
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I-21
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I-21
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I-22
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I-22
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I-22
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PART II
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Investment Risks and Considerations
|
II-1
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Management and Other Service Arrangements
|
II-47
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Selective Disclosure of Portfolio Holdings
|
II-50
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Purchase of Shares
|
II-58
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Redemption of Shares
|
II-68
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Shareholder Services
|
II-70
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Pricing of Shares
|
II-74
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Portfolio Transactions and Brokerage
|
II-76
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Dividends and Taxes
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II-80
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Performance Data
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II-85
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Proxy Voting Policies and Procedures
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II-86
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General Information
|
II-87
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Appendix A Description of Bond Ratings
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A-1
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Appendix B Proxy Voting Policy
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B-1
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PART I: INFORMATION ABOUT BLACKROCK DISCIPLINED SMALL CAP
CORE FUND
Part I of this Statement of
Additional Information (SAI) sets forth information about BlackRock Disciplined Small Cap Core Fund (the Fund), a series of
BlackRock Funds
SM
(the Trust). It includes information about the Trusts Board of Trustees (the Board), the
management services provided to the Fund, performance data for the Fund, and information about other fees paid by and services provided to the Fund.
This Part I should be read in conjunction with the Funds Prospectus and those portions of Part II of this SAI that pertain to the
Fund.
I. Investment Objective and
Policies
Please see the section
Details About the Fund How the Fund Invests in the Funds Prospectus for information about the Funds investment objective
and policies.
The Fund is subject to Rule 35d-1
under the Investment Company Act and will not change its investment policies required by that Rule without giving shareholders 60 days prior
written notice.
Securities
issued by certain companies organized outside the United States may not be
deemed to be foreign securities (but rather deemed to be U.S. securities)
if (i) the company’s principal operations are conducted from the United States,
(ii) the company’s equity securities trade principally on a U.S. stock
exchange, (iii) the company does a substantial amount of business in the United States
or (iv) the issuer of securities is included in the Fund’s primary U.S.
benchmark index.
Set forth below is a listing of
some of the types of investments and investment strategies that the Fund may use, and the risks and considerations associated with those investments
and investment strategies. Please see the Part II of this SAI for further information on these investments and investment strategies.
Only information that is clearly
identified as applicable to the Fund is considered to form a part of the Funds SAI.
144A Securities
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X
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Asset-Backed Securities
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Asset-Based Securities
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X
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Precious Metal-Related Securities
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X
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Bank Loans
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Borrowing and Leverage
|
X
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Cash Flows; Expenses
|
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Cash Management
|
X
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Collateralized Debt Obligations
|
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Collateralized Loan Obligations
|
|
Collateralized Bond Obligations
|
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Commercial Paper
|
X
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Commodity-Linked Derivative Instruments and Hybrid Instruments
|
X
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Qualifying Hybrid Instruments
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Hybrid Instruments Without Principal Protection
|
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Limitations on Leverage
|
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Counterparty Risk
|
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Convertible Securities
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X
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Debt Securities
|
X
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Depositary Receipts (ADRs, EDRs and GDRs)
|
X
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Derivatives
|
X
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Hedging
|
X
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Indexed and Inverse Securities
|
X
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Swap Agreements
|
X
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Credit Default Swap Agreements and Similar Instruments
|
X
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Credit Linked Securities
|
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Interest Rate Transactions and Swaptions
|
X
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Total Return Swap Agreements
|
X
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Types of Options
|
X
|
I-1
Options on Securities and Securities Indices
|
X
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Call Options
|
X
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Put Options
|
X
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Risks Associated with Options
|
X
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Futures
|
X
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Risks Associated with Futures
|
X
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Foreign Exchange Transactions
|
X
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Forward Foreign Exchange Transactions
|
X
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Currency Futures
|
X
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Currency Options
|
X
|
Currency Swaps
|
X
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Limitations on Currency Transactions
|
X
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Risk Factors in Hedging Foreign Currency
|
X
|
Risk Factors in Derivatives
|
X
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Credit Risk
|
X
|
Currency Risk
|
X
|
Leverage Risk
|
X
|
Liquidity Risk
|
X
|
Correlation Risk
|
X
|
Index Risk
|
X
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Counterparty Risk
|
X
|
Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC Derivatives
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X
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Distressed Securities
|
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Dollar Rolls
|
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Equity Securities
|
X
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Exchange Traded Notes (ETNs)
|
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Foreign Investment Risks
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X
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Foreign Market Risk
|
X
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Foreign Economy Risk
|
X
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Currency Risk and Exchange Risk
|
X
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Governmental Supervision and Regulation/Accounting Standards
|
X
|
Certain Risks of Holding Fund Assets Outside the United States
|
X
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Publicly Available Information
|
X
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Settlement Risk
|
X
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Funding Agreements
|
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Guarantees
|
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Illiquid or Restricted Securities
|
X
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Inflation-Indexed Bonds
|
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Inflation Risk
|
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Information Concerning the Indices
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Standard & Poors 500
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Russell 2000 Index
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EAFE Index
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Initial Public Offering (IPO) Risk
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X
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Investment Grade Debt Obligations
|
X
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Investment in Emerging Markets
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X
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Brady Bonds
|
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Investment in Other Investment Companies
|
X
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Exchange Traded Funds
|
X
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Junk Bonds
|
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Lease Obligations
|
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Liquidity Management
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X
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Master Limited Partnerships
|
X
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Merger Transaction Risk
|
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I-2
Mezzanine Investments
|
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Money Market Obligations of Domestic Banks, Foreign Banks and Foreign Branches of U.S. Banks
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X
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Mortgage-Related Securities
|
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Mortgage-Backed Securities
|
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Collateralized Mortgage Obligations (CMOs)
|
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Adjustable Rate Mortgage Securities
|
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CMO Residuals
|
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Stripped Mortgage-Backed Securities
|
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Tiered Index Bonds
|
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Municipal Bonds
|
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General Obligation Bonds
|
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Revenue Bonds
|
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PABs
|
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Participation Notes
|
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Pay-in-Kind Bonds
|
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Portfolio Turnover Rates
|
X
|
Preferred Stock
|
X
|
Real Estate Related Securities
|
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Real Estate Investment Trusts (REITS)
|
X
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Repurchase Agreements and Purchase and Sale Contracts
|
X
|
Reverse Repurchase Agreements
|
X
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Rights Offerings and Warrants to Purchase
|
X
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Securities Lending
|
X
|
Securities of Smaller or Emerging Growth Companies
|
X
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Short Sales
|
X
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Sovereign Debt
|
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Standby Commitment Agreements
|
X
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Stripped Securities
|
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Structured Notes
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Supranational Entities
|
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Trust Preferred Securities
|
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U.S. Government Obligations
|
X
|
U.S. Treasury Obligations
|
X
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Utility Industries
|
X
|
When Issued Securities, Delayed Delivery Securities and Forward Commitments
|
X
|
Yields and Ratings
|
|
Zero Coupon Securities
|
|
Regulation
Regarding Derivatives.
Effective December 31, 2012, the Commodity Futures Trading Commission (CFTC) adopted certain regulatory
changes that subject registered investment companies and advisers to registered investment companies to regulation by the CFTC if a fund invests
more than a prescribed level of its liquidation value in CFTC-regulated futures, options and swaps (CFTC Derivatives), or if the
fund markets itself as providing investment exposure to such instruments. To the extent the Fund uses CFTC-regulated futures, options and swaps,
it intends to do so below such prescribed levels and will not market itself as a commodity pool or a vehicle for trading such
instruments. Accordingly, BlackRock has claimed an exclusion from the definition of the term commodity pool operator under the
Commodity Exchange Act (CEA) pursuant to Rule 4.5 under the CEA. BlackRock is not, therefore, subject to registration or regulation
as a commodity pool operator under the CEA in respect of the Fund.
II. Investment
Restrictions
The Fund has adopted restrictions
and policies relating to the investment of the Funds assets and its activities. Certain of the restrictions are fundamental policies of the Fund
and may not be changed without the approval of the holders of a majority of the Funds outstanding voting securities (which for this purpose and
under the Investment Company Act means the lesser of (i) 67% of the shares represented at a meeting at which more than 50% of the outstanding shares
are represented or (ii) more than 50% of the outstanding shares).
I-3
Under these fundamental investment
restrictions, the Fund may not:
1. Concentrate
its investments in a particular industry, as that term is used in the Investment Company Act.
2. Borrow money,
except as permitted under the Investment Company Act.
3. Issue senior
securities to the extent such issuance would violate the Investment Company Act.
4. Purchase or
hold real estate, except the Fund may purchase and hold securities or other instruments that are secured by, or linked to, real estate or interests
therein, securities of real estate investment trusts, mortgage-related securities and securities of issuers engaged in the real estate business, and
the Fund may purchase and hold real estate as a result of the ownership of securities or other instruments.
5. Underwrite
securities issued by others, except to the extent that the sale of portfolio securities by the Fund may be deemed to be an underwriting or as otherwise
permitted by applicable law.
6. Purchase or
sell commodities or commodity contracts, except as permitted by the Investment Company Act.
7. Make loans to
the extent prohibited by the Investment Company Act.
8. Make any
investment inconsistent with the Funds classification as a diversified company under the Investment Company Act.
Notations Regarding the Funds Fundamental Investment Restrictions
The following notations are not
considered to be part of the Funds fundamental investment restrictions and are subject to change without shareholder approval.
With respect to the fundamental
policy relating to concentration set forth in (1) above, the Investment Company Act does not define what constitutes concentration in an
industry. The Commission staff has taken the position that investment of 25% or more of a funds total assets in one or more issuers conducting
their principal activities in the same industry or group of industries constitutes concentration. It is possible that interpretations of concentration
could change in the future. The policy in (1) above will be interpreted to refer to concentration as that term may be interpreted from time to time.
The policy also will be interpreted to permit investment without limit in the following: securities of the U.S. government and its agencies or
instrumentalities; securities of state, territory, possession or municipal governments and their authorities, agencies, instrumentalities or political
subdivisions; and repurchase agreements collateralized by any such obligations. Accordingly, issuers of the foregoing securities will not be considered
to be members of any industry. There also will be no limit on investment in issuers domiciled in a single jurisdiction or country. Finance companies
will be considered to be in the industries of their parents if their activities are primarily related to financing the activities of the parents. Each
foreign government will be considered to be a member of a separate industry. With respect to the Funds industry classifications, the Fund
currently utilizes any one or more of the industry sub-classifications used by one or more widely recognized market indexes or rating group indexes,
and/or as defined by Fund management. The policy also will be interpreted to give broad authority to the Fund as to how to classify issuers within or
among industries.
With respect to the fundamental
policy relating to borrowing money set forth in (2) above, the Investment Company Act permits the Fund to borrow money in amounts of up to one-third of
the Funds total assets from banks for any purpose, and to borrow up to 5% of the Funds total assets from banks or other lenders for
temporary purposes. (The Funds total assets include the amounts being borrowed.) To limit the risks attendant to borrowing, the Investment
Company Act requires the Fund to maintain at all times an asset coverage of at least 300% of the amount of its borrowings. Asset coverage
means the ratio that the value of the Funds total assets (including amounts borrowed), minus liabilities other than borrowings, bears to the
aggregate amount of all borrowings. Borrowing money to increase portfolio holdings is known as leveraging. Certain trading practices and
investments, such as reverse repurchase agreements, may be considered to be borrowings or involve leverage and thus are subject to the Investment
Company Act restrictions. In accordance with Commission staff guidance and interpretations, when the Fund engages in such transactions, the Fund
instead of maintaining asset coverage of at least 300%, may segregate or earmark liquid assets, or enter into an offsetting position, in an amount at
least equal to the Funds exposure, on a mark-to-market basis, to the transaction (as calculated pursuant to requirements of the Commission). The
policy in (2) above will be interpreted to permit the Fund to engage in trading practices and investments that may be considered to be borrowing or to
involve leverage to the extent permitted
I-4
by the Investment Company Act
and to permit the Fund to segregate or earmark liquid assets or enter into offsetting positions in accordance with the Investment Company Act.
Short-term credits necessary for the settlement of securities transactions and arrangements with respect to securities lending will not be considered
to be borrowings under the policy. Practices and investments that may involve leverage but are not considered to be borrowings are not subject to the
policy.
With respect to the fundamental
policy relating to underwriting set forth in (5) above, the Investment Company Act does not prohibit the Fund from engaging in the underwriting
business or from underwriting the securities of other issuers; in fact, in the case of diversified funds, the Investment Company Act permits the Fund
to have underwriting commitments of up to 25% of its assets under certain circumstances. Those circumstances currently are that the amount of the
Funds underwriting commitments, when added to the value of the Funds investments in issuers where the Fund owns more than 10% of the
outstanding voting securities of those issuers, cannot exceed the 25% cap. A fund engaging in transactions involving the acquisition or disposition of
portfolio securities may be considered to be an underwriter under the Securities Act of 1933, as amended (the Securities Act). Although it
is not believed that the application of the Securities Act provisions described above would cause the Fund to be engaged in the business of
underwriting, the policy in (5) above will be interpreted not to prevent the Fund from engaging in transactions involving the acquisition or
disposition of portfolio securities, regardless of whether the Fund may be considered to be an underwriter under the Securities Act or is otherwise
engaged in the underwriting business to the extent permitted by applicable law.
With respect to the fundamental
policy relating to lending set forth in (7) above, the Investment Company Act does not prohibit the fund from making loans (including lending its
securities); however, Commission staff interpretations currently prohibit funds from lending more than one-third of their total assets (including
lending its securities), except through the purchase of debt obligations or the use of repurchase agreements. In addition, collateral arrangements with
respect to options, forward currency and futures transactions and other derivative instruments (as applicable), as well as delays in the settlement of
securities transactions, will not be considered loans.
The Fund is currently classified
as a diversified fund under the Investment Company Act. This means that the Fund may not purchase securities of an issuer (other than obligations
issued or guaranteed by the U.S. government, its agencies or instrumentalities) if, with respect to 75% of its total assets, (a) more than 5% of the
Funds total assets would be invested in securities of that issuer or (b) the Fund would hold more than 10% of the outstanding voting securities
of that issuer. With respect to the remaining 25% of its total assets, the Fund can invest more than 5% of its assets in one issuer. Under the
Investment Company Act, the Fund cannot change its classification from diversified to non-diversified without shareholder approval.
Under its non-fundamental
investment restrictions, which may be changed by the board without shareholder approval, the Fund may not:
a. Purchase
securities of other investment companies, except to the extent permitted by the Investment Company Act. As a matter of policy, however, the Fund will
not purchase shares of any registered open-end investment company or registered unit investment trust, in reliance on Section 12(d)(1)(F) or (G) (the
fund of funds provisions) of the Investment Company Act, at any time the Fund has knowledge that its shares are purchased by another
investment company investor in reliance on the provisions of subparagraph (G) of Section 12(d)(1).
b. Make short
sales of securities or maintain a short position, except to the extent permitted by the Funds Prospectus and Statement of Additional Information,
as amended from time to time, and applicable law.
Unless otherwise indicated, all
limitations under the Funds fundamental or non-fundamental investment restrictions apply only at the time that a transaction is undertaken. Any
change in the percentage of the Funds assets invested in certain securities or other instruments resulting from market fluctuations or other
changes in the Funds total assets will not require the Fund to dispose of an investment until BlackRock Advisors, LLC (BlackRock or
the Manager) determines that it is practicable to sell or close out the investment without undue market or tax
consequences.
III. Information on Trustees and
Officers
The Board consists of fourteen
individuals (each, a Trustee), twelve of whom are not interested persons of the Trust as defined in the Investment Company Act
(the Independent Trustees). The registered investment companies advised by BlackRock or its affiliates (the BlackRock-advised
Funds) are organized into one complex
I-5
of closed-end funds (the
Closed-End Complex), two complexes of open-end funds (the Equity-Liquidity Complex and the Equity-Bond Complex) and
one complex of exchange-traded funds (each, a BlackRock Fund Complex). The Trust is included in the BlackRock Fund Complex referred to as
the Equity-Liquidity Complex. The Trustees also oversee as board members the operations of the other open-end registered investment companies included
in the Equity-Liquidity Complex.
The Board has overall
responsibility for the oversight of the Trust and the Fund. The Co-Chairs of the Board are Independent Trustees, and the Chair of each Board committee
(each, a Committee) is an Independent Trustee. The Board has five standing Committees: an Audit Committee, a Governance and Nominating
Committee, a Compliance Committee, a Performance Oversight and Contract Committee and an Executive Committee. The role of the Co-Chairs of the Board is
to preside at all meetings of the Board, and to act as a liaison with service providers, officers, attorneys, and other Trustees generally between
meetings. The Chair of each Committee performs a similar role with respect to the Committee. The Co-Chairs of the Board or the Chair of a Committee may
also perform such other functions as may be delegated by the Board or the Committee from time to time. The Independent Trustees meet regularly outside
the presence of Fund management, in executive session or with other service providers to the Fund. The Board has regular meetings five times a year,
and may hold special meetings if required before its next regular meeting. Each Committee meets regularly to conduct the oversight functions delegated
to that Committee by the Board and reports its findings to the Board. The Board and each standing Committee conduct annual assessments of their
oversight function and structure. The Board has determined that the Boards leadership structure is appropriate because it allows the Board to
exercise independent judgment over management and to allocate areas of responsibility among Committees and the full Board to enhance effective
oversight.
The Board has engaged the Manager
to manage the Fund on a day-to-day basis. The Board is responsible for overseeing the Manager, other service providers, the operations of the Fund and
associated risk in accordance with the provisions of the Investment Company Act, state law, other applicable laws, the Trusts charter, and the
Funds investment objective and strategies. The Board reviews, on an ongoing basis, the Funds performance, operations, and investment
strategies and techniques. The Board also conducts reviews of the Manager and its role in running the operations of the Fund.
Day-to-day risk management with
respect to the Fund is the responsibility of the Manager or of sub-advisers or other service providers (depending on the nature of the risk), subject
to the supervision of the Manager. The Fund is subject to a number of risks, including investment, compliance, operational and valuation risks, among
others. While there are a number of risk management functions performed by the Manager and the sub-advisers or other service providers, as applicable,
it is not possible to eliminate all of the risks applicable to the Fund. Risk oversight forms part of the Boards general oversight of the Fund
and is addressed as part of various Board and Committee activities. The Board, directly or through a Committee, also reviews reports from, among
others, management, the independent registered public accounting firm for the Fund, sub-advisers, and internal auditors for the investment adviser or
its affiliates, as appropriate, regarding risks faced by the Fund and managements or the service providers risk functions. The Committee
system facilitates the timely and efficient consideration of matters by the Trustees, and facilitates effective oversight of compliance with legal and
regulatory requirements and of the Funds activities and associated risks. The Board has appointed a Chief Compliance Officer, who oversees the
implementation and testing of the Funds compliance program and reports to the Board regarding compliance matters for the Fund and its service
providers. The Independent Trustees have engaged independent legal counsel to assist them in performing their oversight
responsibilities.
The members of the Audit Committee
(the Audit Committee) are Kenneth L. Urish (Chair), Herbert I. London, Robert C. Robb, Jr. and Frederick W. Winter, all of whom are
Independent Trustees. The principal responsibilities of the Audit Committee are to approve the selection, retention, termination and
compensation of the Trusts independent registered public accounting firm (the independent auditors) and to oversee the independent
auditors work. The Audit Committees responsibilities include, without limitation, to (1) evaluate the qualifications and independence of
the independent auditors; (2) approve all audit engagement terms and fees for the Fund; (3) review the conduct and results of each independent audit of
the Funds financial statements; (4) review any issues raised by the independent auditors or Fund management regarding the accounting or financial
reporting policies and practices of the Fund and the internal controls of the Fund and certain service providers; (5) oversee the performance of
the Funds independent auditors; (6) review and discuss with management and the Funds independent auditors
the performance and findings of the Funds internal auditors; (7) discuss with Fund
I-6
management its policies
regarding risk assessment and risk management as such matters relate to the Funds financial reporting and controls; and (8) resolve
any disagreements between Fund management and the independent auditors regarding financial reporting. The Board has adopted a written charter for the
Audit Committee. During the twelve months ended May 31, 2012, the Audit Committee met four times.
The members of the Governance and
Nominating Committee (the Governance Committee) are Dr. Matina S. Horner (Chair), Herbert I. London, Cynthia A.
Montgomery, Robert C. Robb, Jr. and Toby Rosenblatt, all of whom are Independent Trustees. The principal
responsibilities of the Governance Committee are to (1) identify individuals qualified to serve as Independent Trustees of the Trust and recommend
Independent Trustee nominees for election by shareholders or appointment by the Board; (2) advise the Board with respect to Board composition,
procedures and Committees (other than the Audit Committee); (3) oversee periodic self-assessments of the Board and Committees of the Board (other than
the Audit Committee); (4) review and make recommendations regarding Independent Trustee compensation; and (5) monitor corporate governance matters and
develop appropriate recommendations to the Board. The Governance Committee may consider nominations for the office of Trustee made by Fund shareholders
as it deems appropriate. Fund shareholders who wish to recommend a nominee should send nominations to the Secretary of the Trust that include
biographical information and set forth the qualifications of the proposed nominee. The Board has adopted a written charter for the Governance
Committee. During the twelve months ended May 31, 2012, the Governance Committee met four times.
The members of the Compliance
Committee (the Compliance Committee) are Joseph P. Platt (Chair), Rodney D. Johnson, Ian A. MacKinnon and Cynthia A.
Montgomery, all of whom are Independent Trustees. The Compliance Committees purpose is to assist the Board in fulfilling its
responsibility to oversee regulatory and fiduciary compliance matters involving the Trust, the fund-related activities of BlackRock and the
Trusts third-party service providers. The Compliance Committees responsibilities include, without limitation, to (1) oversee the compliance
policies and procedures of the Trust and its service providers and recommend changes or additions to such policies and procedures; (2) review
information on and, where appropriate, recommend policies concerning, the Trusts compliance with applicable law; and (3) review reports from,
oversee the annual performance review of, and make certain recommendations regarding the Trusts Chief Compliance Officer. The Board has adopted a
written charter for the Compliance Committee. During the twelve months ended May 31, 2012, the Compliance Committee met eight
times.
The members of the Performance
Oversight and Contract Committee (the Performance Oversight Committee) are David O. Beim (Chair), Toby Rosenblatt (Vice Chair), Ronald W.
Forbes, Ian A. MacKinnon and Frederick W. Winter, all of whom are Independent Trustees. The Performance Oversight Committees
purpose is to assist the Board in fulfilling its responsibility to oversee the Funds investment performance relative to its agreed-upon
performance objectives and to assist the Independent Trustees in their consideration of investment advisory agreements. The Performance Oversight
Committees responsibilities include, without limitation, to (1) review the Funds investment objective, policies and practices and the
Funds investment performance; (2) review information on appropriate benchmarks and competitive universes and unusual or exceptional investment
matters; (3) review personnel and resources devoted to management of the Fund and evaluate the nature and quality of information furnished to the
Performance Oversight Committee; (4) recommend any required action regarding change in fundamental and non-fundamental investment policies and
restrictions, Fund mergers or liquidations; (5) request and review information on the nature, extent and quality of services provided to the
shareholders; and (6) make recommendations to the Board concerning the approval or renewal of investment advisory agreements. The Board has adopted a
written charter for the Performance Oversight Committee. During the twelve months ended May 31, 2012, the Performance Oversight Committee
met four times.
The members of the Executive
Committee are Ronald W. Forbes and Rodney D. Johnson, both of whom are Independent Trustees, and Paul L. Audet, who serves as an interested Trustee.
The principal responsibilities of the Executive Committee are to (1) act on routine matters between meetings of the Board; (2) act on such matters as
may require urgent action between meetings of the Board; and (3) exercise such other authority as may from time to time be delegated to the Executive
Committee by the Board. The Board has adopted a written charter for the Executive Committee. During the twelve months ended May 31, 2012,
the Executive Committee did not hold any formal meetings.
I-7
The Governance Committee has
adopted a statement of policy that describes the experience, qualifications, skills and attributes that are necessary and desirable for potential
Independent Trustee candidates (the Statement of Policy). The Board believes that each Independent Trustee satisfied, at the time he or she
was initially elected or appointed a Trustee, and continues to satisfy, the standards contemplated by the Statement of Policy. Furthermore, in
determining that a particular Trustee was and continues to be qualified to serve as a Trustee, the Board has considered a variety of criteria, none of
which, in isolation, was controlling. The Board believes that, collectively, the Trustees have balanced and diverse experience, skills, attributes and
qualifications, which allow the Board to operate effectively in governing the Trust and protecting the interests of shareholders. Among the attributes
common to all Trustees are their ability to review critically, evaluate, question and discuss information provided to them, to interact effectively
with the Funds investment adviser, sub-advisers, other service providers, counsel and independent auditors, and to exercise effective business
judgment in the performance of their duties as Trustees.
Each Trustees ability to
perform his or her duties effectively is evidenced by his or her educational background or professional training; business, consulting, public service
or academic positions; experience from service as a board member of the Trust and the other funds in the BlackRock Fund Complex (and any predecessor
funds), other investment funds, public companies, or non-profit entities or other organizations; ongoing commitment and participation in Board and
Committee meetings, as well as his or her leadership of standing and ad hoc committees throughout the years; or other relevant life
experiences.
The table below discusses some of
the experiences, qualifications and skills of each of the Trustees that support the conclusion that each Trustee should serve (or continue to serve) on
the Board.
Trustees
|
|
|
|
Experience, Qualifications and
Skills
|
Independent Trustees
|
|
|
|
|
David O. Beim
|
|
|
|
David O. Beim has served for over 14 years on the boards of registered investment companies, most recently as a member of the boards
of the funds in the Equity-Liquidity Complex and its predecessor funds, including the legacy Merrill Lynch Investment Managers, L.P. (MLIM)
funds. Mr. Beim has served as a professor of finance and economics at the Columbia University Graduate School of Business since 1991 and has taught
courses on corporate finance, international banking and emerging financial markets. The Board benefits from the perspective and background gained by
his almost 20 years of academic experience. He has published numerous articles and books on a range of topics, including, among others, banking and
finance. In addition, Mr. Beim spent 25 years in investment banking, including starting and running the investment banking business at Bankers Trust
Company.
|
Ronald W. Forbes
|
|
|
|
Ronald W. Forbes has served for more than 30 years on the boards of registered investment companies, most recently as a member of the boards of
the funds in the Equity-Liquidity Complex and its predecessor funds, including the legacy MLIM funds. This length of service provides Mr. Forbes with
direct knowledge of the operation of the Fund and the business and regulatory issues facing the Fund. He currently serves as professor emeritus at the
School of Business at the State University of New York at Albany, and has served as a professor of finance thereof since 1989. Mr. Forbes
experience as a professor of finance provides valuable background for his service on the boards. Mr. Forbes has also served as a member of the task
force on municipal securities markets for Twentieth Century Fund.
|
Dr.
Matina S. Horner
|
|
|
|
Dr.
Matina S. Horner has served for over eight years on the boards of registered investment companies, most recently as a member of the
boards of the funds in the Equity-Liquidity Complex and its predecessor funds, including the legacy BlackRock funds. The Board benefits from her
service as executive vice president of Teachers Insurance and Annuity Association and College Retirement Equities Fund. This experience
provides Dr. Horner with management and corporate governance experience. In addition, Dr. Horner served as a professor in the Department
of Psychology at Harvard University and served as President of Radcliffe College for 17 years. Dr. Horner also served on various public, private and
non-profit boards.
|
I-8
Trustees
|
|
|
|
Experience, Qualifications and
Skills
|
Rodney D. Johnson
|
|
|
|
Rodney D. Johnson has served for over 20 years on the boards of registered investment companies, most recently as a member of the boards of the
funds in the Equity-Liquidity Complex and its predecessor funds, including the legacy BlackRock funds. He has over 25 years of experience as a
financial advisor covering a range of engagements, which has broadened his knowledge of and experience with the investment management business. Prior
to founding Fairmount Capital Advisors, Inc., Mr. Johnson served as Chief Financial Officer of Temple University for four
years. He served as Director of Finance and Managing Director, in addition to a variety of other roles, for the City of Philadelphia, and has extensive
experience in municipal finance. Mr. Johnson was also a tenured associate professor of finance at Temple University and a research economist with the
Federal Reserve Bank of Philadelphia.
|
Herbert I. London
|
|
|
|
Herbert I. London has served for over 20 years on the boards of registered investment companies, most recently as a member of the boards of the
funds in the Equity-Liquidity Complex and its predecessor funds, including the legacy MLIM funds. Dr. Londons experience as president of the
Hudson Institute, a world renowned think tank in Washington D.C., since 1997, and in various positions at New York University provide both background
and perspective on financial, economic and global issues, which enhance his service on the Board. He has authored several books and numerous articles,
which have appeared in major newspapers and journals throughout the United States.
|
Ian
A. MacKinnon
|
|
|
|
Ian
A. MacKinnon recently joined as a member of the boards of the funds in the Equity-Liquidity Complex. Mr. MacKinnon spent over 25 years in fixed income
investing. He served over 20 years as a portfolio manager at The Vanguard Group and was managing director and head of the Vanguard Fixed Income Group.
The Board benefits from the perspective and experience he has gained over 25 years in portfolio management and his expertise in the fixed income
markets. Mr. MacKinnon has also served as a board member of the Municipal Securities Rulemaking Board.
|
Cynthia A. Montgomery
|
|
|
|
Cynthia A. Montgomery has served for over 15 years on the boards of registered investment companies, most recently as a member of the boards of
the funds in the Equity-Liquidity Complex and its predecessor funds, including the legacy MLIM funds. The Board benefits from Ms. Montgomerys
more than 20 years of academic experience as a professor at Harvard Business School where she taught courses on corporate strategy and corporate
governance. Ms. Montgomery also has business management and corporate governance experience through her service on the corporate boards of a variety of
public companies. She has also authored numerous articles and books on these topics.
|
Joseph P. Platt
|
|
|
|
Joseph P. Platt has served for over 12 years on the boards of registered investment companies, most recently as a member of the boards of the
funds in the Equity-Liquidity Complex and its predecessor funds, including the legacy BlackRock funds. Mr. Platt currently serves as general partner at
Thorn Partners, LP, a private investment company. Prior to his joining Thorn Partners, LP, he was an owner, director and executive vice president with
Johnson and Higgins, an insurance broker and employee benefits consultant. He has over 25 years experience in the areas of insurance, compensation and
benefits. Mr. Platt also serves on the boards of public, private and non-profit companies.
|
Robert C. Robb, Jr.
|
|
|
|
Robert C. Robb, Jr. has served for over 12 years on the boards of registered investment companies, most recently as a member of the boards of the
funds in the Equity-Liquidity Complex and its predecessor funds, including the legacy BlackRock funds. Mr. Robb has over 30 years of experience in
management consulting and has worked with many companies and business associations located throughout the United States. Mr. Robb brings to the Board a
wealth of practical business experience across a range of industries.
|
I-9
Trustees
|
|
|
|
Experience, Qualifications and
Skills
|
Toby Rosenblatt
|
|
|
|
Toby
Rosenblatt has served for over 20 years on the boards of registered investment companies, most recently as a member of the boards of the funds in the
Equity-Liquidity Complex and its predecessor funds, including the legacy BlackRock funds. He has served as president and general partner of Founders
Investments, Ltd., a private investment limited partnership, since 1999, providing him with relevant experience with the issues faced by investment
management firms and their clients. Mr. Rosenblatt has been active in the civic arena and has served as a trustee of a number of community and
educational organizations for over 30 years.
|
Kenneth L. Urish
|
|
|
|
Kenneth L. Urish has served for over 13 years on the boards of registered investment companies, most recently as a member of the
boards of the funds in the Equity-Liquidity Complex and its predecessor funds, including the legacy BlackRock funds. He has over 30 years of experience
in public accounting. Mr. Urish has served as a managing member of an accounting and consulting firm. Mr. Urish has been determined by the Audit
Committee to be an audit committee financial expert, as such term is defined in the applicable Commission rules.
|
Frederick W. Winter
|
|
|
|
Frederick W. Winter has served for over 13 years on the boards of registered investment companies, most recently as a member of the
boards of the funds in the Equity-Liquidity Complex and its predecessor funds, including the legacy BlackRock funds. The Board benefits from Mr.
Winters years of academic experience, having served as a professor and dean emeritus of the Joseph M. Katz Graduate School of Business at the
University of Pittsburgh since 2005, and dean thereof from 1997 to 2005. He is widely regarded as a specialist in marketing strategy, marketing
management, business-to-business marketing and services marketing. He has also served as a consultant to more than 50 different
firms.
|
Interested Trustees
|
|
|
|
|
Paul L. Audet
|
|
|
|
Paul
L. Audet has a wealth of experience in the investment management industry, including more than 13 years with BlackRock and over 30 years in finance and
asset management. His expertise in finance is demonstrated by his positions as Chief Financial Officer of BlackRock and Head of
BlackRocks Global Cash Management business. Mr. Audet currently is a member of BlackRocks Global Operating and Corporate Risk Management
Committees, the BlackRock Alternative Investors Executive Committee and the Investment Committee for the Private Equity Fund of Funds. Prior to joining
BlackRock, Mr. Audet was the Senior Vice President of Finance at PNC Bank Corp. and Chief Financial Officer of the investment management and mutual
fund processing businesses and Head of PNCs Mergers and Acquisitions unit.
|
Henry Gabbay
|
|
|
|
Henry Gabbays many years of experience in finance provide the Board with a wealth of practical business knowledge and leadership. In
particular, Mr. Gabbays experience as a Consultant for and Managing Director of BlackRock, Inc., Chief Administration Officer of BlackRock and
President of BlackRock Funds provides the Fund with greater insight into the analysis and evaluation of both its existing investment portfolio and
potential future investments as well as enhanced oversight of its investment decisions and investment valuation processes. In addition, Mr.
Gabbays former positions as Chief Administrative Officer of BlackRock and as Treasurer of certain closed-end funds in the BlackRock fund complex
provide the Board with direct knowledge of the operations of the Fund and its investment adviser. Mr. Gabbays previous service on and long
standing relationship with the Board also provide him with a specific understanding of the Fund, its operations, and the business and regulatory issues
facing the Fund.
|
I-10
Biographical Information
Certain biographical and other
information relating to the Trustees of the Trust is set forth below, including address and year of birth, principal occupations for at least the last
five years, length of time served, total number of registered investment companies and investment portfolios overseen in the BlackRock-advised Funds
and any currently held public company and investment company directorships.
Name, Address and Year of Birth
|
|
|
|
Position(s)
Held with
the Trust
|
|
Length of Time Served
2
|
|
Principal Occupation(s)
During Past Five Years
|
|
Number of BlackRock- Advised Registered
Investment Companies (RICs) Consisting of Investment Portfolios (Portfolios) Overseen
|
|
Public Company
and Investment Company
Directorships
|
Independent Trustees
1
|
|
|
|
David O. Beim
3
55 East 52nd Street
New York, NY 10055
1940
|
|
|
|
Trustee
|
|
2007
to present
|
|
Professor of Professional Practice at the Columbia University Graduate School of Business since 1991; Trustee, Phillips Exeter
Academy since 2002; Chairman, Wave Hill Inc. (public garden and cultural center) from 1990 to 2006.
|
|
33
RICs consisting of 106 Portfolios
|
|
None
|
|
Ronald W. Forbes
4
55 East 52nd Street
New York, NY 10055
1940
|
|
|
|
Trustee
|
|
2007
to present
|
|
Professor Emeritus of Finance, School of Business, State University of New York at Albany since 2000.
|
|
33
RICs consisting of 106 Portfolios
|
|
None
|
|
Dr. Matina S. Horner
5
55 East 52nd Street
New York, NY 10055
1939
|
|
|
|
Trustee
|
|
2004
to present
|
|
Executive Vice President of Teachers Insurance and Annuity Association and College Retirement Equities Fund from 1989 to
2003.
|
|
33
RICs consisting of 106 Portfolios
|
|
NSTAR (electric and gas utility)
|
|
Rodney D. Johnson
4
55 East 52nd Street
New York, NY 10055
1941
|
|
|
|
Trustee
|
|
2007
to present
|
|
President, Fairmount Capital Advisors, Inc. since 1987; Member of the Archdiocesan Investment Committee of the Archdiocese of
Philadelphia since 2004; Director, The Committee of Seventy (civic) since 2006; Director, Fox Chase Cancer Center from 2004 to 2011.
|
|
33
RICs consisting of 106 Portfolios
|
|
None
|
|
Herbert I. London
55 East 52nd Street
New York, NY 10055
1939
|
|
|
|
Trustee
|
|
2007
to present
|
|
Professor Emeritus, New York University since 2005; John M. Olin Professor of Humanities, New York University from 1993 to 2005 and
Professor thereof from 1980 to 2005; President Emeritus, Hudson Institute (policy research organization) since 2011, President thereof from 1997 to
2011 and Trustee since 1980; Chairman of the Board of Trustees for Grantham University since 2006; Director, InnoCentive, Inc. (strategic solutions
company) since 2005; Director, Cerego, LLC (software development and design) since 2005; Director, Cybersettle (dispute resolution technology) since
2009.
|
|
33
RICs consisting of 106 Portfolios
|
|
AIMS
Worldwide, Inc. (marketing)
|
|
Ian A. MacKinnon
55 East 52nd Street
New York, NY 10055
1948
|
|
|
|
Trustee
|
|
2012
to present
|
|
Director, Kennett Capital, Inc. (investments) since 2006; Director, Free Library of Philadelphia from 1999 to 2008.
|
|
33
RICs consisting of 106 Portfolios
|
|
None
|
I-11
Name, Address and Year of Birth
|
|
|
|
Position(s)
Held with
the Trust
|
|
Length of Time Served
2
|
|
Principal Occupation(s)
During Past Five Years
|
|
Number of BlackRock- Advised Registered
Investment Companies (RICs) Consisting of Investment Portfolios (Portfolios) Overseen
|
|
Public Company
and Investment Company
Directorships
|
|
Cynthia A. Montgomery
55 East 52nd Street
New York, NY 10055
1952
|
|
|
|
Trustee
|
|
2007
to present
|
|
Professor, Harvard Business School since 1989; Director, McLean Hospital since 2005; Director, Harvard Business School Publishing
from 2005 to 2010.
|
|
33
RICs consisting of 106 Portfolios
|
|
Newell Rubbermaid, Inc. (manufacturing)
|
|
Joseph P. Platt
6
55 East 52nd Street
New York, NY 10055
1947
|
|
|
|
Trustee
|
|
2007
to present
|
|
Director, The West Penn Allegheny Health System (a not-for-profit health system) since 2008; Director, Jones and Brown (Canadian
insurance broker) since 1998; General Partner, Thorn Partners, LP (private investments) since 1998; Director, WQED Multi-Media (public broadcasting
not-for-profit) since 2001; Partner, Amarna Corporation, LLC (private investment company) from 2002 to 2008.
|
|
33
RICs consisting of 106 Portfolios
|
|
Greenlight Capital Re, Ltd. (reinsurance company)
|
|
Robert C. Robb, Jr.
55 East 52nd Street
New York, NY 10055
1945
|
|
|
|
Trustee
|
|
2007
to present
|
|
Partner, Lewis, Eckert, Robb and Company (management and financial consulting firm) since 1981.
|
|
33
RICs consisting of 106 Portfolios
|
|
None
|
|
Toby Rosenblatt
7
55 East 52nd Street
New York, NY 10055
1938
|
|
|
|
Trustee
|
|
2005
to present
|
|
President, Founders Investments Ltd. (private investments) since 1999; Director, Forward Management, LLC since 2007; Director,
College Access Foundation of California (philanthropic foundation) since 2009; Director, A.P. Pharma, Inc. (pharmaceuticals) from 1983 to 2011;
Director, The James Irvine Foundation (philanthropic foundation) from 1998 to 2008.
|
|
33
RICs consisting of 106 Portfolios
|
|
None
|
|
Kenneth L. Urish
8
55 East 52nd Street
New York, NY 10055
1951
|
|
|
|
Trustee
|
|
2007
to present
|
|
Managing Partner, Urish Popeck & Co., LLC (certified public accountants and consultants) since 1976; Chairman of the Professional
Ethics Committee of the Pennsylvania Institute of Certified Public Accountants since 2010 and Committee Member thereof since 2007; Member of External
Advisory Board, The Pennsylvania State University Accounting Department since 2001; Trustee, The Holy Family Institute from 2001 to 2010; President and
Trustee, Pittsburgh Catholic Publishing Associates from 2003 to 2008; Director, Inter-Tel from 2006 to 2007.
|
|
33
RICs consisting of 106 Portfolios
|
|
None
|
I-12
Name, Address and Year of Birth
|
|
|
|
Position(s)
Held with
the Trust
|
|
Length of Time Served
2
|
|
Principal Occupation(s)
During Past Five Years
|
|
Number of BlackRock- Advised Registered
Investment Companies (RICs) Consisting of Investment Portfolios (Portfolios) Overseen
|
|
Public Company
and Investment Company
Directorships
|
|
Frederick W. Winter
55 East 52nd Street
New York, NY 10055
1945
|
|
|
|
Trustee
|
|
2007
to present
|
|
Professor and Dean Emeritus of the Joseph M. Katz School of Business, University of Pittsburgh since 2005 and Dean thereof from 1997
to 2005; Director, Alkon Corporation (pneumatics) since 1992; Director, Tippman Sports (recreation) since 2005; Director, Indotronix International (IT
services) from 2004 to 2008.
|
|
33
RICs consisting of 106 Portfolios
|
|
None
|
Interested Trustees
1,9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul L. Audet
55 East 52nd Street
New York, NY 10055
1953
|
|
|
|
Trustee
|
|
2011
to present
|
|
Senior Managing Director of BlackRock, Inc. and Head of U.S. Mutual Funds since 2011; Chair of the U.S. Mutual Funds Committee
reporting to the Global Executive Committee since 2011; Head of BlackRocks Real Estate business from 2008 to 2011; Member of BlackRocks
Global Operating and Corporate Risk Management Committees and of the BlackRock Alternative Investors Executive Committee and Investment Committee for
the Private Equity Fund of Funds business since 2008; Head of BlackRocks Global Cash Management business from 2005 to
2010; Acting Chief
Financial Officer of BlackRock from 2007 to 2008; Chief Financial Officer of BlackRock from 1998 to 2005.
|
|
155 RICs consisting of 278 Portfolios
|
|
None
|
|
Henry Gabbay
55 East 52nd Street
New York, NY 10055
1947
|
|
|
|
Trustee
|
|
2007
to present
|
|
Consultant, BlackRock, Inc. from 2007 to 2008; Managing Director, BlackRock, Inc. from 1989 to 2007; Chief Administrative Officer,
BlackRock Advisors, LLC from 1998 to 2007; President of BlackRock Funds and BlackRock Bond Allocation Target Shares from 2005 to 2007 and Treasurer of
certain closed-end funds in the BlackRock fund complex from 1989 to 2006.
|
|
155 RICs consisting of 278 Portfolios
|
|
None
|
1
|
|
Trustees serve until their resignation, removal or death, or until
December 31 of the year in which they turn 72. The Board has approved one-year extensions in the terms of Trustees who turn 72 prior to December 31,
2013.
|
2
|
|
Following the combination of MLIM and BlackRock, Inc. in September
2006, the various legacy MLIM and legacy BlackRock fund boards were realigned and consolidated into three new fund boards in 2007. As a result,
although the chart shows certain Independent Trustees as joining the Trusts Board in 2007, those Independent Trustees first became members of the
boards of other legacy MLIM or legacy BlackRock funds as follows: David O. Beim, 1998; Ronald W. Forbes, 1977; Dr. Matina S. Horner, 2004; Rodney D.
Johnson, 1995; Herbert I. London, 1987; Cynthia A. Montgomery, 1994; Joseph P. Platt, 1999; Robert C. Robb, Jr., 1999; Toby Rosenblatt, 2005; Kenneth
L. Urish, 1999; and Frederick W. Winter, 1999.
|
3
|
|
Chair of the Performance Oversight Committee.
|
4
|
|
Co-Chair of the Board of Trustees.
|
5
|
|
Chair of the Governance Committee.
|
I-13
6
|
|
Chair of the Compliance Committee.
|
7
|
|
Vice Chair of the Performance Oversight Committee.
|
8
|
|
Chair of the Audit Committee.
|
9
|
|
Mr. Audet is an interested person, as defined in the
Investment Company Act, of the Trust based on his position with BlackRock, Inc. and its affiliates. Mr. Gabbay is an interested person of
the Trust based on his former positions with BlackRock, Inc. and its affiliates as well as his ownership of BlackRock, Inc. and The PNC Financial
Services Group, Inc. securities.
|
Certain biographical and other
information relating to the officers of the Trust is set forth below, including address and year of birth, principal occupations for at least the last
five years, length of time served, total number of registered investment companies and investment portfolios overseen in the BlackRock-advised Funds
and any currently held public company and investment company directorships.
Name, Address and Year of Birth
|
|
|
|
Position(s)
Held with
the Trust
|
|
Length of Time Served
|
|
Principal Occupation(s)
During Past Five Years
|
|
Number of BlackRock- Advised Registered
Investment Companies (RICs) Consisting of Investment Portfolios (Portfolios) Overseen
|
|
Public Company
and Investment
Company Directorships
|
Trust Officers
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John Perlowski
55 East 52nd Street
New York, NY 10055
1964
|
|
|
|
President and Chief Executive Officer
|
|
2010
to present
|
|
Managing Director of BlackRock, Inc. since 2009; Global Head of BlackRock Fund Administration since 2009; Managing Director and Chief Operating Officer of the Global Product Group at Goldman Sachs Asset Management,
L.P. from 2003 to 2009; Treasurer of Goldman Sachs Mutual Funds from 2003 to 2009 and Senior Vice President thereof from 2007
to 2009; Director of Goldman Sachs Offshore Funds from 2002 to 2009; Director of Family Resource Network (charitable
foundation) since 2009.
|
|
155 RICs consisting of 278 Portfolios
|
|
None
|
|
Richard Hoerner, CFA
55 East 52nd Street
New York, NY 10055
1958
|
|
|
|
Vice
President
|
|
2009
to present
|
|
Managing Director of BlackRock, Inc. since 2000; Head of the Global Cash Group since 2013; Co-head of the Global Cash and
Securities Lending Group from 2010 to 2013; Member of the Cash Management Group Executive Committee since 2005.
|
|
24
RICs consisting of 90 Portfolios
|
|
None
|
|
Brendan Kyne
55 East 52nd Street
New York, NY 10055
1977
|
|
|
|
Vice
President
|
|
2009
to present
|
|
Managing Director of BlackRock, Inc. since 2010; Director of BlackRock, Inc. from 2008 to 2009; Head of Product Development and
Management for BlackRocks U.S. Retail Group since 2009 and Co-head thereof from 2007 to 2009; Vice President of BlackRock, Inc. from 2005 to
2008.
|
|
155 RICs consisting of 278 Portfolios
|
|
None
|
|
Christopher Stavrakos, CFA
55 East 52nd Street
New York, NY 10055
1959
|
|
|
|
Vice
President
|
|
2009
to present
|
|
Managing Director of BlackRock, Inc. since 2006; Co-head of BlackRocks Cash Management Portfolio Management Group since 2006;
Senior Vice President, CIO, and Director of Liability Management for the Securities Lending Group at Mellon Bank from 1999 to 2006.
|
|
24
RICs consisting of 90 Portfolios
|
|
None
|
I-14
Name, Address and Year of Birth
|
|
|
|
Position(s)
Held with
the Trust
|
|
Length of Time Served
|
|
Principal Occupation(s)
During Past Five Years
|
|
Number of BlackRock- Advised Registered
Investment Companies (RICs) Consisting of Investment Portfolios (Portfolios) Overseen
|
|
Public Company
and Investment
Company Directorships
|
|
Neal J. Andrews
55 East 52nd Street
New York, NY 10055
1966
|
|
|
|
Chief Financial Officer and Assistant Treasurer
|
|
2007
to present
|
|
Managing Director of BlackRock, Inc. since 2006; Senior Vice President and Line of Business Head of Fund Accounting and
Administration at PNC Global Investment Servicing (U.S.) Inc. from 1992 to 2006.
|
|
155 RICs consisting of 278 Portfolios
|
|
None
|
|
Jay M. Fife
55 East 52nd Street
New York, NY 10055
1970
|
|
|
|
Treasurer
|
|
2007
to present
|
|
Managing Director of BlackRock, Inc. since 2007; Director of BlackRock, Inc. in 2006; Assistant Treasurer of MLIM and Fund Asset
Management, L.P. advised funds from 2005 to 2006; Director of MLIM Fund Services Group from 2001 to 2006.
|
|
155 RICs consisting of 278 Portfolios
|
|
None
|
|
Brian P. Kindelan
55 East 52nd Street
New York, NY 10055
1959
|
|
|
|
Chief Compliance Officer and Anti-Money Laundering Officer
|
|
2007
to present
|
|
Chief Compliance Officer of the BlackRock-advised funds since 2007; Managing Director and Senior Counsel, BlackRock, Inc. since
2005.
|
|
155 RICs consisting of 278 Portfolios
|
|
None
|
|
Benjamin Archibald
55 East 52nd Street
New York, NY 10055
1975
|
|
|
|
Secretary
|
|
2012
to present
|
|
Director of BlackRock, Inc. since 2010; Assistant Secretary to the Trust from 2010 to 2012; General Counsel and Chief Operating
Officer of Uhuru Capital Management from 2009 to 2010; Executive Director and Counsel of Goldman Sachs Asset Management from 2005 to
2009.
|
|
62
RICs consisting of 189 Portfolios
|
|
None
|
1
|
|
Officers of the Trust serve at the pleasure of the
Board.
|
I-15
Share Ownership
Information relating to each
Trustees share ownership in the Fund and in all BlackRock-advised Funds that are overseen by the respective Trustee (Supervised
Funds) as of December 31, 2012 is set forth in the chart below. As of the date of this SAI, the Trustees owned no shares of the
Fund.
Name of Trustee
|
|
|
|
Aggregate Dollar Range
of Equity
Securities in
Supervised Funds
|
Interested Trustees:
|
|
|
|
|
Paul L. Audet
|
|
|
|
Over $100,000
|
Henry Gabbay
|
|
|
|
Over $100,000
|
Independent Trustees:
|
|
|
|
|
David O. Beim
|
|
|
|
Over $100,000
|
Ronald W. Forbes
|
|
|
|
Over $100,000
|
Dr. Matina S. Horner
|
|
|
|
Over $100,000
|
Rodney D. Johnson
|
|
|
|
Over $100,000
|
Herbert I. London
|
|
|
|
$50,001–$100,000
|
Ian A. MacKinnon
|
|
|
|
None
|
Cynthia A Montgomery
|
|
|
|
Over $100,000
|
Joseph P. Platt
|
|
|
|
Over $100,000
|
Robert C. Robb, Jr.
|
|
|
|
Over $100,000
|
Toby Rosenblatt
|
|
|
|
Over $100,000
|
Kenneth L. Urish
|
|
|
|
Over $100,000
|
Frederick W. Winter
|
|
|
|
Over $100,000
|
As of March 1, 2013,
the Trustees and officers of the Trust as a group owned an aggregate of less than 1% of the outstanding shares of the Fund. As of December 31,
2012, none of the Independent Trustees or their immediate family members owned beneficially or of record any securities of affiliates of the
Manager.
Compensation of Trustees
Each Trustee who is an Independent
Trustee is paid as compensation an annual retainer of $275,000 per year for his or her services as a Board member to the
BlackRock-advised Funds in the Equity-Liquidity Complex, including the Trust, and a $5,000 Board meeting fee to be paid for each in-person Board
meeting attended (a $2,500 Board meeting fee for telephonic attendance at regular Board meetings), for up to five Board meetings held in a calendar
year (compensation for meetings in excess of this number to be determined on a case-by-case basis), together with
out-of-pocket expenses in accordance with a Board policy on travel and other business expenses relating to attendance at
meetings. Each Independent Trustee receives $10,000 per year for each standing Committee on which he or she serves for up to two standing
Committee assignments but is not paid this amount for serving on a Committee which he or she chairs. The Co-Chairs of the Boards of
Trustees/Directors are each paid an additional annual retainer of $60,000. The Chair of the Audit Committees is paid an
additional annual retainer of $40,000 and the Chairs of the Compliance Committees, Governance Committees and Performance Oversight
Committees and the Vice-Chair of the Performance Oversight Committees are each paid an additional annual retainer of
$30,000.
Mr. Gabbay is an interested
Trustee of the Trust and serves as an interested board member of the other funds which comprise the Equity-Liquidity, the Equity-Bond and the
Closed-End Complexes. Mr. Gabbay receives as compensation for his services as a board member of each of these three BlackRock Fund Complexes, (i) an
annual retainer of $550,000 paid quarterly in arrears, allocated to the BlackRock-advised Funds in these three BlackRock Fund Complexes,
including the Trust, and (ii) with respect to each of the two open-end BlackRock Fund Complexes, a board meeting fee of $3,750 (with respect to
meetings of the Equity-Liquidity Complex) and $18,750 (with respect to meetings of the Equity-Bond Complex) to be paid for attendance at each board
meeting up to five board meetings held in a calendar year by each such BlackRock Fund Complex (compensation for meetings in excess of this number to be
determined on a case-by-case basis). Mr. Gabbay will also be reimbursed for out-of-pocket expenses in accordance with a
board policy on travel and other business expenses relating to attendance at meetings. Mr. Gabbays compensation for serving on the boards of
funds in these three BlackRock Fund Complexes (including
I-16
the Trust) is equal to 75% of
each retainer and, as applicable, of each meeting fee (without regard to additional fees paid to Board and Committee chairs) received by the
independent board members serving on such boards. The Board of the Trust or the board of any other BlackRock advised Fund may modify the board
members compensation from time to time depending on market conditions and Mr. Gabbays compensation would be impacted by those
modifications.
The following table sets forth the
compensation the Fund expects to pay the Trustees for the fiscal period of service ending May 31, 2013 and the aggregate compensation
paid to them by all BlackRock-advised Funds for the calendar year ended December 31, 2012.
Name
|
|
|
|
Compensation
from the Fund
|
|
Estimated Annual
Benefits upon
Retirement
|
|
Aggregate
Compensation from
the
Fund and
Other BlackRock-
Advised Funds
1
|
Independent Trustees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David O. Beim
2
|
|
|
|
$
|
337
|
|
|
None
|
|
$
|
300,000
|
|
Ronald W. Forbes
3
|
|
|
|
$
|
347
|
|
|
None
|
|
$
|
326,250
|
|
Dr. Matina S. Horner
4
|
|
|
|
$
|
337
|
|
|
None
|
|
$
|
300,000
|
|
Rodney D. Johnson
3
|
|
|
|
$
|
347
|
|
|
None
|
|
$
|
326,500
|
|
Herbert I. London
|
|
|
|
$
|
328
|
|
|
None
|
|
$
|
275,000
|
|
Ian A. MacKinnon
5
|
|
|
|
$
|
328
|
|
|
None
|
|
$
|
172,967
|
|
Cynthia A. Montgomery
|
|
|
|
$
|
328
|
|
|
None
|
|
$
|
275,000
|
|
Joseph P. Platt
6
|
|
|
|
$
|
340
|
|
|
None
|
|
$
|
313,750
|
|
Robert C. Robb, Jr.
|
|
|
|
$
|
328
|
|
|
None
|
|
$
|
275,000
|
|
Toby Rosenblatt
7
|
|
|
|
$
|
337
|
|
|
None
|
|
$
|
297,500
|
|
Kenneth L. Urish
8
|
|
|
|
$
|
337
|
|
|
None
|
|
$
|
310,000
|
|
Frederick W. Winter
|
|
|
|
$
|
328
|
|
|
None
|
|
$
|
275,000
|
|
Interested Trustees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul L. Audet
|
|
|
|
None
|
|
None
|
|
None
|
Henry Gabbay
|
|
|
|
$
|
246
|
|
|
None
|
|
$
|
641,250
|
|
1
|
|
For the number of BlackRock-advised RICs and
Portfolios from which each Trustee receives compensation, see the Biographical Information chart beginning on page I-11.
|
2
|
|
Chair of the Performance Oversight Committee.
|
4
|
|
Chair of the Governance Committee.
|
5
|
|
Mr. MacKinnon was appointed to serve as a Trustee of
the Trust and as a director or trustee of all of the other funds in the Equity-Liquidity Complex effective May 14, 2012.
|
6
|
|
Chair of the Compliance Committee.
|
7
|
|
Vice-Chair of the Performance Oversight Committee.
|
8
|
|
Chair of the Audit Committee.
|
IV. Management, Advisory and Other
Service Arrangements
Management Agreement
The Trust, on behalf of the Fund,
entered into a management agreement with BlackRock pursuant to which BlackRock is entitled to fees for the services it provides (the Management
Agreement).
As of the date of this SAI, the
Fund has not made any payments to BlackRock for management services.
Pursuant to the Management
Agreement, BlackRock may from time to time, in its sole discretion to the extent permitted by applicable law, appoint one or more sub-advisers,
including, without limitation, affiliates of BlackRock, to perform investment advisory services with respect to the Fund. In addition, BlackRock may
delegate certain of its investment advisory functions under the Management Agreement to one or more of its affiliates to the extent permitted by
applicable law. BlackRock may terminate any or all sub-advisers or such delegation arrangements in its sole discretion at any time to the extent
permitted by applicable law.
I-17
BlackRock entered into a
sub-advisory agreement (the Sub-Advisory Agreement) with BlackRock Fund Advisors (the Sub-Adviser), pursuant to which BlackRock
pays the Sub-Adviser for providing services to BlackRock with respect to the Fund a monthly fee at an annual rate equal to a percentage of the
management fee paid to BlackRock under the Management Agreement.
As of the date of this SAI, the
Fund has not made any payments to the Sub-Adviser for management services.
Administration Agreement
BlackRock and BNY Mellon
Investment Servicing (US) Inc. (BNY Mellon) serve as the Funds co-administrators (the Administrators) pursuant to an
administration agreement (the Administration Agreement). BNY Mellon has agreed to maintain office facilities for the Trust; furnish the
Trust with statistical and research data, clerical, accounting, and bookkeeping services; provide and supervise the operation of an automated data
processing system to process purchase and redemption orders; prepare and file certain reports required by regulatory authorities; prepare and file
Federal and state tax returns; prepare and file material requested by state securities regulators; calculate various contractual expenses; compute the
Funds net asset value, net income and net capital gain or loss; and serve as a liaison with the Trusts independent public accountants. The
Administrators may from time to time voluntarily waive administration fees with respect to the Trust and may voluntarily reimburse the Trust for
expenses.
Under the Administration
Agreement, the Trust pays to BlackRock and BNY Mellon on behalf of the Fund a fee, computed daily and payable monthly, at an aggregate annual rate of
(i) .075% of the first $500 million of the Funds average daily net assets, .065% of the next $500 million of the Funds average daily net
assets and .055% of the average daily net assets of the Fund in excess of $1 billion and (ii) .025% of the first $500 million of average daily net
assets allocated to each class of shares of the Fund, .015% of the next $500 million of such average daily net assets and .005% of the average daily
net assets allocated to each class of shares of the Fund in excess of $1 billion.
Under the Administration
Agreement, BlackRock is responsible for: (i) the supervision and coordination of the performance of the Trusts service providers; (ii) the
negotiation of service contracts and arrangements between the Trust and its service providers; (iii) acting as liaison between the Trustees of the
Trust and the Trusts service providers; and (iv) providing ongoing business management and support services in connection with the Trusts
operations.
The Administration Agreement
provides that BlackRock and BNY Mellon will not be liable for any error of judgment or mistake of law or for any loss suffered by the Trust or the Fund
in connection with the performance of the Administration Agreement, except a loss resulting from willful misfeasance, bad faith or gross negligence in
the performance of their respective duties or from reckless disregard of their respective duties and obligations thereunder. In addition, the Trust
will indemnify each of BlackRock and BNY Mellon and their affiliates against any loss arising in connection with their provision of services under the
Administration Agreement, except that neither BlackRock nor BNY Mellon nor their affiliates shall be indemnified against any loss arising out of
willful misfeasance, bad faith, gross negligence or reckless disregard of their respective duties under the Administration Agreement.
As of the date of this SAI, the
Fund has not made any payments to the Administrators for administration services.
The Trust and its service
providers may engage third party plan administrators who provide trustee, administrative and recordkeeping services for certain employee benefit,
profit-sharing and retirement plans as agent for the Trust with respect to such plans, for the purpose of accepting orders for the purchase and
redemption of shares of the Trust.
In addition, pursuant to a
shareholders administrative services agreement (the Shareholders Administrative Services Agreement), BlackRock provides certain
shareholder liaison services in connection with the Trusts investor service center. The Trust reimburses BlackRock for its costs in maintaining
the service center, which costs include, among other things, employee salaries, leasehold expenses, and other out-of-pocket expenses.
As of the date of this SAI, the
Fund has not made any payments to BlackRock pursuant to the Shareholders Administrative Services Agreement.
I-18
Information Regarding the Portfolio
Managers
Travis Cooke, CFA, and Ali
Jahansouz are the portfolio managers and are jointly and primarily responsible for the day-to-day management of the Fund.
Other Funds and Accounts Managed
The following table sets forth
information about funds and accounts other than the Fund for which the Funds portfolio managers are jointly and primarily responsible for the
day-to-day portfolio management as of January 31, 2013.
|
|
|
|
Number of Other Accounts
Managed
and Assets by Account Type
|
|
Number of Accounts and Assets for
Which
Management Fee is Performance-Based
|
|
Name of Portfolio Manager
|
|
|
|
Other
Registered
Investment
Companies
|
|
Other Pooled
Investment
Vehicles
|
|
Other
Accounts
|
|
Other
Registered
Investment
Companies
|
|
Other Pooled
Investment
Vehicles
|
|
Other
Accounts
|
Travis Cooke, CFA
|
|
|
|
2
|
|
19
|
|
13
|
|
0
|
|
18
|
|
13
|
|
|
|
|
$79.61 million
|
|
$7.76 billion
|
|
$6.46 billion
|
|
$0
|
|
$6.99 billion
|
|
$6.46 billion
|
Ali
Jahansouz
|
|
|
|
2
|
|
19
|
|
13
|
|
0
|
|
18
|
|
13
|
|
|
|
|
$79.61 million
|
|
$7.76 billion
|
|
$6.46 billion
|
|
$0
|
|
$6.99 billion
|
|
$6.46 billion
|
Portfolio Manager Compensation Overview
BlackRocks financial
arrangements with its portfolio managers, its competitive compensation and its career path emphasis at all levels reflect the value senior management
places on key resources. Compensation may include a variety of components and may vary from year to year based on a number of factors. The principal
components of compensation include a base salary, a performance-based discretionary bonus, participation in various benefits programs and one or more
of the incentive compensation programs established by BlackRock.
Base compensation.
Generally, portfolio managers receive base compensation based on their seniority and/or their position with the firm.
Discretionary Incentive
Compensation.
Generally, discretionary incentive compensation for Active Equity portfolio managers is based on a formulaic compensation
program. BlackRocks formulaic portfolio manager compensation program is based on team revenue and pre-tax investment performance relative
to appropriate competitors or benchmarks over 1-, 3- and 5-year performance periods, as applicable. In most cases, these benchmarks are the
same as the benchmark or benchmarks against which the performance of the Fund or other accounts managed by the portfolio managers are
measured. BlackRocks Chief Investment Officers determine the benchmarks or rankings against which the performance of funds and other
accounts managed by each portfolio management team is compared and the period of time over which performance is evaluated. Messrs. Cooke and
Jahansouzs performance is not measured against a specific benchmark.
A smaller element of portfolio
manager discretionary compensation may include consideration of: financial results, expense control, profit margins, strategic planning and
implementation, quality of client service, market share, corporate reputation, capital allocation, compliance and risk control, leadership,
technology and innovation. These factors are considered collectively by BlackRock management and the relevant Chief Investment Officers.
Distribution of
Discretionary Incentive Compensation.
Discretionary incentive compensation is distributed to portfolio managers in a combination of cash and
BlackRock, Inc. restricted stock units which vest ratably over a number of years. For some portfolio managers, discretionary incentive
compensation is also distributed in deferred cash awards that notionally track the returns of select BlackRock investment products they manage
and that vest ratably over a number of years. The BlackRock, Inc. restricted stock units, upon vesting, will be settled in BlackRock, Inc.
common stock. Typically, the cash portion of the discretionary incentive compensation, when combined with base salary, represents more
than 60% of total compensation for the portfolio managers. Paying a portion of discretionary incentive compensation in BlackRock stock puts
compensation earned by a portfolio manager for a given year at risk based on BlackRocks ability to sustain and improve its
performance over future periods. Providing a portion of discretionary incentive compensation in deferred cash awards that notionally track the
BlackRock investment products they manage provides direct alignment with investment product results.
I-19
Long-Term Incentive Plan
Awards
From time to time long-term incentive equity awards are granted to certain key employees to aid in retention, align their
interests with long-term shareholder interests and motivate performance. Equity awards are generally granted in the form of BlackRock, Inc.
restricted stock units that, once vested, settle in BlackRock, Inc. common stock. Mr. Cooke has received long-term incentive
awards.
Deferred Compensation
Program
A portion of the compensation paid to eligible BlackRock employees may be voluntarily deferred at their election for defined
periods of time into an account that tracks the performance of certain of the firms investment products. All of the eligible portfolio
managers have participated in the deferred compensation program.
Other compensation
benefits.
In addition to base compensation and discretionary incentive compensation, portfolio managers may be eligible to receive or
participate in one or more of the following:
Incentive Savings Plans
BlackRock, Inc. has created a variety of incentive savings plans in which BlackRock employees are eligible to participate, including
a 401(k) plan, the BlackRock Retirement Savings Plan (RSP), and the BlackRock Employee Stock Purchase Plan (ESPP). The employer contribution
components of the RSP include a company match equal to 50% of the first 8% of eligible pay contributed to the plan capped at $5,000 per year,
and a company retirement contribution equal to 3-5% of eligible compensation up to the IRS limit ($250,000 for 2012). The RSP offers a
range of investment options, including registered investment companies and collective investment funds managed by the firm. BlackRock
contributions follow the investment direction set by participants for their own contributions or, absent participant investment direction, are
invested into an index target date fund that corresponds to, or is closest to, the year in which the participant attains age 65. The ESPP allows
for investment in BlackRock common stock at a 5% discount on the fair market value of the stock on the purchase date. Annual participation in
the ESPP is limited to the purchase of 1,000 shares of common stock or a dollar value of $25,000 based on its fair market value on the
Purchase Date. Messrs. Cooke and Jahansouz are eligible to participate in these plans.
Fund Ownership
The Fund has not yet made its
shares available for sale; therefore the portfolio managers owned no shares of the Fund as of the date of this SAI.
Portfolio Manager Potential Material Conflicts of
Interest
BlackRock has built a professional working environment, firm-wide compliance
culture and compliance procedures and systems designed to protect against potential incentives that may favor one account
over another. BlackRock has adopted policies and procedures that address the allocation of investment opportunities,
execution of portfolio transactions, personal trading by employees and other potential conflicts of interest that are
designed to ensure that all client accounts are treated equitably over time. Nevertheless, BlackRock furnishes investment
management and advisory services to numerous clients in addition to the Fund, and BlackRock may, consistent with applicable
law, make investment recommendations to other clients or accounts (including accounts which are hedge funds or have
performance or higher fees paid to BlackRock, or in which portfolio managers have a personal interest in the receipt of such
fees), which may be the same as or different from those made to the Fund. In addition, BlackRock, its affiliates and
significant shareholders and any officer, director, shareholder or employee may or may not have an interest in the
securities whose purchase and sale BlackRock recommends to the
Fund. BlackRock, or any of its affiliates or significant
shareholders, or
any officer, director, shareholder, employee or any member of their families may take different actions than those
recommended to the Fund by BlackRock with respect to the same securities. Moreover, BlackRock may refrain from rendering any
advice or services concerning securities of companies of which any of BlackRocks (or its affiliates or
significant shareholders) officers, directors or employees are directors or officers, or companies as to which
BlackRock or any of its affiliates or significant shareholders or the officers, directors and employees of any of them has
any substantial economic interest or possesses material non-public information. Certain portfolio managers also may manage
accounts whose investment strategies may at times be opposed to the strategy utilized for a fund. It should also be noted
that Messrs. Cooke and Jahansouz may be managing hedge fund and/or long only accounts, or may be part of a team managing
hedge fund and/or
long only accounts, subject to incentive fees. Such portfolio
managers may therefore be entitled to receive a portion of any
incentive fees earned on such accounts.
I-20
As a fiduciary, BlackRock owes a
duty of loyalty to its clients and must treat each client fairly. When BlackRock purchases or sells securities for more than one account, the trades
must be allocated in a manner consistent with its fiduciary duties. BlackRock attempts to allocate investments in a fair and equitable manner among
client accounts, with no account receiving preferential treatment. To this end, BlackRock has adopted policies that are intended to ensure reasonable
efficiency in client transactions and provide BlackRock with sufficient flexibility to allocate investments in a manner that is consistent with the
particular investment discipline and client base, as appropriate.
Custodian and Transfer Agent
The Bank of New York Mellon, which has its principal place of business at One
Wall Street, New York, New York 10286, serves as the custodian for the Fund (the “Custodian”). On a monthly basis, the Custodian nets
the Funds daily positive and negative cash balances and
calculates a credit (custody credit) or a charge based
on that net amount. The custodian fees, including the amount of any overdraft charges, may be reduced by that amount of such
custody credits, and any unused credits at the end of a given month may be carried forward to a subsequent month. Any such
credits unused by the end of the Funds fiscal year will not expire. Net debits at the end of a given month are added
to the Funds custody bill and paid by the Fund.
BNY Mellon Investment Servicing
(US) Inc., which has its principal place of business at 301 Bellevue Parkway, Wilmington, Delaware 19809, serves as the transfer and
dividend disbursement agent for the Fund.
Credit Agreement
The Trust, along with certain
other funds managed by the Manager and its affiliates, is a party to a $500 million credit agreement with a group of lenders, which is renewed annually
(the Credit Agreement). The Fund may borrow under the Credit Agreement to meet shareholder redemptions and for other lawful purposes. The
Fund may not borrow under the Credit Agreement for leverage. The Fund may borrow up to the maximum amount allowable under its current Prospectus and
SAI, subject to various other legal, regulatory or contractual limits. Borrowing results in interest expense and other fees and expenses for the Fund
which may impact the Funds net expenses. The costs of borrowing may reduce the Funds return. The Fund is charged its pro rata share of
upfront fees and commitment fees on the aggregate commitment amount based on its net assets. If the Fund borrows pursuant to the Credit Agreement, the
Fund is charged interest at a variable rate.
V. Information on Sales Charges and
Distribution Related Expenses
BlackRock Investments, LLC acts as
the Funds sole distributor. As of the date of this SAI, the Fund has not made any payments pursuant to its Distribution Plan.
VI. Computation of Offering Price Per
Share
An illustration of the computation
of the offering price for the Investor A Shares of the Fund based on a hypothetical investment of $10,000 is set forth below.
Computation of Offering Price Per
Share:
|
|
|
|
Investor A Shares
|
Net
Assets
|
|
|
|
$10,000
|
Number of Shares Outstanding
|
|
|
|
1,000
|
Net
Asset Value Per Share (net assets divided by number of shares outstanding)
|
|
|
|
$10.00
|
Sales Charge (5.25%* of offering price; 5.54%* of net asset value per share)
1
|
|
|
|
0.55
|
Offering Price
|
|
|
|
$10.55
|
1
|
|
Rounded to the nearest one-hundredth percent;
assumes maximum sales charge is applicable.
|
The offering price for the
Funds other share classes is equal to the share class net asset value computed as set forth above for Investor A Shares. Though not subject
to a sales charge, certain share classes may be subject to a CDSC on redemption. For more information on the purchasing and valuation of shares, please
see Purchase of Shares and Pricing of Shares in Part II of this SAI.
I-21
VII. Portfolio Transactions and
Brokerage
See Portfolio Transactions
and Brokerage in Part II of this SAI for more information.
As of the date of this SAI, the
Fund has not paid any brokerage commissions or securities lending agent fees.
VIII. Additional
Information
The Trust
The Trust was organized as a
Massachusetts business trust on December 22, 1988, and is registered under the Investment Company Act as an open end management investment company.
Effective January 31, 1998, the Trust changed its name from Compass Capital Funds
SM
to BlackRock Funds
SM
. The Trust is
authorized to issue an unlimited number of shares of beneficial interest with a par value of $0.001 per share, which may be divided into different
series and classes.
Under Massachusetts law,
shareholders of a business trust may, under certain circumstances, be held personally liable as partners for the obligations of the trust. However, the
Trusts Declaration of Trust provides that shareholders shall not be subject to any personal liability in connection with the assets of the Trust
for the acts or obligations of the Trust, and that every note, bond, contract, order or other undertaking made by the Trust shall contain a provision
to the effect that the shareholders are not personally liable thereunder. The Declaration of Trust provides for indemnification out of the Trust
property of any shareholder held personally liable solely by reason of his being or having been a shareholder and not because of his acts or omissions
or some other reason. The Declaration of Trust also provides that the Trust shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the Trust, and shall satisfy any judgment thereon.
The Declaration of Trust further
provides that all persons having any claim against the Trustees or Trust shall look solely to the trust property for payment; that no Trustee of the
Trust shall be personally liable for or on account of any contract, debt, tort, claim, damage, judgment or decree arising out of or connected with the
administration or preservation of the Trust property or the conduct of any business of the Trust; and that no Trustee shall be personally liable to any
person for any action or failure to act except by reason of such Trustees own bad faith, willful misfeasance, gross negligence or reckless
disregard of his duties as a trustee. With the exception stated, the Declaration of Trust provides that a Trustee is entitled to be indemnified against
all liabilities and expenses reasonably incurred by such Trustee in connection with the defense or disposition of any proceeding in which he may be
involved or with which he may be threatened by reason of his being or having been a Trustee, and that the Trust will indemnify officers,
representatives and employees of the Trust to the same extent that trustees are entitled to indemnification.
Principal Shareholders
As of March 1, 2013,
the Fund had no outstanding shares.
None.
I-22
Part
II
Throughout this Statement of Additional Information (“SAI”),
each BlackRock-advised fund may be referred to as a “Fund” or collectively with others as the “Funds.”
Each Fund is organized either as a Maryland corporation,
a Massachusetts business trust or a Delaware statutory trust. In each jurisdiction, nomenclature varies. For ease and clarity of
presentation, shares of common stock and shares of beneficial interest are referred to herein as “shares” or “Common
Stock,” holders of shares of Common Stock are referred to as “shareholders,” the trustees or directors of each
Fund are referred to as “Directors,” BlackRock Advisors, LLC or its affiliates is the investment adviser or manager
of each Fund and is referred to herein as the “Manager” or “BlackRock,” and the investment advisory agreement
or management agreement applicable to each Fund is referred to as the “Management Agreement.” Each Fund’s Articles
of Incorporation or Declaration of Trust, together with all amendments thereto, is referred to as its “charter.” The
Investment Company Act of 1940, as amended, is referred to herein as the “Investment Company Act.” The Securities Act
of 1933, as amended, is referred to herein as the “Securities Act.” The Securities and Exchange Commission is referred
to herein as the “Commission” or the “SEC.”
Certain Funds are “feeder” funds (each, a “Feeder
Fund”) that invest all or a portion of their assets in a corresponding “master” portfolio (each, a “Master
Portfolio”) of a master limited liability company (each, a “Master LLC”), a mutual fund that has the same objective
and strategies as the Feeder Fund. All investments are generally made at the level of the Master Portfolio. This structure is sometimes
called a “master/feeder” structure. A Feeder Fund’s investment results will correspond directly to the investment
results of the underlying Master Portfolio in which it invests. For simplicity, this SAI uses the term “Fund” to include
both a Feeder Fund and its Master Portfolio.
In addition to containing information about the Fund, Part II
of this SAI contains general information about all funds in the BlackRock-advised fund complex. Certain information contained herein
may not be relevant to a particular Fund.
Investment
Risks and Considerations
Set forth below are descriptions of some of the types of
investments and investment strategies that one or more of the Funds may use, and the risks and considerations associated with those
investments and investment strategies. Please see each Fund’s Prospectus and the “Investment Objectives and Policies”
section of Part I of this SAI for further information on each Fund’s investment policies and risks. Information contained
in this section about the risks and considerations associated with a Fund’s investments and/or investment strategies applies
only to those Funds specifically identified in Part I of this Statement of Additional Information as making each type of investment
or using each investment strategy (each, a “Covered Fund”). Information that does not apply to a Covered Fund does
not form a part of that Covered Fund’s Statement of Additional Information and should not be relied on by investors in that
Covered Fund.
Only information that is clearly identified as applicable
to a Covered Fund is considered to form a part of that Covered Fund’s Statement of Additional Information.
144A Securities.
A Fund may purchase securities
that can be offered and sold only to “qualified institutional buyers” under Rule 144A under the Securities Act.
The Directors have determined to treat as liquid Rule 144A securities that are either freely tradable in their primary markets
offshore or have been determined to be liquid in accordance with the policies and procedures adopted by the Fund’s Directors.
The Directors have adopted guidelines and delegated to the Manager the daily function of determining and monitoring liquidity of
144A securities. The Directors, however, will retain sufficient oversight and will ultimately be responsible for the determinations.
Since it is not possible to predict with assurance exactly how the market for securities sold and offered under Rule 144A
will continue to develop, the Directors will carefully monitor a Fund’s investments in these securities. This investment
practice could have the effect of increasing the level of illiquidity in a Fund to the extent that qualified institutional buyers
become for a time uninterested in purchasing these securities.
Asset-Backed Securities.
Asset-backed securities
are securities backed by home equity loans, installment sale contracts, credit card receivables or other assets. Asset-backed securities
are “pass-through” securities, meaning that principal and interest payments — net of expenses — made by
the borrower on the underlying assets (such as credit card receivables) are passed through to a Fund. The value of asset-backed
securities, like that of traditional fixed income securities, typically increases when interest rates fall and decreases when interest
rates rise. However, asset-backed securities differ from traditional fixed income securities because of their potential for prepayment.
The price paid by a Fund for its asset-backed securities, the yield the Fund expects to receive from such securities and the average
life of the securities are based on a number of factors, including the anticipated rate of prepayment of the underlying assets.
In a period of declining interest rates, borrowers may prepay the underlying assets more quickly than anticipated,
thereby reducing the yield to maturity and the average
life of the asset-backed securities. Moreover, when a Fund reinvests the proceeds of a prepayment in these circumstances, it will
likely receive a rate of interest that is lower than the rate on the security that was prepaid. To the extent that a Fund purchases
asset-backed securities at a premium, prepayments may result in a loss to the extent of the premium paid. If a Fund buys such securities
at a discount, both scheduled payments and unscheduled prepayments will increase current and total returns and unscheduled prepayments
will also accelerate the recognition of income which, when distributed to shareholders, will be taxable as ordinary income. In
a period of rising interest rates, prepayments of the underlying assets may occur at a slower than expected rate, creating maturity
extension risk. This particular risk may effectively change a security that was considered short- or intermediate-term at the time
of purchase into a longer term security. Since the value of longer-term securities generally fluctuates more widely in response
to changes in interest rates than does the value of shorter term securities, maturity extension risk could increase the volatility
of the Fund. When interest rates decline, the value of an asset-backed security with prepayment features may not increase as much
as that of other fixed-income securities, and, as noted above, changes in market rates of interest may accelerate or retard prepayments
and thus affect maturities.
Asset-Based Securities.
Certain Funds may
invest in debt, preferred or convertible securities, the principal amount, redemption terms or conversion terms of which are related
to the market price of some natural resource asset such as gold bullion. These securities are referred to as “asset-based
securities.” A Fund will purchase only asset-based securities that are rated, or are issued by issuers that have outstanding
debt obligations rated, investment grade (for example, AAA, AA, A or BBB by Standard & Poor’s (“S&P”)
or Fitch Ratings (“Fitch”), or Baa by Moody’s Investors Service, Inc. (“Moody’s”) or commercial
paper rated A-1 by S&P or Prime-1 by Moody’s) or by issuers that the Manager has determined to be of similar creditworthiness.
Obligations ranked in the fourth highest rating category, while considered “investment grade,” may have certain speculative
characteristics and may be more likely to be downgraded than securities rated in the three highest rating categories. If an asset-based
security is backed by a bank letter of credit or other similar facility, the Manager may take such backing into account in determining
the creditworthiness of the issuer. While the market prices for an asset-based security and the related natural resource asset
generally are expected to move in the same direction, there may not be perfect correlation in the two price movements. Asset-based
securities may not be secured by a security interest in or claim on the underlying natural resource asset. The asset-based securities
in which a Fund may invest may bear interest or pay preferred dividends at below market (or even relatively nominal) rates. Certain
asset-based securities may be payable at maturity in cash at the stated principal amount or, at the option of the holder, directly
in a stated amount of the asset to which it is related. In such instance, because no Fund presently intends to invest directly
in natural resource assets, a Fund would sell the asset-based security in the secondary market, to the extent one exists, prior
to maturity if the value of the stated amount of the asset exceeds the stated principal amount and thereby realize the appreciation
in the underlying asset.
Precious Metal-Related Securities
. A Fund may invest
in the equity securities of companies that explore for, extract, process or deal in precious metals (
e.g.
, gold, silver
and platinum), and in asset-based securities indexed to the value of such metals. Such securities may be purchased when they are
believed to be attractively priced in relation to the value of a company’s precious metal-related assets or when the values
of precious metals are expected to benefit from inflationary pressure or other economic, political or financial uncertainty or
instability. Based on historical experience, during periods of economic or financial instability the securities of companies involved
in precious metals may be subject to extreme price fluctuations, reflecting the high volatility of precious metal prices during
such periods. In addition, the instability of precious metal prices may result in volatile earnings of precious metal-related companies,
which may, in turn, adversely affect the financial condition of such companies.
The major producers of gold include the Republic of South
Africa, Russia, Canada, the United States, Brazil and Australia. Sales of gold by Russia are largely unpredictable and often relate
to political and economic considerations rather than to market forces. Economic, financial, social and political factors within
South Africa may significantly affect South African gold production.
Bank Loans.
Certain Funds may invest in bank
loans. Bank loans are generally non-investment grade floating rate instruments. Usually, they are freely callable at the issuer’s
option. Certain Funds may invest in fixed and floating rate loans (“Loans”) arranged through private negotiations between
a corporate borrower or a foreign sovereign entity and one or more financial institutions (“Lenders”). A Fund may invest
in such Loans in the form of participations in Loans (“Participations”) and assignments of all or a portion of Loans
from third parties (“Assignments”). A Fund considers these investments to be investments in debt securities for purposes
of its investment policies. Participations typically will result in the Fund having a contractual relationship only with the Lender,
not with the borrower. The Fund will have the right to receive payments of principal, interest and any fees to which it is entitled
only from the Lender selling the Participation and only upon receipt by the Lender of the payments from the borrower. In connection
with purchasing Participations, the Fund generally will have no right to enforce compliance by the borrower with the terms of the
loan agreement relating to the Loans, nor any rights of set-off against the borrower, and the Fund may not benefit directly from
any collateral supporting the Loan in which it has purchased the Participation. As a result, the Fund will assume the credit risk
of both the borrower and the Lender that is selling the Participation. In the event of the insolvency of the Lender selling the
Participation, the
Fund may be treated as a general creditor of the Lender
and may not benefit from any set-off between the Lender and the borrower. The Fund will acquire Participations only if the Lender
interpositioned between the Fund and the borrower is determined by the Fund’s manager to be creditworthy. When the Fund purchases
Assignments from Lenders, the Fund will acquire direct rights against the borrower on the Loan, and will not have exposure to a
counterparty’s credit risk. The Funds may enter into Participations and Assignments on a forward commitment or “when-issued”
basis, whereby a Fund would agree to purchase a Participation or Assignment at set terms in the future. For more information on
forward commitments and when-issued securities, see “When-Issued Securities, Delayed Delivery Securities and Forward Commitments”
below.
A Fund may have difficulty disposing of Assignments and
Participations. In certain cases, the market for such instruments is not highly liquid, and therefore the Fund anticipates that
in such cases such instruments could be sold only to a limited number of institutional investors. The lack of a highly liquid secondary
market may have an adverse impact on the value of such instruments and on the Fund’s ability to dispose of particular Assignments
or Participations in response to a specific economic event, such as deterioration in the creditworthiness of the borrower. Assignments
and Participations will not be considered illiquid so long as it is determined by the Funds’ manager that an adequate trading
market exists for these securities. To the extent that liquid Assignments and Participations that a Fund holds become illiquid,
due to the lack of sufficient buyers or market or other conditions, the percentage of the Fund’s assets invested in illiquid
assets would increase.
Leading financial institutions often act as agent for a
broader group of lenders, generally referred to as a syndicate. The syndicate’s agent arranges the loans, holds collateral
and accepts payments of principal and interest. If the agent develops financial problems, a Fund may not recover its investment
or recovery may be delayed.
The Loans in which the Fund may invest are subject to the
risk of loss of principal and income. Although borrowers frequently provide collateral to secure repayment of these obligations
they do not always do so. If they do provide collateral, the value of the collateral may not completely cover the borrower’s
obligations at the time of a default. If a borrower files for protection from its creditors under the U.S. bankruptcy laws, these
laws may limit a Fund’s rights to its collateral. In addition, the value of collateral may erode during a bankruptcy case.
In the event of a bankruptcy, the holder of a Loan may not recover its principal, may experience a long delay in recovering its
investment and may not receive interest during the delay.
Borrowing and Leverage.
Each Fund may borrow
as a temporary measure for extraordinary or emergency purposes, including to meet redemptions or to settle securities transactions.
Certain Funds will not purchase securities at any time when borrowings exceed 5% of their total assets, except (a) to honor
prior commitments or (b) to exercise subscription rights when outstanding borrowings have been obtained exclusively for settlements
of other securities transactions. Certain Funds may also borrow in order to make investments. The purchase of securities while
borrowings are outstanding will have the effect of leveraging the Fund. Such leveraging increases the Fund’s exposure to
capital risk, and borrowed funds are subject to interest costs that will reduce net income. The use of leverage by a Fund creates
an opportunity for greater total return, but, at the same time, creates special risks. For example, leveraging may exaggerate changes
in the net asset value of Fund shares and in the yield on the Fund’s portfolio. Although the principal of such borrowings
will be fixed, the Fund’s assets may change in value during the time the borrowings are outstanding. Borrowings will create
interest expenses for the Fund that can exceed the income from the assets purchased with the borrowings. To the extent the income
or capital appreciation derived from securities purchased with borrowed funds exceeds the interest the Fund will have to pay on
the borrowings, the Fund’s return will be greater than if leverage had not been used. Conversely, if the income or capital
appreciation from the securities purchased with such borrowed funds is not sufficient to cover the cost of borrowing, the return
to the Fund will be less than if leverage had not been used and, therefore, the amount available for distribution to shareholders
as dividends will be reduced. In the latter case, the Manager in its best judgment nevertheless may determine to maintain the Fund’s
leveraged position if it expects that the benefits to the Fund’s shareholders of maintaining the leveraged position will
outweigh the current reduced return.
Certain types of borrowings by a Fund may result in the
Fund being subject to covenants in credit agreements relating to asset coverage, portfolio composition requirements and other matters.
It is not anticipated that observance of such covenants would impede the Manager from managing a Fund’s portfolio in accordance
with the Fund’s investment objectives and policies. However, a breach of any such covenants not cured within the specified
cure period may result in acceleration of outstanding indebtedness and require the Fund to dispose of portfolio investments at
a time when it may be disadvantageous to do so.
Each Fund may at times borrow from affiliates of the Manager,
provided that the terms of such borrowings are no less favorable than those available from comparable sources of funds in the marketplace.
Cash Flows; Expenses.
The ability of each
Fund to satisfy its investment objective depends to some extent on the Manager’s ability to manage cash flow (primarily from
purchases and redemptions and distributions from the Fund’s investments). The Manager will make
investment changes to a Fund’s portfolio to accommodate
cash flow while continuing to seek to replicate the total return of the Fund’s target index. Investors should also be aware
that the investment performance of each index is a hypothetical number which does not take into account brokerage commissions and
other transaction costs, custody and other costs of investing, and any incremental operating costs (
e.g.
, transfer agency
and accounting costs) that will be borne by the Funds. Finally, since each Fund seeks to replicate the total return of its target
index, the Manager generally will not attempt to judge the merits of any particular security as an investment.
Cash Management.
Generally, the Manager will
employ futures and options on futures to provide liquidity necessary to meet anticipated redemptions or for day-to-day operating
purposes. However, if considered appropriate in the opinion of the Manager, a portion of a Fund’s assets may be invested
in certain types of instruments with remaining maturities of 397 days or less for liquidity purposes. Such instruments would
consist of: (i) obligations of the U.S. Government, its agencies, instrumentalities, authorities or political subdivisions
(“U.S. Government Securities”); (ii) other fixed-income securities rated Aa or higher by Moody’s or AA or
higher by S&P or, if unrated, of comparable quality in the opinion of the Manager; (iii) commercial paper; (iv) bank
obligations, including negotiable certificates of deposit, time deposits and bankers’ acceptances; and (v) repurchase
agreements. At the time the Fund invests in commercial paper, bank obligations or repurchase agreements, the issuer or the issuer’s
parent must have outstanding debt rated Aa or higher by Moody’s or AA or higher by S&P or outstanding commercial paper,
bank obligations or other short-term obligations rated Prime-1 by Moody’s or A-1 by S&P; or, if no such ratings are available,
the instrument must be of comparable quality in the opinion of the Manager.
Collateralized Debt Obligations.
Certain Funds
may invest in collateralized debt obligations (“CDOs”), which include collateralized bond obligations (“CBOs”),
collateralized loan obligations (“CLOs”) and other similarly structured securities. CDOs are types of asset-backed
securities. A CBO is ordinarily issued by a trust or other special purpose entity (“SPE”) and is typically backed by
a diversified pool of fixed income securities (which may include high risk, below investment grade securities) held by such issuer.
A CLO is ordinarily issued by a trust or other SPE and is typically collateralized by a pool of loans, which may include, among
others, domestic and non-U.S. senior secured loans, senior unsecured loans, and subordinate corporate loans, including loans that
may be rated below investment grade or equivalent unrated loans, held by such issuer. Although certain CDOs may benefit from credit
enhancement in the form of a senior-subordinate structure, overcollateralization or bond insurance, such enhancement may not always
be present, and may fail to protect a Fund against the risk of loss on default of the collateral. Certain CDO issuers may use derivatives
contracts to create “synthetic” exposure to assets rather than holding such assets directly, which entails the risks
of derivative instruments described elsewhere in this SAI. CDOs may charge management fees and administrative expenses, which are
in addition to those of a Fund.
For both CBOs and CLOs, the cash flows from the SPE are split into
two or more portions, called tranches, varying in risk and yield. The riskiest portion is the “equity” tranche, which
bears the first loss from defaults from the bonds or loans in the SPE and serves to protect the other, more senior tranches from
default (though such protection is not complete). Since it is partially protected from defaults, a senior tranche from a CBO or
CLO typically has higher ratings and lower yields than its underlying securities, and may be rated investment grade. Despite the
protection from the equity tranche, CBO or CLO tranches can experience substantial losses due to actual defaults, downgrades of
the underlying collateral by rating agencies, forced liquidation of the collateral pool due to a failure of coverage tests, increased
sensitivity to defaults due to collateral default and disappearance of protecting tranches, market anticipation of defaults as
well as investor aversion to CBO or CLO securities as a class. Interest on certain tranches of a CDO may be paid in kind or deferred
and capitalized (paid in the form of obligations of the same type rather than cash), which involves continued exposure to default
risk with respect to such payments.
The risks of an investment in a CDO depend largely on the
type of the collateral securities and the class of the CDO in which a Fund invests. Normally, CBOs, CLOs and other CDOs are privately
offered and sold, and thus are not registered under the securities laws. As a result, investments in CDOs may be characterized
by a Fund as illiquid securities. However, an active dealer market may exist for CDOs, allowing a CDO to qualify for Rule 144A
transactions. In addition to the normal risks associated with fixed income securities and asset-backed securities generally discussed
elsewhere in this SAI, CDOs carry additional risks including, but not limited to: (i) the possibility that distributions from collateral
securities will not be adequate to make interest or other payments; (ii) the risk that the collateral may default or decline in
value or be downgraded, if rated by a nationally recognized statistical rating organization (“NRSRO”); (iii) a Fund
may invest in tranches of CDOs that are subordinate to other tranches; (iv) the structure and complexity of the transaction and
the legal documents could lead to disputes among investors regarding the characterization of proceeds; (v) the investment return
achieved by the Fund could be significantly different than those predicted by financial models; (vi) the lack of a readily available
secondary market for CDOs; (vii) risk of forced “fire sale” liquidation due to technical defaults such as coverage
test failures; and (viii) the CDO’s manager may perform poorly.
Commercial Paper
.
Certain Funds may purchase
commercial paper. Commercial paper purchasable by each Fund includes “Section 4(2) paper,” a term that includes
debt obligations issued in reliance on the “private placement” exemption from registration afforded by Section 4(2)
of the Securities Act. Section 4(2) paper is restricted as to disposition under the Federal securities laws, and is frequently
sold (and resold) to institutional investors such as the Fund through or with the assistance of investment dealers who make a market
in the Section 4(2) paper, thereby providing liquidity. Certain transactions in Section 4(2) paper may qualify for the
registration exemption provided in Rule 144A under the Securities Act. Most Funds can purchase commercial paper rated (at
the time of purchase) “A-1” by S&P or “Prime-1” by Moody’s or when deemed advisable by a Fund’s
Manager or sub-adviser, “high quality” issues rated “A-2”, “Prime-2” or “F-2” by
S&P, Moody’s or Fitch, respectively.
Commodity-Linked Derivative Instruments and Hybrid
Instruments
.
Certain Funds seek to gain exposure to the commodities markets primarily through investments in hybrid instruments.
Hybrid instruments are either equity or debt derivative securities with one or more commodity-dependent components that have payment
features similar to a commodity futures contract, a commodity option contract, or a combination of both. Therefore, these instruments
are “commodity-linked.” They are considered “hybrid” instruments because they have both commodity-like
and security-like characteristics. Hybrid instruments are derivative instruments because at least part of their value is derived
from the value of an underlying commodity, futures contract, index or other readily measurable economic variable.
The prices of commodity-linked derivative instruments may
move in different directions than investments in traditional equity and debt securities when the value of those traditional securities
is declining due to adverse economic conditions. As an example, during periods of rising inflation, debt securities have historically
tended to decline in value due to the general increase in prevailing interest rates. Conversely, during those same periods of rising
inflation, the prices of certain commodities, such as oil and metals, have historically tended to increase. Of course, there cannot
be any guarantee that these investments will perform in that manner in the future, and at certain times the price movements of
commodity-linked instruments have been parallel to those of debt and equity securities. Commodities have historically tended to
increase and decrease in value during different parts of the business cycle than financial assets. Nevertheless, at various times,
commodities prices may move in tandem with the prices of financial assets and thus may not provide overall portfolio diversification
benefits. Under favorable economic conditions, the Fund’s investments may be expected to under-perform an investment in traditional
securities. Over the long term, the returns on the Fund’s investments are expected to exhibit low or negative correlation
with stocks and bonds.
Qualifying Hybrid Instruments.
Certain Funds may
invest in hybrid instruments that qualify for exclusion from regulation under the Commodity Exchange Act and the regulations adopted
thereunder. A hybrid instrument that qualifies for this exclusion from regulation must be “predominantly a security.”
A hybrid instrument is considered to be predominantly a security if (a) the issuer of the hybrid instrument receives payment
in full of the purchase price of the hybrid instrument, substantially contemporaneously with delivery of the hybrid instrument;
(b) the purchaser or holder of the hybrid instrument is not required to make any payment to the issuer in addition to the
purchase price paid under subparagraph (a), whether as margin, settlement payment, or otherwise, during the life of the hybrid
instrument or at maturity; (c) the issuer of the hybrid instrument is not subject by the terms of the instrument to mark-to-market
margining requirements; and (d) the hybrid instrument is not marketed as a contract of sale of a commodity for future delivery
(or option on such a contract) subject to applicable provisions of the Commodity Exchange Act. Hybrid instruments may be principal
protected, partially protected, or offer no principal protection. A principal protected hybrid instrument means that the issuer
will pay, at a minimum, the par value of the note at maturity. Therefore, if the commodity value to which the hybrid instrument
is linked declines over the life of the note, the Fund will receive at maturity the face or stated value of the note. With a principal
protected hybrid instrument, the Fund will receive at maturity the greater of the par value of the note or the increase in its
value based on the underlying commodity or index. This protection is, in effect, an option whose value is subject to the volatility
and price level of the underlying commodity. The Manager’s decision whether to use principal protection depends in part on
the cost of the protection. In addition, the protection feature depends upon the ability of the issuer to meet its obligation to
buy back the security, and, therefore, depends on the creditworthiness of the issuer. With full principal protection, the Fund
will receive at maturity of the hybrid instrument either the stated par value of the hybrid instrument, or potentially, an amount
greater than the stated par value if the underlying commodity, index, futures contract or economic variable to which the hybrid
instrument is linked has increased in value. Partially protected hybrid instruments may suffer some loss of principal if the underlying
commodity, index, futures contract or economic variable to which the hybrid instrument is linked declines in value during the term
of the hybrid instrument. However, partially protected hybrid instruments have a specified limit as to the amount of principal
that they may lose.
Hybrid Instruments Without Principal Protection.
Certain
Funds may invest in hybrid instruments that offer no principal protection. At maturity, there is a risk that the underlying commodity
price, futures contract, index or other economic variable may have declined sufficiently in value such that some or all of the
face value of the hybrid instrument might not be returned. The Manager, at its discretion, may invest in a partially protected
principal structured note or a note without principal protection. In deciding to purchase a
note without principal protection, the Manager may consider,
among other things, the expected performance of the underlying commodity futures contract, index or other economic variable over
the term of the note, the cost of the note, and any other economic factors that the Manager believes are relevant.
Limitations on Leverage.
Some of the hybrid instruments
in which a Fund may invest may involve leverage. To avoid being subject to undue leverage risk, a Fund will seek to limit the amount
of economic leverage it has under any one hybrid instrument that it buys and the leverage of the Fund’s overall portfolio.
A Fund will not invest in a hybrid instrument if, at the time of purchase: (i) that instrument’s “leverage ratio”
exceeds 300% of the price increase in the underlying commodity, futures contract, index or other economic variable or (ii) the
Fund’s “portfolio leverage ratio” exceeds 150%, measured at the time of purchase. “Leverage ratio”
is the expected increase in the value of a hybrid instrument, assuming a one percent price increase in the underlying commodity,
futures contract, index or other economic factor. In other words, for a hybrid instrument with a leverage factor of 150%, a 1%
gain in the underlying economic variable would be expected to result in a 1.5% gain in value for the hybrid instrument. Conversely,
a hybrid instrument with a leverage factor of 150% would suffer a 1.5% loss if the underlying economic variable lost 1% of its
value. “Portfolio leverage ratio” is defined as the average (mean) leverage ratio of all instruments in a Fund’s
portfolio, weighted by the market values of such instruments or, in the case of futures contracts, their notional values. To the
extent that the policy on a Fund’s use of leverage stated above conflicts with the Investment Company Act or the rules and
regulations thereunder, the Fund will comply with the applicable provisions of the Investment Company Act. A Fund may at times
or from time to time decide not to use leverage in its investments or use less leverage than may otherwise be allowable.
Counterparty Risk.
A significant risk of hybrid
instruments is counterparty risk. Unlike exchange-traded futures and options, which are standard contracts, hybrid instruments
are customized securities, tailor-made by a specific issuer. With a listed futures or options contract, an investor’s counterparty
is the exchange clearinghouse. Exchange clearinghouses are capitalized by the exchange members and typically have high investment
grade ratings (
e.g.
, ratings of AAA or AA by S&P). Therefore, the risk is small that an exchange clearinghouse might
be unable to meet its obligations at maturity. However, with a hybrid instrument, a Fund will take on the counterparty credit risk
of the issuer. That is, at maturity of the hybrid instrument, there is a risk that the issuer may be unable to perform its obligations
under the structured note.
Convertible Securities.
A convertible security
is a bond, debenture, note, preferred stock or other security that may be converted into or exchanged for a prescribed amount of
common stock or other equity security of the same or a different issuer within a particular period of time at a specified price
or formula. A convertible security entitles the holder to receive interest paid or accrued on debt or the dividend paid on preferred
stock until the convertible security matures or is redeemed, converted or exchanged. Before conversion, convertible securities
have characteristics similar to nonconvertible income securities in that they ordinarily provide a stable stream of income with
generally higher yields than those of common stocks of the same or similar issuers, but lower yields than comparable nonconvertible
securities. The value of a convertible security is influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline. The credit standing of the issuer and other factors also may
have an effect on the convertible security’s investment value. Convertible securities rank senior to common stock in a corporation’s
capital structure but are usually subordinated to comparable nonconvertible securities. Convertible securities may be subject to
redemption at the option of the issuer at a price established in the convertible security’s governing instrument.
The characteristics of convertible securities make them
potentially attractive investments for an investment company seeking a high total return from capital appreciation and investment
income. These characteristics include the potential for capital appreciation as the value of the underlying common stock increases,
the relatively high yield received from dividend or interest payments as compared to common stock dividends and decreased risks
of decline in value relative to the underlying common stock due to their fixed income nature. As a result of the conversion feature,
however, the interest rate or dividend preference on a convertible security is generally less than would be the case if the securities
were issued in nonconvertible form.
In analyzing convertible securities, the Manager will consider
both the yield on the convertible security relative to its credit quality and the potential capital appreciation that is offered
by the underlying common stock, among other things.
Convertible securities are issued and traded in a number
of securities markets. Even in cases where a substantial portion of the convertible securities held by a Fund are denominated in
U.S. dollars, the underlying equity securities may be quoted in the currency of the country where the issuer is domiciled. As a
result, fluctuations in the exchange rate between the currency in which the debt security is denominated and the currency in which
the share price is quoted will affect the value of the convertible security. With respect to convertible securities denominated
in a currency different from that of the underlying equity securities, the conversion price may be based on a fixed exchange rate
established at the time the security is issued, which may increase the effects of currency risk. As described below, a Fund is
authorized to enter into foreign currency hedging transactions in which it may seek to reduce the effect of exchange rate fluctuations.
Apart from currency considerations, the value of convertible
securities is influenced by both the yield on nonconvertible securities of comparable issuers and by the value of the underlying
common stock. The value of a convertible security viewed without regard to its conversion feature (
i.e.,
strictly on the
basis of its yield) is sometimes referred to as its “investment value.” To the extent interest rates change, the investment
value of the convertible security typically will fluctuate. At the same time, however, the value of the convertible security will
be influenced by its “conversion value,” which is the market value of the underlying common stock that would be obtained
if the convertible security were converted. Conversion value fluctuates directly with the price of the underlying common stock.
If the conversion value of a convertible security is substantially below its investment value, the price of the convertible security
is governed principally by its investment value. To the extent the conversion value of a convertible security increases to a point
that approximates or exceeds its investment value, the price of the convertible security will be influenced principally by its
conversion value. A convertible security will sell at a premium over the conversion value to the extent investors place value on
the right to acquire the underlying common stock while holding a fixed income security. The yield and conversion premium of convertible
securities issued in Japan and the Euromarket are frequently determined at levels that cause the conversion value to affect their
market value more than the securities’ investment value.
Holders of convertible securities generally have a claim
on the assets of the issuer prior to the common stockholders but may be subordinated to other debt securities of the same issuer.
A convertible security may be subject to redemption at the option of the issuer at a price established in a charter provision,
indenture or other governing instrument pursuant to which the convertible security was issued. If a convertible security held by
a Fund is called for redemption, the Fund will be required to redeem the security, convert it into the underlying common stock
or sell it to a third party. Certain convertible debt securities may provide a put option to the holder, which entitles the holder
to cause the security to be redeemed by the issuer at a premium over the stated principal amount of the debt security under certain
circumstances.
A Fund may also invest in synthetic convertible securities.
Synthetic convertible securities may include either Cash-Settled Convertibles or Manufactured Convertibles. Cash-Settled Convertibles
are instruments that are created by the issuer and have the economic characteristics of traditional convertible securities but
may not actually permit conversion into the underlying equity securities in all circumstances. As an example, a private company
may issue a Cash-Settled Convertible that is convertible into common stock only if the company successfully completes a public
offering of its common stock prior to maturity and otherwise pays a cash amount to reflect any equity appreciation. Manufactured
Convertibles are created by the Manager or another party by combining separate securities that possess one of the two principal
characteristics of a convertible security,
i.e.,
fixed income (“fixed income component”) or a right to acquire
equity securities (“convertibility component”). The fixed income component is achieved by investing in nonconvertible
fixed income securities, such as nonconvertible bonds, preferred stocks and money market instruments. The convertibility component
is achieved by investing in call options, warrants, or other securities with equity conversion features (“equity features”)
granting the holder the right to purchase a specified quantity of the underlying stocks within a specified period of time at a
specified price or, in the case of a stock index option, the right to receive a cash payment based on the value of the underlying
stock index.
A Manufactured Convertible differs from traditional convertible
securities in several respects. Unlike a traditional convertible security, which is a single security that has a unitary market
value, a Manufactured Convertible is comprised of two or more separate securities, each with its own market value. Therefore, the
total “market value” of such a Manufactured Convertible is the sum of the values of its fixed income component and
its convertibility component.
More flexibility is possible in the creation of a Manufactured
Convertible than in the purchase of a traditional convertible security. Because many corporations have not issued convertible securities,
the Manager may combine a fixed income instrument and an equity feature with respect to the stock of the issuer of the fixed income
instrument to create a synthetic convertible security otherwise unavailable in the market. The Manager may also combine a fixed
income instrument of an issuer with an equity feature with respect to the stock of a different issuer when the Manager believes
such a Manufactured Convertible would better promote a Fund’s objective than alternative investments. For example, the Manager
may combine an equity feature with respect to an issuer’s stock with a fixed income security of a different issuer in the
same industry to diversify the Fund’s credit exposure, or with a U.S. Treasury instrument to create a Manufactured Convertible
with a higher credit profile than a traditional convertible security issued by that issuer. A Manufactured Convertible also is
a more flexible investment in that its two components may be purchased separately and, upon purchasing the separate securities,
“combined” to create a Manufactured Convertible. For example, the Fund may purchase a warrant for eventual inclusion
in a Manufactured Convertible while postponing the purchase of a suitable bond to pair with the warrant pending development of
more favorable market conditions.
The value of a Manufactured Convertible may respond to
certain market fluctuations differently from a traditional convertible security with similar characteristics. For example, in the
event a Fund created a Manufactured Convertible by combining a short-term U.S. Treasury instrument and a call option on a stock,
the Manufactured Convertible would be expected to outperform a traditional
convertible of similar maturity that is convertible into
that stock during periods when Treasury instruments outperform corporate fixed income securities and underperform during periods
when corporate fixed income securities outperform Treasury instruments.
Debt Securities.
Debt securities, such as
bonds, involve credit risk. This is the risk that the issuer will not make timely payments of principal and interest. The degree
of credit risk depends on the issuer’s financial condition and on the terms of the debt securities. Changes in an issuer’s
credit rating or the market’s perception of an issuer’s creditworthiness may also affect the value of a Fund’s
investment in that issuer. Credit risk is reduced to the extent a Fund limits its debt investments to U.S. Government securities.
All debt securities, however, are subject to interest rate risk. This is the risk that the value of the security may fall when
interest rates rise. If interest rates move sharply in a manner not anticipated by Fund management, a Fund’s investments
in debt securities could be adversely affected and the Fund could lose money. In general, the market price of debt securities with
longer maturities will go up or down more in response to changes in interest rates than will the market price of shorter-term debt
securities.
During periods of rising interest rates, the average life
of certain fixed income securities is extended because of slower than expected principal payments. This may lock in a below-market
interest rate and extend the duration of these fixed-income securities, especially mortgage-related securities, making them more
sensitive to changes in interest rates. As a result, in a period of rising interest rates, these securities may exhibit additional
volatility and lose value. This is known as extension risk.
The value of fixed income securities in the Funds can be
expected to vary inversely with changes in prevailing interest rates. Fixed income securities with longer maturities, which tend
to produce higher yields, are subject to potentially greater capital appreciation and depreciation than securities with shorter
maturities. The Funds are not restricted to any maximum or minimum time to maturity in purchasing individual portfolio securities,
and the average maturity of a Fund’s assets will vary.
Depositary Receipts (ADRs, EDRs and GDRs).
Certain
Funds may invest in the securities of foreign issuers in the form of Depositary Receipts or other securities convertible into securities
of foreign issuers. Depositary Receipts may not necessarily be denominated in the same currency as the underlying securities into
which they may be converted. The Fund may invest in both sponsored and unsponsored American Depositary Receipts (“ADRs”),
European Depositary Receipts (“EDRs”), Global Depositary Receipts (“GDRs”) and other similar global instruments.
ADRs typically are issued by an American bank or trust company and evidence ownership of underlying securities issued by a foreign
corporation. EDRs, which are sometimes referred to as Continental Depositary Receipts, are receipts issued in Europe, typically
by foreign banks and trust companies, that evidence ownership of either foreign or domestic underlying securities. GDRs are depositary
receipts structured like global debt issues to facilitate trading on an international basis. Unsponsored ADR, EDR and GDR programs
are organized independently and without the cooperation of the issuer of the underlying securities. As a result, available information
concerning the issuer may not be as current as for sponsored ADRs, EDRs and GDRs, and the prices of unsponsored ADRs, EDRs and
GDRs may be more volatile than if such instruments were sponsored by the issuer. Depositary Receipts are generally subject to the
same risks as the foreign securities that they evidence or into which they may be converted. Investments in ADRs, EDRs and GDRs
present additional investment considerations as described under “Foreign Investment Risks.”
Derivatives
Each Fund may use instruments referred to as derivative
securities. Derivatives are financial instruments the value of which is derived from another security, a commodity (such as gold
or oil), a currency or an index (a measure of value or rates, such as the S&P 500 Index or the prime lending rate). Derivatives
allow a Fund to increase or decrease the level of risk to which the Fund is exposed more quickly and efficiently than transactions
in other types of instruments. Each Fund may use derivatives for hedging purposes. Certain Funds may also use derivatives for speculative
purposes to seek to enhance returns. The use of a derivative is speculative if the Fund is primarily seeking to achieve gains,
rather than offset the risk of other positions. When a Fund invests in a derivative for speculative purposes, the Fund will be
fully exposed to the risks of loss of that derivative, which may sometimes be greater than the derivative’s cost. Unless
otherwise permitted, no Fund may use any derivative to gain exposure to an asset or class of assets that it would be prohibited
by its investment restrictions from purchasing directly.
Hedging
. Hedging is a strategy in which a derivative
is used to offset the risks associated with other Fund holdings. Losses on the other investment may be substantially reduced by
gains on a derivative that reacts in an opposite manner to market movements. While hedging can reduce losses, it can also reduce
or eliminate gains or cause losses if the market moves in a manner different from that anticipated by the Fund or if the cost of
the derivative outweighs the benefit of the hedge. Hedging also involves correlation risk,
i.e.
the risk that changes in
the value of the derivative will not match those of the holdings being hedged as expected by a Fund, in which case any losses on
the holdings being hedged may not be reduced or may be increased. The inability to close options and futures positions also could
have an adverse impact on a Fund’s ability to hedge effectively its portfolio. There is also a risk of loss by the Fund of
margin deposits or collateral in the event of bankruptcy of a broker with whom the Fund has an open position in an option, a
futures contract or a related option. There can be no assurance
that a Fund’s hedging strategies will be effective. No Fund is required to engage in hedging transactions and each Fund may
choose not to do so.
A Fund may use derivative instruments and trading strategies,
including the following:
Indexed and Inverse Securities.
A Fund may invest
in securities the potential return of which is based on an index or interest rate. As an illustration, a Fund may invest in a debt
security that pays interest based on the current value of an interest rate index, such as the prime rate. A Fund may also invest
in a debt security that returns principal at maturity based on the level of a securities index or a basket of securities, or based
on the relative changes of two indices. In addition, certain Funds may invest in securities the potential return of which is based
inversely on the change in an index or interest rate (that is, a security the value of which will move in the opposite direction
of changes to an index or interest rate). For example, a Fund may invest in securities that pay a higher rate of interest when
a particular index decreases and pay a lower rate of interest (or do not fully return principal) when the value of the index increases.
If a Fund invests in such securities, it may be subject to reduced or eliminated interest payments or loss of principal in the
event of an adverse movement in the relevant interest rate, index or indices. Indexed and inverse securities involve credit risk,
and certain indexed and inverse securities may involve leverage risk, liquidity risk and currency risk. When used for hedging purposes,
indexed and inverse securities involve correlation risk. (Furthermore, where such a security includes a contingent liability, in
the event of an adverse movement in the underlying index or interest rate, a Fund may be required to pay substantial additional
margin to maintain the position.)
Swap Agreements.
Swap agreements are two-party contracts
entered into primarily by institutional investors for periods ranging from a few weeks to more than one year. In a standard “swap”
transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined
investments or instruments, which can be adjusted for an interest factor. The gross returns to be exchanged or “swapped”
between the parties are generally calculated with respect to a “notional amount,”
i.e.
, the return on or increase
in value of a particular dollar amount invested at a particular interest rate or in a “basket” of securities representing
a particular index.
Whether a Fund’s use of swap agreements or options
on swap agreements (“swaptions”) will be successful in furthering its investment objectives will depend on the Manager’s
or sub-adviser’s ability to predict correctly whether certain types of investments are likely to produce greater returns
than other investments. Because they are two-party contracts and because they may have terms of greater than seven days, swap agreements
may be considered to be illiquid. Moreover, a Fund bears the risk of loss of the amount expected to be received under a swap agreement
in the event of the default or bankruptcy of a swap agreement counterparty. A Fund will enter into swap agreements only with counterparties
that meet certain standards of creditworthiness. If there is a default by the other party to such a transaction, a Fund will have
contractual remedies pursuant to the agreements related to the transaction. Swap agreements are also subject to the risk that a
Fund will not be able to meet its obligations to the counterparty. The Fund, however, will segregate liquid assets permitted to
be so segregated by the Commission in an amount equal to or greater than the market value of the liabilities under the swap agreement
or the amount it would cost the Fund initially to make an equivalent direct investment, plus or minus any amount the Fund is obligated
to pay or is to receive under the swap agreement. The swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents utilizing standardized swap documentation. As a result,
the swap market has become relatively liquid. The swaps market is largely unregulated. It is possible that developments in the
swaps market, including potential government regulation, could adversely affect a Fund’s ability to terminate existing swap
agreements or to realize amounts to be received under such agreements.
Credit Default Swap Agreements and Similar Instruments.
Certain Funds may enter into credit default swap agreements and similar agreements, and may also buy credit-linked securities.
The credit default swap agreement or similar instrument may have as reference obligations one or more securities that are not currently
held by a Fund. The protection “buyer” in a credit default contract may be obligated to pay the protection “seller”
an up-front payment or a periodic stream of payments over the term of the contract, provided generally that no credit event on
a reference obligation has occurred. If a credit event occurs, the seller generally must pay the buyer the “par value”
(full notional value) of the swap in exchange for an equal face amount of deliverable obligations of the reference entity described
in the swap, or the seller may be required to deliver the related net cash amount, if the swap is cash settled. A Fund may be either
the buyer or seller in the transaction. If a Fund is a buyer and no credit event occurs, the Fund recovers nothing if the swap
is held through its termination date. However, if a credit event occurs, the Fund may elect to receive the full notional value
of the swap in exchange for an equal face amount of deliverable obligations of the reference entity that may have little or no
value. As a seller, a Fund generally receives an up-front payment or a fixed rate of income throughout the term of the swap, which
typically is between six months and three years, provided that there is no credit event. If a credit event occurs, generally the
seller must pay the buyer the full notional value of the swap in exchange for an equal face amount of deliverable obligations of
the reference entity that may have little or no value.
Credit default swaps and similar instruments involve greater
risks than if a Fund had invested in the reference obligation directly, since, in addition to general market risks, they are subject
to illiquidity risk, counterparty risk and credit risk. A Fund will enter into credit default swap agreements and similar instruments
only with counterparties who are rated investment grade quality by at least one nationally recognized statistical rating organization
at the time of entering into such transaction or whose creditworthiness is believed by the Manager to be equivalent to such rating.
A buyer also will lose its investment and recover nothing should no credit event occur and the swap is held to its termination
date. If a credit event were to occur, the value of any deliverable obligation received by the seller, coupled with the up front
or periodic payments previously received, may be less than the full notional value it pays to the buyer, resulting in a loss of
value to the Fund. When a Fund acts as a seller of a credit default swap or a similar instrument, it is exposed to many of the
same risks of leverage since, if a credit event occurs, the seller may be required to pay the buyer the full notional value of
the contract net of any amounts owed by the buyer related to its delivery of deliverable obligations.
Credit Linked Securities
. Among the income producing
securities in which a Fund may invest are credit linked securities, which are issued by a limited purpose trust or other vehicle
that, in turn, invests in a derivative instrument or basket of derivative instruments, such as credit default swaps, interest rate
swaps and other securities, in order to provide exposure to certain fixed income markets. For instance, a Fund may invest in credit
linked securities as a cash management tool in order to gain exposure to a certain market and/or to remain fully invested when
more traditional income producing securities are not available.
Like an investment in a bond, investments in these credit
linked securities represent the right to receive periodic income payments (in the form of distributions) and payment of principal
at the end of the term of the security. However, these payments are conditioned on the issuer’s receipt of payments from,
and the issuer’s potential obligations to, the counterparties to the derivative instruments and other securities in which
the issuer invests. For instance, the issuer may sell one or more credit default swaps, under which the issuer would receive a
stream of payments over the term of the swap agreements provided that no event of default has occurred with respect to the referenced
debt obligation upon which the swap is based. If a default occurs, the stream of payments may stop and the issuer would be obligated
to pay the counterparty the par (or other agreed upon value) of the referenced debt obligation. This, in turn, would reduce the
amount of income and principal that a Fund would receive. A Fund’s investments in these instruments are indirectly subject
to the risks associated with derivative instruments, including, among others, credit risk, default or similar event risk, counterparty
risk, interest rate risk, leverage risk and management risk. It is also expected that the securities will be exempt from registration
under the Securities Act. Accordingly, there may be no established trading market for the securities and they may constitute illiquid
investments.
Interest Rate Transactions and Swaptions.
Certain
Funds, to the extent permitted under applicable law, may enter into forms of swap agreements including interest rate caps, under
which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates exceed a specified
rate, or “cap”; and interest rate floors, under which, in return for a premium, one party agrees to make payments to
the other to the extent that interest rates fall below a specified rate, or “floor”. Caps and floors are less liquid
than swaps. A swaption is a contract that gives a counterparty the right (but not the obligation) to enter into a new swap agreement
or to shorten, extend, cancel or otherwise modify an existing swap agreement, at some designated future time on specified terms.
A Fund may write (sell) and purchase put and call swaptions. Certain Funds may also enter into swaptions on either an asset-based
or liability-based basis, depending on whether a Fund is hedging its assets or its liabilities. A Fund may enter into these transactions
primarily to preserve a return or spread on a particular investment or portion of their holdings, as a duration management technique
or to protect against an increase in the price of securities a Fund anticipates purchasing at a later date. They may also be used
for speculation to increase returns.
A Fund will usually enter into interest rate swaps on a
net basis,
i.e.
, the two payment streams are netted out, with the Fund receiving or paying, as the case may be, only the
net amount of the two payments.
Depending on the terms of the particular option agreement,
a Fund will generally incur a greater degree of risk when it writes a swaption than it will incur when it purchases a swaption.
When a Fund purchases a swaption, it risks losing only the amount of the premium it has paid should it decide to let the option
expire unexercised. However, when a Fund writes a swaption, upon exercise of the option the Fund will become obligated according
to the terms of the underlying agreement.
A Fund will accrue the net amount of the excess, if any,
of its obligations over its entitlements with respect to each interest rate or currency swap or swaption on a daily basis and its
Manager or sub-adviser will designate liquid assets on its books and records in an amount having an aggregate net asset value at
least equal to the accrued excess to the extent required by SEC guidelines. If the other party to an interest rate swap defaults,
a Fund’s risk of loss consists of the net amount of interest payments that the Fund is contractually entitled to receive.
Total Return Swap Agreements.
Total return swap
agreements are contracts in which one party agrees to make periodic payments to another party based on the change in market value
of the assets underlying the contract, which may include a specified security, basket
of securities or securities indices during the specified
period, in return for periodic payments based on a fixed or variable interest rate or the total return from other underlying assets.
Total return swap agreements may be used to obtain exposure to a security or market without owning or taking physical custody of
such security or investing directly in such market. Total return swap agreements may effectively add leverage to the Fund’s
portfolio because, in addition to its total net assets, the Fund would be subject to investment exposure on the notional amount
of the swap.
Total return swap agreements are subject to the risk that
a counterparty will default on its payment obligations to the Fund thereunder. Swap agreements also bear the risk that the Fund
will not be able to meet its obligation to the counterparty. Generally, the Fund will enter into total return swaps on a net basis
(
i.e.
, the two payment streams are netted against one another with the Fund receiving or paying, as the case may be, only
the net amount of the two payments). The net amount of the excess, if any, of the Fund’s obligations over its entitlements
with respect to each total return swap will be accrued on a daily basis, and an amount of liquid assets having an aggregate net
asset value at least equal to the accrued excess will be segregated by the Fund. If the total return swap transaction is entered
into on other than a net basis, the full amount of the Fund’s obligations will be accrued on a daily basis, and the full
amount of the Fund’s obligations will be segregated by the Fund in an amount equal to or greater than the market value of
the liabilities under the total return swap agreement or the amount it would have cost the Fund initially to make an equivalent
direct investment, plus or minus any amount the Fund is obligated to pay or is to receive under the total return swap agreement.
Types of Options
Options on Securities and Securities Indices.
A
Fund may engage in transactions in options on individual securities, baskets of securities or securities indices, or particular
measurements of value or rates (an “index”), such as an index of the price of treasury securities or an index representative
of short-term interest rates. Such investments may be made on exchanges and in the over-the-counter (“OTC”) markets.
In general, exchange-traded options have standardized exercise prices and expiration dates and require the parties to post margin
against their obligations, and the performance of the parties’ obligations in connection with such options is guaranteed
by the exchange or a related clearing corporation. OTC options have more flexible terms negotiated between the buyer and the seller,
but generally do not require the parties to post margin and are subject to greater credit risk. OTC options also involve greater
liquidity risk. See “Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC Derivatives” below.
Call Options
. A Fund may purchase call options on
any of the types of securities or instruments in which it may invest. A purchased call option gives a Fund the right to buy, and
obligates the seller to sell, the underlying security at the exercise price at any time during the option period. A Fund also may
purchase and sell call options on indices. Index options are similar to options on securities except that, rather than taking or
making delivery of securities underlying the option at a specified price upon exercise, an index option gives the holder the right
to receive cash upon exercise of the option if the level of the index upon which the option is based is greater than the exercise
price of the option.
A Fund also is authorized to write (
i.e.
, sell)
covered call options on the securities or instruments in which it may invest and to enter into closing purchase transactions with
respect to certain of such options. A covered call option is an option in which a Fund, in return for a premium, gives another
party a right to buy specified securities owned by the Fund at a specified future date and price set at the time of the contract.
The principal reason for writing call options is the attempt to realize, through the receipt of premiums, a greater return than
would be realized on the securities alone. By writing covered call options, a Fund gives up the opportunity, while the option is
in effect, to profit from any price increase in the underlying security above the option exercise price. In addition, a Fund’s
ability to sell the underlying security will be limited while the option is in effect unless the Fund enters into a closing purchase
transaction. A closing purchase transaction cancels out a Fund’s position as the writer of an option by means of an offsetting
purchase of an identical option prior to the expiration of the option it has written. Covered call options also serve as a partial
hedge to the extent of the premium received against the price of the underlying security declining.
A call option is considered to be covered if a Fund holds
a call on the same security or index as the call written where the exercise price of the call held is (i) equal to or less
than the exercise price of the call written, or (ii) greater than the exercise price of the call written provided the difference
is maintained by the Fund in liquid assets designated on the Manager’s or sub-adviser’s books and records to the extent
required by SEC guidelines.
A Fund also is authorized to write (
i.e.
, sell)
uncovered call options on securities or instruments in which it may invest but that are not currently held by the Fund. The principal
reason for writing uncovered call options is to realize income without committing capital to the ownership of the underlying securities
or instruments. When writing uncovered call options, a Fund must deposit and maintain sufficient margin with the broker-dealer
through which it made the uncovered call option as collateral to ensure that the securities can be purchased for delivery if and
when the option is exercised. In addition, in connection with each such transaction a Fund will segregate unencumbered liquid securities
or cash with a value at least equal to the Fund’s exposure (the difference between the unpaid
amounts owed by the Fund on such transaction minus any
collateral deposited with the broker-dealer), on a marked-to-market basis (as calculated pursuant to requirements of the Commission).
Such segregation will ensure that the Fund has assets available to satisfy its obligations with respect to the transaction and
will avoid any potential leveraging of the Fund’s portfolio. Such segregation will not limit the Fund’s exposure to
loss. During periods of declining securities prices or when prices are stable, writing uncovered calls can be a profitable strategy
to increase a Fund’s income with minimal capital risk. Uncovered calls are riskier than covered calls because there is no
underlying security held by a Fund that can act as a partial hedge. Uncovered calls have speculative characteristics and the potential
for loss is unlimited. When an uncovered call is exercised, a Fund must purchase the underlying security to meet its call obligation.
There is also a risk, especially with less liquid preferred and debt securities, that the securities may not be available for purchase.
If the purchase price exceeds the exercise price, a Fund will lose the difference.
Put Options
. A Fund is authorized to purchase put
options to seek to hedge against a decline in the value of its securities or to enhance its return. By buying a put option, a Fund
acquires a right to sell the underlying securities or instruments at the exercise price, thus limiting the Fund’s risk of
loss through a decline in the market value of the securities or instruments until the put option expires. The amount of any appreciation
in the value of the underlying securities or instruments will be partially offset by the amount of the premium paid for the put
option and any related transaction costs. Prior to its expiration, a put option may be sold in a closing sale transaction and profit
or loss from the sale will depend on whether the amount received is more or less than the premium paid for the put option plus
the related transaction costs. A closing sale transaction cancels out a Fund’s position as the purchaser of an option by
means of an offsetting sale of an identical option prior to the expiration of the option it has purchased. A Fund also may purchase
uncovered put options.
A Fund also has authority to write (
i.e.
, sell)
put options on the types of securities or instruments that may be held by the Fund, provided that such put options are covered,
meaning that such options are secured by segregated, liquid assets. A Fund will receive a premium for writing a put option, which
increases the Fund’s return. A Fund will not sell puts if, as a result, more than 50% of the Fund’s assets would be
required to cover its potential obligations under its hedging and other investment transactions.
A Fund is also authorized to write (
i.e.
, sell)
uncovered put options on securities or instruments in which it may invest but with respect to which the Fund does not currently
have a corresponding short position or has not deposited as collateral cash equal to the exercise value of the put option with
the broker-dealer through which it made the uncovered put option. The principal reason for writing uncovered put options is to
receive premium income and to acquire such securities or instruments at a net cost below the current market value. A Fund has the
obligation to buy the securities or instruments at an agreed upon price if the price of the securities or instruments decreases
below the exercise price. If the price of the securities or instruments increases during the option period, the option will expire
worthless and a Fund will retain the premium and will not have to purchase the securities or instruments at the exercise price.
In connection with such a transaction, a Fund will segregate unencumbered liquid assets with a value at least equal to the Fund’s
exposure, on a marked-to-market basis (as calculated pursuant to requirements of the Commission). Such segregation will ensure
that a Fund has assets available to satisfy its obligations with respect to the transaction and will avoid any potential leveraging
of the Fund’s portfolio. Such segregation will not limit the Fund’s exposure to loss.
Risks Associated with Options.
There are several
risks associated with transactions in options on securities and indexes. For example, there are significant differences between
the securities and options markets that could result in an imperfect correlation between these markets, causing a given transaction
not to achieve its objectives. In addition, a liquid secondary market for particular options, whether traded over-the-counter or
on a national securities exchange may be absent for reasons which include the following: there may be insufficient trading interest
in certain options; restrictions may be imposed by a national securities exchange on opening transactions or closing transactions
or both; trading halts, suspensions or other restrictions may be imposed with respect to particular classes or series of options
or underlying securities; unusual or unforeseen circumstances may interrupt normal operations on a national securities exchange;
the facilities of a national securities exchange or the Options Clearing Corporation may not at all times be adequate to handle
current trading volume; or one or more national securities exchanges could, for economic or other reasons, decide or be compelled
at some future date to discontinue the trading of options (or a particular class or series of options), in which event the secondary
market on that national securities exchange (or in that class or series of options) would cease to exist, although outstanding
options that had been issued by the Options Clearing Corporation as a result of trades on that national securities exchange would
continue to be exercisable in accordance with their terms.
Futures
A Fund may engage in transactions in futures and options
on futures. Futures are standardized, exchange-traded contracts that obligate a purchaser to take delivery, and a seller to make
delivery, of a specific amount of an asset at a specified future date at a specified price. No price is paid upon entering into
a futures contract. Rather, upon purchasing or selling a futures contract a Fund is required to deposit collateral (“margin”)
equal to a percentage (generally less than 10%) of the contract value. Each day thereafter until the futures
position is closed, the Fund will pay additional margin
representing any loss experienced as a result of the futures position the prior day or be entitled to a payment representing any
profit experienced as a result of the futures position the prior day. Futures involve substantial leverage risk.
The sale of a futures contract limits a Fund’s risk
of loss from a decline in the market value of portfolio holdings correlated with the futures contract prior to the futures contract’s
expiration date. In the event the market value of the portfolio holdings correlated with the futures contract increases rather
than decreases, however, a Fund will realize a loss on the futures position and a lower return on the portfolio holdings than would
have been realized without the purchase of the futures contract.
The purchase of a futures contract may protect a Fund from
having to pay more for securities as a consequence of increases in the market value for such securities during a period when the
Fund was attempting to identify specific securities in which to invest in a market the Fund believes to be attractive. In the event
that such securities decline in value or a Fund determines not to complete an anticipatory hedge transaction relating to a futures
contract, however, the Fund may realize a loss relating to the futures position.
A Fund is also authorized to purchase or sell call and
put options on futures contracts including financial futures and stock indices. Generally, these strategies would be used under
the same market and market sector conditions (
i.e.
, conditions relating to specific types of investments) in which the Fund
entered into futures transactions. A Fund may purchase put options or write call options on futures contracts and stock indices
in lieu of selling the underlying futures contract in anticipation of a decrease in the market value of its securities. Similarly,
a Fund can purchase call options, or write put options on futures contracts and stock indices, as a substitute for the purchase
of such futures to hedge against the increased cost resulting from an increase in the market value of securities which the Fund
intends to purchase.
To maintain greater flexibility, a Fund may invest in instruments
which have characteristics similar to futures contracts. These instruments may take a variety of forms, such as debt securities
with interest or principal payments determined by reference to the value of a security, an index of securities or a commodity at
a future point in time. The risks of such investments could reflect the risks of investing in futures and securities, including
volatility and illiquidity.
Risks Associated with Futures.
The primary risks
associated with the use of futures contracts and options are (a) the imperfect correlation between the change in market value
of the instruments held by a Fund and the price of the futures contract or option; (b) possible lack of a liquid secondary
market for a futures contract and the resulting inability to close a futures contract when desired; (c) losses caused by
unanticipated market movements, which are potentially unlimited; (d) the Manager’s or sub-adviser’s inability
to predict correctly the direction of securities prices, interest rates, currency exchange rates and other economic factors; and
(e) the possibility that the counterparty will default in the performance of its obligations.
Foreign Exchange Transactions.
A Fund may engage
in spot and forward foreign exchange transactions and currency swaps, purchase and sell options on currencies and purchase and
sell currency futures and related options thereon (collectively, “Currency Instruments”) for purposes of hedging against
the decline in the value of currencies in which its portfolio holdings are denominated against the U.S. dollar or, with respect
to certain Funds, to seek to enhance returns. Such transactions could be effected with respect to hedges on foreign dollar denominated
securities owned by a Fund, sold by a Fund but not yet delivered, or committed or anticipated to be purchased by a Fund. As an
illustration, a Fund may use such techniques to hedge the stated value in U.S. dollars of an investment in a yen-denominated security.
In such circumstances, for example, the Fund may purchase a foreign currency put option enabling it to sell a specified amount
of yen for dollars at a specified price by a future date. To the extent the hedge is successful, a loss in the value of the yen
relative to the dollar will tend to be offset by an increase in the value of the put option. To offset, in whole or in part, the
cost of acquiring such a put option, the Fund may also sell a call option which, if exercised, requires it to sell a specified
amount of yen for dollars at a specified price by a future date (a technique called a “straddle”). By selling such
a call option in this illustration, the Fund gives up the opportunity to profit without limit from increases in the relative value
of the yen to the dollar. “Straddles” of the type that may be used by a Fund are considered to constitute hedging transactions.
Certain Funds have a fundamental investment restriction that restricts currency option strategies. No Fund will attempt to hedge
all of its foreign portfolio positions.
Forward Foreign Exchange Transactions.
Forward foreign
exchange transactions are OTC contracts to purchase or sell a specified amount of a specified currency or multinational currency
unit at a price and future date set at the time of the contract. Spot foreign exchange transactions are similar but require current,
rather than future, settlement. A Fund will enter into foreign exchange transactions for purposes of hedging either a specific
transaction or a portfolio position, or, with respect to certain Funds, to seek to enhance returns. A Fund may enter into a foreign
exchange transaction for purposes of hedging a specific transaction by, for example, purchasing a currency needed to settle a security
transaction or selling a currency in which the Fund has received or anticipates receiving a dividend or distribution. A Fund may
enter into a foreign exchange transaction for purposes of hedging a portfolio position by selling forward a currency in which a
portfolio position of the Fund is denominated or by purchasing a currency in which the Fund
anticipates acquiring a portfolio position in the near
future. A Fund may also hedge portfolio positions through currency swaps, which are transactions in which one currency is simultaneously
bought for a second currency on a spot basis and sold for the second currency on a forward basis. A Fund may also engage in proxy
hedging transactions to reduce the effect of currency fluctuations on the value of existing or anticipated holdings of portfolio
securities. Proxy hedging is often used when the currency to which the Fund is exposed is difficult to hedge or to hedge against
the dollar. Proxy hedging entails entering into a forward contract to sell a currency whose changes in value are generally considered
to be linked to a currency or currencies in which some or all of the Fund’s securities are, or are expected to be, denominated,
and to buy U.S. dollars. Proxy hedging involves some of the same risks and considerations as other transactions with similar instruments.
Currency transactions can result in losses to the Fund if the currency being hedged fluctuates in value to a degree or in a direction
that is not anticipated. In addition, there is the risk that the perceived linkage between various currencies may not be present
or may not be present during the particular time that a Fund is engaged in proxy hedging. A Fund may also cross-hedge currencies
by entering into forward contracts to sell one or more currencies that are expected to decline in value relative to other currencies
to which the Fund has or in which the Fund expects to have portfolio exposure. For example, a Fund may hold both Canadian government
bonds and Japanese government bonds, and the Manager or sub-adviser may believe that Canadian dollars will deteriorate against
Japanese yen. This strategy would be a hedge against a decline in the value of Canadian dollars, although it would expose the Fund
to declines in the value of the Japanese yen relative to the US dollar. Forward foreign exchange transactions involve substantial
currency risk, and also involve credit and liquidity risk. A Fund may also hedge a currency by entering into a transaction in a
Currency Instrument denominated in a currency other than the currency being hedged (a “cross-hedge”). A Fund will only
enter into a cross-hedge if the Manager believes that (i) there is a demonstrably high correlation between the currency in
which the cross-hedge is denominated and the currency being hedged, and (ii) executing a cross-hedge through the currency
in which the cross-hedge is denominated will be significantly more cost-effective or provide substantially greater liquidity than
executing a similar hedging transaction by means of the currency being hedged.
Some of the forward foreign currency contracts entered
into by the Funds are classified as non-deliverable forwards (“NDF”). NDFs are cash-settled, short-term forward contracts
that may be thinly traded or are denominated in non-convertible foreign currency, where the profit or loss at the time at the settlement
date is calculated by taking the difference between the agreed upon exchange rate and the spot rate at the time of settlement,
for an agreed upon notional amount of funds. All NDFs have a fixing date and a settlement date. The fixing date is the date at
which the difference between the prevailing market exchange rate and the agreed upon exchange rate is calculated. The settlement
date is the date by which the payment of the difference is due to the party receiving payment. NDFs are commonly quoted for time
periods of one month up to two years, and are normally quoted and settled in U.S. dollars. They are often used to gain exposure
to and/or hedge exposure to foreign currencies that are not internationally traded.
Currency Futures.
A Fund may also seek to enhance
returns or hedge against the decline in the value of a currency through use of currency futures or options thereon. Currency futures
are similar to forward foreign exchange transactions except that futures are standardized, exchange-traded contracts while forward
foreign exchange transactions are traded in the OTC market. Currency futures involve substantial currency risk, and also involve
leverage risk.
Currency Options.
A Fund may also seek to enhance
returns or hedge against the decline in the value of a currency through the use of currency options. Certain Funds have fundamental
investment restrictions that permit the purchase of currency options, but prohibit the writing of currency options. Currency options
are similar to options on securities. For example, in consideration for an option premium the writer of a currency option is obligated
to sell (in the case of a call option) or purchase (in the case of a put option) a specified amount of a specified currency on
or before the expiration date for a specified amount of another currency. A Fund may engage in transactions in options on currencies
either on exchanges or OTC markets. Where a Fund is permitted to write currency options, it may write covered call options on up
to 100% of the currencies in its portfolio. See “Types of Options” above and “Additional Risk Factors of OTC
Transactions; Limitations on the Use of OTC Derivatives” below. Currency options involve substantial currency risk, and may
also involve credit, leverage or liquidity risk.
Currency Swaps.
In order to protect
against currency fluctuations, a Fund may enter into currency swaps.
A Fund may also hedge portfolio positions through currency
swaps, which are transactions in which one currency is simultaneously bought for a second currency on a spot basis and sold for
the second currency on a forward basis.
Currency swaps involve the exchange of the rights of a Fund
and another party to make or receive payments in specified currencies. Currency swaps usually involve the delivery of the entire
principal value of one designated currency in exchange for the other designated currency. Because currency swaps usually involve
the delivery of the entire principal value of one designated currency in exchange for the other designated currency, the entire
principal value of a currency swap is subject to the risk that the other party to the swap will default on its contractual delivery
obligations.
Limitations on Currency Transactions.
A Fund will
not hedge a currency in excess of the aggregate market value of the securities that it owns (including receivables for unsettled
securities sales), or has committed to purchase or anticipates purchasing, which are
denominated in such currency. Open positions in forward
foreign exchange transactions used for non-hedging purposes will be covered by the segregation of liquid assets and are marked
to market daily. A Fund’s exposure to futures or options on currencies will be covered as described below under “Risk
Factors in Derivatives.”
Risk Factors in Hedging Foreign Currency.
Hedging
transactions involving Currency Instruments involve substantial risks, including correlation risk. While a Fund’s use of
Currency Instruments to effect hedging strategies is intended to reduce the volatility of the net asset value of the Fund’s
shares, the net asset value of the Fund’s shares will fluctuate. Moreover, although Currency Instruments will be used with
the intention of hedging against adverse currency movements, transactions in Currency Instruments involve the risk that anticipated
currency movements will not be accurately predicted and that the Fund’s hedging strategies will be ineffective. To the extent
that a Fund hedges against anticipated currency movements that do not occur, the Fund may realize losses and decrease its total
return as the result of its hedging transactions. Furthermore, a Fund will only engage in hedging activities from time to time
and may not be engaging in hedging activities when movements in currency exchange rates occur.
In connection with its trading in forward foreign currency
contracts, a Fund will contract with a foreign or domestic bank, or foreign or domestic securities dealer, to make or take future
delivery of a specified amount of a particular currency. There are no limitations on daily price moves in such forward contracts,
and banks and dealers are not required to continue to make markets in such contracts. There have been periods during which certain
banks or dealers have refused to quote prices for such forward contracts or have quoted prices with an unusually wide spread between
the price at which the bank or dealer is prepared to buy and that at which it is prepared to sell. Governmental imposition of credit
controls might limit any such forward contract trading. With respect to its trading of forward contracts, if any, a Fund will be
subject to the risk of bank or dealer failure and the inability of, or refusal by, a bank or dealer to perform with respect to
such contracts. Any such default would deprive the Fund of any profit potential or force the Fund to cover its commitments for
resale, if any, at the then market price and could result in a loss to the Fund.
It may not be possible for a Fund to hedge against currency
exchange rate movements, even if correctly anticipated, in the event that (i) the currency exchange rate movement is so generally
anticipated that the Fund is not able to enter into a hedging transaction at an effective price, or (ii) the currency exchange
rate movement relates to a market with respect to which Currency Instruments are not available and it is not possible to engage
in effective foreign currency hedging. The cost to a Fund of engaging in foreign currency transactions varies with such factors
as the currencies involved, the length of the contract period and the market conditions then prevailing. Since transactions in
foreign currency exchange usually are conducted on a principal basis, no fees or commissions are involved.
Risk Factors in Derivatives
Derivatives are volatile and involve significant risks,
including:
Credit Risk
— the risk that the counterparty
in a derivative transaction will be unable to honor its financial obligation to a Fund, or the risk that the reference entity in
a credit default swap or similar derivative will not be able to honor its financial obligations.
Currency Risk
— the risk that changes in the
exchange rate between two currencies will adversely affect the value (in U.S. dollar terms) of an investment.
Leverage Risk
— the risk associated with certain
types of investments or trading strategies (such as, for example, borrowing money to increase the amount of investments) that relatively
small market movements may result in large changes in the value of an investment. Certain investments or trading strategies that
involve leverage can result in losses that greatly exceed the amount originally invested.
Liquidity Risk
— the risk that certain securities
may be difficult or impossible to sell at the time that the seller would like or at the price that the seller believes the security
is currently worth.
Correlation Risk
— the risk that changes in
the value of a derivative will not match the changes in the value of the portfolio holdings that are being hedged or of the particular
market or security to which the Fund seeks exposure.
Index Risk
— If the derivative is linked to
the performance of an index, it will be subject to the risks associated with changes in that index. If the index changes, a Fund
could receive lower interest payments or experience a reduction in the value of the derivative to below what that Fund paid. Certain
indexed securities, including inverse securities (which move in an opposite direction to the index), may create leverage, to the
extent that they increase or decrease in value at a rate that is a multiple of the changes in the applicable index.
A Fund intends to enter into transactions involving derivatives
only if there appears to be a liquid secondary market for such instruments or, in the case of illiquid instruments traded in OTC
transactions, such instruments satisfy the criteria set forth below under “Additional Risk Factors of OTC Transactions; Limitations
on the Use of OTC Derivatives.” However, there can be no assurance that, at any specific time, either a liquid secondary
market will exist for a derivative or the Fund will otherwise be able to sell such instrument at an acceptable price. It may, therefore,
not be possible to close a position in a derivative without incurring substantial losses, if at all.
Certain transactions in derivatives (such as futures
transactions or sales of put options) involve substantial leverage risk and may expose a Fund to potential losses that exceed the
amount originally invested by the Fund. When a Fund engages in such a transaction, the Fund will segregate liquid assets with a
value at least equal to the Fund’s exposure, on a mark-to-market basis, to the transaction (as calculated pursuant to requirements
of the Commission). Such segregation will ensure that a Fund has assets available to satisfy its obligations with respect to the
transaction, but will not limit the Fund’s exposure to loss.
Additional Risk Factors of OTC Transactions; Limitations
on the Use of OTC Derivatives
Certain derivatives traded in OTC markets, including indexed
securities, swaps and OTC options, involve substantial liquidity risk. The absence of liquidity may make it difficult or impossible
for a Fund to sell such instruments promptly at an acceptable price. The absence of liquidity may also make it more difficult for
a Fund to ascertain a market value for such instruments. A Fund will, therefore, acquire illiquid OTC instruments (i) if the
agreement pursuant to which the instrument is purchased contains a formula price at which the instrument may be terminated or sold,
or (ii) for which the Manager anticipates the Fund can receive on each business day at least two independent bids or offers,
unless a quotation from only one dealer is available, in which case that dealer’s quotation may be used.
Because derivatives traded in OTC markets are not guaranteed
by an exchange or clearing corporation and generally do not require payment of margin, to the extent that a Fund has unrealized
gains in such instruments or has deposited collateral with its counterparty the Fund is at risk that its counterparty will become
bankrupt or otherwise fail to honor its obligations. A Fund will attempt to minimize these risks by engaging in transactions in
derivatives traded in OTC markets only with financial institutions that have substantial capital or that have provided the Fund
with a third-party guaranty or other credit enhancement.
Distressed Securities.
A Fund may invest
in securities, including loans purchased in the secondary market, that are the subject of bankruptcy proceedings or otherwise in
default or in risk of being in default as to the repayment of principal and/or interest at the time of acquisition by the Fund
or that are rated in the lower rating categories by one or more nationally recognized statistical rating organizations (for example,
Ca or lower by Moody’s and CC or lower by S&P or Fitch or, if unrated, are in the judgment of the Manager of equivalent
quality (“Distressed Securities”). Investment in Distressed Securities is speculative and involves significant risks.
A Fund will generally make such investments only when the
Manager believes it is reasonably likely that the issuer of the Distressed Securities will make an exchange offer or will be the
subject of a plan of reorganization pursuant to which the Fund will receive new securities in return for the Distressed Securities.
However, there can be no assurance that such an exchange offer will be made or that such a plan of reorganization will be adopted.
In addition, a significant period of time may pass between the time at which a Fund makes its investment in Distressed Securities
and the time that any such exchange offer or plan of reorganization is completed. During this period, it is unlikely that a Fund
will receive any interest payments on the Distressed Securities, the Fund will be subject to significant uncertainty as to whether
or not the exchange offer or plan of reorganization will be completed and the Fund may be required to bear certain extraordinary
expenses to protect and recover its investment. Therefore, to the extent the Fund seeks capital appreciation through investment
in distressed securities, the Fund’s ability to achieve current income for its shareholders may be diminished. The Fund also
will be subject to significant uncertainty as to when and in what manner and for what value the obligations evidenced by the distressed
securities will eventually be satisfied (
e.g.
, through a liquidation of the obligor’s assets, an exchange offer or
plan of reorganization involving the distressed securities or a payment of some amount in satisfaction of the obligation). Even
if an exchange offer is made or plan of reorganization is adopted with respect to Distressed Securities held by a Fund, there can
be no assurance that the securities or other assets received by a Fund in connection with such exchange offer or plan of reorganization
will not have a lower value or income potential than may have been anticipated when the investment was made or no value. Moreover,
any securities received by a Fund upon completion of an exchange offer or plan of reorganization may be restricted as to resale.
Similarly, if a Fund participates in negotiations with respect to any exchange offer or plan of reorganization with respect to
an issuer of Distressed Securities, the Fund may be restricted from disposing of such securities. To the extent that a Fund becomes
involved in such proceedings, the Fund may have a more active participation in the affairs of the issuer than that assumed generally
by an investor. The Fund, however, will not make investments for the purpose of exercising day-to-day management of any issuer’s
affairs.
Dollar Rolls.
A dollar roll transaction involves
a sale by the Fund of a mortgage-backed or other security concurrently with an agreement by the Fund to repurchase a similar security
at a later date at an agreed-upon price. The securities that are repurchased will bear the same interest rate and a similar maturity
as those sold, but pools of mortgages collateralizing those securities may have different prepayment histories than those sold.
During the period between the sale and repurchase, a Fund will not be entitled to receive interest and principal payments on the
securities sold. Proceeds of the sale will be invested in additional instruments for the Fund, and the income from these investments
will generate income for the Fund. If such income does not exceed the income, capital appreciation and gain or loss that would
have been realized on the securities sold as part of the dollar roll, the use of this technique will diminish the investment performance
of a Fund compared with what the performance would have been without the use of dollar rolls. At the time a Fund enters into a
dollar roll transaction, the Manager or sub-adviser will designate assets on its books and records in an amount equal to the amount
of the Fund’s commitments and will subsequently monitor the account to ensure that its value is maintained.
Dollar rolls involve the risk that the market value of
the securities subject to a Fund’s forward purchase commitment may decline below, or the market value of the securities subject
to a Fund’s forward sale commitment may increase above, the exercise price of the forward commitment. In the event the buyer
of the securities files for bankruptcy or becomes insolvent, a Fund’s use of the proceeds of the current sale portion of
the transaction may be restricted pending a determination by the other party, or its trustee or receiver, whether to enforce the
Fund’s obligation to purchase the similar securities in the forward transaction. Dollar rolls are speculative techniques
that can be deemed to involve leverage. At the time a Fund sells securities and agrees to repurchase securities at a future date,
the Fund will segregate liquid assets with a value equal to the repurchase price. A Fund may engage in dollar roll transactions
to enhance return. Each dollar roll transaction is accounted for as a sale or purchase of a portfolio security and a subsequent
purchase or sale of a substantially similar security in the forward market. Successful use of mortgage dollar rolls may depend
upon the Manager’s ability to correctly predict interest rates and prepayments. There is no assurance that dollar rolls can
be successfully employed.
Equity Securities.
Certain Funds may invest
in equity securities, which include common stock and, for certain Funds, preferred stock (including convertible preferred stock);
bonds, notes and debentures convertible into common or preferred stock; stock purchase warrants and rights; equity interests in
trusts; general and limited partnerships and limited liability companies; and depositary receipts. For a discussion of the types
of equity securities in which your Fund may invest and the risks associated with investing in such equity securities, see your
Fund’s Prospectus.
Exchange Traded Notes (“ETNs”).
Certain
Funds may invest in ETNs. ETNs are generally notes representing debt of the issuer, usually a financial institution. ETNs combine
both aspects of bonds and ETFs. An ETN’s returns are based on the performance of one or more underlying assets, reference
rates or indexes, minus fees and expenses. Similar to ETFs, ETNs are listed on an exchange and traded in the secondary market.
However, unlike an ETF, an ETN can be held until the ETN’s maturity, at which time the issuer will pay a return linked to
the performance of the specific asset, index or rate (“reference instrument”) to which the ETN is linked minus certain
fees. Unlike regular bonds, ETNs do not make periodic interest payments, and principal is not protected.
The value of an ETN may be influenced by, among other things,
time to maturity, level of supply and demand for the ETN, volatility and lack of liquidity in underlying markets, changes in the
applicable interest rates, the performance of the reference instrument, changes in the issuer’s credit rating and economic,
legal, political or geographic events that affect the reference instrument. An ETN that is tied to a reference instrument may not
replicate the performance of the reference instrument. ETNs also incur certain expenses not incurred by their applicable reference
instrument. Some ETNs that use leverage can, at times, be relatively illiquid and, thus, they may be difficult to purchase or sell
at a fair price. Levered ETNs are subject to the same risk as other instruments that use leverage in any form. While leverage allows
for greater potential return, the potential for loss is also greater. Finally, additional losses may be incurred if the investment
loses value because, in addition to the money lost on the investment, the loan still needs to be repaid.
Because the return on the ETN is dependent on the issuer’s
ability or willingness to meet its obligations, the value of the ETN may change due to a change in the issuer’s credit rating,
despite no change in the underlying reference instrument. The market value of ETN shares may differ from the value of the reference
instrument. This difference in price may be due to the fact that the supply and demand in the market for ETN shares at any point
in time is not always identical to the supply and demand in the market for the assets underlying the reference instrument that
the ETN seeks to track.
There may be restrictions on the Fund’s right to
redeem its investment in an ETN, which are generally meant to be held until maturity. The Fund’s decision to sell its ETN
holdings may be limited by the availability of a secondary market. An investor in an ETN could lose some or all of the amount invested.
Foreign Investment Risks.
Certain Funds may
invest in foreign securities, including securities from issuers located in emerging market countries. These securities may be denominated
in U.S. dollars or in a foreign currency. Investing in foreign securities involves
risks not typically associated with investing in securities
of companies organized and operated in the United States that can increase the chances that a Fund will lose money.
Securities issued by certain companies organized outside
the United States may not be deemed to be foreign securities (but rather deemed to be U.S. securities) if (i) the company’s
principal operations are conducted from the U.S., (ii) the company’s equity securities trade principally on a U.S. stock
exchange, (iii) the company does a substantial amount of business in the U.S. or (iv) the issuer of securities is included in the
Fund’s primary U.S. benchmark index.
In addition to equity securities, foreign investments of
the Funds may include: (a) debt obligations issued or guaranteed by foreign sovereign governments or their agencies, authorities,
instrumentalities or political subdivisions, including a foreign state, province or municipality; (b) debt obligations of
supranational organizations; (c) debt obligations of foreign banks and bank holding companies; (d) debt obligations of
domestic banks and corporations issued in foreign currencies; (e) debt obligations denominated in the Euro; and (f) foreign
corporate debt securities and commercial paper. Such securities may include loan participations and assignments, convertible securities
and zero-coupon securities.
Dividends or interest on, or proceeds from the sale of,
foreign securities may be subject to foreign withholding taxes.
Foreign Market Risk.
Funds that may invest in foreign
securities offer the potential for more diversification than a Fund that invests only in the United States because securities traded
on foreign markets have often (though not always) performed differently from securities traded in the United States. However, such
investments often involve risks not present in U.S. investments that can increase the chances that a Fund will lose money. In particular,
a Fund is subject to the risk that, because there are generally fewer investors on foreign exchanges and a smaller number of shares
traded each day, it may be difficult for the Fund to buy and sell securities on those exchanges. In addition, prices of foreign
securities may fluctuate more than prices of securities traded in the United States. Investments in foreign markets may also be
adversely affected by governmental actions such as the imposition of punitive taxes. In addition, the governments of certain countries
may prohibit or impose substantial restrictions on foreign investing in their capital markets or in certain industries. Any of
these actions could severely affect security prices, impair a Fund’s ability to purchase or sell foreign securities or transfer
the Fund’s assets or income back into the United States, or otherwise adversely affect a Fund’s operations. Other potential
foreign market risks include exchange controls, difficulties in pricing securities, defaults on foreign government securities,
difficulties in enforcing favorable legal judgments in foreign courts, and political and social conditions, such as diplomatic
relations, confiscatory taxation, expropriation, limitation on the removal of funds or assets, or imposition of (or change in)
exchange control regulations. Legal remedies available to investors in certain foreign countries may be less extensive than those
available to investors in the United States or other foreign countries. In addition, changes in government administrations or economic
or monetary policies in the U.S. or abroad could result in appreciation or depreciation of portfolio securities and could favorably
or adversely affect a Fund’s operations. Also, brokerage commissions and other costs of buying or selling securities often
are higher in foreign countries than they are in the United States. This reduces the amount the Fund can earn on its investments.
Foreign Economy Risk.
The economies of certain foreign
markets often do not compare favorably with that of the United States with respect to such issues as growth of gross national product,
reinvestment of capital, resources, and balance of payments position. Certain such economies may rely heavily on particular industries
or foreign capital and are more vulnerable to diplomatic developments, the imposition of economic sanctions against a particular
country or countries, changes in international trading patterns, trade barriers, and other protectionist or retaliatory measures.
Currency Risk and Exchange Risk.
Because foreign
securities generally are denominated and pay dividends or interest in foreign currencies, the value of a Fund that invests in foreign
securities as measured in U.S. dollars will be affected favorably or unfavorably by changes in exchange rates. Generally, when
the U.S. dollar rises in value against a foreign currency, a security denominated in that currency loses value because the currency
is worth fewer U.S. dollars. Conversely, when the U.S. dollar decreases in value against a foreign currency, a security denominated
in that currency gains value because the currency is worth more U.S. dollars. This risk, generally known as “currency risk,”
means that a stronger U.S. dollar will reduce returns for U.S. investors while a weak U.S. dollar will increase those returns.
Governmental Supervision and Regulation/Accounting Standards.
Many foreign governments supervise and regulate stock exchanges, brokers and the sale of securities less than does the United
States. Some countries may not have laws to protect investors comparable to the U.S. securities laws. For example, some foreign
countries may have no laws or rules against insider trading. Insider trading occurs when a person buys or sells a company’s
securities based on nonpublic information about that company. Accounting standards in other countries are not necessarily the same
as in the United States. If the accounting standards in another country do not require as much detail as U.S. accounting standards,
it may be harder for Fund management to completely and accurately determine a company’s financial condition. In addition,
the U.S. Government has from time to time in the past imposed restrictions, through penalties and
otherwise, on foreign investments by U.S. investors such
as the Fund. If such restrictions should be reinstituted, it might become necessary for the Fund to invest all or substantially
all of its assets in U.S. securities.
Certain Risks of Holding Fund Assets Outside the United
States.
A Fund generally holds its foreign securities and cash in foreign banks and securities depositories. Some foreign banks
and securities depositories may be recently organized or new to the foreign custody business. In addition, there may be limited
or no regulatory oversight over their operations. Also, the laws of certain countries may put limits on a Fund’s ability
to recover its assets if a foreign bank or depository or issuer of a security or any of their agents goes bankrupt. In addition,
it is often more expensive for a Fund to buy, sell and hold securities in certain foreign markets than in the United States. The
increased expense of investing in foreign markets reduces the amount a Fund can earn on its investments and typically results in
a higher operating expense ratio for the Fund as compared to investment companies that invest only in the United States.
Publicly Available Information.
In general, less
information is publicly available with respect to foreign issuers than is available with respect to U.S. companies. Most foreign
companies are also not subject to the uniform accounting and financial reporting requirements applicable to issuers in the United
States. While the volume of transactions effected on foreign stock exchanges has increased in recent years, it remains appreciably
below that of the New York Stock Exchange. Accordingly, a Fund’s foreign investments may be less liquid and their prices
may be more volatile than comparable investments in securities in U.S. companies. In addition, there is generally less government
supervision and regulation of securities exchanges, brokers and issuers in foreign countries than in the United States.
Settlement Risk.
Settlement and clearance procedures
in certain foreign markets differ significantly from those in the United States. Foreign settlement procedures and trade regulations
also may involve certain risks (such as delays in payment for or delivery of securities) not typically generated by the settlement
of U.S. investments. Communications between the United States and emerging market countries may be unreliable, increasing the risk
of delayed settlements or losses of security certificates in markets that still rely on physical settlement. Settlements in certain
foreign countries at times have not kept pace with the number of securities transactions; these problems may make it difficult
for a Fund to carry out transactions. If a Fund cannot settle or is delayed in settling a purchase of securities, it may miss attractive
investment opportunities and certain of its assets may be uninvested with no return earned thereon for some period. If a Fund cannot
settle or is delayed in settling a sale of securities, it may lose money if the value of the security then declines or, if it has
contracted to sell the security to another party, the Fund could be liable to that party for any losses incurred.
Funding Agreements.
Certain Funds may invest
in Guaranteed Investment Contracts and similar funding agreements. In connection with these investments, a Fund makes cash contributions
to a deposit fund of an insurance company’s general account. The insurance company then credits to the Fund on a monthly
basis guaranteed interest, which is based on an index (such as LIBOR). The funding agreements provide that this guaranteed interest
will not be less than a certain minimum rate. The purchase price paid for a funding agreement becomes part of the general assets
of the insurance company, and the contract is paid from the general assets of the insurance company. Generally, funding agreements
are not assignable or transferable without the permission of the issuing insurance companies, and an active secondary market in
some funding agreements does not currently exist.
Guarantees
.
A Fund may purchase securities
which contain guarantees issued by an entity separate from the issuer of the security. Generally, the guarantor of a security (often
an affiliate of the issuer) will fulfill an issuer’s payment obligations under a security if the issuer is unable to do so.
Illiquid or Restricted Securities.
Each Fund
may invest up to 15% of its net assets in securities that lack an established secondary trading market or otherwise are considered
illiquid. Liquidity of a security relates to the ability to dispose easily of the security and the price to be obtained upon disposition
of the security, which may be less than would be obtained for a comparable more liquid security. Illiquid securities may trade
at a discount from comparable, more liquid investments. Investment of a Fund’s assets in illiquid securities may restrict
the ability of the Fund to dispose of its investments in a timely fashion and for a fair price as well as its ability to take advantage
of market opportunities. The risks associated with illiquidity will be particularly acute where a Fund’s operations require
cash, such as when the Fund redeems shares or pays dividends, and could result in the Fund borrowing to meet short-term cash requirements
or incurring capital losses on the sale of illiquid investments.
A Fund may invest in securities that are not registered
under the Securities Act (“restricted securities”). Restricted securities may be sold in private placement transactions
between issuers and their purchasers and may be neither listed on an exchange nor traded in other established markets. In many
cases, privately placed securities may not be freely transferable under the laws of the applicable jurisdiction or due to contractual
restrictions on resale. As a result of the absence of a public trading market, privately placed securities may be less liquid and
more difficult to value than publicly traded securities. To the extent that privately placed securities may be resold in privately
negotiated transactions, the prices realized from the sales, due to illiquidity, could be less than those originally paid
by the Fund or less than their fair market value. In addition,
issuers whose securities are not publicly traded may not be subject to the disclosure and other investor protection requirements
that may be applicable if their securities were publicly traded. If any privately placed securities held by a Fund are required
to be registered under the securities laws of one or more jurisdictions before being resold, the Fund may be required to bear the
expenses of registration. Certain of the Fund’s investments in private placements may consist of direct investments and may
include investments in smaller, less seasoned issuers, which may involve greater risks. These issuers may have limited product
lines, markets or financial resources, or they may be dependent on a limited management group. In making investments in such securities,
a Fund may obtain access to material nonpublic information, which may restrict the Fund’s ability to conduct portfolio transactions
in such securities.
Some of these securities are new and complex, and trade
only among institutions; the markets for these securities are still developing, and may not function as efficiently as established
markets. Owning a large percentage of restricted or illiquid securities could hamper the Fund’s ability to raise cash to
meet redemptions. Also, because there may not be an established market price for these securities, the Fund may have to estimate
their value, which means that their valuation (and, to a much smaller extent, the valuation of the Fund) may have a subjective
element. Transactions in restricted or illiquid securities may entail registration expense and other transaction costs that are
higher than those for transactions in unrestricted or liquid securities. Where registration is required for restricted or illiquid
securities a considerable time period may elapse between the time the Fund decides to sell the security and the time it is actually
permitted to sell the security under an effective registration statement. If during such period, adverse market conditions were
to develop, the Fund might obtain less favorable pricing terms that when it decided to sell the security.
Inflation-Indexed Bonds
.
Certain Funds may
invest in inflation-indexed bonds, which are fixed income securities or other instruments whose principal value is periodically
adjusted according to the rate of inflation. Two structures are common. The U.S. Treasury and some other issuers use a structure
that accrues inflation into the principal value of the bond. Most other issuers pay out the Consumer Price Index (“CPI”)
accruals as part of a semi-annual coupon.
Inflation-indexed securities issued by the U.S. Treasury
have maturities of five, ten or thirty years, although it is possible that securities with other maturities will be issued in the
future. The U.S. Treasury securities pay interest on a semi-annual basis, equal to a fixed percentage of the inflation-adjusted
principal amount. For example, if a Fund purchased an inflation-indexed bond with a par value of $1,000 and a 3% real rate of return
coupon (payable 1.5% semi-annually), and inflation over the first six months was 1%, the mid-year par value of the bond would be
$1,010 and the first semi-annual interest payment would be $15.15 ($1,010 times 1.5%). If inflation during the second half of the
year resulted in the whole year’s inflation equaling 3%, the end-of-year par value of the bond would be $1,030 and the second
semi-annual interest payment would be $15.45 ($1,030 times 1.5%).
If the periodic adjustment rate measuring inflation falls,
the principal value of inflation-indexed bonds will be adjusted downward, and, consequently, the interest payable on these securities
(calculated with respect to a smaller principal amount) will be reduced. Repayment of the original bond principal upon maturity
(as adjusted for inflation) is guaranteed in the case of U.S. Treasury inflation-indexed bonds, even during a period of deflation.
However, the current market value of the bonds is not guaranteed, and will fluctuate. Certain Funds may also invest in other inflation
related bonds which may or may not provide a similar guarantee. If a guarantee of principal is not provided, the adjusted principal
value of the bond repaid at maturity may be less than the original principal. In addition, if the Fund purchases inflation-indexed
bonds offered by foreign issuers, the rate of inflation measured by the foreign inflation index may not be correlated to the rate
of inflation in the United States.
The value of inflation-indexed bonds is expected to change
in response to changes in real interest rates. Real interest rates, in turn, are tied to the relationship between nominal interest
rates and the rate of inflation. Therefore, if inflation were to rise at a faster rate than nominal interest rates, real interest
rates might decline, leading to an increase in value of inflation-indexed bonds. In contrast, if nominal interest rates increased
at a faster rate than inflation, real interest rates might rise, leading to a decrease in value of inflation-indexed bonds. There
can be no assurance, however, that the value of inflation-indexed bonds will be directly correlated to changes in interest rates.
While these securities are expected to be protected from
long-term inflationary trends, short-term increases in inflation may lead to a decline in value. If interest rates rise due to
reasons other than inflation (for example, due to changes in currency exchange rates), investors in these securities may not be
protected to the extent that the increase is not reflected in the bond’s inflation measure.
In general, the measure used to determine the periodic
adjustment of U.S. inflation-indexed bonds is the Consumer Price Index for Urban Consumers (“CPI-U”), which is calculated
monthly by the U.S. Bureau of Labor Statistics. The CPI-U is a measurement of changes in the cost of living, made up of components
such as housing, food, transportation and energy. Inflation-indexed bonds issued by a foreign government are generally adjusted
to reflect a comparable inflation index, calculated by that government. There can be no assurance that the CPI-U or any foreign
inflation index will accurately measure the real rate of inflation in the prices of goods and
services. Moreover, there can be no assurance that the
rate of inflation in a foreign country will be correlated to the rate of inflation in the United States.
Any increase in the principal amount of an inflation-indexed
bond will be considered taxable ordinary income, even though investors do not receive their principal until maturity.
Inflation Risk
.
Like all mutual funds,
the Funds are subject to inflation risk. Inflation risk is the risk that the present value of assets or income from investments
will be less in the future as inflation decreases the value of money. As inflation increases, the present value of a Fund’s
assets can decline as can the value of a Fund’s distributions.
Information Concerning the Indices.
Standard & Poor’s
®
500 Index (“S&P 500”)
. “Standard & Poor’s
®
,
S&P
®
, “S&P 500
®
,
“Standard & Poor’s 500”, and “500” are trademarks of The McGraw-Hill Companies, Inc. and have
been licensed for use by certain BlackRock Funds. No Fund is sponsored, endorsed, sold or promoted by S&P, a division of The
McGraw Hill Companies, Inc. S&P makes no representation regarding the advisability of investing in any Fund. S&P makes
no representation or warranty, express or implied, to the owners of shares of a Fund or any member of the public regarding the
advisability of investing in securities generally or in a Fund particularly or the ability of the S&P 500 to track general
stock market performance. S&P’s only relationship to certain Funds is the licensing of certain trademarks and trade names
of S&P and of the S&P 500 which is determined, composed and calculated by S&P without regard to the Funds. S&P
has no obligation to take the needs of a Fund or the owners of shares of a Fund into consideration in determining, composing or
calculating the S&P 500. S&P is not responsible for and has not participated in the determination of the prices and amount
of any Fund or the timing of the issuance or sale of shares of a Fund or in the determination or calculation of the equation by
which a Fund is to be converted into cash. S&P has no obligation or liability in connection with the administration, marketing
or trading of any Fund.
S&P does not guarantee the accuracy and/or the completeness
of the S&P 500 Index or any data included therein, and S&P shall have no liability for any errors, omissions, or interruptions
therein. S&P makes no warranty, express or implied, as to results to be obtained by a Fund, owners of shares of a Fund, or
any other person or entity from the use of the S&P 500 Index or any data included therein. S&P makes no express or implied
warranties and expressly disclaims all warranties of merchantability or fitness for a particular purpose or use with respect to
the S&P 500 Index or any data included therein. Without limiting any of the foregoing, in no event shall S&P have any liability
for any special, punitive, indirect, or consequential damages (including lost profits), even if notified of the possibility of
such damages.
Russell
®
Indexes.
No Fund is promoted, sponsored or endorsed by, nor in any way affiliated with Frank Russell Company. Frank Russell
Company is not responsible for and has not reviewed any Fund nor any associated literature or publications and Frank Russell Company
makes no representation or warranty, express or implied, as to their accuracy, or completeness, or otherwise.
Frank Russell Company reserves the right, at any time and
without notice, to alter, amend, terminate or in any way change a Russell Index. Frank Russell Company has no obligation to take
the needs of any particular Fund or its participants or any other product or person into consideration in determining, composing
or calculating the Russell Index.
Frank Russell Company’s publication of the Russell
Indexes in no way suggests or implies an opinion by Frank Russell Company as to the attractiveness or appropriateness of investment
in any or all securities upon which the Russell Indexes is based. Frank Russell Company makes no representation, warranty, or guarantee
as to the accuracy, completeness, reliability, or otherwise of the Russell Indexes or any data included in the Russell Indexes.
Frank Russell Company makes no representation or warranty regarding the use, or the results of use, of the Russell Indexes or any
data included therein, or any security (or combination thereof) comprising the Russell Indexes. Frank Russell Company makes no
other express or implied warranty, and expressly disclaims any warranty, of any kind, including, without means of limitation, any
warranty of merchantability or fitness for a particular purpose with respect to the Russell Indexes or any data or any security
(or combination thereof) included therein.
MSCI Europe, Australasia and Far East (Capitalization
Weighted) Index (“EAFE Index”).
The EAFE Index is the exclusive property of MSCI, Inc. (“MSCI”). The
EAFE Index is a service mark of MSCI and has been licensed for use by the Manager and its affiliates.
No Fund is sponsored, endorsed, sold or promoted by MSCI.
MSCI makes no representation or warranty, express or implied, to the owners of shares of a Fund or any member of the public regarding
the advisability of investing in securities generally or in a Fund particularly or the ability of the EAFE Index to track general
stock market performance. MSCI is the licensor of certain trademarks, service marks and trade names of MSCI and of the EAFE Index.
MSCI has no obligation to take the needs of any Fund or the owners of shares of a Fund into consideration in determining, composing
or calculating the EAFE Index. MSCI is not responsible for and has
not participated in the determination of the timing of,
prices at, or quantities of shares of any Fund to be issued or in the determination or calculation of the equation by which the
shares of a Fund are redeemable for cash. MSCI has no obligation or liability to owners of shares of a Fund in connection with
the administration, marketing or trading of the Fund.
Although MSCI shall obtain information for inclusion in
or for use in the calculation of the EAFE Index from sources which MSCI considers reliable, MSCI does not guarantee the accuracy
and/or the completeness of the EAFE Index or any data included therein. MSCI makes no warranty, express or implied, as to results
to be obtained by licensee, licensee’s customers and counterparties, owners of shares of a Fund, or any other person or entity
from the use of the EAFE Index or any data included therein in connection with the rights licensed hereunder or for any other use.
MSCI makes no express or implied warranties, and hereby expressly disclaims all warranties of merchantability or fitness for a
particular purpose with respect to the EAFE Index or any data included therein. Without limiting any of the foregoing, in no event
shall MSCI have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits)
even if notified of the possibility of such damages.
Initial Public Offering (“IPO”) Risk.
The volume of initial public offerings and the levels at which the newly issued stocks trade in the secondary market are
affected by the performance of the stock market overall. If initial public offerings are brought to the market, availability may
be limited and a Fund may not be able to buy any shares at the offering price, or if it is able to buy shares, it may not be able
to buy as many shares at the offering price as it would like. In addition, the prices of securities involved in initial public
offerings are often subject to greater and more unpredictable price changes than more established stocks. IPOs have the potential
to produce substantial gains. There is no assurance that any Fund will have access to profitable IPOs and therefore investors should
not rely on any past gains from IPOs as an indication of future performance. The investment performance of a Fund during periods
when it is unable to invest significantly or at all in IPOs may be lower than during periods when it is able to do so. In addition,
as a Fund increases in size, the impact of IPOs on its performance will generally decrease. Securities issued in IPOs are subject
to many of the same risks as investing in companies with smaller market capitalizations. Securities issued in IPOs have no trading
history, and information about the companies may be available for very limited periods.
Investment Grade Debt Obligations.
Certain
Funds may invest in “investment grade securities,” which are securities rated in the four highest rating categories
of a nationally recognized statistical rating organization (“NRSRO”) or deemed to be of equivalent quality by a Fund’s
Manager. Certain Funds may invest in debt securities rated Aaa by Moody’s or AAA by S&P. It should be noted that debt
obligations rated in the lowest of the top four ratings (
i.e.
, “Baa” by Moody’s or “BBB” by
S&P) are considered to have some speculative characteristics and are more sensitive to economic change than higher rated securities.
If an investment grade security of a Fund is subsequently downgraded below investment grade, the Fund’s Manager will consider
such an event in determining whether the Fund should continue to hold the security. Subject to its investment strategies, there
is no limit on the amount of such downgraded securities a Fund may hold, although under normal market conditions the manager do
not expect to hold these securities to a material extent.
See Appendix A to this Statement of Additional Information
for a description of applicable securities ratings.
Investment in Emerging Markets.
Certain Funds
may invest in the securities of issuers domiciled in various countries with emerging capital markets. Specifically, a country with
an emerging capital market is any country that the World Bank, the International Finance Corporation, the United Nations or its
authorities has determined to have a low or middle income economy. Countries with emerging markets can be found in regions such
as Asia, Latin America, Eastern Europe and Africa.
Investments in the securities of issuers domiciled in countries
with emerging capital markets involve certain additional risks that do not generally apply to investments in securities of issuers
in more developed capital markets, such as (i) low or non-existent trading volume, resulting in a lack of liquidity and increased
volatility in prices for such securities, as compared to securities of comparable issuers in more developed capital markets; (ii) uncertain
national policies and social, political and economic instability, increasing the potential for expropriation of assets, confiscatory
taxation, high rates of inflation or unfavorable diplomatic developments; (iii) possible fluctuations in exchange rates, differing
legal systems and the existence or possible imposition of exchange controls, custodial restrictions or other foreign or U.S. governmental
laws or restrictions applicable to such investments; (iv) national policies that may limit a Fund’s investment opportunities
such as restrictions on investment in issuers or industries deemed sensitive to national interests; and (v) the lack or relatively
early development of legal structures governing private and foreign investments and private property. In addition to withholding
taxes on investment income, some countries with emerging markets may impose differential capital gains taxes on foreign investors.
Political and economic structures in emerging market countries
may be undergoing significant evolution and rapid development, and these countries may lack the social, political and economic
stability characteristic of more developed countries. In such a dynamic environment, there can be no assurance that any or all
of these capital markets will continue to present viable investment opportunities
for a Fund. In the past, governments of such nations have
expropriated substantial amounts of private property, and most claims of the property owners have never been fully settled. There
is no assurance that such expropriations will not reoccur. In such an event, it is possible that a Fund could lose the entire value
of its investments in the affected market. As a result the risks described above, including the risks of nationalization or expropriation
of assets, may be heightened. In addition, unanticipated political or social developments may affect the value of investments in
these countries and the availability to a Fund of additional investments. The small size and inexperience of the securities markets
in certain of these countries and the limited volume of trading in securities in these countries may make investments in the countries
illiquid and more volatile than investments in Japan or most Western European countries.
Also, there may be less publicly available information
about issuers in emerging markets than would be available about issuers in more developed capital markets, and such issuers may
not be subject to accounting, auditing and financial reporting standards and requirements comparable to those to which U.S. companies
are subject. In certain countries with emerging capital markets, reporting standards vary widely. As a result, traditional investment
measurements used in the United States, such as price/earnings ratios, may not be applicable. Emerging market securities may be
substantially less liquid and more volatile than those of mature markets, and company shares may be held by a limited number of
persons. This may adversely affect the timing and pricing of the Fund’s acquisition or disposal of securities.
Practices in relation to settlement of securities transactions
in emerging markets involve higher risks than those in developed markets, in part because a Fund will need to use brokers and counterparties
that are less well capitalized, and custody and registration of assets in some countries may be unreliable. The possibility of
fraud, negligence, undue influence being exerted by the issuer or refusal to recognize ownership exists in some emerging markets,
and, along with other factors, could result in ownership registration being completely lost. A Fund would absorb any loss resulting
from such registration problems and may have no successful claim for compensation.
Investment in non-dollar denominated securities including
securities from issuers located in emerging market countries may be on either a currency hedged or unhedged basis, and the Funds
may hold from time to time various foreign currencies pending investment or conversion into U.S. dollars. Some of these instruments
may have the characteristics of futures contracts. In addition, certain Funds may engage in foreign currency exchange transactions
to seek to protect against changes in the level of future exchange rates which would adversely affect the Fund’s performance.
These investments and transactions involving foreign securities, currencies, options (including options that relate to foreign
currencies), futures, hedging and cross-hedging are described below and under “Derivatives—Futures” and “Foreign
Exchange Transactions.”
Risks of Investing in Asia-Pacific Countries.
In
addition to the risks of foreign investing and the risks of investing in developing markets, the developing market Asia-Pacific
countries in which a Fund may invest are subject to certain additional or specific risks. Certain Funds may make substantial investments
in Asia-Pacific countries. In many of these markets, there is a high concentration of market capitalization and trading volume
in a small number of issuers representing a limited number of industries, as well as a high concentration of investors and financial
intermediaries. Many of these markets also may be affected by developments with respect to more established markets in the region
such as in Japan and Hong Kong. Brokers in developing market Asia-Pacific countries typically are fewer in number and less well
capitalized than brokers in the United States. These factors, combined with the U.S. regulatory requirements for open-end investment
companies and the restrictions on foreign investment discussed below, result in potentially fewer investment opportunities for
a Fund and may have an adverse impact on the investment performance of the Fund.
Many of the developing market Asia-Pacific countries may
be subject to a greater degree of economic, political and social instability than is the case in the United States and Western
European countries. Such instability may result from, among other things: (i) authoritarian governments or military involvement
in political and economic decision-making, including changes in government through extra-constitutional means; (ii) popular
unrest associated with demands for improved political, economic and social conditions; (iii) internal insurgencies; (iv) hostile
relations with neighboring countries; and (v) ethnic, religious and racial disaffection. In addition, the governments of many
of such countries, such as Indonesia, have a substantial role in regulating and supervising the economy. Another risk common to
most such countries is that the economy is heavily export oriented and, accordingly, is dependent upon international trade. The
existence of overburdened infrastructure and obsolete financial systems also presents risks in certain countries, as do environmental
problems. Certain economies also depend to a significant degree upon exports of primary commodities and, therefore, are vulnerable
to changes in commodity prices that, in turn, may be affected by a variety of factors.
The legal systems in certain developing market Asia-Pacific
countries also may have an adverse impact on the Fund. For example, while the potential liability of a shareholder in a U.S. corporation
with respect to acts of the corporation is generally limited to the amount of the shareholder’s investment, the notion of
limited liability is less clear in certain emerging market Asia-Pacific countries.
Similarly, the rights of investors in developing market
Asia-Pacific companies may be more limited than those of shareholders of U.S. corporations. It may be difficult or impossible to
obtain and/or enforce a judgment in a developing market Asia-Pacific country.
Governments of many developing market Asia-Pacific countries
have exercised and continue to exercise substantial influence over many aspects of the private sector. In certain cases, the government
owns or controls many companies, including the largest in the country. Accordingly, government actions in the future could have
a significant effect on economic conditions in developing market Asia-Pacific countries, which could affect private sector companies
and a Fund itself, as well as the value of securities in the Fund’s portfolio. In addition, economic statistics of developing
market Asia-Pacific countries may be less reliable than economic statistics of more developed nations.
In addition to the relative lack of publicly available
information about developing market Asia-Pacific issuers and the possibility that such issuers may not be subject to the same accounting,
auditing and financial reporting standards as U.S. companies, inflation accounting rules in some developing market Asia-Pacific
countries require companies that keep accounting records in the local currency, for both tax and accounting purposes, to restate
certain assets and liabilities on the company’s balance sheet in order to express items in terms of currency of constant
purchasing power. Inflation accounting may indirectly generate losses or profits for certain developing market Asia-Pacific companies.
Satisfactory custodial services for investment securities
may not be available in some developing Asia-Pacific countries, which may result in the Fund incurring additional costs and delays
in providing transportation and custody services for such securities outside such countries.
Certain developing Asia-Pacific countries, such as the
Philippines, India and Turkey, are especially large debtors to commercial banks and foreign governments.
On March 11, 2011, a powerful earthquake and resulting
tsunami struck northeastern Japan causing major damage along the coast, including damage to nuclear power plants in the region.
This disaster, and the resulting damage, could have a severe and negative impact on a Fund’s investment portfolio and, in
the longer term, could impair the ability of issuers in which the Fund invests to conduct their businesses in the manner normally
conducted.
Fund management may determine that, notwithstanding otherwise
favorable investment criteria, it may not be practicable or appropriate to invest in a particular developing Asia-Pacific country.
A Fund may invest in countries in which foreign investors, including management of the Fund, have had no or limited prior experience.
Restrictions on Foreign Investments in Asia-Pacific
Countries.
Some developing Asia-Pacific countries prohibit or impose substantial restrictions on investments in their capital
markets, particularly their equity markets, by foreign entities such as a Fund. As illustrations, certain countries may require
governmental approval prior to investments by foreign persons or limit the amount of investment by foreign persons in a particular
company or limit the investment by foreign persons to only a specific class of securities of a company which may have less advantageous
terms (including price and shareholder rights) than securities of the company available for purchase by nationals. There can be
no assurance that a Fund will be able to obtain required governmental approvals in a timely manner. In addition, changes to restrictions
on foreign ownership of securities subsequent to a Fund’s purchase of such securities may have an adverse effect on the value
of such shares. Certain countries may restrict investment opportunities in issuers or industries deemed important to national interests.
The manner in which foreign investors may invest in companies
in certain developing Asia-Pacific countries, as well as limitations on such investments, also may have an adverse impact on the
operations of a Fund. For example, a Fund may be required in certain of such countries to invest initially through a local broker
or other entity and then have the shares purchased re-registered in the name of the Fund. Re-registration may in some instances
not be able to occur on a timely basis, resulting in a delay during which a Fund may be denied certain of its rights as an investor,
including rights as to dividends or to be made aware of certain corporate actions. There also may be instances where a Fund places
a purchase order but is subsequently informed, at the time of re-registration, that the permissible allocation of the investment
to foreign investors has been filled, depriving the Fund of the ability to make its desired investment at that time.
Substantial limitations may exist in certain countries
with respect to a Fund’s ability to repatriate investment income, capital or the proceeds of sales of securities by foreign
investors. A Fund could be adversely affected by delays in, or a refusal to grant, any required governmental approval for repatriation
of capital, as well as by the application to the Fund of any restrictions on investments. It is possible that certain countries
may impose currency controls or other restrictions relating to their currencies or to securities of issuers in those countries.
To the extent that such restrictions have the effect of making certain investments illiquid, securities may not be
available for sale to meet redemptions. Depending on a
variety of financial factors, the percentage of a Fund’s portfolio subject to currency controls may increase. In the event
other countries impose similar controls, the portion of the Fund’s assets that may be used to meet redemptions may be further
decreased. Even where there is no outright restriction on repatriation of capital, the mechanics of repatriation may affect certain
aspects of the operations of a Fund (for example, if funds may be withdrawn only in certain currencies and/or only at an exchange
rate established by the government).
In certain countries, banks or other financial institutions
may be among the leading companies or have actively traded securities available for investment. The Investment Company Act restricts
a Fund’s investments in any equity securities of an issuer that, in its most recent fiscal year, derived more than 15% of
its revenues from “securities related activities,” as defined by the rules thereunder. These provisions may restrict
a Fund’s investments in certain foreign banks and other financial institutions.
Political and economic structures in emerging market countries
may be undergoing significant evolution and rapid development, and these countries may lack the social, political and economic
stability characteristic of more developed countries. Some of these countries may have in the past failed to recognize private
property rights and have at times nationalized or expropriated the assets of private companies. As a result the risks described
above, including the risks of nationalization or expropriation of assets, may be heightened. In addition, unanticipated political
or social developments may affect the value of investments in these countries and the availability to a Fund of additional investments
in emerging market countries. The small size and inexperience of the securities markets in certain of these countries and the limited
volume of trading in securities in these countries may make investments in the countries illiquid and more volatile than investments
in Japan or most Western European countries. There may be little financial or accounting information available with respect to
issuers located in certain emerging market countries, and it may be difficult to assess the value or prospects of an investment
in such issuers.
The expense ratios of the Funds investing significantly
in foreign securities can be expected to be higher than those of Funds investing primarily in domestic securities. The costs attributable
to investing abroad are usually higher for several reasons, such as the higher cost of custody of foreign securities, higher commissions
paid on comparable transactions on foreign markets and additional costs arising from delays in settlements of transactions involving
foreign securities.
Risks of Investments in Russia
. A Fund may invest
a portion of its assets in securities issued by companies located in Russia. Because of the recent formation of the Russian securities
markets as well as the underdeveloped state of Russia’s banking system, settlement, clearing and registration of securities
transactions are subject to significant risks. Ownership of shares is defined according to entries in the company’s share
register and normally evidenced by extracts from the register. These extracts are not negotiable instruments and are not effective
evidence of securities ownership. The registrars are not necessarily subject to effective state supervision nor are they licensed
with any governmental entity. Also, there is no central registration system for shareholders and it is possible for a Fund to lose
its registration through fraud, negligence or mere oversight. While a Fund will endeavor to ensure that its interest continues
to be appropriately recorded either itself or through a custodian or other agent inspecting the share register and by obtaining
extracts of share registers through regular confirmations, these extracts have no legal enforceability and it is possible that
subsequent illegal amendment or other fraudulent act may deprive the Fund of its ownership rights or improperly dilute its interest.
In addition, while applicable Russian regulations impose liability on registrars for losses resulting from their errors, it may
be difficult for a Fund to enforce any rights it may have against the registrar or issuer of the securities in the event of loss
of share registration. While a Fund intends to invest directly in Russian companies that use an independent registrar, there can
be no assurance that such investments will not result in a loss to the Fund.
Brady Bonds.
Certain Funds may invest in Brady Bonds.
A Fund’s emerging market debt securities may include emerging market governmental debt obligations commonly referred to as
Brady Bonds. Brady Bonds are securities created through the exchange of existing commercial bank loans to sovereign entities for
new obligations in connection with debt restructurings under a debt restructuring plan introduced by former U.S. Secretary of the
Treasury, Nicholas F. Brady (the “Brady Plan”). Brady Plan debt restructurings have been implemented in a number of
countries, including: Argentina, Bolivia, Brazil, Bulgaria, Costa Rica, the Dominican Republic, Ecuador, Jordan, Mexico, Niger,
Nigeria, Panama, Peru, the Philippines, Poland, Uruguay and Venezuela.
Brady Bonds may be collateralized or uncollateralized,
are issued in various currencies (primarily the U.S. dollar) and are actively traded in the over-the-counter secondary market.
Brady Bonds are not considered to be U.S. Government securities. U.S. dollar-denominated, collateralized Brady Bonds, which may
be fixed rate par bonds or floating rate discount bonds, are generally collateralized in full as to principal by U.S. Treasury
zero-coupon bonds having the same maturity as the Brady Bonds. Interest payments on these Brady Bonds generally are collateralized
on a one-year or longer rolling-forward basis by cash or securities in an amount that, in the case of fixed rate bonds, is equal
to at least one year of interest payments or, in the case of floating rate bonds, initially is equal to at least one year’s
interest payments based on the applicable interest rate at that time and is adjusted at regular intervals thereafter. Certain Brady
Bonds are entitled to “value recovery payments” in certain circumstances, which in effect constitute
supplemental interest payments but generally are not collateralized.
For example, some Mexican and Venezuelan Brady Bonds include attached value recovery options, which increase interest payments
if oil revenues rise. Brady Bonds are often viewed as having three or four valuation components: (i) the collateralized repayment
of principal at final maturity; (ii) the collateralized interest payments; (iii) the uncollateralized interest payments;
and (iv) any uncollateralized repayment of principal at maturity (the uncollateralized amounts constitute the “residual
risk”).
Most Mexican Brady Bonds issued to date have principal
repayments at final maturity fully collateralized by U.S. Treasury zero-coupon bonds (or comparable collateral denominated in other
currencies) and interest coupon payments collateralized on an 18-month rolling-forward basis by funds held in escrow by an agent
for the bondholders. A significant portion of the Venezuelan Brady Bonds and the Argentine Brady Bonds issued to date have repayments
at final maturity collateralized by U.S. Treasury zero-coupon bonds (or comparable collateral denominated in other currencies)
and/or interest coupon payments collateralized on a 14-month (for Venezuela) or 12-month (for Argentina) rolling-forward basis
by securities held by the Federal Reserve Bank of New York as collateral agent.
Brady Bonds involve various risk factors described above
associated with investing in foreign securities, including the history of defaults with respect to commercial bank loans by public
and private entities of countries issuing Brady Bonds. In light of the residual risk of Brady Bonds and, among other factors, the
history of defaults, investments in Brady Bonds are considered speculative. There can be no assurance that Brady Bonds in which
the Funds may invest will not be subject to restructuring arrangements or to requests for new credit, which may cause the Funds
to suffer a loss of interest or principal on any of its holdings.
Investment in Other Investment
Companies
. Each Fund may, subject to applicable law, invest in other investment companies (including investment companies
managed by BlackRock and its affiliates), including money market funds and exchange traded funds (“ETFs”), which are
typically open-end funds or unit investment trusts listed on a stock exchange. In accordance with the Investment Company Act, a
Fund may invest up to 10% of its total assets in securities of other investment companies (measured at the time of such investment).
In addition, under the Investment Company Act a Fund may not acquire securities of an investment company if such acquisition would
cause the Fund to own more than 3% of the total outstanding voting stock of such investment company and a Fund may not invest in
another investment company if such investment would cause more than 5% of the value of the Fund’s total assets to be invested
in securities of such investment company. (These limits do not restrict a Feeder Fund from investing all of its assets in shares
of its Master Portfolio.) In addition to the restrictions on investing in other investment companies discussed above, a Fund may
not invest in a registered closed-end investment company if such investment would cause the Fund and other BlackRock-advised investment
companies to own more than 10% of the total outstanding voting stock of such closed-end investment company. Pursuant to the Investment
Company Act (or alternatively, pursuant to exemptive orders received from the Commission) these percentage limitations do not apply
to investments in affiliated money market funds, and under certain circumstances, do not apply to investments in affiliated investment
companies, including ETFs. In addition, many third-party ETFs have obtained exemptive relief from the Commission to permit unaffiliated
funds (such as the Funds) to invest in their shares beyond the statutory limits, subject to certain conditions and pursuant to
contractual arrangements between the ETFs and the investing funds. A Fund may rely on these exemptive orders in investing in ETFs.
Further, under certain circumstances a Fund may be able to rely on certain provisions of the Investment Company Act to invest in
shares of unaffiliated investment companies beyond the statutory limits noted above, but subject to certain other statutory restrictions.
As with other investments, investments
in other investment companies are subject to market and selection risk.
Shares of investment companies, such as closed-end fund investment
companies, that trade on an exchange may at times be acquired at market prices representing premiums to their net asset values.
In addition, investment companies held by a Fund that trade on an exchange could trade at a discount from net asset value, and
such discount could increase while the Fund holds the shares. If the market price of shares of an exchange-traded investment company
decreases below the price that the Fund paid for the shares and the Fund were to sell its shares of such investment company at
a time when the market price is lower than the price at which it purchased the shares, the Fund would experience a loss.
In addition, if a Fund acquires shares in investment companies, including affiliated investment companies, shareholders would bear
both their proportionate share of expenses in the Fund and, indirectly, the expenses of such investment companies. Such expenses,
both at the Fund level and acquired investment company level, would include management and advisory fees, unless such fees have
been waived by BlackRock. Please see the relevant Fund’s prospectus to determine whether any such management and advisory
fees have been waived by BlackRock. Investments by a Fund in wholly owned investment entities created under the laws of certain
countries will not be deemed an investment in other investment companies.
To the extent shares of a Fund are
held by an affiliated fund, the ability of the Fund itself to purchase other affiliated investment companies may be limited. In
addition, a fund-of-funds (e.g., an investment company that seeks to meet its investment objective by
investing significantly in other investment
companies) may be limited in its ability to purchase affiliated underlying funds if such affiliated underlying funds themselves
own shares of affiliated funds.
A number of publicly traded closed-end investment companies
have been organized to facilitate indirect foreign investment in developing countries, and certain of such countries, such as Thailand,
South Korea, Chile and Brazil, have specifically authorized such funds. There also are investment opportunities in certain of such
countries in pooled vehicles that resemble open-end investment companies. The restrictions on investments in securities of investment
companies set forth above may limit opportunities for a Fund to invest indirectly in certain developing countries.
Junk Bonds.
Non-investment grade or “high
yield” fixed income or convertible securities commonly known to investors as “junk bonds” are debt securities
that are rated below investment grade by the major rating agencies or are unrated securities that Fund management believes are
of comparable quality. While generally providing greater income and opportunity for gain, non-investment grade debt securities
may be subject to greater risks than securities which have higher credit ratings, including a high risk of default, and their yields
will fluctuate over time. High yield securities will generally be in the lower rating categories of recognized rating agencies
(rated “Ba” or lower by Moody’s or “BB” or lower by S&P) or will be non-rated. The credit rating
of a high yield security does not necessarily address its market value risk, and ratings may from time to time change, positively
or negatively, to reflect developments regarding the issuer’s financial condition. High yield securities are considered to
be speculative with respect to the capacity of the issuer to timely repay principal and pay interest or dividends in accordance
with the terms of the obligation and may have more credit risk than higher rated securities.
The major risks in junk bond investments include the following:
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Junk bonds may be issued by less creditworthy companies. These securities are vulnerable to adverse changes in the issuer’s industry and to general economic conditions. Issuers of junk bonds may be unable to meet their interest or principal payment obligations because of an economic downturn, specific issuer developments or the unavailability of additional financing.
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The issuers of junk bonds may have a larger amount of outstanding debt relative to their assets than issuers of investment grade bonds. If the issuer experiences financial stress, it may be unable to meet its debt obligations. The issuer’s ability to pay its debt obligations also may be lessened by specific issuer developments, or the unavailability of additional financing. Issuers of high yield securities are often in the growth stage of their development and/or involved in a reorganization or takeover.
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Junk bonds are frequently ranked junior to claims by other creditors. If the issuer cannot meet its obligations, the senior obligations are generally paid off before the junior obligations, which will potentially limit a Fund’s ability to fully recover principal or to receive interest payments when senior securities are in default. Thus, investors in high yield securities have a lower degree of protection with respect to principal and interest payments then do investors in higher rated securities.
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Junk bonds frequently have redemption features that permit an issuer to repurchase the security from a Fund before it matures. If an issuer redeems the junk bonds, a Fund may have to invest the proceeds in bonds with lower yields and may lose income.
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Prices of junk bonds are subject to extreme price fluctuations. Negative economic developments may have a greater impact on the prices of junk bonds than on those of other higher rated fixed income securities.
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Junk bonds may be less liquid than higher rated fixed income securities even under normal economic conditions. Under certain economic and/or market conditions, a Fund may have difficulty disposing of certain high yield securities due to the limited number of investors in that sector of the market. There are fewer dealers in the junk bond market, and there may be significant differences in the prices quoted for junk bonds by the dealers, and such quotations may not be the actual prices available for a purchase or sale. Because junk bonds are less liquid, judgment may play a greater role in valuing certain of a Fund’s portfolio securities than in the case of securities trading in a more liquid market.
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The secondary markets for high yield securities are not as liquid as the secondary markets for higher rated securities. The secondary markets for high yield securities are concentrated in relatively few market makers and participants in the markets are mostly institutional investors, including insurance companies, banks, other financial institutions and mutual funds. In addition, the trading volume for high yield securities is generally lower than that for higher rated securities and the secondary markets could contract under adverse market or economic conditions independent of any specific adverse changes in the condition of a particular issuer. Under certain economic and/or market conditions, a Fund may have difficulty disposing of certain high yield securities due to the limited number of investors in that sector of the market. An illiquid secondary market
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may adversely affect the market price of the high yield security,
which may result in increased difficulty selling the particular issue and obtaining accurate market quotations on the issue when
valuing a Fund’s assets. Market quotations on high yield securities are available only from a limited number of dealers,
and such quotations may not be the actual prices available for a purchase or sale. When the secondary market for high yield securities
becomes more illiquid, or in the absence of readily available market quotations for such securities, the relative lack of reliable
objective data makes it more difficult to value a Fund’s securities, and judgment plays a more important role in determining
such valuations.
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A Fund may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting issuer.
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The junk bond markets may react strongly to adverse news about an issuer or the economy, or to the perception or expectation of adverse news, whether or not it is based on fundamental analysis. Additionally, prices for high yield securities may be affected by legislative and regulatory developments. These developments could adversely affect a Fund’s net asset value and investment practices, the secondary market for high yield securities, the financial condition of issuers of these securities and the value and liquidity of outstanding high yield securities, especially in a thinly traded market. For example, federal legislation requiring the divestiture by federally insured savings and loan associations of their investments in high yield bonds and limiting the deductibility of interest by certain corporate issuers of high yield bonds adversely affected the market in the past.
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The rating assigned by a rating agency evaluates the issuing agency’s assessment of the safety of a non-investment grade security’s principal and interest payments, but does not address market value risk. Because such ratings of the ratings agencies may not always reflect current conditions and events, in addition to using recognized rating agencies and other sources, the sub-adviser performs its own analysis of the issuers whose non-investment grade securities a Fund holds. Because of this, the Fund’s performance may depend more on the sub-adviser’s own credit analysis than in the case of mutual funds investing in higher-rated securities.
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In selecting non-investment grade securities, the adviser
or sub-adviser considers factors such as those relating to the creditworthiness of issuers, the ratings and performance of the
securities, the protections afforded the securities and the diversity of the Fund. The sub-adviser continuously monitors the issuers
of non-investment grade securities held by the Fund for their ability to make required principal and interest payments, as well
as in an effort to control the liquidity of the Fund so that it can meet redemption requests. If a security’s rating is reduced
below the minimum credit rating that is permitted for a Fund, the Fund’s sub-adviser will consider whether the Fund should
continue to hold the security.
In the event that a Fund investing in high yield securities
experiences an unexpected level of net redemptions, the Fund could be forced to sell its holdings without regard to the investment
merits, thereby decreasing the assets upon which the Fund’s rate of return is based.
The costs attributable to investing in the junk bond markets
are usually higher for several reasons, such as higher investment research costs and higher commission costs.
Lease Obligations
.
A Fund may hold
participation certificates in a lease, an installment purchase contract, or a conditional sales contract (“lease obligations”).
The Manager will monitor the credit standing of each borrower
and each entity providing credit support and/or a put option relating to lease obligations. In determining whether a lease obligation
is liquid, the Manager will consider, among other factors, the following: (i) whether the lease can be cancelled; (ii) the
degree of assurance that assets represented by the lease could be sold; (iii) the strength of the lessee’s general credit
(
e.g.
, its debt, administrative, economic and financial characteristics); (iv) in the case of a municipal lease, the
likelihood that the municipality would discontinue appropriating funding for the leased property because the property is no longer
deemed essential to the operations of the municipality (
e.g.
, the potential for an “event of nonappropriation”);
(v) legal recourse in the event of failure to appropriate; (vi) whether the security is backed by a credit enhancement
such as insurance; and (vii) any limitations which are imposed on the lease obligor’s ability to utilize substitute
property or services other than those covered by the lease obligation.
Municipal leases, like other municipal debt obligations,
are subject to the risk of non-payment. The ability of issuers of municipal leases to make timely lease payments may be adversely
impacted in general economic downturns and as relative governmental cost burdens are allocated and reallocated among Federal, state
and local governmental units. Such non-payment would result in a reduction of income to a Fund, and could result in a reduction
in the value of the municipal lease experiencing non-payment and a
potential decrease in the net asset value of a Fund. Issuers
of municipal securities might seek protection under the bankruptcy laws. In the event of bankruptcy of such an issuer, a Fund could
experience delays and limitations with respect to the collection of principal and interest on such municipal leases and a Fund
may not, in all circumstances, be able to collect all principal and interest to which it is entitled. To enforce its rights in
the event of a default in lease payments, a Fund might take possession of and manage the assets securing the issuer’s obligations
on such securities, which may increase the Fund’s operating expenses and adversely affect the net asset value of the Fund.
When the lease contains a non-appropriation clause, however, the failure to pay would not be a default and a Fund would not have
the right to take possession of the assets. Any income derived from a Fund’s ownership or operation of such assets may not
be tax-exempt. In addition, a Fund’s intention to qualify as a “regulated investment company” under the Internal
Revenue Code of 1986, as amended (the “Code”), may limit the extent to which a Fund may exercise its rights by taking
possession of such assets, because as a regulated investment company a Fund is subject to certain limitations on its investments
and on the nature of its income.
Liquidity Management
.
As a temporary
defensive measure, if its Manager determines that market conditions warrant, certain Funds may invest without limitation in high
quality money market instruments. Certain Funds may also invest in high quality money market instruments pending investment or
to meet anticipated redemption requests. High quality money market instruments include U.S. government obligations, U.S. government
agency obligations, dollar denominated obligations of foreign issuers, bank obligations, including U.S. subsidiaries and branches
of foreign banks, corporate obligations, commercial paper, repurchase agreements and obligations of supranational organizations.
Generally, such obligations will mature within one year from the date of settlement, but may mature within two years from the date
of settlement.
Master Limited Partnerships
.
Certain
Funds may invest in publicly traded master limited partnerships (“MLPs”) which are limited partnerships or limited
liability companies taxable as partnerships. MLPs may derive income and gains from the exploration, development, mining or production,
processing, refining, transportation (including pipelines transporting gas, oil, or products thereof), or the marketing of any
mineral or natural resources. MLPs generally have two classes of owners, the general partner and limited partners. When investing
in an MLP, a Fund intends to purchase publicly traded common units issued to limited partners of the MLP. The general partner is
typically owned by a major energy company, an investment fund, the direct management of the MLP or is an entity owned by one or
more of such parties. The general partner may be structured as a private or publicly traded corporation or other entity. The general
partner typically controls the operations and management of the MLP through an up to 2% equity interest in the MLP plus, in many
cases, ownership of common units and subordinated units. Limited partners own the remainder of the partnership, through ownership
of common units, and have a limited role in the partnership’s operations and management.
MLPs are typically structured such that common units and
general partner interests have first priority to receive quarterly cash distributions up to an established minimum amount (“minimum
quarterly distributions” or “MQD”). Common and general partner interests also accrue arrearages in distributions
to the extent the MQD is not paid. Once common and general partner interests have been paid, subordinated units receive distributions
of up to the MQD; however, subordinated units do not accrue arrearages. Distributable cash in excess of the MQD paid to both common
and subordinated units is distributed to both common and subordinated units generally on a pro rata basis. The general partner
is also eligible to receive incentive distributions if the general partner operates the business in a manner which results in distributions
paid per common unit surpassing specified target levels. As the general partner increases cash distributions to the limited partners,
the general partner receives an increasingly higher percentage of the incremental cash distributions. A common arrangement provides
that the general partner can reach a tier where it receives 50% of every incremental dollar paid to common and subordinated unit
holders. These incentive distributions encourage the general partner to streamline costs, increase capital expenditures and acquire
assets in order to increase the partnership’s cash flow and raise the quarterly cash distribution in order to reach higher
tiers. Such results benefit all security holders of the MLP.
MLP common units represent a limited partnership interest
in the MLP. Common units are listed and traded on U.S. securities exchanges, with their value fluctuating predominantly based on
prevailing market conditions and the success of the MLP. Certain Funds intend to purchase common units in market transactions.
Unlike owners of common stock of a corporation, owners of common units have limited voting rights and have no ability annually
to elect directors. In the event of liquidation, common units have preference over subordinated units, but not over debt or preferred
units, to the remaining assets of the MLP.
Merger Transaction Risk.
In replicating its
target index, a Fund may buy stock of the target company in an announced merger transaction prior to the consummation of such transaction.
In that circumstance, a Fund would expect to receive an amount (whether in cash, stock of the acquiring company or a combination
of both) in excess of the purchase price paid by the Fund for the target company’s stock. However, a Fund is subject to the
risk that the merger transaction may be canceled, delayed or restructured, in which case a Fund’s holding of the target company’s
stock may not result in any profit for the Fund and may lose significant value.
Mezzanine Investments.
Certain Funds, consistent
with restrictions on investing in securities of a specific credit quality, may invest in certain high yield securities known as
mezzanine investments, which are subordinated debt securities which are generally issued in private placements in connection with
an equity security (
e.g.
, with attached warrants). Such mezzanine investments may be issued with or without registration
rights. Similar to other high yield securities, maturities of mezzanine investments are typically seven to ten years, but the expected
average life is significantly shorter at three to five years. Mezzanine investments are usually unsecured and subordinate to other
obligations of the issuer.
Money Market Obligations of Domestic Banks, Foreign
Banks and Foreign Branches of U.S. Banks
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Certain Funds may invest in a broad range of short-term, high quality,
U.S. dollar-denominated instruments, such as government, bank, commercial and other obligations that are available in the money
markets. Bank obligations include certificates of deposit (“CDs”), notes, bankers’ acceptances (“BAs”)
and time deposits, including instruments issued or supported by the credit of U.S. or foreign banks or savings institutions, domestic
branches of foreign banks, and also foreign branches of domestic banks having total assets at the time of purchase in excess of
$1 billion. These obligations may be general obligations of the parent bank or may be limited to the issuing branch or subsidiary
by the terms of a specific obligation or by government regulation. In particular, the Funds may invest in:
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(a)
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U.S. dollar-denominated obligations issued or supported by the credit of U.S. or foreign banks or savings institutions with total assets in excess of $1 billion (including assets of domestic and foreign branches of such banks);
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(b)
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high quality commercial paper and other obligations issued or guaranteed by U.S. and foreign corporations and other issuers rated (at the time of purchase) A-2 or higher by S&P, Prime-2 or higher by Moody’s or F-2 or higher by Fitch, as well as high quality corporate bonds rated (at the time of purchase) A or higher by those rating agencies;
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(c)
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unrated notes, paper and other instruments that are of comparable quality to the instruments described in (b) above as determined by the Fund’s Manager;
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(d)
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asset-backed securities (including interests in pools of assets such as mortgages, installment purchase obligations and credit card receivables);
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(e)
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securities issued or guaranteed as to principal and interest by the U.S. Government or by its agencies or authorities and related custodial receipts;
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(f)
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dollar-denominated securities issued or guaranteed by foreign governments or their political subdivisions, agencies or authorities;
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(g)
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funding agreements issued by highly-rated U.S. insurance companies;
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(h)
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securities issued or guaranteed by state or local governmental bodies;
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(i)
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repurchase agreements relating to the above instruments;
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(j)
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municipal bonds and notes whose principal and interest payments are guaranteed by the U.S. Government or one of its agencies or instrumentalities or which otherwise depend directly or indirectly on the credit of the United States;
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(k)
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fixed and variable rate notes and similar debt instruments rated MIG-2, VMIG-2 or Prime-2 or higher by Moody’s, SP-2 or A-2 or higher by S&P, or F-2 or higher by Fitch;
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(l)
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tax-exempt commercial paper and similar debt instruments rated Prime-2 or higher by Moody’s, A-2 or higher by S&P, or F-2 or higher by Fitch;
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(m)
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municipal bonds rated A or higher by Moody’s, S&P or Fitch;
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(n)
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unrated notes, paper or other instruments that are of comparable quality to the instruments described above, as determined by the Fund’s Manager under guidelines established by the Board; and
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(o)
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municipal bonds and notes which are guaranteed as to principal and interest by the U.S. Government or an agency or instrumentality thereof or which otherwise depend directly or indirectly on the credit of the United States.
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To the extent consistent with their investment objectives,
a Fund may invest in debt obligations of domestic or foreign corporations and banks, and may acquire commercial obligations issued
by Canadian corporations and Canadian counterparts of U.S. corporations, as well as Europaper, which is U.S. dollar-denominated
commercial paper of a foreign issuer.
Mortgage-Related Securities
Mortgage-Backed Securities.
Mortgage-backed securities
represent interests in pools of mortgages in which payments of both principal and interest on the securities are generally made
monthly, in effect “passing through” monthly payments made by borrowers on the residential or commercial mortgage loans
that underlie the securities (net of any fees paid to the issuer or guarantor of the securities). Mortgage-backed securities differ
from other forms of debt securities, which normally provide for periodic payment of interest in fixed amounts with principal payments
at maturity or specified call dates.
Mortgage-backed securities are subject to the general risks
associated with investing in real estate securities; that is, they may lose value if the value of the underlying real estate to
which a pool of mortgages relates declines. In addition, investments in mortgage-backed securities involve certain specific risks.
These risks include the failure of a party to meet its commitments under the related operative documents, adverse interest rate
changes and the effects of prepayments on mortgage cash flows. Mortgage-backed securities are “pass-through” securities,
meaning that principal and interest payments made by the borrower on the underlying mortgages are passed through to a Fund. The
value of mortgage-backed securities, like that of traditional fixed income securities, typically increases when interest rates
fall and decreases when interest rates rise. However, mortgage-backed securities differ from traditional fixed income securities
because of their potential for prepayment without penalty. The price paid by a Fund for its mortgage-backed securities, the yield
the Fund expects to receive from such securities and the weighted average life of the securities are based on a number of factors,
including the anticipated rate of prepayment of the underlying mortgages. In a period of declining interest rates, borrowers may
prepay the underlying mortgages more quickly than anticipated, thereby reducing the yield to maturity and the average life of the
mortgage-backed securities. Moreover, when a Fund reinvests the proceeds of a prepayment in these circumstances, it will likely
receive a rate of interest that is lower than the rate on the security that was prepaid.
To the extent that a Fund purchases mortgage-backed securities
at a premium, mortgage foreclosures and principal prepayments may result in a loss to the extent of the premium paid. If a Fund
buys such securities at a discount, both scheduled payments of principal and unscheduled prepayments will increase current and
total returns and will accelerate the recognition of income, which, when distributed to shareholders, will be taxable as ordinary
income. In a period of rising interest rates, prepayments of the underlying mortgages may occur at a slower than expected rate,
creating maturity extension risk. This particular risk may effectively change a security that was considered short- or intermediate-term
at the time of purchase into a long-term security. Since the value of long-term securities generally fluctuates more widely in
response to changes in interest rates than that of shorter-term securities, maturity extension risk could increase the inherent
volatility of the Fund. Under certain interest rate and prepayment scenarios, a Fund may fail to recoup fully its investment in
mortgage-backed securities notwithstanding any direct or indirect governmental or agency guarantee.
There are currently three types of mortgage pass-through
securities: (1) those issued by the U.S. government or one of its agencies or instrumentalities, such as the Government National
Mortgage Association (“Ginnie Mae”), the Federal National Mortgage Association (“Fannie Mae”) and the Federal
Home Loan Mortgage Corporation (“Freddie Mac”); (2) those issued by private issuers that represent an interest
in or are collateralized by pass-through securities issued or guaranteed by the U.S. government or one of its agencies or instrumentalities;
and (3) those issued by private issuers that represent an interest in or are collateralized by whole mortgage loans or pass-through
securities without a government guarantee but that usually have some form of private credit enhancement.
Ginnie Mae is a wholly owned U.S. government corporation
within the Department of Housing and Urban Development. Ginnie Mae is authorized to guarantee, with the full faith and credit of
the U.S. government, the timely payment of principal and interest on securities issued by the institutions approved by Ginnie Mae
(such as savings and loan institutions, commercial banks and mortgage banks), and backed by pools of Federal Housing Administration
(“FHA”)-insured or Veterans’ Administration (“VA”)-guaranteed mortgages. Pass-through certificates
guaranteed by Ginnie Mae (such certificates are also known as “Ginnie Maes”) are guaranteed as to the timely payment
of principal and interest by Ginnie Mae, whose guarantee is backed by the full faith and credit of the United States. Ginnie Mae
is a wholly-owned U.S. Government corporation within the Department of Housing and Urban Development. Ginnie Mae certificates also
are supported by the authority of Ginnie Mae to borrow funds from the U.S. Treasury Department to make payments under its guarantee.
Mortgage-related securities issued by Fannie Mae include Fannie Mae guaranteed Mortgage Pass-Through Certificates (also known as
“Fannie Maes”), which are guaranteed as to timely payment of principal and interest by Fannie Mae. They are not backed
by or entitled to the full faith and credit of the United States, but are supported by the right of Fannie Mae to borrow from the
U.S. Treasury Department. Fannie Mae was established as a federal agency in 1938 and in 1968 was chartered by Congress as a private
shareholder-owned company. Mortgage-related securities issued by the Freddie Mac include Freddie Mac Mortgage Participation Certificates
(also known as “Freddie Macs” or “PCs”). Freddie Mac is a stockholder-owned corporation
chartered by Congress in 1970. Freddie Macs are not guaranteed
by the United States or by any Federal Home Loan Banks and do not constitute a debt or obligation of the United States or of any
Federal Home Loan Bank. Freddie Macs entitle the holder to timely payment of interest, which is guaranteed by Freddie Mac. Freddie
Mac guarantees either ultimate collection or timely payment of all principal payments on the underlying mortgage loans. While Freddie
Mac generally does not guarantee timely payment of principal, Freddie Mac may remit the amount due on account of its guarantee
of ultimate payment of principal at any time after default on an underlying mortgage, but in no event later than one year after
it becomes payable. On September 6, 2008, Director James Lockhart of the Federal Housing Finance Agency (“FHFA”)
appointed FHFA as conservator of both Fannie Mae and Freddie Mac. In addition the U.S. Treasury Department agreed to provide Fannie
Mae and Freddie Mac up to $100 billion of capital each on an as needed basis to insure that they continue to provide liquidity
to the housing and mortgage markets.
Private mortgage pass-through securities are structured
similarly to Ginnie Mae, Fannie Mae, and Freddie Mac mortgage pass-through securities and are issued by originators of and investors
in mortgage loans, including depository institutions, mortgage banks, investment banks and special purpose subsidiaries of the
foregoing.
Pools created by private mortgage pass-through issuers generally
offer a higher rate of interest than government and government-related pools because there are no direct or indirect government
or agency guarantees of payments in the private pools. However, timely payment of interest and principal of these pools may be
supported by various forms of insurance or guarantees, including individual loan, title, pool and hazard insurance and letters
of credit. The insurance and guarantees are issued by governmental entities, private insurers and the mortgage poolers. The insurance
and guarantees and the creditworthiness of the issuers thereof will be considered in determining whether a mortgage-related security
meets a Fund’s investment quality standards. There can be no assurance that the private insurers or guarantors can meet their
obligations under the insurance policies or guarantee arrangements. Private mortgage pass-through securities may be bought without
insurance or guarantees if, through an examination of the loan experience and practices of the originator/servicers and poolers,
the Manager determines that the securities meet a Fund’s quality standards. Any mortgage-related securities that are issued
by private issuers have some exposure to subprime loans as well as to the mortgage and credit markets generally.
In addition, mortgage-related
securities that are issued by private issuers are not subject to the underwriting requirements for the underlying mortgages that
are applicable to those mortgage-related securities that have a government or government-sponsored entity guarantee. As a result,
the mortgage loans underlying private mortgage-related securities may, and frequently do, have less favorable collateral, credit
risk or other underwriting characteristics than government or government-sponsored mortgage-related securities and have wider variances
in a number of terms including interest rate, term, size, purpose and borrower characteristics. Privately issued pools more frequently
include second mortgages, high loan-to-value mortgages and manufactured housing loans. The coupon rates and maturities of the underlying
mortgage loans in a private-label mortgage-related securities pool may vary to a greater extent than those included in a government
guaranteed pool, and the pool may include subprime mortgage loans. Subprime loans refer to loans made to borrowers with weakened
credit histories or with a lower capacity to make timely payments on their loans. For these reasons, the loans underlying these
securities have had in many cases higher default rates than those loans that meet government underwriting requirements.
The risk of non-payment is
greater for mortgage-related securities that are backed by mortgage pools that contain subprime loans, but a level of risk exists
for all loans. Market factors adversely affecting mortgage loan repayments may include a general economic turndown, high unemployment,
a general slowdown in the real estate market, a drop in the market prices of real estate, or an increase in interest rates resulting
in higher mortgage payments by holders of adjustable rate mortgages.
Privately issued mortgage-related
securities are not traded on an exchange and there may be a limited market for the securities, especially when there is a perceived
weakness in the mortgage and real estate market sectors. Without an active trading market, mortgage-related securities held in
a fund’s portfolio may be particularly difficult to value because of the complexities involved in assessing the value of
the underlying mortgage loans.
A Fund from time to time may purchase in the secondary
market (i) certain mortgage pass-through securities packaged and master serviced by PNC Mortgage Securities Corp. (“PNC
Mortgage”) or Midland Loan Services, Inc. (“Midland”), or (ii) mortgage-related securities containing loans or
mortgages originated by PNC Bank, National Association (“PNC Bank”) or its affiliates. It is possible that under some
circumstances, PNC Mortgage, Midland or other affiliates could have interests that are in conflict with the holders of these mortgage-backed
securities, and such holders could have rights against PNC Mortgage, Midland or their affiliates. For example, if PNC Mortgage,
Midland or their affiliates engaged in negligence or willful misconduct in carrying out its duties as a master servicer, then any
holder of the mortgage-backed security could seek recourse against PNC Mortgage, Midland or their affiliates, as applicable. Also,
as a master servicer, PNC Mortgage, Midland or their affiliates may make certain representations and warranties regarding the quality
of the mortgages and properties underlying a mortgage-backed security. If one or more of those representations
or warranties is false, then the holders of the mortgage-backed
securities could trigger an obligation of PNC Mortgage, Midland or their affiliates, as applicable, to repurchase the mortgages
from the issuing trust. Finally, PNC Mortgage, Midland or their affiliates may own securities that are subordinate to the senior
mortgage-backed securities owned by a Fund.
Collateralized Mortgage Obligations
(“CMOs”).
CMOs are debt obligations collateralized by residential or commercial mortgage loans or residential or commercial mortgage pass-through
securities. Interest and prepaid principal are generally paid monthly. CMOs may be collateralized by whole mortgage loans or private
mortgage pass-through securities but are more typically collateralized by portfolios of mortgage pass-through securities guaranteed
by Ginnie Mae, Freddie Mac, or Fannie Mae. The issuer of a series of CMOs may elect to be treated as a Real Estate Mortgage Investment
Conduit (“REMIC”). All future references to CMOs also include REMICs.
CMOs are structured into multiple classes, often referred
to as a “tranche,” each issued at a specific adjustable or fixed interest rate, and bearing a different stated maturity
date and each must be fully retired no later than its final distribution date. Actual maturity and average life will depend upon
the prepayment experience of the collateral, which is ordinarily unrelated to the stated maturity date. CMOs often provide for
a modified form of call protection through a de facto breakdown of the underlying pool of mortgages according to how quickly the
loans are repaid. Monthly payment of principal received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the longer maturity classes usually receive principal
only after the first class has been retired. An investor may be partially protected against a sooner than desired return of principal
because of the sequential payments.
Certain issuers of CMOs are not considered investment companies
pursuant to a rule adopted by the Commission, and a Fund may invest in the securities of such issuers without the limitations imposed
by the Investment Company Act on investments by a Fund in other investment companies. In addition, in reliance on an earlier Commission
interpretation, a Fund’s investments in certain other qualifying CMOs, which cannot or do not rely on the rule, are also
not subject to the limitation of the Investment Company Act on acquiring interests in other investment companies. In order to be
able to rely on the Commission’s interpretation, these CMOs must be unmanaged, fixed asset issuers, that: (1) invest
primarily in mortgage-backed securities; (2) do not issue redeemable securities; (3) operate under general exemptive
orders exempting them from all provisions of the Investment Company Act; and (4) are not registered or regulated under the
Investment Company Act as investment companies. To the extent that a Fund selects CMOs that cannot rely on the rule or do not meet
the above requirements, the Fund may not invest more than 10% of its assets in all such entities and may not acquire more than
3% of the voting securities of any single such entity.
A Fund may also invest in, among other things, parallel
pay CMOs, Planned Amortization Class CMOs (“PAC bonds”), sequential pay CMOs, and floating rate CMOs. Parallel
pay CMOs are structured to provide payments of principal on each payment date to more than one class. PAC bonds generally require
payments of a specified amount of principal on each payment date. Sequential pay CMOs generally pay principal to only one class
at a time while paying interest to several classes. Floating rate CMOs are securities whose coupon rate fluctuates according to
some formula related to an existing market index or rate. Typical indices would include the eleventh district cost-of-funds index
(“COFI”), LIBOR, one-year Treasury yields, and ten-year Treasury yields.
Classes of CMOs also include planned amortization classes (“PACs”)
and targeted amortization classes (“TACs”). PAC bonds generally require payments of a specified amount of principal
on each payment date. The scheduled principal payments for PAC Certificates generally have the highest priority on each payment
date after interest due has been paid to all classes entitled to receive interest currently. Shortfalls, if any, are added to the
amount payable on the next payment date. The PAC Certificate payment schedule is taken into account in calculating the final distribution
date of each class of PAC. In order to create PAC tranches, one or more tranches generally must be created that absorb most of
the volatility in the underlying mortgage assets. These tranches (often called “supports” or “companion”
tranches) tend to have market prices and yields that are more volatile than the PAC classes.
TACs are similar to PACs in that they require that specified amounts
of principal be applied on each payment date to one or more classes of REMIC Certificates. A PAC’s payment schedule, however,
remains in effect as long as prepayment rates on the underlying mortgages do not exceed certain ranges. In contrast, a TAC provides
investors with protection, to a certain level, against either faster than expected or slower than expected prepayment rates, but
not both. TACs thus provide more cash flow stability than a regular sequential paying class, but less than a PAC. TACs also tend
to have market prices and yields that are more volatile than PACs.
Adjustable Rate Mortgage Securities.
Adjustable
rate mortgage securities (“ARMs”) are pass-through securities collateralized by mortgages with adjustable rather than
fixed rates. ARMs eligible for inclusion in a mortgage pool generally provide for a fixed initial mortgage interest rate for a
set number of scheduled monthly payments. After that schedule of payments has been completed, the interest rates are subject to
periodic adjustment based on changes to a designated benchmark index.
ARMs contain maximum and minimum rates beyond which the
mortgage interest rate may not vary over the lifetime of the security. In addition, certain ARMs provide for additional limitations
on the maximum amount by which the mortgage interest rate may adjust for any single adjustment period. In the event that market
rates of interest rise more rapidly to levels above that of the ARM’s maximum rate, the ARM’s coupon may represent
a below market rate of interest. In these circumstances, the market value of the ARM security will likely have fallen.
Certain ARMs contain limitations on changes in the required
monthly payment. In the event that a monthly payment is not sufficient to pay the interest accruing on an ARM, any such excess
interest is added to the principal balance of the mortgage loan, which is repaid through future monthly payments. If the monthly
payment for such an instrument exceeds the sum of the interest accrued at the applicable mortgage interest rate and the principal
payment required at such point to amortize the outstanding principal balance over the remaining term of the loan, the excess is
then used to reduce the outstanding principal balance of the ARM.
CMO Residuals.
CMO residuals are derivative mortgage
securities issued by agencies or instrumentalities of the U.S. government or by private originators of, or investors in, mortgage
loans, including savings and loan associations, homebuilders, mortgage banks, commercial banks, investment banks, and special purpose
entities of the foregoing. The cash flow generated by the mortgage assets underlying a series of CMOs is applied first to make
required payments of principal and interest on the CMOs and second to pay the related administrative expenses of the issuer. The
residual in a CMO structure generally represents the interest in any excess cash flow remaining after making the foregoing payments.
Each payment of such excess cash flow to a holder of the related CMO residual represents income and/or a return of capital. The
amount of residual cash flow resulting from a CMO will depend on, among other things, the characteristics of the mortgage assets,
the coupon rate of each class of CMO, prevailing interest rates, the amount of administrative expenses and the prepayment experience
on the mortgage assets. In part, the yield to maturity on the CMO residuals is extremely sensitive to prepayments on the related
underlying mortgage assets, in the same manner as an interest-only (“IO”) class of stripped mortgage-related securities.
In addition, if a series of a CMO includes a class that bears interest at an adjustable rate, the yield to maturity on the related
CMO residual will also be extremely sensitive to changes in the level of the index upon which interest rate adjustments are based.
In certain circumstances, a Fund may fail to recoup fully its initial investment in a CMO residual.
CMO residuals are generally purchased and sold by institutional
investors through one or more investment banking firms acting as brokers or dealers. The CMO residual market has developed relatively
recently and CMO residuals may not have the liquidity of other more established securities trading in other markets. Transactions
in CMO residuals are generally completed only after careful review of the characteristics of the securities in question. In addition,
CMO residuals may or, pursuant to an exemption therefrom, may not have been registered under the Securities Act. Residual interests
generally are junior to, and may be significantly more volatile than, “regular” CMO and REMIC interests.
Stripped Mortgage-Backed Securities.
A Fund may
invest in stripped mortgage-backed securities (“SMBSs”) issued by agencies or instrumentalities of the United States.
SMBSs are derivative multi-class mortgage-backed securities. SMBS arrangements commonly involve two classes of securities that
receive different proportions of the interest and principal distributions on a pool of mortgage assets. A common variety of SMBS
is where one class (the principal only or PO class) receives some of the interest and most of the principal from the underlying
assets, while the other class (the interest only or IO class) receives most of the interest and the remainder of the principal.
In the most extreme case, the IO class receives all of the interest, while the PO class receives all of the principal. While a
Fund may purchase securities of a PO class, a Fund is more likely to purchase the securities of an IO class. The yield to maturity
of an IO class is extremely sensitive to the rate of principal payments (including prepayments) on the related underlying assets,
and a rapid rate of principal payments in excess of that considered in pricing the securities will have a material adverse effect
on an IO security’s yield to maturity. If the underlying mortgage assets experience greater than anticipated payments of
principal, a Fund may fail to recoup fully its initial investment in IOs. In addition, there are certain types of IOs that represent
the interest portion of a particular class as opposed to the interest portion of the entire pool. The sensitivity of this type
of IO to interest rate fluctuations may be increased because of the characteristics of the principal portion to which they relate.
As a result of the above factors, a Fund generally will purchase IOs only as a component of so called “synthetic” securities.
This means that purchases of IOs will be matched with certain purchases of other securities, such as POs, inverse floating rate
CMOs or fixed rate securities; as interest rates fall, presenting a greater risk of unanticipated prepayments of principal, the
negative effect on a Fund because of its holdings of IOs should be diminished somewhat because of the increased yield on the inverse
floating rate CMOs or the increased appreciation on the POs or fixed rate securities.
Tiered Index Bonds.
Tiered index bonds are relatively
new forms of mortgage-related securities. The interest rate on a tiered index bond is tied to a specified index or market rate.
So long as this index or market rate is below a predetermined “strike” rate, the interest rate on the tiered index
bond remains fixed. If, however, the specified index or market rate rises above the “strike” rate, the interest rate
of the tiered index bond will decrease. Thus, under these circumstances, the interest rate on a tiered index bond, like an inverse
floater, will move in the opposite direction of prevailing
interest rates, with the result that the price of the tiered index bond may be considerably more volatile than that of a fixed-rate
bond.
Municipal Bonds.
Certain Funds may invest
in obligations issued by or on behalf of states, territories and possessions of the United States and the District of Columbia
and their political subdivisions, agencies and instrumentalities, the payments from which, in the opinion of bond counsel to the
issuer, are excludable from gross income for Federal income tax purposes (“Municipal Bonds”). Municipal Bonds include
debt obligations issued to obtain funds for various public purposes, including the construction of a wide range of public facilities,
refunding of outstanding obligations and obtaining funds for general operating expenses and loans to other public institutions
and facilities. In addition, certain types of bonds are issued by or on behalf of public authorities to finance various privately
owned or operated facilities, including certain facilities for the local furnishing of electric energy or gas, sewage facilities,
solid waste disposal facilities and other specialized facilities. Such obligations are included within the term Municipal Bonds
if the interest paid thereon is excluded from gross income for Federal income tax purposes and any applicable state and local taxes.
Other types of private activity bonds, the proceeds of which are used for the construction, equipment or improvement of privately
operated industrial or commercial facilities, may constitute Municipal Bonds, although the current Federal tax laws place substantial
limitations on the size of such issues. The interest on Municipal Bonds may bear a fixed rate or be payable at a variable or floating
rate. The two principal classifications of Municipal Bonds are “general obligation” and “revenue” or “special
obligation” bonds, which latter category includes private activity bonds (“PABs”) (or “industrial development
bonds” under pre-1986 law).
General Obligation Bonds.
General obligation bonds
are secured by the issuer’s pledge of its full faith, credit and taxing power for the payment of principal and interest.
The taxing power of any governmental entity may be limited, however, by provisions of its state constitution or laws, and an entity’s
creditworthiness will depend on many factors, including potential erosion of its tax base due to population declines, natural disasters,
declines in the state’s industrial base or inability to attract new industries, economic limits on the ability to tax without
eroding the tax base, state legislative proposals or voter initiatives to limit ad valorem real property taxes and the extent to
which the entity relies on Federal or state aid, access to capital markets or other factors beyond the state’s or entity’s
control. Accordingly, the capacity of the issuer of a general obligation bond as to the timely payment of interest and the repayment
of principal when due is affected by the issuer’s maintenance of its tax base.
Revenue Bonds.
Revenue bonds are payable only from
the revenues derived from a particular facility or class of facilities or, in some cases, from the proceeds of a special excise
tax or other specific revenue source such as payments from the user of the facility being financed; accordingly, the timely payment
of interest and the repayment of principal in accordance with the terms of the revenue or special obligation bond is a function
of the economic viability of such facility or such revenue source.
Revenue bonds issued by state or local agencies to finance
the development of low-income, multi-family housing involve special risks in addition to those associated with municipal bonds
generally, including that the underlying properties may not generate sufficient income to pay expenses and interest costs. Such
bonds are generally non-recourse against the property owner, may be junior to the rights of others with an interest in the properties,
may pay interest that changes based in part on the financial performance of the property, may be prepayable without penalty and
may be used to finance the construction of housing developments which, until completed and rented, do not generate income to pay
interest. Increases in interest rates payable on senior obligations may make it more difficult for issuers to meet payment obligations
on subordinated bonds.
PABs.
PABs are, in most cases, tax-exempt securities
issued by states, municipalities or public authorities to provide funds, usually through a loan or lease arrangement, to a private
entity for the purpose of financing construction or improvement of a facility to be used by the entity. Such bonds are secured
primarily by revenues derived from loan repayments or lease payments due from the entity, which may or may not be guaranteed by
a parent company or otherwise secured. PABs generally are not secured by a pledge of the taxing power of the issuer of such bonds.
Therefore, an investor should understand that repayment of such bonds generally depends on the revenues of a private entity and
be aware of the risks that such an investment may entail. The continued ability of an entity to generate sufficient revenues for
the payment of principal and interest on such bonds will be affected by many factors including the size of the entity, its capital
structure, demand for its products or services, competition, general economic conditions, government regulation and the entity’s
dependence on revenues for the operation of the particular facility being financed.
Participation Notes.
A Fund may buy participation
notes from a bank or broker-dealer (“issuer”) that entitle the Fund to a return measured by the change in value of
an identified underlying security or basket of securities (collectively, the “underlying security”). Participation
notes are typically used when a direct investment in the underlying security is restricted due to country-specific regulations.
The Fund is subject to counterparty risk associated with each issuer.
Investment in a participation note is not the same as investment in the constituent shares of the company. A participation note
represents only an obligation of the issuer to provide the Fund the
economic performance equivalent to holding shares of an underlying
security. A participation note does not provide any beneficial or equitable entitlement or interest in the relevant underlying
security. In other words, shares of the underlying security are not in any way owned by the Fund. However each participation note
synthetically replicates the economic benefit of holding shares in the underlying security. Because a participation note is an
obligation of the issuer, rather than a direct investment in shares of the underlying security, the Fund may suffer losses potentially
equal to the full value of the participation note if the issuer fails to perform its obligations. A Fund attempts to mitigate that
risk by purchasing only from issuers which BlackRock deems to be creditworthy.
The counterparty may, but is not required to, purchase the shares
of the underlying security to hedge its obligation. The fund may, but is not required to, purchase credit protection against the
default of the issuer. When the participation note expires or a Fund exercises the participation note and closes its position,
that Fund receives a payment that is based upon the then-current value of the underlying security converted into U.S. dollars (less
transaction costs). The price, performance and liquidity of the participation note are all linked directly to the underlying security.
A Fund’s ability to redeem or exercise a participation note generally is dependent on the liquidity in the local trading
market for the security underlying the participation note.
Pay-in-kind Bonds
.
Certain Funds may invest
in Pay-in-kind, or PIK, bonds. PIK bonds are bonds which pay interest through the issuance of additional debt or equity securities.
Similar to zero coupon obligations, pay-in-kind bonds also carry additional risk as holders of these types of securities realize
no cash until the cash payment date unless a portion of such securities is sold and, if the issuer defaults, a Fund may obtain
no return at all on its investment. The market price of pay-in-kind bonds is affected by interest rate changes to a greater extent,
and therefore tends to be more volatile, than that of securities which pay interest in cash. Additionally, current federal tax
law requires the holder of certain pay-in-kind bonds to accrue income with respect to these securities prior to the receipt of
cash payments. To maintain its qualification as a regulated investment company and avoid liability for federal income and excise
taxes, each Fund may be required to distribute income accrued with respect to these securities and may have to dispose of portfolio
securities under disadvantageous circumstances in order to generate cash to satisfy these distribution requirements.
Portfolio Turnover Rates
.
A Fund’s
annual portfolio turnover rate will not be a factor preventing a sale or purchase when the Manager believes investment considerations
warrant such sale or purchase. Although each of S&P 500 Index Fund, Small Cap Index Fund, International Index Fund and Index
Equity will use an approach to investing that is largely a passive, indexing approach, each Fund may engage in a substantial number
of portfolio transactions. With respect to these Funds, the rate of portfolio turnover will be a limiting factor when the Manager
considers whether to purchase or sell securities for a Fund only to the extent that the Manager will consider the impact of transaction
costs on a Fund’s tracking error. Portfolio turnover may vary greatly from year to year as well as within a particular year.
High portfolio turnover (
i.e.
, 100% or more) may result in increased transaction costs to a Fund, including brokerage commissions,
dealer mark-ups and other transaction costs on the sale of the securities and reinvestment in other securities. The sale of a Fund’s
securities may result in the recognition of capital gain or loss. Given the frequency of sales, such gain or loss will likely be
short-term capital gain or loss. These effects of higher than normal portfolio turnover may adversely affect a Fund’s performance.
Preferred Stock.
Certain of the Funds may
invest in preferred stocks. Preferred stock has a preference over common stock in liquidation (and generally dividends as well)
but is subordinated to the liabilities of the issuer in all respects. As a general rule, the market value of preferred stock with
a fixed dividend rate and no conversion element varies inversely with interest rates and perceived credit risk, while the market
price of convertible preferred stock generally also reflects some element of conversion value. Because preferred stock is junior
to debt securities and other obligations of the issuer, deterioration in the credit quality of the issuer will cause greater changes
in the value of a preferred stock than in a more senior debt security with similar stated yield characteristics. Unlike interest
payments on debt securities, preferred stock dividends are payable only if declared by the issuer’s board of directors. Preferred
stock also may be subject to optional or mandatory redemption provisions.
Real Estate Related Securities
. Although
no Fund may invest directly in real estate, certain Funds may invest in equity securities of issuers that are principally engaged
in the real estate industry. Such investments are subject to certain risks associated with the ownership of real estate and with
the real estate industry in general. These risks include, among others: possible declines in the value of real estate; risks related
to general and local economic conditions; possible lack of availability of mortgage funds or other limitations on access to capital;
overbuilding; risks associated with leverage; market illiquidity; extended vacancies of properties; increase in competition, property
taxes, capital expenditures and operating expenses; changes in zoning laws or other governmental regulation; costs resulting from
the clean-up of, and liability to third parties for damages resulting from, environmental problems; tenant bankruptcies or other
credit problems; casualty or condemnation losses; uninsured damages from floods, earthquakes or other natural disasters; limitations
on and variations in rents, including decreases in market rates for rents; investment in developments that are not completed or
that are subject to delays in completion; and changes in interest rates. To the extent that assets underlying a Fund’s investments
are concentrated geographically, by property type or in certain other respects, the Fund may be subject to certain
of the foregoing risks to a greater extent. Investments
by a Fund in securities of companies providing mortgage servicing will be subject to the risks associated with refinancings and
their impact on servicing rights.
In addition, if a Fund receives rental income or income
from the disposition of real property acquired as a result of a default on securities the Fund owns, the receipt of such income
may adversely affect the Fund’s ability to retain its tax status as a regulated investment company because of certain income
source requirements applicable to regulated investment companies under the Code.
Real Estate Investment Trusts (“REITs”).
In pursuing its investment strategy, a Fund may invest in shares of REITs. REITs possess certain risks which differ from
an investment in common stocks. REITs are financial vehicles that pool investor’s capital to purchase or finance real estate.
REITs may concentrate their investments in specific geographic areas or in specific property types,
i.e.
, hotels, shopping
malls, residential complexes and office buildings.
REITs are subject to management fees and other expenses,
and so a Fund that invests in REITs will bear its proportionate share of the costs of the REITs’ operations. There are three
general categories of REITs: Equity REITs, Mortgage REITs and Hybrid REITs. Equity REITs invest primarily in direct fee ownership
or leasehold ownership of real property; they derive most of their income from rents. Mortgage REITs invest mostly in mortgages
on real estate, which may secure construction, development or long-term loans; the main source of their income is mortgage interest
payments. Hybrid REITs hold both ownership and mortgage interests in real estate.
Investing in REITs involves certain unique risks in addition
to those risks associated with investing in the real estate industry in general. The market value of REIT shares and the ability
of the REITs to distribute income may be adversely affected by several factors, including rising interest rates, changes in the
national, state and local economic climate and real estate conditions, perceptions of prospective tenants of the safety, convenience
and attractiveness of the properties, the ability of the owners to provide adequate management, maintenance and insurance, the
cost of complying with the Americans with Disabilities Act, increased competition from new properties, the impact of present or
future environmental legislation and compliance with environmental laws, failing to maintain their exemptions from registration
under the Investment Company Act, changes in real estate taxes and other operating expenses, adverse changes in governmental rules
and fiscal policies, adverse changes in zoning laws and other factors beyond the control of the issuers of the REITs. In addition,
distributions received by a Fund from REITs may consist of dividends, capital gains and/or return of capital. As REITs generally
pay a higher rate of dividends (on a pre-tax basis) than operating companies, to the extent application of the Fund’s investment
strategy results in the Fund investing in REIT shares, the percentage of the Fund’s dividend income received from REIT shares
will likely exceed the percentage of the Fund’s portfolio which is comprised of REIT shares. Generally, dividends received
by a Fund from REIT shares and distributed to the Fund’s shareholders will not constitute “qualified dividend income”
eligible for the reduced tax rate applicable to qualified dividend income; therefore, the tax rate applicable to that portion of
the dividend income attributable to REIT shares held by the Fund that shareholders of the Fund receive will be taxed at a higher
rate than dividends eligible for the reduced tax rate applicable to qualified dividend income.
REITs (especially mortgage REITs) are also subject to interest
rate risk. Rising interest rates may cause REIT investors to demand a higher annual yield, which may, in turn, cause a decline
in the market price of the equity securities issued by a REIT. Rising interest rates also generally increase the costs of obtaining
financing, which could cause the value of a Fund’s REIT investments to decline. During periods when interest rates are declining,
mortgages are often refinanced. Refinancing may reduce the yield on investments in mortgage REITs. In addition, since REITs depend
on payment under their mortgage loans and leases to generate cash to make distributions to their shareholders, investments in REITs
may be adversely affected by defaults on such mortgage loans or leases.
Investing in certain REITs, which often have small market
capitalizations, may also involve the same risks as investing in other small capitalization companies. REITs may have limited financial
resources and their securities may trade less frequently and in limited volume and may be subject to more abrupt or erratic price
movements than larger company securities. Historically, small capitalization stocks, such as REITs, have been more volatile in
price than the larger capitalization stocks such as those included in the S&P 500 Index. The management of a REIT may be subject
to conflicts of interest with respect to the operation of the business of the REIT and may be involved in real estate activities
competitive with the REIT. REITs may own properties through joint ventures or in other circumstances in which the REIT may not
have control over its investments. REITs may incur significant amounts of leverage.
Repurchase Agreements and Purchase and Sale Contracts.
Under repurchase agreements and purchase and sale contracts, the other party agrees, upon entering into the contract with
a Fund, to repurchase a security sold to the Fund at a mutually agreed-upon time and price in a specified currency, thereby determining
the yield during the term of the agreement.
A purchase and sale contract differs from a repurchase
agreement in that the contract arrangements stipulate that securities are owned by the Fund and the purchaser receives any interest
on the security paid during the period. In the case of repurchase agreements, the prices at which the trades are conducted do not
reflect accrued interest on the underlying obligation; whereas, in the case of purchase
and sale contracts, the prices take into account accrued
interest. A Fund may enter into “tri-party” repurchase agreements. In “tri-party” repurchase agreements,
an unaffiliated third party custodian maintains accounts to hold collateral for the Fund and its counterparties and, therefore,
the Fund may be subject to the credit risk of those custodians.
Repurchase agreements and purchase and sale contracts result
in a fixed rate of return insulated from market fluctuations during the term of the agreement, although such return may be affected
by currency fluctuations. However, in the event of a default under a repurchase agreement or under a purchase and sale contract,
instead of the contractual fixed rate, the rate of return to the Fund would be dependent upon intervening fluctuations of the market
values of the securities underlying the contract and the accrued interest on those securities. In such event, the Fund would have
rights against the seller for breach of contract with respect to any losses arising from market fluctuations following the default.
Both types of agreement usually cover short periods, such
as less than one week, although they may have longer terms, and may be construed to be collateralized loans by the purchaser to
the seller secured by the securities transferred to the purchaser. In the case of a repurchase agreement, as a purchaser, a Fund’s
Manager or sub-adviser will monitor the creditworthiness of the seller, and a Fund will require the seller to provide additional
collateral if the market value of the securities falls below the repurchase price at any time during the term of the repurchase
agreement. The Fund does not have this right to seek additional collateral as a purchaser in the case of purchase and sale contracts.
The Fund’s adviser or sub-adviser will mark-to-market daily the value of the securities. Securities subject to repurchase
agreements and purchase and sale contracts will be held by the Fund’s custodian (or sub-custodian) in the Federal Reserve/Treasury
book-entry system or by another authorized securities depository.
In the event of default by the seller under a repurchase
agreement construed to be a collateralized loan, the underlying securities are not owned by the Fund but only constitute collateral
for the seller’s obligation to pay the repurchase price. Therefore, the Fund may suffer time delays and incur costs or possible
losses in connection with disposition of the collateral. If the seller becomes insolvent and subject to liquidation or reorganization
under applicable bankruptcy or other laws, a Fund’s ability to dispose of the underlying securities may be restricted. Finally,
it is possible that a Fund may not be able to substantiate its interest in the underlying securities. To minimize this risk, the
securities underlying the repurchase agreement will be held by the custodian at all times in an amount at least equal to the repurchase
price, including accrued interest. If the seller fails to repurchase the securities, a Fund may suffer a loss to the extent proceeds
from the sale of the underlying securities are less than the repurchase price.
A Fund may not invest in repurchase agreements or purchase
and sale contracts maturing in more than seven days if such investments, together with the Fund’s other illiquid investments,
would exceed 15% of the Fund’s net assets. Repurchase agreements and purchase and sale contracts may be entered into only
with financial institutions that have capital of at least $50 million or whose obligations are guaranteed by an entity that has
capital of at least $50 million.
Reverse Repurchase Agreements.
A Fund may
enter into reverse repurchase agreements with the same parties with whom it may enter into repurchase agreements. Under a reverse
repurchase agreement, a Fund sells securities to another party and agrees to repurchase them at a particular date and price. A
Fund may enter into a reverse repurchase agreement when it is anticipated that the interest income to be earned from the investment
of the proceeds of the transaction is greater than the interest expense of the transaction.
At the time a Fund enters into a reverse repurchase agreement,
it will segregate liquid assets with a value not less than the repurchase price (including accrued interest). The use of reverse
repurchase agreements may be regarded as leveraging and, therefore, speculative. Furthermore, reverse repurchase agreements involve
the risks that (i) the interest income earned in the investment of the proceeds will be less than the interest expense, (ii) the
market value of the securities retained in lieu of sale by a Fund may decline below the price of the securities the Fund has sold
but is obligated to repurchase, (iii) the market value of the securities sold will decline below the price at which the Fund
is required to repurchase them and (iv) the securities will not be returned to the Fund.
In addition, if the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, such buyer or its trustee or receiver may receive an extension
of time to determine whether to enforce a Fund’s obligations to repurchase the securities and the Fund’s use of the
proceeds of the reverse repurchase agreement may effectively be restricted pending such decision.
Rights Offerings and Warrants to Purchase.
Certain
Funds may participate in rights offerings and may purchase warrants, which are privileges issued by corporations enabling the owners
to subscribe to and purchase a specified number of shares of the corporation at a specified price during a specified period of
time. Subscription rights normally have a short life span to expiration. The purchase of rights or warrants involves the risk that
a Fund could lose the purchase value of a right or warrant if the right to subscribe to additional shares is not exercised prior
to the rights’ and warrants’ expiration. Also, the purchase of rights and/or warrants involves the risk that the effective
price paid for the right and/or warrant added to the subscription price of the related security may exceed the value of the
subscribed security’s market price such as when there
is no movement in the level of the underlying security. Buying a warrant does not make the Fund a shareholder of the underlying
stock. The warrant holder has no voting or dividend rights with respect to the underlying stock. A warrant does not carry any right
to assets of the issuer, and for this reason investment in warrants may be more speculative than other equity-based investments.
Securities Lending.
Each Fund may lend portfolio
securities with a value not exceeding 33 1/3% of its total assets or the limit prescribed by applicable law to banks, brokers and
other financial institutions. In return, the Fund receives collateral in cash or securities issued or guaranteed by the U.S. Government
or irrevocable letters of credit issued by a bank (other than a borrower of the Fund’s portfolio securities or any affiliate
of such borrower), which qualifies as a custodian bank for an investment company under the Investment Company Act, which collateral
will be maintained at all times in an amount equal to at least 100% of the current market value of the loaned securities. The Manager
may instruct the lending agent (as defined below) to terminate loans and recall securities so that the securities may be voted
by a Fund if required by the Manager’s proxy voting guidelines. See “Proxy Voting Policies and Procedures” below.
Such notice shall be provided in advance such that a period of time equal to no less than the normal settlement period for the
securities in question prior to the record date for the proxy vote or other corporate entitlement is provided.
A Fund receives the equivalent of any income it would have
received on the loaned securities. Where a Fund receives securities as collateral, the Fund receives a fee for its loans from the
borrower and does not receive the income on the collateral. Where a Fund receives cash collateral, it may invest such collateral
and retain the amount earned, net of any amount rebated to the borrower. As a result, the Fund’s yield may increase. Loans
of securities are terminable at any time and the borrower, after notice, is required to return borrowed securities within the standard
time period for settlement of securities transactions. The Fund is obligated to return the collateral to the borrower upon the
return of the loaned securities. A Fund could suffer a loss in the event the Fund must return the cash collateral and there are
losses on investments made with the cash collateral. In the event the borrower defaults on any of its obligations with respect
to a securities loan, a Fund could suffer a loss where the value of the collateral is below the market value of the borrowed securities
plus any other receivables from the borrower along with any transaction costs to repurchase the securities. A Fund could also experience
delays and costs in gaining access to the collateral. Each Fund may pay reasonable finder’s, lending agent, administrative
and custodial fees in connection with its loans.
Each Fund has received an exemptive order from the Commission
permitting it to lend portfolio securities to affiliates of the Fund and to retain an affiliate of the Fund as lending agent. Pursuant
to that order, each Fund has retained an affiliated entity of the Manager as the securities lending agent (the “lending agent”)
for a fee, including a fee based on a share of the returns on investment of cash collateral. In connection with securities lending
activities, the lending agent may, upon the advice of the Manager and on behalf of a Fund, invest cash collateral received by the
Fund for such loans, among other things, in a private investment company managed by the lending agent or in registered money market
funds advised by the Manager or its affiliates. Pursuant to the same order, each Fund may invest its uninvested cash in registered
money market funds advised by the Manager or its affiliates, or in a private investment company managed by the lending agent. If
a Fund acquires shares in either the private investment company or an affiliated money market fund, shareholders would bear both
their proportionate share of the Fund’s expenses and, indirectly, the expenses of such other entities. However, in accordance
with the exemptive order, the investment adviser to the private investment company will not charge any advisory fees with respect
to shares purchased by the Fund. Such shares also will not be subject to a sales load, redemption fee, distribution fee or service
fee, or in the case of the shares of an affiliated money market fund, the payment of any such sales load, redemption fee, distribution
fee or service fee will be offset by the Manager’s waiver of a portion of its advisory fee.
A Fund would continue to accrue the equivalent of the same
interest or other income on loaned securities that it would have received had the securities not been on loan, and would also earn
income on investments made with any cash collateral for such loans. Any cash collateral received by a Fund in connection with such
loans may be invested in a broad range of high quality, U.S. dollar-denominated money market instruments that meet Rule 2a-7 restrictions
for money market funds.
BlackRock Investment Management, LLC (“BIM”),
an affiliate of BlackRock, acts as securities lending agent for the Funds and will be paid a fee for the provision of these services,
including advisory services with respect to the collateral of the Funds’ securities lending program.
Securities of Smaller or Emerging Growth Companies.
Investment in smaller or emerging growth companies involves greater risk than is customarily associated with investments
in more established companies. The securities of smaller or emerging growth companies may be subject to more abrupt or erratic
market movements than larger, more established companies or the market average in general. These companies may have limited product
lines, markets or financial resources, or they may be dependent on a limited management group.
While smaller or emerging growth company issuers may offer
greater opportunities for capital appreciation than large cap issuers, investments in smaller or emerging growth companies may
involve greater risks and thus may be considered speculative. Fund management believes that properly selected companies of this
type have the potential to increase their earnings or market valuation at a rate substantially in excess of the general growth
of the economy. Full development of these companies and trends frequently takes time.
Small cap and emerging growth securities will often be
traded only in the OTC market or on a regional securities exchange and may not be traded every day or in the volume typical of
trading on a national securities exchange. As a result, the disposition by a Fund of portfolio securities to meet redemptions or
otherwise may require the Fund to make many small sales over a lengthy period of time, or to sell these securities at a discount
from market prices or during periods when, in Fund management’s judgment, such disposition is not desirable.
The process of selection and continuous supervision by
Fund management does not, of course, guarantee successful investment results; however, it does provide access to an asset class
not available to the average individual due to the time and cost involved. Careful initial selection is particularly important
in this area as many new enterprises have promise but lack certain of the fundamental factors necessary to prosper. Investing in
small cap and emerging growth companies requires specialized research and analysis. In addition, many investors cannot invest sufficient
assets in such companies to provide wide diversification.
Small companies are generally little known to most individual
investors although some may be dominant in their respective industries. Fund management believes that relatively small companies
will continue to have the opportunity to develop into significant business enterprises. A Fund may invest in securities of small
issuers in the relatively early stages of business development that have a new technology, a unique or proprietary product or service,
or a favorable market position. Such companies may not be counted upon to develop into major industrial companies, but Fund management
believes that eventual recognition of their special value characteristics by the investment community can provide above-average
long-term growth to the portfolio.
Equity securities of specific small cap issuers may present
different opportunities for long-term capital appreciation during varying portions of economic or securities market cycles, as
well as during varying stages of their business development. The market valuation of small cap issuers tends to fluctuate during
economic or market cycles, presenting attractive investment opportunities at various points during these cycles.
Smaller companies, due to the size and kinds of markets
that they serve, may be less susceptible than large companies to intervention from the Federal government by means of price controls,
regulations or litigation.
Short Sales.
Certain Funds may make short
sales of securities, either as a hedge against potential declines in value of a portfolio security or to realize appreciation when
a security that the Fund does not own declines in value. Certain Funds have a fundamental investment restriction prohibiting short
sales of securities other than short sales against-the-box. In a short sale against-the-box, at the time of the sale, the Fund
owns or has the immediate and unconditional right to acquire the identical security at no additional cost. When a Fund makes a
short sale, it borrows the security sold short and delivers it to the broker-dealer through which it made the short sale. A Fund
may have to pay a fee to borrow particular securities and is often obligated to turn over any payments received on such borrowed
securities to the lender of the securities.
A Fund secures its obligation to replace the borrowed security
by depositing collateral with the broker-dealer, usually in cash, U.S. Government securities or other liquid securities similar
to those borrowed. With respect to uncovered short positions, a Fund is required to deposit similar collateral with its custodian,
if necessary, to the extent that the value of both collateral deposits in the aggregate is at all times equal to at least 100%
of the current market value of the security sold short. Depending on arrangements made with the broker-dealer from which the Fund
borrowed the security, regarding payment received by the Fund on such security, a Fund may not receive any payments (including
interest) on its collateral deposited with such broker-dealer.
Because making short sales in securities that it does not
own exposes a Fund to the risks associated with those securities, such short sales involve speculative exposure risk. A Fund will
incur a loss as a result of a short sale if the price of the security increases between the date of the short sale and the date
on which the Fund replaces the borrowed security. As a result, if a Fund makes short sales in securities that increase in value,
it will likely underperform similar mutual funds that do not make short sales in securities. A Fund will realize a gain on a short
sale if the security declines in price between those dates. There can be no assurance that a Fund will be able to close out a short
sale position at any particular time or at an acceptable price. Although a Fund’s gain is limited to the price at which it
sold the security short, its potential loss is limited only by the maximum attainable price of the security, less the price at
which the security was sold and may, theoretically, be unlimited.
Sovereign Debt.
Investment in sovereign debt
can involve a high degree of risk. The governmental entity that controls the repayment of sovereign debt may not be able or willing
to repay the principal and/or interest when due in accordance with the terms of such debt. A governmental entity’s willingness
or ability to repay principal and interest due in a timely manner may be affected by, among other factors, its cash flow situation,
the extent of its foreign reserves, the availability of sufficient foreign exchange on the date a payment is due, the relative
size of the debt service burden to the economy as a whole, the governmental entity’s policy towards the International Monetary
Fund and the political constraints to which a governmental entity may be subject. Governmental entities may also be dependent on
expected disbursements from foreign governments, multilateral agencies and others abroad to reduce principal and interest arrearages
on their debt. The commitment on the part of these governments, agencies and others to make such disbursements may be conditioned
on the implementation of economic reforms and/or economic performance and the timely service of such debtor’s obligations.
Failure to implement such reforms, achieve such levels of economic performance or repay principal or interest when due may result
in the cancellation of such third parties’ commitments to lend funds to the governmental entity, which may further impair
such debtor’s ability or willingness to timely service its debts. Consequently, governmental entities may default on their
sovereign debt.
Holders of sovereign debt may be requested to participate
in the rescheduling of such debt and to extend further loans to governmental entities. In the event of a default by a governmental
entity, there may be few or no effective legal remedies for collecting on such debt.
Standby Commitment Agreements.
Standby commitment
agreements commit a Fund, for a stated period of time, to purchase a stated amount of securities that may be issued and sold to
that Fund at the option of the issuer. The price of the security is fixed at the time of the commitment. At the time of entering
into the agreement, the Fund is paid a commitment fee, regardless of whether or not the security is ultimately issued. A Fund will
enter into such agreements for the purpose of investing in the security underlying the commitment at a price that is considered
advantageous to the Fund. A Fund will limit its investment in such commitments so that the aggregate purchase price of securities
subject to such commitments, together with the value of the Fund’s other illiquid investments, will not exceed 15% of its
net assets taken at the time of the commitment. A Fund segregates liquid assets in an aggregate amount equal to the purchase price
of the securities underlying the commitment.
There can be no assurance that the securities subject to
a standby commitment will be issued, and the value of the security, if issued, on the delivery date may be more or less than its
purchase price. Since the issuance of the security underlying the commitment is at the option of the issuer, the Fund may bear
the risk of a decline in the value of such security and may not benefit from an appreciation in the value of the security during
the commitment period.
The purchase of a security pursuant to a standby commitment
agreement and the related commitment fee will be recorded on the date on which the security can reasonably be expected to be issued,
and the value of the security thereafter will be reflected in the calculation of a Fund’s net asset value. The cost basis
of the security will be adjusted by the amount of the commitment fee. In the event the security is not issued, the commitment fee
will be recorded as income on the expiration date of the standby commitment.
Stand-by commitments will only be entered into with dealers,
banks and broker-dealers which, in the Manager’s or sub-adviser’s opinion, present minimal credit risks. A Fund will
acquire stand-by commitments solely to facilitate portfolio liquidity and not to exercise its rights thereunder for trading purposes.
Stand-by commitments will be valued at zero in determining net asset value. Accordingly, where a Fund pays directly or indirectly
for a stand-by commitment, its cost will be reflected as an unrealized loss for the period during which the commitment is held
by such Fund and will be reflected as a realized gain or loss when the commitment is exercised or expires.
Stripped Securities.
Stripped securities
are created when the issuer separates the interest and principal components of an instrument and sells them as separate securities.
In general, one security is entitled to receive the interest payments on the underlying assets (the interest only or “IO”
security) and the other to receive the principal payments (the principal only or “PO” security). Some stripped securities
may receive a combination of interest and principal payments. The yields to maturity on IOs and POs are sensitive to the expected
or anticipated rate of principal payments (including prepayments) on the related underlying assets, and principal payments may
have a material effect on yield to maturity. If the underlying assets experience greater than anticipated prepayments of principal,
a Fund may not fully recoup its initial investment in IOs. Conversely, if the underlying assets experience less than anticipated
prepayments of principal, the yield on POs could be adversely affected. Stripped securities may be highly sensitive to changes
in interest rates and rates of prepayment.
Structured Notes.
Structured notes and other
related instruments purchased by a Fund are generally privately negotiated debt obligations where the principal and/or interest
is determined by reference to the performance of a specific asset, benchmark asset, market or interest rate (“reference measure”).
Issuers of structured notes include corporations and banks. The interest rate or the principal amount payable upon maturity or
redemption may increase or decrease, depending upon changes in the value of the
reference measure. The terms of a structured note may provide
that, in certain circumstances, no principal is due at maturity and, therefore, may result in a loss of invested capital by a Fund.
The interest and/or principal payments that may be made on a structured product may vary widely, depending on a variety of factors,
including the volatility of the reference measure.
Structured notes may be positively or negatively indexed,
so the appreciation of the reference measure may produce an increase or a decrease in the interest rate or the value of the principal
at maturity. The rate of return on structured notes may be determined by applying a multiplier to the performance or differential
performance of reference measures. Application of a multiplier involves leverage that will serve to magnify the potential for gain
and the risk of loss.
The purchase of structured notes exposes a Fund to the
credit risk of the issuer of the structured product. Structured notes may also be more volatile, less liquid, and more difficult
to price accurately than less complex securities and instruments or more traditional debt securities. The secondary market for
structured notes could be illiquid making them difficult to sell when the Fund determines to sell them. The possible lack of a
liquid secondary market for structured notes and the resulting inability of the Fund to sell a structured note could expose the
Fund to losses and could make structured notes more difficult for the Fund to value accurately.
Supranational Entities
. A Fund may invest
in debt securities of supranational entities. Examples of such entities include the International Bank for Reconstruction and Development
(the World Bank), the European Steel and Coal Community, the Asian Development Bank and the Inter-American Development Bank. The
government members, or “stockholders,” usually make initial capital contributions to the supranational entity and in
many cases are committed to make additional capital contributions if the supranational entity is unable to repay its borrowings.
There is no guarantee that one or more stockholders of a supranational entity will continue to make any necessary additional capital
contributions. If such contributions are not made, the entity may be unable to pay interest or repay principal on its debt securities,
and a Fund may lose money on such investments.
Trust Preferred Securities.
Certain of the
Funds may invest in trust preferred securities. Trust preferred securities are typically issued by corporations, generally in the
form of interest bearing notes with preferred securities characteristics, or by an affiliated business trust of a corporation,
generally in the form of beneficial interests in subordinated debentures or similarly structured securities. The trust preferred
securities market consists of both fixed and adjustable coupon rate securities that are either perpetual in nature or have stated
maturity dates.
Trust preferred securities are typically junior and fully
subordinated liabilities of an issuer and benefit from a guarantee that is junior and fully subordinated to the other liabilities
of the guarantor. In addition, trust preferred securities typically permit an issuer to defer the payment of income for five years
or more without triggering an event of default. Because of their subordinated position in the capital structure of an issuer, the
ability to defer payments for extended periods of time without default consequences to the issuer, and certain other features (such
as restrictions on common dividend payments by the issuer or ultimate guarantor when full cumulative payments on the trust preferred
securities have not been made), these trust preferred securities are often treated as close substitutes for traditional preferred
securities, both by issuers and investors.
Trust preferred securities include but are not limited
to trust originated preferred securities (“TOPRS
®
”); monthly income preferred securities (“MIPS
®
”);
quarterly income bond securities (“QUIBS
®
” ); quarterly income debt securities (“QUIDS
®
”);
quarterly income preferred securities (“QUIPS
SM
”); corporate trust securities (“CORTS
®
”);
public income notes (“PINES
®
”); and other trust preferred securities.
Trust preferred securities are typically issued with a
final maturity date, although some are perpetual in nature. In certain instances, a final maturity date may be extended and/or
the final payment of principal may be deferred at the issuer’s option for a specified time without default. No redemption
can typically take place unless all cumulative payment obligations have been met, although issuers may be able to engage in open-market
repurchases without regard to whether all payments have been paid.
Many trust preferred securities are issued by trusts or
other special purpose entities established by operating companies and are not a direct obligation of an operating company. At the
time the trust or special purpose entity sells such preferred securities to investors, it purchases debt of the operating company
(with terms comparable to those of the trust or special purpose entity securities), which enables the operating company to deduct
for tax purposes the interest paid on the debt held by the trust or special purpose entity. The trust or special purpose entity
is generally required to be treated as transparent for Federal income tax purposes such that the holders of the trust preferred
securities are treated as owning beneficial interests in the underlying debt of the operating company. Accordingly, payments on
the trust preferred securities are treated as interest rather than dividends for Federal income tax purposes. The trust or special
purpose entity in turn would be a holder of the operating company’s debt and would have priority with respect to the operating
company’s earnings and profits over the operating company’s common shareholders, but would typically be subordinated
to other
classes of the operating company’s debt. Typically
a preferred share has a rating that is slightly below that of its corresponding operating company’s senior debt securities.
U.S. Government Obligations.
A Fund may purchase
obligations issued or guaranteed by the U.S. Government and U.S. Government agencies and instrumentalities. Obligations of certain
agencies and instrumentalities of the U.S. Government are supported by the full faith and credit of the U.S. Treasury. Others are
supported by the right of the issuer to borrow from the U.S. Treasury; and still others are supported only by the credit of the
agency or instrumentality issuing the obligation. No assurance can be given that the U.S. Government will provide financial support
to U.S. Government-sponsored instrumentalities if it is not obligated to do so by law. Certain U.S. Treasury and agency securities
may be held by trusts that issue participation certificates (such as Treasury income growth receipts (“TIGRs”) and
certificates of accrual on Treasury certificates (“CATs”)). These certificates, as well as Treasury receipts and other
stripped securities, represent beneficial ownership interests in either future interest payments or the future principal payments
on U.S. Government obligations. These instruments are issued at a discount to their “face value” and may (particularly
in the case of stripped mortgage-backed securities) exhibit greater price volatility than ordinary debt securities because of the
manner in which their principal and interest are returned to investors.
Examples of the types of U.S. Government obligations that
may be held by the Funds include U.S. Treasury Bills, Treasury Notes and Treasury Bonds and the obligations of the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United States, Small Business Administration, Ginnie Mae,
Fannie Mae, Federal Financing Bank, General Services Administration, Student Loan Marketing Association, Central Bank for Cooperatives,
Federal Home Loan Banks, Freddie Mac, Federal Intermediate Credit Banks, Federal Land Banks, Farm Credit Banks System, Maritime
Administration, Tennessee Valley Authority and Washington D.C. Armory Board. The Funds may also invest in mortgage-related securities
issued or guaranteed by U.S. Government agencies and instrumentalities, including such instruments as obligations of the Ginnie
Mae, Fannie Mae and Freddie Mac. See “Mortgage-Backed Securities” above.
U.S. Treasury Obligations.
Treasury obligations
may differ in their interest rates, maturities, times of issuance and other characteristics. Obligations of U.S. Government agencies
and authorities are supported by varying degrees of credit but generally are not backed by the full faith and credit of the U.S.
Government. No assurance can be given that the U.S. Government will provide financial support to its agencies and authorities if
it is not obligated by law to do so.
Utility Industries
Risks that are intrinsic to the utility industries include
difficulty in obtaining an adequate return on invested capital, difficulty in financing large construction programs during an inflationary
period, restrictions on operations and increased cost and delays attributable to environmental considerations and regulation, difficulty
in raising capital in adequate amounts on reasonable terms in periods of high inflation and unsettled capital markets, technological
innovations that may render existing plants, equipment or products obsolete, the potential impact of natural or man-made disasters,
increased costs and reduced availability of certain types of fuel, occasional reduced availability and high costs of natural gas
for resale, the effects of energy conservation, the effects of a national energy policy and lengthy delays and greatly increased
costs and other problems associated with the design, construction, licensing, regulation and operation of nuclear facilities for
electric generation, including, among other considerations, the problems associated with the use of radioactive materials and the
disposal of radioactive wastes. There are substantial differences among the regulatory practices and policies of various jurisdictions,
and any given regulatory agency may make major shifts in policy from time to time. There is no assurance that regulatory authorities
will, in the future, grant rate increases or that such increases will be adequate to permit the payment of dividends on common
stocks issued by a utility company. Additionally, existing and possible future regulatory legislation may make it even more difficult
for utilities to obtain adequate relief. Certain of the issuers of securities held in the Fund’s portfolio may own or operate
nuclear generating facilities. Governmental authorities may from time to time review existing policies and impose additional requirements
governing the licensing, construction and operation of nuclear power plants. Prolonged changes in climatic conditions can also
have a significant impact on both the revenues of an electric and gas utility as well as the expenses of a utility, particularly
a hydro-based electric utility.
Utility companies in the United States and in foreign countries
are generally subject to regulation. In the United States, most utility companies are regulated by state and/or federal authorities.
Such regulation is intended to ensure appropriate standards of service and adequate capacity to meet public demand. Generally,
prices are also regulated in the United States and in foreign countries with the intention of protecting the public while ensuring
that the rate of return earned by utility companies is sufficient to allow them to attract capital in order to grow and continue
to provide appropriate services. There can be no assurance that such pricing policies or rates of return will continue in the future.
The nature of regulation of the utility industries continues
to evolve both in the United States and in foreign countries. In recent years, changes in regulation in the United States increasingly
have allowed utility companies to provide services and products outside their traditional geographic areas and lines of business,
creating new areas of competition within the industries. In some instances, utility companies are operating on an unregulated basis.
Because of trends toward deregulation and the evolution of independent power producers as well as new entrants to the field of
telecommunications, non-regulated providers of utility services have become a significant part of their respective industries.
The Manager believes that the emergence of competition and deregulation will result in certain utility companies being able to
earn more than their traditional regulated rates of return, while others may be forced to defend their core business from increased
competition and may be less profitable. Reduced profitability, as well as new uses of funds (such as for expansion, operations
or stock buybacks) could result in cuts in dividend payout rates. The Manager seeks to take advantage of favorable investment opportunities
that may arise from these structural changes. Of course, there can be no assurance that favorable developments will occur in the
future.
Foreign utility companies are also subject to regulation,
although such regulations may or may not be comparable to those in the United States. Foreign utility companies may be more heavily
regulated by their respective governments than utilities in the United States and, as in the United States, generally are required
to seek government approval for rate increases. In addition, many foreign utilities use fuels that may cause more pollution than
those used in the United States, which may require such utilities to invest in pollution control equipment to meet any proposed
pollution restrictions. Foreign regulatory systems vary from country to country and may evolve in ways different from regulation
in the United States.
A Fund’s investment policies are designed to enable
it to capitalize on evolving investment opportunities throughout the world. For example, the rapid growth of certain foreign economies
will necessitate expansion of capacity in the utility industries in those countries. Although many foreign utility companies currently
are government-owned, thereby limiting current investment opportunities for a Fund, the Manager believes that, in order to attract
significant capital for growth, foreign governments are likely to seek global investors through the privatization of their utility
industries. Privatization, which refers to the trend toward investor ownership of assets rather than government ownership, is expected
to occur in newer, faster-growing economies and in mature economies. Of course, there is no assurance that such favorable developments
will occur or that investment opportunities in foreign markets will increase.
The revenues of domestic and foreign utility companies
generally reflect the economic growth and development in the geographic areas in which they do business. The Manager will take
into account anticipated economic growth rates and other economic developments when selecting securities of utility companies.
Electric.
The electric utility industry consists
of companies that are engaged principally in the generation, transmission and sale of electric energy, although many also provide
other energy-related services. In the past, electric utility companies, in general, have been favorably affected by lower fuel
and financing costs and the full or near completion of major construction programs. In addition, many of these companies have generated
cash flows in excess of current operating expenses and construction expenditures, permitting some degree of diversification into
unregulated businesses. Some electric utilities have also taken advantage of the right to sell power outside of their traditional
geographic areas. Electric utility companies have historically been subject to the risks associated with increases in fuel and
other operating costs, high interest costs on borrowings needed for capital construction programs, costs associated with compliance
with environmental and safety regulations and changes in the regulatory climate. As interest rates declined, many utilities refinanced
high cost debt and in doing so improved their fixed charges coverage. Regulators, however, lowered allowed rates of return as interest
rates declined and thereby caused the benefits of the rate declines to be shared wholly or in part with customers. In a period
of rising interest rates, the allowed rates of return may not keep pace with the utilities’ increased costs. The construction
and operation of nuclear power facilities are subject to strict scrutiny by, and evolving regulations of, the Nuclear Regulatory
Commission and state agencies which have comparable jurisdiction. Strict scrutiny might result in higher operating costs and higher
capital expenditures, with the risk that the regulators may disallow inclusion of these costs in rate authorizations or the risk
that a company may not be permitted to operate or complete construction of a facility. In addition, operators of nuclear power
plants may be subject to significant costs for disposal of nuclear fuel and for decommissioning such plants.
The rating agencies look closely at the business profile
of utilities. Ratings for companies are expected to be impacted to a greater extent in the future by the division of their asset
base. Electric utility companies that focus more on the generation of electricity may be assigned less favorable ratings as this
business is expected to be competitive and the least regulated. On the other hand, companies that focus on transmission and distribution,
which is expected to be the least competitive and the more regulated part of the business, may see higher ratings given the greater
predictability of cash flow.
A number of states are considering or have enacted deregulation
proposals. The introduction of competition into the industry as a result of such deregulation has at times resulted in lower revenue,
lower credit ratings, increased default risk, and lower electric utility
security prices. Such increased competition may also cause
long-term contracts, which electric utilities previously entered into to buy power, to become “stranded assets” which
have no economic value. Any loss associated with such contracts must be absorbed by ratepayers and investors. In addition, some
electric utilities have acquired electric utilities overseas to diversify, enhance earnings and gain experience in operating in
a deregulated environment. In some instances, such acquisitions have involved significant borrowings, which have burdened the acquirer’s
balance sheet. There is no assurance that current deregulation proposals will be adopted. However, deregulation in any form could
significantly impact the electric utilities industry.
Telecommunications.
The telecommunications industry
today includes both traditional telephone companies, with a history of broad market coverage and highly regulated businesses, and
cable companies, which began as small, lightly regulated businesses focused on limited markets. Today these two historically different
businesses are converging in an industry that is trending toward larger, competitive national and international markets with an
emphasis on deregulation. Companies that distribute telephone services and provide access to the telephone networks still comprise
the greatest portion of this segment, but non-regulated activities such as wireless telephone services, paging, data transmission
and processing, equipment retailing, computer software and hardware and internet services are becoming increasingly significant
components as well. In particular, wireless and internet telephone services continue to gain market share at the expense of traditional
telephone companies. The presence of unregulated companies in this industry and the entry of traditional telephone companies into
unregulated or less regulated businesses provide significant investment opportunities with companies that may increase their earnings
at faster rates than had been allowed in traditional regulated businesses. Still, increasing competition, technological innovations
and other structural changes could adversely affect the profitability of such utilities and the growth rate of their dividends.
Given mergers and proposed legislation and enforcement changes, it is likely that both traditional telephone companies and cable
companies will continue to provide an expanding range of utility services to both residential, corporate and governmental customers.
Gas
. Gas transmission companies and gas distribution
companies are undergoing significant changes. In the United States, interstate transmission companies are regulated by the Federal
Energy Regulatory Commission, which is reducing its regulation of the industry. Many companies have diversified into oil and gas
exploration and development, making returns more sensitive to energy prices. In the recent decade, gas utility companies have been
adversely affected by disruptions in the oil industry and have also been affected by increased concentration and competition. In
the opinion of the Manager, however, environmental considerations could improve the gas industry outlook in the future. For example,
natural gas is the cleanest of the hydrocarbon fuels, and this may result in incremental shifts in fuel consumption toward natural
gas and away from oil and coal, even for electricity generation. However, technological or regulatory changes within the industry
may delay or prevent this result.
Water.
Water supply utilities are companies that
collect, purify, distribute and sell water. In the United States and around the world the industry is highly fragmented because
most of the supplies are owned by local authorities. Companies in this industry are generally mature and are experiencing little
or no per capita volume growth. In the opinion of the Manager, there may be opportunities for certain companies to acquire other
water utility companies and for foreign acquisition of domestic companies. The Manager believes that favorable investment opportunities
may result from consolidation of this segment. As with other utilities, however, increased regulation, increased costs and potential
disruptions in supply may adversely affect investments in water supply utilities.
Utility Industries Generally.
There can be no assurance
that the positive developments noted above, including those relating to privatization and changing regulation, will occur or that
risk factors other than those noted above will not develop in the future.
When Issued Securities, Delayed Delivery Securities
and Forward Commitments.
A Fund may purchase or sell securities that it is entitled to receive on a when issued basis.
A Fund may also purchase or sell securities on a delayed delivery basis or through a forward commitment (including on a “TBA”
(to be announced) basis). These transactions involve the purchase or sale of securities by a Fund at an established price with
payment and delivery taking place in the future. The Fund enters into these transactions to obtain what is considered an advantageous
price to the Fund at the time of entering into the transaction. When a Fund purchases securities in these transactions, the Fund
segregates liquid securities in an amount equal to the amount of its purchase commitments.
There can be no assurance that a security purchased on
a when issued basis will be issued or that a security purchased or sold on a delayed delivery basis or through a forward commitment
will be delivered. Also, the value of securities in these transactions on the delivery date may be more or less than the price
paid by the Fund to purchase the securities. The Fund will lose money if the value of the security in such a transaction declines
below the purchase price and will not benefit if the value of the security appreciates above the sale price during the commitment
period.
If deemed advisable as a matter of investment strategy,
a Fund may dispose of or renegotiate a commitment after it has been entered into, and may sell securities it has committed to purchase
before those securities are delivered to the Fund on the settlement date. In these cases the Fund may realize a taxable capital
gain or loss.
When a Fund engages in when-issued, TBA or forward commitment
transactions, it relies on the other party to consummate the trade. Failure of such party to do so may result in the Fund’s
incurring a loss or missing an opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a commitment
to purchase securities, and any subsequent fluctuations in their market value, is taken into account when determining the market
value of a Fund starting on the day the Fund agrees to purchase the securities. The Fund does not earn interest on the securities
it has committed to purchase until they are paid for and delivered on the settlement date.
Yields and Ratings
.
The yields on
certain obligations are dependent on a variety of factors, including general market conditions, conditions in the particular market
for the obligation, the financial condition of the issuer, the size of the offering, the maturity of the obligation and the ratings
of the issue. The ratings of Moody’s, Fitch and S&P represent their respective opinions as to the quality of the obligations
they undertake to rate. Ratings, however, are general and are not absolute standards of quality. Consequently, obligations with
the same rating, maturity and interest rate may have different market prices. Subsequent to its purchase by a Fund, a rated security
may cease to be rated. A Fund’s Manager or sub-adviser will consider such an event in determining whether the Fund should
continue to hold the security.
Zero Coupon Securities.
Zero coupon securities
are securities that are sold at a discount to par value and do not pay interest during the life of the security. The discount approximates
the total amount of interest the security will accrue and compound over the period until maturity at a rate of interest reflecting
the market rate of the security at the time of issuance. Upon maturity, the holder of a zero coupon security is entitled to receive
the par value of the security.
While interest payments are not made on such securities,
holders of such securities are deemed to have received income (“phantom income”) annually, notwithstanding that cash
may not be received currently. The effect of owning instruments that do not make current interest payments is that a fixed yield
is earned not only on the original investment but also, in effect, on all discount accretion during the life of the obligations.
This implicit reinvestment of earnings at a fixed rate eliminates the risk of being unable to invest distributions at a rate as
high as the implicit yield on the zero coupon bond, but at the same time eliminates the holder’s ability to reinvest at higher
rates in the future. For this reason, some of these securities may be subject to substantially greater price fluctuations during
periods of changing market interest rates than are comparable securities that pay interest currently. Longer term zero coupon bonds
are more exposed to interest rate risk than shorter term zero coupon bonds. These investments benefit the issuer by mitigating
its need for cash to meet debt service, but also require a higher rate of return to attract investors who are willing to defer
receipt of cash.
A Fund accrues income with respect to these securities
for Federal income tax and accounting purposes prior to the receipt of cash payments. Zero coupon securities may be subject to
greater fluctuation in value and less liquidity in the event of adverse market conditions than comparably rated securities that
pay cash interest at regular intervals.
Further, to maintain its qualification for pass-through
treatment under the Federal tax laws, a Fund is required to distribute income to its shareholders and, consequently, may have to
dispose of other, more liquid portfolio securities under disadvantageous circumstances or may have to leverage itself by borrowing
in order to generate the cash to satisfy these distributions. The required distributions may result in an increase in a Fund’s
exposure to zero coupon securities.
In addition to the above-described risks, there are certain
other risks related to investing in zero coupon securities. During a period of severe market conditions, the market for such securities
may become even less liquid. In addition, as these securities do not pay cash interest, a Fund’s investment exposure to these
securities and their risks, including credit risk, will increase during the time these securities are held in the Fund’s
portfolio.
Suitability (All Funds)
The economic benefit of an investment in any Fund depends
upon many factors beyond the control of the Fund, the Manager and its affiliates. Each Fund should be considered a vehicle for
diversification and not as a balanced investment program. The suitability for any particular investor of a purchase of shares in
a Fund will depend upon, among other things, such investor’s investment objectives and such investor’s ability to accept
the risks associated with investing in securities, including the risk of loss of principal.
Investment Restrictions (All Funds)
See “Investment Restrictions” in Part I of
each Fund’s Statement of Additional Information for the specific fundamental and non-fundamental investment restrictions
adopted by each Fund. In addition to those investment restrictions, each Fund is also subject to the restrictions discussed below.
The staff of the Commission has taken the position that
purchased OTC options and the assets used as cover for written OTC options are illiquid securities. Therefore, each Fund has adopted
an investment policy pursuant to which it will not purchase or sell OTC options (including OTC options on futures contracts) if,
as a result of any such transaction, the sum of the market value of OTC options currently outstanding that are held by the Fund,
the market value of the underlying securities covered by OTC call options currently outstanding that were sold by the Fund and
margin deposits on the Fund’s existing OTC options on financial futures contracts would exceed 15% of the net assets of the
Fund, taken at market value, together with all other assets of the Fund that are determined to be illiquid. However, if an OTC
option is sold by a Fund to a primary U.S. Government securities dealer recognized by the Federal Reserve Bank of New York and
if the Fund has the unconditional contractual right to repurchase such OTC option from the dealer at a predetermined price, then
the Fund will treat as illiquid only such amount of the underlying securities as is equal to the repurchase price less the amount
by which the option is “in-the-money” (
i.e.
, current market value of the underlying securities minus the option’s
strike price). The repurchase price with the primary dealers is typically a formula price that is generally based on a multiple
of the premium received for the option, plus the amount by which the option is “in-the-money.” This policy as to OTC
options is not a fundamental policy of any Fund and may be amended by the Board of Directors of the Fund without the approval of
the Fund’s shareholders.
Each Fund’s investments will be limited in order
to allow the Fund to qualify as a “regulated investment company” for purposes of the Code. See “Dividends and
Taxes — Taxes.” To qualify, among other requirements, each Fund will limit its investments so that, at the close of
each quarter of the taxable year, (i) at least 50% of the market value of each Fund’s assets is represented by cash,
securities of other regulated investment companies, U.S. government securities and other securities, with such other securities
limited, in respect of any one issuer, to an amount not greater than 5% of the Fund’s assets and not greater than 10% of
the outstanding voting securities of such issuer and (ii) not more than 25% of the value of its assets is invested in the
securities (other than U.S. government securities or securities of other regulated investment companies) of any one issuer, any
two or more issuers that the Fund controls and that are determined to be engaged in the same or similar trades or businesses or
related trades or businesses or in the securities of one or more 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).
Foreign government securities (unlike U.S. government securities)
are not exempt from the diversification requirements of the Code and the securities of each foreign government issuer are considered
to be obligations of a single issuer. These tax-related limitations may be changed by the Directors of a Fund to the extent necessary
to comply with changes to the Federal tax requirements. A Fund that is “diversified” under the Investment Company Act
must satisfy the foregoing 5% and 10% requirements with respect to 75% of its total assets.
Management
and Other Service Arrangements
Directors and Officers
See “Information on Directors and Officers,“—Biographical
Information,“—Share Ownership” and “— Compensation of Directors” in Part I of each Fund’s
Statement of Additional Information for biographical and certain other information relating to the Directors and officers of your
Fund, including Directors’ compensation.
Management Arrangements
Management Services.
The Manager provides each Fund
with investment advisory and management services. Subject to the oversight of the Board of Directors, the Manager is responsible
for the actual management of a Fund’s portfolio and reviews the Fund’s holdings in light of its own research analysis
and that from other relevant sources.
The responsibility for making decisions to buy, sell or
hold a particular security rests with the Manager. The Manager performs certain of the other administrative services and provides
all the office space, facilities, equipment and necessary personnel for management of each Fund.
Each Feeder Fund invests all or a portion of its assets
in shares of a Master Portfolio. To the extent a Feeder Fund invests all of its assets in a Master Portfolio, it does not invest
directly in portfolio securities and does not require management services. For such Feeder Funds, portfolio management occurs at
the Master Portfolio level.
Management Fee.
Each Fund has entered into a Management
Agreement with the Manager pursuant to which the Manager receives for its services to the Fund monthly compensation at an annual
rate based on the average daily net assets of the Fund. For information regarding specific fee rates for your Fund and the fees
paid by your Fund to the Manager for the Fund’s last three fiscal years or other applicable periods, see “Management
and Advisory Arrangements” in Part I of each Fund’s Statement of Additional Information.
For Funds that do not have an administrator, each Management
Agreement obligates the Manager to provide management services and to pay all compensation of and furnish office space for officers
and employees of a Fund in connection with investment and economic research, trading and investment management of the Fund, as
well as the fees of all Directors of the Fund who are interested persons of the Fund. Each Fund pays all other expenses incurred
in the operation of that Fund, including among other things: taxes; expenses for legal and auditing services; costs of preparing,
printing and mailing proxies, shareholder reports, prospectuses and statements of additional information, except to the extent
paid by BlackRock Investments, LLC (“BRIL” or the “Distributor”); charges of the custodian and sub-custodian,
and the transfer agent; expenses of redemption of shares; Commission fees; expenses of registering the shares under Federal, state
or foreign laws; fees and expenses of Directors who are not interested persons of a Fund as defined in the Investment Company Act;
accounting and pricing costs (including the daily calculations of net asset value); insurance; interest; brokerage costs; litigation
and other extraordinary or non-recurring expenses; and other expenses properly payable by the Fund. Certain accounting services
are provided to each Fund by State Street Bank and Trust Company (“State Street”) or BNY Mellon Investment Servicing
(US) Inc. (“BNY Mellon”) pursuant to an agreement between State Street or BNY Mellon and each Fund. Each Fund pays
a fee for these services. In addition, the Manager provides certain accounting services to each Fund and the Fund pays the Manager
a fee for such services. The Distributor pays certain promotional expenses of the Funds incurred in connection with the offering
of shares of the Funds. Certain expenses are financed by each Fund pursuant to distribution plans in compliance with Rule 12b-1
under the Investment Company Act. See “Purchase of Shares — Distribution Plans.”
Sub-Advisory Fee.
The Manager of certain Funds has
entered into one or more sub-advisory agreements (the “Sub-Advisory Agreements”) with the sub-adviser or sub-advisers
identified in each such Fund’s Prospectus (the “Sub-Adviser”) pursuant to which the Sub-Adviser provides sub-advisory
services to the Manager with respect to the Fund. For information relating to the fees, if any, paid by the Manager to the Sub-Adviser
pursuant to the Sub-Advisory Agreement for the Fund’s last three fiscal years or other applicable periods, see “Management
and Advisory Arrangements” in Part I of each Fund’s Statement of Additional Information.
Organization of the Manager.
BlackRock Advisors, LLC is a
Delaware limited liability company and BlackRock Fund Advisors is a California corporation. Each Manager is an indirect, wholly
owned subsidiary of BlackRock, Inc. BlackRock, Inc., through its subsidiaries and divisions, provides (i) investment management
services to individuals and institutional investors through separate account management, non-discretionary advisory programs and
commingled investment vehicles; (ii) risk management services, investment accounting and trade processing tools; (iii) transition
management services, and (iv) securities lending services.
Duration and Termination.
Unless earlier terminated
as described below, each Management Agreement and each Sub-Advisory Agreement will remain in effect for an initial two year period
and from year to year thereafter if approved annually (a) by the Board of Directors or by a vote of a majority of the outstanding
voting securities of a Fund and (b) by a majority of the Directors of the Fund who are not parties to such agreement or interested
persons (as defined in the Investment Company Act) of any such party. Each Agreement automatically terminates on assignment and
may be terminated without penalty on 60 days’ written notice at the option of either party thereto or by the vote of
the shareholders of the applicable Fund.
Other Service Arrangements
Administrative Services and Administrative Fee.
Certain
Funds have entered into an administration agreement (the “Administration Agreement”) with an administrator identified
in the Fund’s Prospectus and Part I of the Fund’s Statement of Additional Information (each an “Administrator”).
For its services to a Fund, the Administrator receives monthly compensation at the annual rate set forth in each applicable Fund’s
Prospectus. For information regarding any administrative fees paid by your Fund to the Administrator for the periods indicated,
see “Management and Advisory Arrangements” in Part I of that Fund’s Statement of Additional Information.
For Funds that have an Administrator, the Administration
Agreement obligates the Administrator to provide certain administrative services to the Fund and to pay, or cause its affiliates
to pay, for maintaining its staff and personnel and to provide office space,
facilities and necessary personnel for the Fund. Each Administrator
is also obligated to pay, or cause its affiliates to pay, the fees of those officers and Directors of the Fund who are affiliated
persons of the Administrator or any of its affiliates.
Duration and Termination of Administration Agreement.
Unless earlier terminated as described below, each Administration Agreement will continue for an initial two year period and
from year to year if approved annually (a) by the Board of Directors of each applicable Fund or by a vote of a majority of
the outstanding voting securities of such Fund and (b) by a majority of the Directors of the Fund who are not parties to such
contract or interested persons (as defined in the Investment Company Act) of any such party. Such contract is not assignable and
may be terminated without penalty on 60 days’ written notice at the option of either party thereto or by the vote of
the shareholders of the Fund.
Transfer Agency Services.
BNY Mellon Investment
Servicing (US) Inc. (in this capacity, the “Transfer Agent”), a subsidiary of The Bank of New York Mellon Corporation,
acts as each Fund’s Transfer Agent pursuant to a Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency
Agreement (the “Transfer Agency Agreement”) with the Funds. Pursuant to the Transfer Agency Agreement, the Transfer
Agent is responsible for the issuance, transfer and redemption of shares and the opening and maintenance of shareholder accounts.
Each Fund pays the Transfer Agent a fee for the services it receives based on the type of account and the level of services required.
Each Fund reimburses the Transfer Agent’s reasonable out-of-pocket expenses and pays a fee of 0.10% of account assets for
certain accounts that participate in certain fee-based programs sponsored by the Manager or its affiliates. For purposes of each
Transfer Agency Agreement, the term “account” includes a shareholder account maintained directly by the Transfer Agent
and any other account representing the beneficial interest of a person in the relevant share class on a recordkeeping system. Effective
July 1, 2010, the Transfer Agent ceased to be an affiliate of the Funds.
Independent Registered Public Accounting Firm.
The
Audit Committee of each Fund, which is comprised of all of the Fund’s non-interested Directors, has selected an independent
registered public accounting firm for that Fund that audits the Fund’s financial statements. Please see the inside back cover
page of your Fund’s Prospectus for information on your Fund’s independent registered public accounting firm.
Custodian Services.
The name and address of the
custodian (the “Custodian”) of each Fund are provided on the inside back cover page of the Fund’s Prospectus.
The Custodian is responsible for safeguarding and controlling the Fund’s cash and securities, handling the receipt and delivery
of securities and collecting interest and dividends on the Fund’s investments. The Custodian is authorized to establish separate
accounts in foreign currencies and to cause foreign securities owned by the Fund to be held in its offices outside the United States
and with certain foreign banks and securities depositories.
For certain Feeder Funds, the Custodian also acts as the
custodian of the Master Portfolio’s assets.
With respect to each Fund, under an arrangement effective January
1, 2010, on a monthly basis, the Custodian nets the Fund’s daily positive and negative cash balances and calculates a credit
(“custody credit”) or a charge based on that net amount. The custodian fees, including the amount of any overdraft
charges, may be reduced by the amount of such custody credits, and any unused credits at the end of a given month may be carried
forward to a subsequent month. Any such credits unused by the end of a Fund’s fiscal year will not expire. Net debits at
the end of a given month are added to the Fund’s custody bill and paid by the Fund.
Accounting Services.
Each Fund has entered into
an agreement with State Street or BNY Mellon, pursuant to which State Street or BNY Mellon provides certain accounting services
to the Fund. Each Fund pays a fee for these services. State Street or BNY Mellon provides similar accounting services to the Master
LLCs. The Manager or the Administrator also provides certain accounting services to each Fund and each Fund reimburses the Manager
or the Administrator for these services.
See “Management and Advisory Arrangements —
Accounting Services” in Part I of each Fund’s Statement of Additional Information for information on the amounts paid
by your Fund and, if applicable, Master LLC to State Street and the Manager or, if applicable, the Administrator for the periods
indicated.
Distribution Expenses.
Each Fund has entered into
a distribution agreement with the Distributor in connection with the continuous offering of each class of shares of the Fund (the
“Distribution Agreement”). The Distribution Agreement obligates the Distributor to pay certain expenses in connection
with the offering of each class of shares of the Funds. After the prospectuses, statements of additional information and periodic
reports have been prepared, set in type and mailed to shareholders, the Distributor pays for the printing and distribution of these
documents used in connection with the offering to dealers and investors. The Distributor also pays for other supplementary sales
literature and advertising costs. The Distribution Agreement is subject to the same renewal requirements and termination provisions
as the Management Agreement described above.
Code of Ethics
Each Fund, the Manager, each Sub-Adviser and the Distributor
has adopted a Code of Ethics pursuant to Rule 17j-1 under the Investment Company Act. The Codes of Ethics establish procedures
for personal investing and restrict certain transactions. Employees subject to the Code of Ethics may invest in securities for
their personal investment accounts, including securities that may be purchased or held by a Fund.
Selective
Disclosure of Portfolio Holdings
The Board of Directors of each Fund and the Board of Directors
of the Manager have each approved Portfolio Information Distribution Guidelines (the “Guidelines”) regarding the disclosure
of each Fund’s portfolio securities, as applicable, and other portfolio information. The purpose of the Guidelines is to
ensure that (i) shareholders and prospective shareholders of the Funds have equal access to portfolio holdings and characteristics
and (ii) third parties (such as consultants, intermediaries and third-party data providers) have access to such information no
more frequently than shareholders and prospective shareholders.
Pursuant to the Guidelines, each Fund and the Manager may, under
certain circumstances as set forth below, make selective disclosure with respect to a Fund’s portfolio holdings. Each Board
of Directors has approved the adoption by the Fund of the Guidelines, and employees of the Manager are responsible for adherence
to the Guidelines. The Board of Directors provides ongoing oversight of the Fund’s and Manager’s compliance with the
Guidelines. Examples of the types of information that may be disclosed pursuant to the Guidelines are provided below. This information
may be both material non-public information (“Confidential Information”) and proprietary information of BlackRock.
Information that is non-material or that may be obtained from public sources (
i.e.
, information that has been publicly disclosed
via a filing with the Commission (
e.g.
, fund annual report), through a press release or placement on a publicly-available
internet web site) shall not be deemed Confidential Information.
Except as otherwise provided in the Guidelines, Confidential Information
relating to a Fund may not be distributed to persons not employed by BlackRock unless the Fund has a legitimate business purpose
for doing so. Confidential Information may also be disclosed to the Fund’s Directors and their respective counsel, outside
counsel for the Fund and the Fund’s auditors, and may be disclosed to the Fund’s service providers and other appropriate
parties with the approval of the Fund’s Chief Compliance Officer, BlackRock’s General Counsel, BlackRock’s Chief
Compliance Officer or the designee of such persons, and in addition, in the case of disclosure to third parties, subject to a confidentiality
or non-disclosure agreement, as necessary, in accordance with the Guidelines. Information may also be disclosed as required by
applicable laws and regulation.
Examples of instances in which selective disclosure of a Fund’s
portfolio securities or other portfolio information may be appropriate include: (i) disclosure for due diligence purposes to an
investment adviser that is in merger or acquisition talks with BlackRock; (ii) disclosure to a newly-hired investment adviser or
sub-adviser prior to its commencing its duties; (iii) disclosure to a third-party feeder fund consistent with its agreement with
a master portfolio advised by BlackRock; (iv) disclosure to third-party service providers of legal, auditing, custody, proxy voting,
pricing and other services to the Fund or a third-party feeder fund or (v) disclosure to a rating or ranking organization.
Asset and Return Information.
Data on NAVs, asset levels
(by total fund and share class), accruals, yields, capital gains, dividends and fund returns (net of fees by share class) are generally
available to shareholders, prospective shareholders, consultants and third-party data providers upon request, as soon as such data
is available. Data on number of shareholders (total and by share class) and benchmark returns (including performance measures such
as standard deviation, information ratio, Sharpe ratio, alpha, and beta) are generally available to shareholders, prospective shareholders,
consultants and third-party data providers as soon as such data is released after month-end.
Portfolio Characteristics.
Examples of portfolio characteristics
include sector allocation, credit quality breakdown, maturity distribution, duration and convexity measures, average credit quality,
average maturity, average coupon, top 10 holdings with percent of the fund held, average market capitalization, capitalization
range, ROE, P/E, P/B, P/CF, P/S and EPS.
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1.
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Month-end portfolio characteristics are available to shareholders, prospective shareholders,
intermediaries and consultants on the fifth calendar day after month-end.
1
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1
The precise number of days specified above may vary
slightly from period to period depending on whether the specified calendar day falls on a weekend or holiday.
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2.
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Fund Fact Sheets, which contain certain portfolio characteristics, are available, in both hard copy and electronically, to shareholders, prospective shareholders, intermediaries and consultants on a monthly or quarterly basis no earlier than the fifth calendar day after the end of a month or quarter.
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3.
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Money Market Performance Reports, which contain money market fund performance for the recent month, rolling 12-month average yields and benchmark performance, are available on a monthly basis to shareholders, prospective shareholders, intermediaries and consultants by the tenth calendar day of the month. This information may also be obtained electronically upon request.
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Portfolio Holdings.
In addition to position description,
portfolio holdings may also include issuer name, CUSIP, ticker symbol, total shares and market value for equity portfolios and
issuer name, CUSIP, ticker symbol, coupon, maturity, current face value and market value for fixed income portfolios. Other information
that may be provided includes quantity, SEDOL, market price, yield, weighted average life, duration and convexity of each security
in a Fund as of a specific date.
The following shall not be deemed to be a disclosure of Confidential
Information:
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Generally, month-end portfolio holdings may be made available to fund shareholders, prospective shareholders, intermediaries,
consultants and third party data providers (
e.g.
, Lipper, Morningstar and Bloomberg) on the 20th calendar day after the
end of each month, except for BlackRock Global Allocation Fund, Inc., BlackRock Long-Horizon Equity Fund, Global Allocation Portfolio
of BlackRock Series Fund, Inc. and BlackRock Global Allocation V.I. Fund of BlackRock Variable Series Funds, Inc., whose holdings
may be made available on the 40
th
calendar day after the end of the quarter (based on each Fund’s fiscal year
end).
1
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The following information as it relates to money market funds, unless
made available to the public, shall be deemed a disclosure of Confidential Information and, subject to the Guidelines, requires
a confidentiality or non-disclosure arrangement:
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Weekly portfolio holdings made available to fund shareholders, prospective shareholders, intermediaries and consultants on
the next business day after the end of the weekly period.
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Weekly portfolio holdings and characteristics made available to third-party data providers (
e.g.
, Lipper, Morningstar,
Bloomberg, S&P, Fitch, Moody’s, Crane Data and iMoneyNet, Inc.) on the next business day after the end of the weekly
period.
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Other Information.
The Guidelines shall also apply to other
Confidential Information of a Fund such as attribution analyses or security-specific information (
e.g.
, information about
Fund holdings where an issuer has been downgraded, been acquired or declared bankruptcy).
Implementation.
All BlackRock employees must adhere to the
Guidelines when responding to inquiries from shareholders, prospective shareholders, consultants, and third-party databases. A
Fund’s Chief Compliance Officer is responsible for oversight of compliance with the Guidelines and will recommend to the
Board of Directors any changes to the Guidelines that he or she deems necessary or appropriate to ensure the Fund’s and BlackRock’s
compliance.
Ongoing Arrangements.
The Manager has entered into ongoing
agreements to provide selective disclosure of Fund portfolio holdings to the following persons or entities:
1. Fund’s
Board of Directors and, if necessary, Independent Directors’ counsel and Fund counsel.
2. Fund’s
Transfer Agent
3. Fund’s
Custodian
4. Fund’s
Administrator, if applicable.
5. Fund’s
independent registered public accounting firm.
6. Fund’s
accounting services provider
7. Independent
rating agencies — Morningstar, Inc., Lipper Inc., S&P, Moody’s, Fitch
8. Information
aggregators — Markit on Demand, Thomson Financial and Bloomberg, eVestments Alliance, Informa/PSN Investment Solutions, Crane
Data, and iMoneyNet.
9. Sponsors of
401(k) plans that include BlackRock-advised funds — E.I. Dupont de Nemours and Company, Inc.
10. Consultants
for pension plans that invest in BlackRock-advised funds — Rocaton Investment Advisors, LLC, Mercer Investment Consulting,
Callan Associates, Brockhouse & Cooper, Cambridge Associates, Morningstar/Investorforce, Russell Investments (Mellon Analytical
Solutions) and Wilshire Associates.
11. Pricing
Vendors — Reuters Pricing Service, Bloomberg, FT Interactive Data (FT IDC), ITG, Telekurs Financial, FactSet Research Systems,
Inc., JP Morgan Pricing Direct (formerly Bear Stearns Pricing Service), Standard and Poor’s Security Evaluations Service,
Lehman Index Pricing, Bank of America High Yield Index, Loan Pricing Corporation (LPC), LoanX, Super Derivatives, IBOXX Index,
Barclays Euro Gov’t Inflation-Linked Bond Index, JPMorgan Emerging & Developed Market Index, Reuters/WM Company, Nomura
BPI Index, Japan Securities Dealers Association, Valuation Research Corporation and Murray, Devine & Co., Inc.
12. Portfolio
Compliance Consultants — Oracle/i-Flex Solutions, Inc.
13. Third-party
feeder funds — Hewitt Money Market Fund, Hewitt Series Fund, Hewitt Financial Services LLC, Homestead, Inc., Transamerica,
State Farm Mutual Fund and Sterling Capital Funds and their respective boards, sponsors, administrators and other service providers.
14. Affiliated
feeder funds — BlackRock Cayman Prime Money Market Fund, Ltd. and BlackRock Cayman Treasury Money Market Fund Ltd., and their
respective boards, sponsors, administrators and other service providers.
15. Other —
Investment Company Institute.
With respect to each such arrangement, a Fund has a legitimate business
purpose for the release of information. The release of the information is subject to confidential treatment to prohibit the entity
from sharing with an unauthorized source or trading upon the information provided. The Funds, BlackRock and their affiliates do
not receive any compensation or other consideration in connection with such arrangements.
The Funds and the Manager monitor, to the extent possible, the use
of Confidential Information by the individuals or firms to which it has been disclosed. To do so, in addition to the requirements
of any applicable confidentiality agreement and/or the terms and conditions of the Fund’s and Manager’s Code of Ethics
and Code of Business Conduct and Ethics — all of which require persons or entities in possession of Confidential Information
to keep such information confidential and not to trade on such information for their own benefit — the Manager’s compliance
personnel under the supervision of the Fund’s Chief Compliance Officer, monitor the Manager’s securities trading desks
to determine whether individuals or firms who have received Confidential Information have made any trades on the basis of that
information. In addition, the Manager maintains an internal restricted list to prevent trading by the personnel of the Manager
or its affiliates in securities — including securities held by a Fund — about which the Manager has Confidential Information.
There can be no assurance, however, that the Fund’s policies and procedures with respect to the selective disclosure of portfolio
holdings will prevent the misuse of such information by individuals or firms that receive such information.
Potential Conflicts of Interest
The PNC Financial Services Group, Inc. (“PNC”)
has a significant economic interest in BlackRock, Inc., the parent of BlackRock Advisors, LLC, the Funds’ investment adviser.
PNC is considered to be an affiliate of BlackRock, Inc., under the Investment Company Act. Certain activities of BlackRock Advisors,
LLC, BlackRock, Inc. and their affiliates (collectively, “BlackRock”) and PNC and its
affiliates (collectively, “PNC” and together
with BlackRock, “Affiliates”), with respect to the Funds and/or other accounts managed by BlackRock or PNC, may give
rise to actual or perceived conflicts of interest such as those described below.
BlackRock is one of the world’s largest
asset management firms. PNC is a diversified financial services organization spanning the retail, business and corporate markets.
BlackRock, PNC and their respective affiliates (including, for these purposes, their directors, partners, trustees, managing members,
officers and employees), including the entities and personnel who may be involved in the investment activities and business operations
of a Fund, are engaged worldwide in businesses, including equity, fixed income, cash management and alternative investments, and
have interests other than that of managing the Funds. These are considerations of which investors in a Fund should be aware, and
which may cause conflicts of interest that could disadvantage the Fund and its shareholders. These activities and interests include
potential multiple advisory, transactional, financial and other interests in securities and other instruments, and companies that
may be purchased or sold by a Fund.
BlackRock and its Affiliates have proprietary
interests in, and may manage or advise with respect to, accounts or funds (including separate accounts and other funds and collective
investment vehicles) that have investment objectives similar to those of a Fund and/or that engage in transactions in the same
types of securities, currencies and instruments as the Fund. One or more Affiliates are also major participants in the global currency,
equities, swap and fixed income markets, in each case both on a proprietary basis and for the accounts of customers. As such, one
or more Affiliates are or may be actively engaged in transactions in the same securities, currencies, and instruments in which
a Fund invests. Such activities could affect the prices and availability of the securities, currencies, and instruments in which
a Fund invests, which could have an adverse impact on the Fund’s performance. Such transactions, particularly in respect
of most proprietary accounts or customer accounts, will be executed independently of a Fund’s transactions and thus at prices
or rates that may be more or less favorable than those obtained by the Fund.
When BlackRock and its Affiliates seek
to purchase or sell the same assets for their managed accounts, including a Fund, the assets actually purchased or sold may be
allocated among the accounts on a basis determined in their good faith discretion to be equitable. In some cases, this system may
adversely affect the size or price of the assets purchased or sold for a Fund. In addition, transactions in investments by one
or more other accounts managed by BlackRock or its Affiliates may have the effect of diluting or otherwise disadvantaging the values,
prices or investment strategies of a Fund, particularly, but not limited to, with respect to small capitalization, emerging market
or less liquid strategies. This may occur when investment decisions regarding a Fund are based on research or other information
that is also used to support decisions for other accounts. When BlackRock or its Affiliates implements a portfolio decision or
strategy on behalf of another account ahead of, or contemporaneously with, similar decisions or strategies for a Fund, market impact,
liquidity constraints, or other factors could result in the Fund receiving less favorable trading results and the costs of implementing
such decisions or strategies could be increased or the Fund could otherwise be disadvantaged. BlackRock or its Affiliates may,
in certain cases, elect to implement internal policies and procedures designed to limit such consequences, which may cause a Fund
to be unable to engage in certain activities, including purchasing or disposing of securities, when it might otherwise be desirable
for it to do so.
Conflicts may also arise because portfolio
decisions regarding a Fund may benefit other accounts managed by BlackRock or its Affiliates. For example, the sale of a long position
or establishment of a short position by a Fund may impair the price of the same security sold short by (and therefore benefit)
one or more Affiliates or their other accounts, and the purchase of a security or covering of a short position in a security by
a Fund may increase the price of the same security held by (and therefore benefit) one or more Affiliates or their other accounts.
BlackRock and its Affiliates and their
clients may pursue or enforce rights with respect to an issuer in which a Fund has invested, and those activities may have an adverse
effect on the Fund. As a result, prices, availability, liquidity and terms of the Fund’s investments may be negatively impacted
by the activities of BlackRock or its Affiliates or their clients, and transactions for the Fund may be impaired or effected at
prices or terms that may be less favorable than would otherwise have been the case.
The results of a Fund’s investment
activities may differ significantly from the results achieved by BlackRock and its Affiliates for their proprietary accounts or
other accounts (including investment companies or collective investment vehicles) managed or advised by them. It is possible that
one or more Affiliate-managed accounts and such other accounts will achieve investment results that are substantially more or less
favorable than the results achieved by a Fund. Moreover, it is possible that a Fund will sustain losses during periods in which
one or more Affiliates or Affiliate-managed accounts achieve significant profits on their trading for proprietary or other accounts.
The opposite result is also possible. The investment activities of one or more Affiliates for their proprietary accounts and accounts
under their management may also limit the investment opportunities for a Fund in certain emerging and other markets in which limitations
are imposed upon the amount of investment, in the aggregate or in individual issuers, by affiliated foreign investors.
From time to time, a Fund’s activities
may also be restricted because of regulatory restrictions applicable to one or more Affiliates, and/or their internal policies
designed to comply with such restrictions. As a result, there may be periods, for example, when BlackRock, and/or one or more Affiliates,
will not initiate or recommend certain types of transactions in certain securities or instruments with respect to which BlackRock
and/or one or more Affiliates are performing services or when position limits have been reached.
In connection with its management of a
Fund, BlackRock may have access to certain fundamental analysis and proprietary technical models developed by one or more Affiliates.
BlackRock will not be under any obligation, however, to effect transactions on behalf of a Fund in accordance with such analysis
and models. In addition, neither BlackRock nor any of its Affiliates will have any obligation to make available any information
regarding their proprietary activities or strategies, or the activities or strategies used for other accounts managed by them,
for the benefit of the management of a Fund and it is not anticipated that BlackRock will have access to such information for the
purpose of managing the Fund. The proprietary activities or portfolio strategies of BlackRock and its Affiliates, or the activities
or strategies used for accounts managed by them or other customer accounts could conflict with the transactions and strategies
employed by BlackRock in managing a Fund.
In addition, certain principals and certain
employees of BlackRock are also principals or employees of BlackRock or another Affiliate. As a result, the performance by these
principals and employees of their obligations to such other entities may be a consideration of which investors in a Fund should
be aware.
BlackRock may enter into transactions and
invest in securities, instruments and currencies on behalf of a Fund in which customers of BlackRock or its Affiliates, or, to
the extent permitted by the Commission, BlackRock or another Affiliate, serves as the counterparty, principal or issuer. In such
cases, such party’s interests in the transaction will be adverse to the interests of the Fund, and such party may have no
incentive to assure that the Fund obtains the best possible prices or terms in connection with the transactions. In addition, the
purchase, holding and sale of such investments by a Fund may enhance the profitability of BlackRock or its Affiliates. One or more
Affiliates may also create, write or issue derivatives for their customers, the underlying securities, currencies or instruments
of which may be those in which a Fund invests or which may be based on the performance of the Fund. A Fund may, subject to applicable
law, purchase investments that are the subject of an underwriting or other distribution by one or more Affiliates and may also
enter into transactions with other clients of an Affiliate where such other clients have interests adverse to those of the Fund.
At times, these activities may cause departments
of BlackRock or its Affiliates to give advice to clients that may cause these clients to take actions adverse to the interests
of the Fund. To the extent affiliated transactions are permitted, a Fund will deal with BlackRock and its Affiliates on an arms-length
basis. BlackRock or its Affiliates may also have an ownership interest in certain trading or information systems used by a Fund.
A Fund’s use of such trading or information systems may enhance the profitability of BlackRock and its Affiliates.
One or more Affiliates may act as broker,
dealer, agent, lender or adviser or in other commercial capacities for a Fund. It is anticipated that the commissions, mark-ups,
mark-downs, financial advisory fees, underwriting and placement fees, sales fees, financing and commitment fees, brokerage fees,
other fees, compensation or profits, rates, terms and conditions charged by an Affiliate will be in its view commercially reasonable,
although each Affiliate, including its sales personnel, will have an interest in obtaining fees and other amounts that are favorable
to the Affiliate and such sales personnel.
Subject to applicable law, the Affiliates
(and their personnel and other distributors) will be entitled to retain fees and other amounts that they receive in connection
with their service to the Funds as broker, dealer, agent, lender, adviser or in other commercial capacities and no accounting to
the Funds or their shareholders will be required, and no fees or other compensation payable by the Funds or their shareholders
will be reduced by reason of receipt by an Affiliate of any such fees or other amounts.
When an Affiliate acts as broker, dealer,
agent, adviser or in other commercial capacities in relation to the Funds, the Affiliate may take commercial steps in its own interests,
which may have an adverse effect on the Funds. A Fund will be required to establish business relationships with its counterparties
based on the Fund’s own credit standing. Neither BlackRock nor any of the Affiliates will have any obligation to allow their
credit to be used in connection with a Fund’s establishment of its business relationships, nor is it expected that the Fund’s
counterparties will rely on the credit of BlackRock or any of the Affiliates in evaluating the Fund’s creditworthiness.
Purchases and sales of securities for a
Fund may be bunched or aggregated with orders for other BlackRock client accounts. BlackRock and its Affiliates, however, are not
required to bunch or aggregate orders if portfolio management decisions for different accounts are made separately, or if they
determine that bunching or 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 Funds 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 Funds. In addition, under certain circumstances, the
Funds will not be charged the same commission or commission equivalent rates in connection with a bunched or aggregated order.
BlackRock may select brokers (including,
without limitation, Affiliates) that furnish BlackRock, the Funds, other BlackRock client accounts or other Affiliates or personnel,
directly or through correspondent relationships, with research or other appropriate services which provide, in BlackRock’s
view, appropriate assistance to BlackRock in the investment decision-making process (including with respect to futures, fixed-price
offerings and over-the-counter transactions). Such research or other services may include, to the extent permitted by law, research
reports on companies, industries and securities; economic and financial data; financial publications; proxy analysis; trade industry
seminars; computer data bases; research-oriented software and other services and products. Research or other services obtained
in this manner may be used in servicing any or all of the Funds and other BlackRock client accounts, including in connection with
BlackRock client accounts other than those that pay commissions to the broker relating to the research or other service arrangements.
Such products and services may disproportionately benefit other BlackRock client accounts relative to the Funds based on the amount
of brokerage commissions paid by the Funds and such other BlackRock client accounts. For example, research or other services that
are paid for through one client’s commissions may not be used in managing that client’s account. In addition, other
BlackRock client accounts may receive the benefit, including disproportionate benefits, of economies of scale or price discounts
in connection with products and services that may be provided to the Funds and to such other BlackRock client accounts. To the
extent that BlackRock uses soft dollars, it will not have to pay for those products and services itself.
BlackRock may receive research that is
bundled with the trade execution, clearing, and/or settlement services provided by a particular broker-dealer. To the extent that
BlackRock receives research on this basis, many of the same conflicts related to traditional soft dollars may exist. For example,
the research effectively will be paid by client commissions that also will be used to pay for the execution, clearing, and settlement
services provided by the broker-dealer and will not be paid by BlackRock.
BlackRock may endeavor to execute trades
through brokers who, pursuant to such arrangements, provide research or other services in order to ensure the continued receipt
of research or other services BlackRock believes are useful in its investment decision-making process. BlackRock may from time
to time choose not to engage in the above described arrangements to varying degrees. BlackRock may also enter into commission sharing
arrangements under which BlackRock may execute transactions through a broker-dealer, including, where permitted, an Affiliate,
and request that the broker-dealer allocate a portion of the commissions or commission credits to another firm that provides research
to BlackRock. To the extent that BlackRock engages in commission sharing arrangements, many of the same conflicts related to traditional
soft dollars may exist.
BlackRock may utilize certain electronic
crossing networks (“ECNs”) in executing client securities transactions for certain types of securities. These ECNs
may charge fees for their services, including access fees and transaction fees. The transaction fees, which are similar to commissions
or markups/markdowns, will generally be charged to clients and, like commissions and markups/markdowns, would generally be included
in the cost of the securities purchased. Access fees may be paid by BlackRock even though incurred in connection with executing
transactions on behalf of clients, including the Funds. In certain circumstances, ECNs may offer volume discounts that will reduce
the access fees typically paid by BlackRock. This would have the effect of reducing the access fees paid by BlackRock. BlackRock
will only utilize ECNs consistent with its obligation to seek to obtain best execution in client transactions.
BlackRock has adopted policies and procedures
designed to prevent conflicts of interest from influencing proxy voting decisions that it makes on behalf of advisory clients,
including the Funds, and to help ensure that such decisions are made in accordance with BlackRock’s fiduciary obligations
to its clients. Nevertheless, notwithstanding such proxy voting policies and procedures, actual proxy voting decisions of BlackRock
may have the effect of favoring the interests of other clients or businesses of other divisions or units of BlackRock and/or its
Affiliates, provided that BlackRock believes such voting decisions to be in accordance with its fiduciary obligations. For a more
detailed discussion of these policies and procedures, see “Proxy Voting Policies and Procedures.”
It is also possible that, from time to
time, BlackRock or its Affiliates may, although they are not required to, purchase and hold shares of a Fund. Increasing a 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. BlackRock and its Affiliates reserve the right to redeem at any time some or all of the shares of a
Fund acquired for their own accounts. A large redemption of shares of a Fund by BlackRock or its Affiliates 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. BlackRock will consider the effect of redemptions on a Fund and other shareholders in deciding whether to redeem
its shares.
It is possible that a Fund may invest in
securities of companies with which an Affiliate has or is trying to develop investment banking relationships as well as securities
of entities in which BlackRock or its Affiliates has significant debt or equity investments or in which an Affiliate makes a market.
A Fund also may invest in securities of companies to which an Affiliate provides or may some day provide research coverage. Such
investments could cause conflicts between the interests of a Fund and the interests of other clients of BlackRock or its Affiliates.
In making investment decisions for a Fund, BlackRock is not permitted to obtain or use material non-public information acquired
by any division, department or Affiliate of BlackRock in the course of these activities. In addition, from time to time, the activities
of an Affiliate may limit a Fund’s flexibility in purchases and sales of securities. When an Affiliate is engaged in an underwriting
or other distribution of securities of an entity, BlackRock may be prohibited from purchasing or recommending the purchase of certain
securities of that entity for a Fund.
BlackRock and its Affiliates, their personnel
and other financial service providers have interests in promoting sales of the Funds. With respect to BlackRock and its Affiliates
and their personnel, the remuneration and profitability relating to services to and sales of the Funds or other products may be
greater than remuneration and profitability relating to services to and sales of certain funds or other products that might be
provided or offered. BlackRock and its Affiliates and their sales personnel may directly or indirectly receive a portion of the
fees and commissions charged to the Funds or their shareholders. BlackRock and its advisory or other personnel may also benefit
from increased amounts of assets under management. Fees and commissions may also be higher than for other products or services,
and the remuneration and profitability to BlackRock or its Affiliates and such personnel resulting from transactions on behalf
of or management of the Funds may be greater than the remuneration and profitability resulting from other funds or products.
BlackRock and its Affiliates and their
personnel may receive greater compensation or greater profit in connection with an account for which BlackRock serves as an adviser
than with an account advised by an unaffiliated investment adviser. Differentials in compensation may be related to the fact that
BlackRock may pay a portion of its advisory fee to its Affiliate, or relate to compensation arrangements, including for portfolio
management, brokerage transactions or account servicing. Any differential in compensation may create a financial incentive on the
part of BlackRock or its Affiliates and their personnel to recommend BlackRock over unaffiliated investment advisers or to effect
transactions differently in one account over another.
BlackRock and its Affiliates may provide
valuation assistance to certain clients with respect to certain securities or other investments and the valuation recommendations
made for their clients’ accounts may differ from the valuations for the same securities or investments assigned by a Fund’s
pricing vendors, especially if such valuations are based on broker-dealer quotes or other data sources unavailable to the Fund’s
pricing vendors. While BlackRock will generally communicate its valuation information or determinations to a Fund’s pricing
vendors and/or fund accountants, there may be instances where the Fund’s pricing vendors or fund accountants assign a different
valuation to a security or other investment than the valuation for such security or investment determined or recommended by BlackRock.
As disclosed in more detail in “Pricing
of Shares – Determination of Net Asset Value” in this Statement of Additional Information, when market quotations are
not readily available or are believed by BlackRock to be unreliable, a Fund’s investments may be valued at fair value by
BlackRock, pursuant to procedures adopted by the Funds’ Board of Directors. When determining an asset’s “fair
value,” BlackRock seeks to determine the price that a 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 a 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 BlackRock deems relevant at the time of the determination, and may be based on analytical values
determined by BlackRock 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 a Fund’s net asset value.
As a result, a Fund’s sale or redemption of its shares at net asset value, at a time when a holding or holdings are valued
by BlackRock (pursuant to Board-adopted procedures) at fair value, may have the effect of diluting or increasing the economic interest
of existing shareholders.
To the extent permitted by applicable law,
a Fund may invest all or some of its short term cash investments in any money market fund or similarly-managed private fund advised
or managed by BlackRock. In connection with any such investments, a Fund, to the extent permitted by the Investment Company Act,
may pay its share of expenses of a money market fund in which it invests, which may result in a Fund bearing some additional expenses.
BlackRock and its Affiliates and their
directors, officers and employees, may buy and sell securities or other investments for their own accounts, and may have conflicts
of interest with respect to investments made on behalf of a Fund. As a result of differing trading and investment strategies or
constraints, positions may be taken by directors, officers, employees and Affiliates of BlackRock that are the same, different
from or made at different times than positions taken for the Fund. To lessen the possibility that a Fund will be adversely affected
by this personal trading, the Fund, BRIL and BlackRock each have adopted a Code of Ethics in compliance with
Section 17(j) of the Investment Company
Act that restricts securities trading in the personal accounts of investment professionals and others who normally come into possession
of information regarding the Fund’s portfolio transactions. Each Code of Ethics can be reviewed and copied at the Commission’s
Public Reference Room in Washington, D.C. Information about obtaining documents on the Commission’s website may be obtained
by calling the Commission at (800) SEC-0330. Each Code of Ethics is also available on the EDGAR Database on the Commission’s
Internet site at http://www.sec.gov, and copies may be obtained, after paying a duplicating fee, by e-mail at publicinfo@sec.gov
or by writing the Commission’s Public Reference Section, Washington, DC 20549-0102.
BlackRock and its Affiliates will not purchase
securities or other property from, or sell securities or other property to, a Fund, except that the Fund may in accordance with
rules adopted under the Investment Company Act engage in transactions with accounts that are affiliated with the Fund as a result
of common officers, directors, or investment advisers or pursuant to exemptive orders granted to the Funds and/or BlackRock by
the Commission. These transactions would be affected in circumstances in which BlackRock determined that it would be appropriate
for the Fund to purchase and another client of BlackRock to sell, or the Fund to sell and another client of BlackRock to purchase,
the same security or instrument on the same day. From time to time, the activities of a Fund may be restricted because of regulatory
requirements applicable to BlackRock or its Affiliates and/or BlackRock’s internal policies designed to comply with, limit
the applicability of, or otherwise relate to such requirements. A client not advised by BlackRock would not be subject to some
of those considerations. There may be periods when BlackRock may not initiate or recommend certain types of transactions, or may
otherwise restrict or limit their advice in certain securities or instruments issued by or related to companies for which an Affiliate
is performing investment banking, market making, advisory or other services or has proprietary positions. For example, when an
Affiliate is engaged in an underwriting or other distribution of securities of, or advisory services for, a company, the Funds
may be prohibited from or limited in purchasing or selling securities of that company. In addition, when BlackRock is engaged to
provide advisory or risk management services for a company, BlackRock may be prohibited from or limited in purchasing or selling
securities of that company on behalf of a Fund, particularly where such services result in BlackRock obtaining material non-public
information about the company. Similar situations could arise if personnel of BlackRock or its Affiliates serve as directors of
companies the securities of which the Funds wish to purchase or sell. However, if permitted by applicable law, and where consistent
with BlackRock’s policies and procedures (including the necessary implementation of appropriate information barriers), the
Funds may purchase securities or instruments that are issued by such companies, are the subject of an underwriting, distribution,
or advisory assignment by an Affiliate or are the subject of an advisory or risk management assignment by BlackRock, or where personnel
of BlackRock or its Affiliates are directors or officers of the issuer.
In certain circumstances where the Funds
invest in securities issued by companies that operate in certain regulated industries, in certain emerging or international markets,
or are subject to corporate or regulatory ownership definitions, there may be limits on the aggregate amount invested by Affiliates
(including BlackRock) for their proprietary accounts and for client accounts (including the Funds) that may not be exceeded without
the grant of a license or other regulatory or corporate consent, or, if exceeded, may cause BlackRock, the Funds or other client
accounts to suffer disadvantages or business restrictions. As a result, BlackRock on behalf of its clients (including the Funds)
may limit purchases, sell existing investments, or otherwise restrict or limit the exercise of rights (including voting rights)
when BlackRock, in its sole discretion, deems it appropriate in light of potential regulatory or other restrictions on ownership
or other consequences resulting from reaching investment thresholds.
In those circumstances where ownership
thresholds or limitations must be observed, BlackRock seeks to allocate limited investment opportunities equitably among clients
(including the Funds), taking into consideration benchmark weight and investment strategy. When ownership in certain securities
nears an applicable threshold, BlackRock may limit purchases in such securities to the issuer's weighting in the applicable benchmark
used by BlackRock to manage the Fund. If client (including Fund) holdings of an issuer exceed an applicable threshold and BlackRock
is unable to obtain relief to enable the continued holding of such investments, it may be necessary to sell down these positions
to meet the applicable limitations. In these cases, benchmark overweight positions will be sold prior to benchmark positions being
reduced to meet applicable limitations.
In addition to the foregoing, other ownership
thresholds may trigger reporting requirements to governmental and regulatory authorities, and such reports may entail the disclosure
of the identity of a client or BlackRock’s intended strategy with respect to such security or asset.
BlackRock and its Affiliates may maintain
securities indices as part of their product offerings. Index based funds seek to track the performance of securities indices and
may use the name of the index in the fund name. Index providers, including BlackRock and its Affiliates may be paid licensing fees
for use of their index or index name. BlackRock and its Affiliates will not be obligated to license their indices to BlackRock,
and BlackRock cannot be assured that the terms of any index licensing agreement with BlackRock and its Affiliates will be as favorable
as those terms offered to other index licensees.
BlackRock and its Affiliates may serve
as Authorized Participants in the creation and redemption of exchange traded funds, including funds advised by affiliates of BlackRock.
BlackRock and its Affiliates may therefore be deemed to be participants in a distribution of such exchange traded funds, which
could render them statutory underwriters.
The custody arrangement described in “Management
and Other Service Arrangements” may lead to potential conflicts of interest with BlackRock where BlackRock has agreed to
waive fees and/or reimburse ordinary operating expenses in order to cap expenses of the Funds. This is because the custody arrangements
with the Funds' custodian may have the effect of reducing custody fees when the Funds leave cash balances uninvested. When a Fund’s
actual operating expense ratio exceeds a stated cap, a reduction in custody fees reduces the amount of waivers and/or reimbursements
BlackRock would be required to make to the Fund. This could be viewed as having the potential to provide BlackRock an incentive
to keep high positive cash balances for Funds with expense caps in order to offset fund custody fees that BlackRock might otherwise
reimburse. However, BlackRock’s portfolio managers do not intentionally keep uninvested balances high, but rather make investment
decisions that they anticipate will be beneficial to fund performance.
Present and future activities of BlackRock
and its Affiliates, including BlackRock Advisors, LLC, in addition to those described in this section, may give rise to additional
conflicts of interest.
Purchase
of Shares
Most BlackRock-advised open-end fund offers multiple classes
of shares under a plan adopted under Rule 18f-3 under the Investment Company Act. Investor A Shares are sold to investors
choosing the initial sales charge alternative and Investor B and Investor C Shares are sold to investors choosing the deferred
sales charge alternative. Effective July 1, 2009, Investor B Shares of each Fund are no longer available for purchase except through
exchanges, dividend reinvestments, and for purchase by certain qualified employee benefit plans. Shareholders with investments
in Investor B Shares as of July 1, 2009 may continue to hold such shares until they automatically convert to Investor A Shares
under the existing conversion schedule. All other features of Investor B Shares, including the Rule 12b-1 distribution and service
fees, contingent deferred sales charge schedules and conversion features, remain unchanged and continue in effect. Institutional
Shares are sold to certain eligible investors without a sales charge. Certain Funds offer Class R Shares, which are available
only to certain retirement plans and are sold without a sales charge. In addition, certain Funds offer Service Shares, BlackRock
Shares and/or Class K Shares that are available only to certain eligible investors. Please see the appropriate Prospectus for your
Fund to determine which classes are offered by your Fund and under what circumstances. Each class has different exchange privileges.
See “Shareholder Services — Exchange Privilege.”
The applicable offering price for purchase orders is based
on the net asset value of a Fund next determined after receipt of the purchase order by a dealer or other financial intermediary
(“Selling Dealer”) that has been authorized by the Distributor by contract to accept such orders. As to purchase orders
received by Selling Dealers prior to the close of business on the New York Stock Exchange (“NYSE”) (generally, the
NYSE closes at 4:00 p.m. Eastern time), on the day the order is placed, including orders received after the close of business on
the previous day, the applicable offering price is based on the net asset value determined as of the close of business on the NYSE
on that day. If the purchase orders are not received by the Selling Dealer before the close of business on the NYSE, such orders
are deemed received on the next business day. It is the responsibility of brokers to transmit purchase orders and payment on a
timely basis. Generally, if payment is not received within the period described in the Prospectuses, the order will be canceled,
notice thereof will be given, and the broker and its customers will be responsible for any loss to the Fund or its shareholders.
Orders of less than $500 may be mailed by a broker to the Transfer Agent.
The minimum investment for the initial purchase of shares
is set forth in the Prospectus for each Fund. Each Fund has lower investment minimums for other categories of shareholders eligible
to purchase Institutional Shares, including selected fee-based programs. Each Fund may permit a lower initial investment for certain
investors if their purchase, combined with purchases by other investors received together by the Fund, meets the minimum investment
requirement. Each Fund may, in its discretion, reject any purchase order, modify or waive the minimum initial or subsequent investment
requirements, reject any order for any class of shares and suspend and resume the sale of any share class of any Fund at any time.
The minimum initial investment for employees of a Fund, a Fund’s Manager, Sub-Advisers or BRIL, or employees of their affiliates,
is $100, unless payment is made through a payroll deduction program, in which case the minimum investment is $25.
Under certain circumstances, subject to approval by BlackRock,
each Fund may permit firms to convert shares of a Fund from one class of shares to another class of shares of the same Fund. Shareholders
should consult with their own tax advisers regarding any tax consequences relating to such conversions.
Each Fund or the Distributor may suspend the continuous
offering of the Fund’s shares of any class at any time in response to conditions in the securities markets or otherwise and
may resume offering the shares from time to time. Any order may be rejected by
a Fund or the Distributor. Neither the Distributor, the
securities dealers nor other financial intermediaries are permitted to withhold placing orders to benefit themselves by a price
change.
The term “purchase,” as used in the Prospectus
and this Statement of Additional Information, refers to (i) a single purchase by an individual, (ii) concurrent purchases
by an individual, his or her spouse and their children under the age of 21 years purchasing shares for his, her or their own
account, and (iii) single purchases by a trustee or other fiduciary purchasing shares for a single trust estate or single
fiduciary account although more than one beneficiary may be involved. The term “purchase” also includes purchases by
any “company,” as that term is defined in the Investment Company Act, but does not include purchases by (i) any
company that has not been in existence for at least six months, (ii) a company that has no purpose other than the purchase
of shares of a Fund or shares of other registered investment companies at a discount, or (iii) any group of individuals whose
sole organizational nexus is that its participants are credit cardholders of a company, policyholders of an insurance company,
customers of either a bank or broker-dealer or clients of an investment adviser.
In-Kind Purchases.
Payment for shares of a Fund
may, at the discretion of BlackRock, be made in the form of securities that are permissible investments for the Fund and that meet
the investment objective, policies and limitations of the Fund as described herein. In connection with an in-kind securities payment,
the Fund may require, among other things, that the securities: (i) be valued on the day of purchase in accordance with the pricing
methods used by the Fund; (ii) be accompanied by satisfactory assurance that the Fund will have good and marketable title to such
securities; (iii) not be subject to any restrictions upon resale by the Fund; (iv) be in proper form for transfer to the Fund;
and (v) be accompanied by adequate information concerning the basis and other tax matters relating to the securities. All dividends,
interest, subscription or other rights pertaining to such securities shall become the property of the Fund engaged in the in-kind
purchase transaction and must be delivered to the Fund by the investor upon receipt from the issuer. Shares purchased in exchange
for securities generally cannot be redeemed until the transfer has settled.
Institutional Shares
Institutional Shares may be purchased at net asset value
without a sales charge. Only certain investors are eligible to purchase Institutional Shares. Investors who are eligible to purchase
Institutional Shares should purchase Institutional Shares because they are not subject to any sales charge and have lower ongoing
expenses than Investor A, Investor B, Investor C, Class R, or Service Shares.
Eligible Institutional Share Investors.
Institutional Shares of the Funds may be purchased by customers
of broker-dealers and agents that have established a servicing relationship with the Fund on behalf of their customers. These broker-dealers
and agents may impose additional or different conditions on the purchase or redemption of Fund shares by their customers and may
charge their customers transaction, account or other fees on the purchase and redemption of Fund shares. Each broker-dealer or
agent is responsible for transmitting to its customers a schedule of any such fees and information regarding any additional or
different conditions regarding purchases and redemptions. Shareholders who are customers of such broker-dealers or agents should
consult them for information regarding these fees and conditions.
Payment for Institutional Shares must normally be made
in Federal funds or other funds immediately available by 4 p.m. (Eastern time) on the first business day following receipt of the
order. If payment for a purchase order is not received by the prescribed time, an investor may be liable for any resulting losses
or expenses incurred by the Fund.
Investors who currently own Institutional Shares in a shareholder
account are entitled to purchase additional Institutional Shares of a Fund in that account. In addition, the following investors
may purchase Institutional Shares: employees, officers, directors/trustees of BlackRock, Inc., BlackRock Funds, The PNC Financial
Services Group Inc., Merrill Lynch & Co., Inc., Barclays PLC or their respective affiliates and any trust, pension, profit-sharing
or other benefit plan for such persons; institutional and individual retail investors with a minimum investment of $2 million
who purchase through certain broker-dealers or directly from the Fund; certain qualified retirement plans; investors in selected
fee based programs; clients of registered investment advisers who have $250,000 invested in the Funds; clients of the Trust departments
of PNC Bank and Bank of America, N.A. and their affiliates for whom they (i) act in a fiduciary capacity (excluding participant
directed employee benefit plans); (ii) otherwise have investment discretion; or (iii) act as custodian for at least $2 million
in assets; unaffiliated banks, thrifts or trust companies that have agreements with the Distributor; certain state sponsored 529
college savings plans; and holders of certain Merrill Lynch sponsored unit investment trusts (UITs) who reinvest dividends received
from such UITs in shares of a Fund.
Purchase Privileges of Certain Persons
. Employees,
officers, directors/trustees of BlackRock, Inc., BlackRock Funds, Merrill Lynch & Co., Inc., The PNC Financial Services Group
Inc., or their respective affiliates; and any trust, pension, profit-sharing or other benefit plan for such persons may purchase
Institutional Shares at lower minimums as stated in each Fund’s prospectus. In addition,
employees, officers, directors/trustees previously associated
with PNC Global Investment Servicing (U.S.) Inc. in its capacity as the Funds' former Transfer Agent and/or accounting agent, and
who, prior to July 1, 2010, acquired Investor A Shares in a Fund without paying a sales charge based on a waiver for such persons
previously in effect, may continue to buy Investor A Shares in such Fund without paying a sales charge. A Fund realizes economies
of scale and reduction of sales-related expenses by virtue of the familiarity of these persons with the Fund. Employees, directors,
and board members of other funds wishing to purchase shares of a Fund must satisfy the Fund’s suitability standards.
Initial Sales Charge Alternative — Investor A
Shares
Investors who prefer an initial sales charge alternative
may elect to purchase Investor A Shares. Investor A1 Shares generally are not continuously offered but are offered (i) for purchase
by certain authorized employee benefit plans and (ii) to certain investors who currently hold Investor A1 Shares for dividend and
capital gain reinvestment only. For ease of reference, Investor A and Investor A1 Shares are sometimes referred to herein as “front-end
load shares.”
Investors qualifying for significantly reduced initial
sales charges may find the initial sales charge alternative particularly attractive because similar sales charge reductions are
not available with respect to the deferred sales charges imposed in connection with investments in Investor B, Investor B1, Investor
B2, Investor B3, Investor C, Investor C1, Investor C2 and Investor C3 Shares (sometimes referred to herein as “CDSC shares”).
Investors who do not qualify for reduced initial sales charges and who expect to maintain their investment for an extended period
of time also may elect to purchase Investor A Shares, because over time the accumulated ongoing service and distribution fees on
CDSC shares may exceed the front-end sales charge shares’ initial sales charge and service fee. Although some investors who
previously purchased Institutional Shares may no longer be eligible to purchase Institutional Shares of other Funds, those previously
purchased Institutional Shares, together with all BlackRock front-end load and CDSC share holdings, will count toward a right of
accumulation that may qualify the investor for a reduced initial sales charge on new initial sales charge purchases. In addition,
the ongoing CDSC shares service and distribution fees will cause CDSC shares to have higher expense ratios, pay lower dividends
and have lower total returns than the initial sales charge shares. The ongoing front-end load shares’ service fees will cause
Investor A, Investor A1 and Service Shares to have a higher expense ratio, pay lower dividends and have a lower total return than
Institutional Shares.
See “Information on Sales Charges and Distribution
Related Expenses — Investor A Sales Charge Information” in Part I of each Fund’s Statement of Additional Information
for information about amounts paid to the Distributor in connection with Investor A and Investor A1 Shares for the periods indicated.
The Distributor may reallow discounts to selected securities
dealers and other financial intermediaries and retain the balance over such discounts. At times a Distributor may reallow the entire
sales charge to such dealers. Since securities dealers and other financial intermediaries selling front-end load shares of a Fund
will receive a concession equal to most of the sales charge, they may be deemed to be underwriters under the Securities Act.
Reduced Initial Sales Charges
Certain investors may be eligible for a reduction in or
waiver of a sales load due to the nature of the investors and/or the reduced sales efforts necessary to obtain their investments.
Reinvested Dividends.
No sales charges are imposed
upon shares issued as a result of the automatic reinvestment of dividends.
Rights of Accumulation.
Investors have a “right
of accumulation” under which the current value of an investor’s existing Investor A, Investor A1, Investor B, Investor
B1, Investor B2, Investor B3, Investor C, Investor C1, Investor C2, Investor C3 and Institutional Shares in most BlackRock Funds
and the investment in the BlackRock College Advantage 529 Program by the investor or by or on behalf of the investor’s spouse
and minor children may be combined with the amount of the current purchase in determining whether an investor qualifies for a breakpoint
and a reduced front-end sales charge. Financial intermediaries may value current holdings of their customers differently for purposes
of determining whether an investor qualifies for a breakpoint and a reduced front-end sales charge, although customers of the same
financial intermediary will be treated similarly. In order to use this right, the investor must alert BlackRock to the existence
of any previously purchased shares.
Letter of Intent
. An investor may qualify for a
reduced front-end sales charge immediately by signing a “Letter of Intent” stating the investor’s intention to
buy a specified amount of Investor A, Investor B, Investor C or Institutional Shares in one or more BlackRock Funds within the
next 13 months that would, if bought all at once, qualify the investor for a reduced sales charge. The initial investment
must meet the minimum initial purchase requirement. The 13-month Letter of Intent period commences on the day that the
Letter of Intent is received by the Fund, and the investor
must tell the Fund that later purchases are subject to the Letter of Intent. Purchases submitted prior to the date the Letter of
Intent is received by the Fund are not counted toward the sales charge reduction. During the term of the Letter of Intent, the
Fund will hold Investor A Shares representing up to 5% of the indicated amount in an escrow account for payment of a higher sales
load if the full amount indicated in the Letter of Intent is not purchased. If the full amount indicated is not purchased within
the 13-month period and the investor does not pay the higher sales load within 20 days, the Fund will redeem enough of the
Investor A Shares held in escrow to pay the difference.
Other.
The following persons may also buy Investor
A Shares without paying a sales charge: (a) authorized qualified employee benefit plans or savings plans; (b) rollovers of current
investments through authorized qualified employee benefit plans or savings plans, provided the shares are transferred to the same
BlackRock Fund as either a direct rollover, or subsequent to distribution, the rolled over proceeds are contributed to a BlackRock
IRA through an account directly with the Fund; (c) persons investing through an authorized payroll deduction plan; (d) persons
investing through an authorized investment plan for organizations which operate under Section 501(c)(3) of the Code; (e) registered
investment advisers, trust companies and bank trust departments exercising discretionary investment authority with respect to amounts
to be invested in a Fund; (f) persons participating in a fee-based program (such as a wrap account) under which they (i) pay advisory
fees to a broker-dealer or other financial institution or (ii) pay fees to a broker-dealer or other financial institution for providing
transaction processing and other administrative services, but not investment advisory services; (g) certain state sponsored 529
college savings plans; (h) persons involuntarily liquidated from a Fund, who within 60 days of liquidation buy new shares of another
BlackRock Fund (but only up to the amount that was liquidated); and (i) insurance company separate accounts. The following persons
associated with the Funds, the Fund’s Manager, Sub-Advisers, Transfer Agent, Distributor, fund accounting agents, Barclays
PLC and their affiliates may buy Investor A Shares of each of the Funds without paying a sales charge to the extent permitted by
these firms including: (a) officers, directors and partners; (b) employees and retirees; (c) employees of firms who have entered
into selling agreements to distribute shares of BlackRock-advised funds; (d) immediate family members of such persons (“immediate
family members” shall be defined as the investor, the investor’s spouse or domestic partner, children, parents and
siblings); and (e) any trust, pension, profit-sharing or other benefit plan for any of the persons set forth in (a) through (d).
Investors who qualify for any of these exemptions from the sales charge should purchase Investor A Shares.
If you invest $1,000,000 or more in Investor A or Investor
A1 Shares, you may not pay an initial sales charge. However, if you redeem your Investor A or Investor A1 Shares within eighteen
months after purchase, you may be charged a deferred sales charge. The deferred sales charge on Investor A Shares is not charged
in connection with: (a) redemptions of Investor A Shares purchased through authorized qualified employee benefit plans or
savings plans and rollovers of current investments in a Fund through such plans; (b) exchanges described in “Exchange
Privilege” below; (c) redemptions made in connection with minimum required distributions due to the shareholder reaching
age 70 1/2 from IRA and 403(b)(7) accounts; (d) certain post-retirement withdrawals from an IRA or other retirement plan if
you are over 59 1/2 years old and you purchased your shares prior to October 2, 2006; (e) redemptions made with respect to
certain retirement plans sponsored by a Fund, BlackRock or its affiliates; (f) redemptions (i) within one year of a shareholder’s
death or, if later, the receipt of a certified probate settlement (including in connection with the distribution of account assets
to a beneficiary of the decedent) or (ii) in connection with a shareholder’s disability (as defined in the Code) subsequent
to the purchase of Investor A Shares; (g) involuntary redemptions of Investor A Shares in accounts with low balances; (h) certain
redemptions made pursuant to the Systematic Withdrawal Plan (described below); (i) redemptions related to the payment of PFPC
Trust Company custodial IRA fees; and (j) redemptions when a shareholder can demonstrate hardship, in the absolute discretion
of a Fund.
If a dealer waives its right to receive a placement fee,
the Fund may, at its own discretion, waive the CDSC (as defined below) related to purchases of $1,000,000 or more of Investor A
Shares.
Investor A Shares are also available at net asset value
to investors that, for regulatory reasons, are required to transfer investment positions from a foreign registered investment company
advised by BlackRock or its affiliates to a U.S. registered BlackRock-advised fund.
Placement Fees.
BlackRock may pay placement fees to dealers, up to the
following amounts, on purchases of Investor A Shares of all Funds.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Funds Except Balanced Capital,
Basic Value and
Managed Volatility
|
|
Balanced Capital, Basic Value
and Managed Volatility
|
Less than $3,000,000
|
|
|
1.00
|
%
|
|
|
0.75
|
%
|
$3 million but less than $15 million
|
|
|
0.50
|
%
|
|
|
0.50
|
%
|
$15 million and above
|
|
|
0.25
|
%
|
|
|
0.25
|
%
|
For the table above, the placement fees indicated will
apply up to the indicated breakpoint (so that, for example, a sale of $4 million worth of Investor A Shares will result in
a placement fee of up to 1.00% (0.75% for Balanced Capital, Basic Value and Managed Volatility) on the first $3 million and
0.50% on the final $1 million).
Acquisition of Certain Investment Companies
. Investor
A Shares may be offered at net asset value in connection with the acquisition of the assets of, or merger or consolidation with,
a personal holding company or a public or private investment company.
Purchases Through Certain Financial Intermediaries
.
Reduced sales charges may be applicable for purchases of Investor A Shares of a Fund through certain financial advisers, selected
securities dealers and other financial intermediaries that meet and adhere to standards established by the Manager from time to
time.
Deferred Sales Charge Alternative — Investor B
and Investor C Shares
Investor B, Investor B1, Investor B2 and Investor B3 Shares
generally are not continuously offered but are offered by exchange (Investor B Shares only) and also to certain investors who currently
hold Investor B, Investor B1, Investor B2 or Investor B3 Shares for dividend and capital gain reinvestment. In addition, certain
qualified employee benefit plans that currently hold Investor B, Investor B1, Investor B2 or Investor B3 Shares may purchase additional
Investor B, Investor B1, Investor B2 or Investor B3 Shares or effect exchanges between Funds in those classes.
Investors choosing the deferred sales charge alternative
should consider Investor C Shares if they are uncertain as to the length of time they intend to hold their assets in a Fund. If
you select Investor C Shares, you do not pay an initial sales charge at the time of purchase. A Fund will not accept a purchase
order of $500,000 or more for Investor C Shares.
If you select Investor C, Investor C1, Investor C2 or Investor
C3 Shares, you do not pay an initial sales charge at the time of purchase. Investor C1, Investor C2 and Investor C3 Shares generally
are not continuously offered but are offered (i) for purchase by certain qualified employee benefit plans and (ii) to certain investors
who currently hold Investor C1, Investor C2 or Investor C3 Shares for dividend and capital gain reinvestment.
The deferred sales charge alternatives may be particularly
appealing to investors who do not qualify for the reduction in initial sales charges. CDSC shares are subject to ongoing service
fees and distribution fees; however, these fees potentially may be offset to the extent any return is realized on the additional
funds initially invested in CDSC shares. In addition, Investor B, Investor B1, Investor B2 or Investor B3 Shares will be converted
into Investor A or Investor A1 Shares, as set forth in each Fund’s prospectus, of a Fund after a conversion period of approximately
eight years, and, thereafter, investors will be subject to lower ongoing fees.
BlackRock compensates financial advisers and other financial
intermediaries for selling CDSC shares at the time of purchase from its own funds. Proceeds from the CDSC (as defined below) and
the distribution fee are paid to the Distributor and are used by the Distributor to defray the expenses of securities dealers or
other financial intermediaries related to providing distribution-related services to each Fund in connection with the sale of the
CDSC shares. The combination of the CDSC and the ongoing distribution fee facilitates the ability of each Fund to sell the CDSC
shares without a sales charge being deducted at the time of purchase. See “Distribution Plans” below. Imposition of
the CDSC and the distribution fee on CDSC shares is limited by the NASD asset-based sales charge rule. See “Limitations on
the Payment of Deferred Sales Charges” below.
Dealers will generally receive commissions equal to 4.00%
of Investor B Shares sold by them plus ongoing fees under the Fund’s Distribution and Service Plan. Dealers may not receive
a commission in connection with sales of Investor B, Investor B1, Investor B2 or Investor B3 Shares to certain qualified employee
benefit plans sponsored by the Fund, BlackRock or its affiliates, but may receive fees under the Distribution and Service Plan.
These commissions and payments may be different than the reallowances, placement fees and commissions paid to dealers in connection
with sales of Investor A, Investor A1, Investor C, Investor C1, Investor C2 and Investor C3 Shares.
Dealers will generally immediately receive commissions
equal to 1.00% of the Investor C Shares sold by them plus ongoing fees under the Fund’s Distribution and Service Plan. Dealers
may not receive a commission in connection with sales of Investor C, Investor C1, Investor C2 or Investor C3 Shares to certain
qualified employee benefit plans sponsored by the Fund, BlackRock or its affiliates, but may receive fees under the Amended and
Restated Distribution and Service Plan. These commissions and payments may be different than the reallowances, placement fees and
commissions paid to dealers in connection with sales of Investor A, Investor A1, Investor B, Investor B1, Investor B2 and Investor
B3 Shares.
Contingent Deferred Sales Charges — Investor B
and Investor B1 Shares
. If you redeem Investor B, Investor B1, Investor B2 or Investor B3 Shares within six years of purchase,
you may be charged a contingent deferred sales charge (“CDSC”) at the rates indicated in the Fund’s Prospectus
and below. The CDSC will be calculated in a manner that results in the lowest applicable rate being charged. The charge will be
assessed on an amount equal to the lesser of the proceeds of redemption or the cost of the shares being redeemed. Accordingly,
no CDSC will be imposed on increases in net asset value above the initial purchase price. In addition, no CDSC will be assessed
on shares acquired through reinvestment of dividends. The order of redemption will be first of shares held for over six years in
the case of Investor B Shares, next of shares acquired pursuant to reinvestment of dividends, and finally of shares in the order
of those held longest. The same order of redemption will apply if you transfer shares from your account to another account. If
you exchange your Investor B, Investor B1, Investor B2 or Investor B3 Shares for Investor B Shares of another Fund, the CDSC schedule
that applies to the shares that you originally purchased will continue to apply to the shares you acquire in the exchange.
The following table sets forth the schedule that applies
to the Investor B CDSC:
|
|
|
|
|
|
|
|
|
|
|
CDSC as a Percentage
|
Years Since Purchase
|
|
|
|
of Dollar Amount
|
Payment Made
|
|
|
|
Subject to Charge*
|
0 — 1
|
|
|
|
|
4.50%
|
|
1 — 2
|
|
|
|
|
4.00%
|
|
2 — 3
|
|
|
|
|
3.50%
|
|
3 — 4
|
|
|
|
|
3.00%
|
|
4 — 5
|
|
|
|
|
2.00%
|
|
5 — 6
|
|
|
|
|
1.00%
|
|
6 and thereafter
|
|
|
|
None
|
|
*
|
|
The percentage charge will apply to the lesser of the original cost of the shares being redeemed or the proceeds of your redemption. Shares acquired through reinvestment of dividends are not subject to a deferred sales charge. Shares purchased prior to June 1, 2001 were subject to the four-year contingent deferred sales charge schedule then in effect which has now expired. Shares purchased prior to October 2, 2006 are subject to the 4.00% six-year CDSC schedule in effect at that time. Not all BlackRock funds have identical deferred sales charge schedules. If you exchange your shares for shares of another fund, the original charge will apply.
|
To provide an example, assume an investor purchased 100
shares at $10 per share (at a cost of $1,000) and in the third year after purchase, the net asset value per share is $12 and, during
such time, the investor has acquired 10 additional shares upon dividend reinvestment. If at such time the investor makes his or
her first redemption of 50 shares (proceeds of $600), 10 shares will not be subject to a CDSC because they were issued through
dividend reinvestment. With respect to the remaining 40 shares, the charge is applied only to the original cost of $10 per share
and not to the increase in net asset value of $2 per share. Therefore, $400 of the $600 redemption proceeds will be charged at
a rate of 3.50% (the applicable rate in the third year after purchase).
Conversion of Investor B, Investor B1, Investor B2 and
Investor B3 Shares to Investor A and Investor A1 Shares.
Approximately eight years after purchase (the “Conversion Period”),
Investor B, Investor B1, Investor B2 and Investor B3 Shares of each Fund will convert automatically into Investor A or Investor
A1 Shares of that Fund (the “Conversion”). The Conversion will occur at least once each month (on the “Conversion
Date”) on the basis of the relative net asset value of the shares of the two classes on the Conversion Date, without the
imposition of any sales load, fee or other charge. The Conversion will not be deemed a purchase or sale of the shares for Federal
income tax purposes.
Shares acquired through reinvestment of dividends on Investor
B, Investor B1, Investor B2 or Investor B3 Shares will also convert automatically to Investor A or Investor A1 Shares, as set forth
in each Fund’s prospectus. The Conversion Date for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying the dividend reinvestment shares were outstanding.
In general, Investor B Shares of equity Funds will convert
approximately eight years after initial purchase and Investor B, Investor B1, Investor B2 and Investor B3 Shares of taxable and
tax-exempt fixed income Funds will convert approximately ten years after initial purchase. If you exchange Investor B, Investor
B1, Investor B2 or Investor B3 Shares with an eight-year Conversion Period for Investor B Shares with a ten-year Conversion Period,
or vice versa, the Conversion Period that applies to the shares you acquire in the exchange will apply and the holding period for
the shares exchanged will be tacked on to the holding period for the shares acquired. The Conversion Period also may be modified
for investors that participate in certain fee-based programs. See “Shareholder Services — Fee-Based Programs.”
If you own shares of a Fund that, in the past, issued stock
certificates and you continue to hold such stock certificates, you must deliver any certificates for Investor B Shares of the Fund
to be converted to the Transfer Agent at least one week prior to the Conversion Date applicable to those shares. If the Transfer
Agent does not receive the certificates at least one week prior to the Conversion Date, your Investor B, Investor B1, Investor
B2 or Investor B3 Shares will convert to Investor A or Investor A1 Shares, as set forth in each Fund’s prospectus, on the
next scheduled Conversion Date after the certificates are delivered.
Contingent Deferred Sales Charge — Investor C
Shares
Investor C, Investor C1, Investor C2 and Investor C3 Shares
that are redeemed within one year of purchase may be subject to a 1.00% CDSC charged as a percentage of the dollar amount subject
thereto. In determining whether an Investor C, Investor C1, Investor C2 or Investor C3 CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible rate being charged. The charge will be assessed
on an amount equal to the lesser of the proceeds of redemption or the cost of the shares being redeemed. Accordingly, no CDSC will
be imposed on increases in net asset value above the initial purchase price of Investor C, Investor C1, Investor C2 and Investor
C3 Shares. In addition, no CDSC will be assessed on Investor C, Investor C1, Investor C2 and Investor C3 Shares acquired through
reinvestment of dividends. It will be assumed that the redemption is first of shares held for over one year or shares acquired
pursuant to reinvestment of dividends and then of shares held longest during the one-year period. A transfer of shares from a shareholder’s
account to another account will be assumed to be made in the same order as a redemption.
See “Information on Sales Charges and Distribution
Related Expenses — Investor B and Investor C Sales Charge Information” in Part I of each Fund’s Statement of
Additional Information for information about amounts paid to the Distributor in connection with CDSC shares for the periods indicated.
Investor B and Investor C Shares — Contingent
Deferred Sales Charge Waivers and Reductions
The CDSC on Investor B, Investor B1, Investor B2, Investor
B3, Investor C, Investor C1, Investor C2 and Investor C3 Shares is not charged in connection with: (1) redemptions of Investor
B, Investor B1, Investor B2, Investor B3, Investor C, Investor C1, Investor C2 and Investor C3 Shares purchased through certain
authorized qualified employee benefit plans and rollovers of current investments in the Fund through such plans; (2) exchanges
described in “Exchange Privilege” below; (3) redemptions made in connection with minimum required distributions
due to the shareholder reaching age 70 1/2 from IRA and 403(b)(7) accounts; (4) certain post-retirement withdrawals from an
IRA or other retirement plan if you are over 59
1/2
years
old and you purchased your shares prior to October 2, 2006; (5) redemptions made with respect to certain retirement plans
sponsored by the Fund, BlackRock or its affiliates; (6) redemptions in connection with a shareholder’s death as long
as the waiver request is made within one year of death or, if later, reasonably promptly following completion of probate (including
in connection with the distribution of account assets to a beneficiary of the decedent) or disability (as defined in the Code)
subsequent to the purchase of Investor B, Investor B1, Investor B2, Investor B3, Investor C, Investor C1, Investor C2 or Investor
C3 Shares; (7) withdrawals resulting from shareholder disability (as defined in the Internal Revenue Code) as long as the
disability arose subsequent to the purchase of the shares; (8) involuntary redemptions of Investor B, Investor B1, Investor
B2, Investor B3, Investor C, Investor C1, Investor C2 or Investor C3 Shares in accounts with low balances as described in “Redemption
of Shares” below; (9) redemptions made pursuant to a systematic withdrawal plan, subject to the limitations set forth
under “Systematic Withdrawal Plan” below; (10) redemptions related to the payment of The Bank of New York Mellon
custodial IRA fees; and (11) redemptions when a shareholder can demonstrate hardship, in the absolute discretion of the Fund.
In addition, no CDSC is charged on Investor B, Investor B1, Investor B2, Investor B3, Investor C, Investor C1, Investor C2 or Investor
C3 Shares acquired through the reinvestment of dividends or distributions.
Class R Shares
Certain of the Funds offer Class R Shares as described
in each such Fund’s Prospectus. Class R Shares are available only to certain retirement plans. Class R Shares are
not subject to an initial sales charge or a CDSC but are subject to an ongoing distribution fee of 0.25% per year and an ongoing
service fee of 0.25% per year. Distribution fees are used to support the Fund’s marketing and distribution efforts, such
as compensating financial advisers and other financial intermediaries, advertising and promotion. Service fees are used to compensate
securities dealers and other financial intermediaries for service activities. If Class R Shares are held over time, these
fees may exceed the maximum sales charge that an investor would have paid as a shareholder of one of the other share classes.
Class K Shares
Certain of the Funds offer Class K Shares as described
in each such Fund’s Prospectus. Class K Shares are available only to (i) qualified recordkeepers with a distribution
and/or fund servicing agreement (establishing an omnibus trading relationship) maintained with the Fund’s distributor, or
(ii) defined benefit plans, defined contribution plans, endowments and foundations with greater than $10 million in a qualified
tax-exempt plan, or (iii) employers with greater than $10 million in the aggregate between qualified and non-qualified plans
that they sponsor.
Service Shares
Certain Funds offer Service Shares, which are available
only to certain investors, including: (i) certain financial institutions, such as banks and brokerage firms, acting on behalf of
their customers; (ii) certain persons who were shareholders of the Compass Capital Group of Funds at the time of its combination
with The PNC
®
Fund in 1996;
and (iii) participants in the Capital Directions
SM
asset allocation program.
Service Shares are not subject to an initial sales charge or a CDSC but are subject to an ongoing service fee of 0.25% per year.
BlackRock Shares
Certain Funds offer BlackRock Shares, which are available
only to certain investors. BlackRock Shares are offered without a sales charge to institutional investors, registered investment
advisers and certain fee-based programs.
Distribution Plans
Each Fund has entered into a distribution agreement with
BRIL under which BRIL, as agent, offers shares of each Fund on a continuous basis. BRIL has agreed to use appropriate efforts to
effect sales of the shares, but it is not obligated to sell any particular amount of shares. BRIL’s principal business address
is 40 East 52nd Street, New York, NY 10022. BRIL is an affiliate of BlackRock.
Pursuant to the distribution plans of the Investor A, Investor
A1, Investor B, Investor B1, Investor B2, Investor B3, Investor C, Investor C1, Investor C2, Investor C3 and Class R Shares
(each, a “Plan”), the Fund may pay BRIL and/or BlackRock or any other affiliate or significant shareholder of BlackRock
fees for distribution and sales support services. Currently, as described further below, only Investor B, Investor B1, Investor
B2, Investor B3, Investor C, Investor C1, Investor C2, Investor C3 and Class R Shares bear the expense of distribution fees
under a Plan. In addition, the Fund may pay to brokers, dealers, financial institutions and industry professionals (including BlackRock,
BRIL, PNC, Barclays and their affiliates) (collectively, “Service Organizations”) fees for the provision of personal
services to shareholders. In the past, BlackRock or BRIL has retained a portion of the shareholder servicing fees paid by the Fund.
Each Fund’s Plans are subject to the provisions of
Rule 12b-1 under the Investment Company Act. In their consideration of a Plan, the Directors must consider all factors they
deem relevant, including information as to the benefits of the Plan to the Fund and the related class of shareholders. In approving
a Plan in accordance with Rule 12b-1, the non-interested Directors concluded that there is reasonable likelihood that the
Plan will benefit the Fund and its related class of shareholders. The Plan provides, among other things, that: (i) the Board
of Directors shall receive quarterly reports regarding the amounts expended under the Plan and the purposes for which such expenditures
were made; (ii) the Plan will continue in effect for so long as its continuance is approved at least annually by the Board
of Directors in accordance with Rule 12b-1 under the Investment Company Act; (iii) any material amendment thereto must
be approved by the Board of Directors, including the directors who are not “interested persons” of the Fund (as defined
in the Investment Company Act) and who have no direct or indirect financial interest in the operation of the Plan or any agreement
entered into in connection with the Plan (the “12b-1 Directors”), acting in person at a meeting called for said purpose;
(iv) any amendment to increase materially the costs which any class of shares may bear for distribution services pursuant
to the Plan shall be effective only upon approval by a vote of a majority of the outstanding shares of such class and by a majority
of the 12b-1 Directors; and (v) while the Plan remains in effect, the selection and nomination of the Fund’s Directors
who are not “interested persons” of the Fund shall be committed to the discretion of the Fund’s non-interested
Directors. Rule 12b-1 further requires that each Fund preserve copies of each Plan and any report made pursuant to such plan
for a period of not less than six years from the date of the Plan or such report, the first two years in an easily accessible place.
Payments under the Plans are based on a percentage of average
daily net assets attributable to the shares regardless of the amount of expenses incurred. As a result, distribution-related revenues
from the Plans may be more or less than distribution-related expenses of the related class. Information with respect to the distribution-related
revenues and expenses is presented to the Directors for their consideration quarterly. Distribution-related revenues consist of
the service fees, the distribution fees and the CDSCs. Distribution-
related expenses consist of financial adviser compensation,
branch office and regional operation center selling and transaction processing expenses, advertising, sales promotion and marketing
expenses and interest expense. Distribution-related revenues paid with respect to one class will not be used to finance the distribution
expenditures of another class. Sales personnel may receive different compensation for selling different classes of shares.
The Plan is terminable as to any class of shares without
penalty at any time by a vote of a majority of the 12b-1 Directors, or by vote of the holders of a majority of the shares of such
class.
See “Distribution Related Expenses” in Part
I of each Fund’s Statement of Additional Information for information relating to the fees paid by your Fund to the Distributor
under each Plan during the Fund’s most recent fiscal year.
Limitations on the Payment of Deferred Sales Charges
The maximum sales charge rule in the Conduct Rules of the
NASD imposes a limitation on certain asset-based sales charges such as the distribution fee borne by Class R Shares, and the
distribution fee and the CDSC borne by the Investor B and Investor C Shares. This limitation does not apply to the service fee.
The maximum sales charge rule is applied separately to each class and limits the aggregate of distribution fee payments and CDSCs
payable by a Fund to (1) 6.25% of eligible gross sales of Investor B, Investor C and Class R Shares, computed separately
(excluding shares issued pursuant to dividend reinvestments and exchanges), plus (2) interest on the unpaid balance for the
respective class, computed separately, at the prime rate plus 1% (the unpaid balance being the maximum amount payable minus amounts
received from the payment of the distribution fee and the CDSC). See Part I, Section V “Information on Sales Charges
and Distribution Related Expenses — Limitation on the Payment of Deferred Sales Charge” of each Fund’s Statement
of Additional Information for comparative information as of your Fund’s most recent fiscal year end with respect to the Investor
B, Investor C and, if applicable, Class R Shares of your Fund.
Other Compensation to Selling Dealers
BlackRock and certain of their affiliates may make payments
relating to distribution and sales support activities out of their past profits or other sources available to them (and not as
an additional charge to the Fund). From time to time, BRIL, BlackRock or their affiliates may compensate affiliated and unaffiliated
brokers, dealers, financial institutions and industry professionals (including BlackRock, Merrill Lynch, Hilliard Lyons and their
affiliates) (collectively, “Service Organizations”) for the sale and distribution of shares of a Fund or for services
to a Fund and its shareholders. These non-distribution and service plan payments may take the form of, among other things, “due
diligence” payments for a dealer’s examination of the Funds and payments for providing extra employee training and
information relating to Funds; “listing” fees for the placement of the Funds on a dealer’s list of mutual funds
available for purchase by its customers; “finders” fees for directing investors to the Fund; “distribution and
marketing support” fees or “revenue sharing” for providing assistance in promoting the sale of the Funds’
shares; payments for the sale of shares and/or the maintenance of share balances; CUSIP fees; maintenance fees; and set-up fees
regarding the establishment of new accounts. The payments made by BRIL, BlackRock and their affiliates may be a fixed dollar amount
or may be based on a percentage of the value of shares sold to, or held by, customers of the Service Organization involved, and
may be different for different Service Organizations. The payments described above are made from BRIL’s, BlackRock’s
or their affiliates’ own assets pursuant to agreements with Service Organizations and do not change the price paid by investors
for the purchase of the Fund’s shares or the amount the Fund will receive as proceeds from such sales.
As of
the date of this Statement of Additional Information, as amended or supplemented from time to time, the following Service Organizations
are receiving such payments: Ameriprise Financial Services, AXA Advisors, Cetera Advisor Networks LLC, Cetera Advisors LLC, Cetera
Financial Specialists LLC, Cetera Investment Services LLC, Chase Investment Services Corp, CCO Investment Services, Commonwealth
Equity Services (Commonwealth Financial Network), Donegal Securities, FSC Securities Corporation, ING Financial Partners, Investacorp,
Inc., LPL Financial Corporation, Merrill Lynch, MetLife Securities, Morgan Stanley Smith Barney, New England Securities Corporation,
Oppenheimer & Co., PFS Investments, Raymond James, RBC Capital Markets, Royal Alliance Associates, SagePoint Financial, Securities
America, State Farm VP Management Corp., Tower Square Securities, Triad Advisors, Inc., UBS Financial Services, U.S. Bancorp Investments,
Walnut Street Securities, Wells Fargo, Woodbury Financial Services, Inc. and/or broker dealers and other financial services firms
under common control with the above organizations (or their successors or assignees). The level of payments made to these Service
Organizations in any year will vary, may be limited to specific Funds or share classes, and normally will not exceed the sum of
(a) 0.25% of such year’s Fund sales by that Service Organization, and (b) 0.21% of the assets attributable to that Service
Organization invested in a Fund. In certain cases, the payments described in the preceding sentence are subject to certain minimum
payment levels. In addition, from time to time BRIL, BlackRock or certain of their affiliates may make fixed dollar amount payments
to certain Service Organizations listed above that are not based on the value of the shares sold to, or held by, the Service Organization’s
customers and may be different for different Service Organizations
.
Other Distribution Arrangements
Certain Funds and BlackRock have entered into distribution
agreements with UBS AG whereby UBS AG may, in certain circumstances, sell certain shares of the Funds in certain jurisdictions.
The level of payments made to UBS AG in any year for the sale and distribution of a Fund’s shares will vary and normally
will not exceed the sum of the service fee payable on the assets attributable to UBS AG plus an additional fee equal to a percentage
of such assets which shall range up to 0.25%.
In lieu of payments pursuant to the foregoing, BRIL, BlackRock,
PNC or their affiliates may make payments to the above named Service Organizations of an agreed-upon amount which, subject to certain
agreed-upon minimums, will generally not exceed the amount that would have been payable pursuant to the formula, and may also make
similar payments to other Service Organizations.
If investment advisers, distributors or affiliates of mutual
funds pay bonuses and incentives in differing amounts, financial firms and their financial consultants may have financial incentives
for recommending a particular mutual fund over other mutual funds. In addition, depending on the arrangements in place at any particular
time, a financial firm and its financial consultants may also have a financial incentive for recommending a particular share class
over other share classes.
You should consult your financial adviser and review carefully any disclosure by the financial firm
as to compensation received by your financial adviser for more information about the payments described above.
Furthermore, BRIL, BlackRock and their affiliates may contribute
to various non-cash and cash incentive arrangements to promote the sale of shares, and may sponsor various contests and promotions
subject to applicable FINRA regulations in which participants may receive prizes such as travel awards, merchandise and cash. Subject
to applicable FINRA regulations, BRIL, BlackRock and their affiliates may also: (i) pay for the travel expenses, meals, lodging
and entertainment of broker/dealers, financial institutions and their salespersons in connection with educational and sales promotional
programs, (ii) sponsor speakers, educational seminars and charitable events and (iii) provide other sales and marketing
conferences and other resources to broker-dealers, financial institutions and their salespersons.
BlackRock, Inc., the parent company of BlackRock, has agreed
to pay PNC Bank and certain of its affiliates fees for administration and servicing with respect to assets of the Fund attributable
to shares held by customers of such entities. These assets are predominantly in the Institutional Share class of a Fund, with respect
to which the Fund does not pay shareholder servicing fees under a Plan. The fees are paid according to the following schedule:
certain money market funds: 0.15% of net assets; certain fixed income funds: 0.20% of net assets; and certain equity funds: 0.25%
of net assets (except that with respect to Index Equity, the fee is 0.04% of net assets).
Service Organizations may charge their clients additional
fees for account-related services. Service Organizations may charge their customers a service fee in connection with the purchase
or redemption of Fund shares. The amount and applicability of such a fee is determined and disclosed to its customers by each individual
Service Organization. Service fees typically are fixed, nominal dollar amounts and are in addition to the sales and other charges
described in the Prospectuses and this Statement of Additional Information. Your Service Organization will provide you with specific
information about any service fees you will be charged.
Pursuant to the Plans, each Fund enters into service arrangements
with Service Organizations pursuant to which Service Organizations will render certain support services to their customers (“Customers”)
who are the beneficial owners of Hilliard Lyons, Service, Investor A, Investor A1, Investor B, Investor B1, Investor B2, Investor
C, Investor C1, Investor C2 and Class R Shares of all Funds. Such services will be provided to Customers who are the beneficial
owners of shares of such classes and are intended to supplement the services provided by the Fund’s Administrators and Transfer
Agent to the Fund’s shareholders of record. In consideration for payment of the applicable service fee Service Organizations
may provide general shareholder liaison services, including, but not limited to: (i) answering customer inquiries regarding account
status and history, the manner in which purchases, exchanges and redemptions of shares may be effected and certain other matters
pertaining to the Customers’ investments; and (ii) assisting Customers in designating and changing dividend options,
account designations and addresses.
To the extent a shareholder is not associated with a Service
Organization, the shareholder servicing fees will be paid to BlackRock, and BlackRock will provide services. In addition to, rather
than in lieu of, distribution and shareholder servicing fees that a Fund may pay to a Service Organization pursuant to the Plan
and fees the Fund pays to its Transfer Agent, the Fund may enter into non-Plan agreements with Service Organizations pursuant to
which the Fund will pay a Service Organization for administrative, networking, recordkeeping, sub-transfer agency and shareholder
services. These non-Plan payments are generally based on either: (1) a percentage of the average daily net assets of Fund
shareholders serviced by a Service Organization or (2) a fixed dollar amount for each account serviced by a Service Organization.
The aggregate amount of these payments may be substantial. From time to time, BlackRock,
BRIL or their affiliates also may pay a portion of the
fees for administrative, networking, omnibus, operational and recordkeeping, sub-transfer agency and shareholder services described
above at its or their own expense and out of its or their legitimate profits.
Redemption
of Shares
Shares normally will be redeemed for cash upon receipt
of a request in proper form, although each Fund retains the right to redeem some or all of its shares in-kind under unusual circumstances
(valued in the same way as they would be valued for purposes of computing a Fund’s NAV), in order to protect the interests
of remaining shareholders, or to accommodate a request by a particular shareholder that does not adversely affect the interest
of the remaining shareholders, by delivery of securities selected from the Fund’s assets at its discretion. In-kind payment
means payment will be made in portfolio securities rather than cash. If this occurs, the redeeming shareholder might incur brokerage
or other transaction costs to convert the securities to cash. Each Fund has elected, however, to be governed by Rule 18f-1
under the Investment Company Act so that the Fund is obligated to redeem its shares solely in cash up to the lesser of $250,000
or 1% of its net asset value during any 90-day period for any shareholder of the Fund. The redemption price is the net asset value
per share next determined after the initial receipt of proper notice of redemption. The value of shares of each Fund at the time
of redemption may be more or less than your cost at the time of purchase, depending in part on the market value of the securities
held by the Fund at such time. Except for any CDSC or redemption fee that may be applicable, there will be no redemption charge
if your redemption request is sent directly to the Transfer Agent. If you are liquidating your holdings you will receive all dividends
reinvested through the date of redemption.
The right to redeem shares may be suspended or payment
upon redemption may be delayed for more than seven days only (i) for any period during which trading on the NYSE is restricted
as determined by the Commission or during which the NYSE is closed (other than customary weekend and holiday closings), (ii) for
any period during which an emergency exists, as defined by the Commission, as a result of which disposal of portfolio securities
or determination of the net asset value of a Fund is not reasonably practicable, and (iii) for such other periods as the Commission
may by order permit for the protection of shareholders of the Fund. (A Fund may also suspend or postpone the recordation of the
transfer of its shares upon the occurrence of any of the foregoing conditions.)
Each Fund, with other investment companies advised by the
Manager, has entered into a joint committed line of credit with a syndicate of banks that is intended to provide the Fund with
a temporary source of cash to be used to meet redemption requests from shareholders in extraordinary or emergency circumstances.
The Fund may redeem shares involuntarily to reimburse a
Fund for any loss sustained by reason of the failure of a shareholder to make full-payment for shares purchased by the shareholder
or to collect any charge relating to a transaction effected for the benefit of a shareholder. The Fund reserves the express right
to redeem shares of each Fund involuntarily at any time if the Fund’s Board determines, in its sole discretion, that failure
to do so may have adverse consequences to the holders of shares in the Fund. Upon such redemption the holders of shares so redeemed
shall have no further right with respect thereto other than to receive payment of the redemption price.
Redemption
Investor, Institutional and Class R Shares
Redeem by Telephone:
You may sell Investor class
shares held at BlackRock by telephone request if certain conditions are met and if the amount being sold is less than (i) $100,000
for payments by check or (ii) $250,000 for payments through the Automated Clearing House Network (“ACH”) or wire transfer.
Certain redemption requests, such as those in excess of these amounts, and those where (i) the Fund does not have verified
banking information on file; or (ii) the proceeds are not paid to the record owner at the record address, must be in writing
with a medallion signature guarantee provided by any “eligible guarantor institution” as defined in Rule 17Ad-15
under the Securities Exchange Act of 1934 (the “Exchange Act”), whose existence and validity may be verified by the
Transfer Agent through the use of industry publications. For Institutional Shares, certain redemption requests may require written
instructions with a medallion signature guarantee. Call (800) 441-7762 for details. You can obtain a medallion signature guarantee
stamp from a bank, securities dealer, securities broker, credit union, savings and loan association, national securities exchange
or registered securities association. The three recognized medallion programs are Securities Transfer Agent Medallion Program,
Stock Exchanges Medallion Program and New York Stock Exchange, Inc. Medallion Signature Program. Signature guarantees which are
not a part of these programs will not be accepted. A notary public seal will not be acceptable. Generally, a properly signed written
request with any required signature guarantee is all that is required for a redemption. In some cases, however, other documents
may be necessary. Additional documentary evidence of authority is required by the Transfer Agent in the event redemption is requested
by a corporation, partnership, trust, fiduciary, executor or administrator.
If you make a redemption request before a Fund has collected
payment for the purchase of shares, the Fund may delay mailing your proceeds. This delay will usually not exceed ten days. A Fund,
its Administrators and the Distributor will employ reasonable procedures to confirm that instructions communicated by telephone
are genuine. Telephone redemption requests will not be honored if: (i) the accountholder is deceased, (ii) the proceeds
are to be sent to someone other than the shareholder of record, (iii) a Fund does not have verified information on file, (iv) the
request is by an individual other than the accountholder of record, (v) the account is held by joint tenants who are divorced,
(vi) the address on the account has changed within the last 30 days or share certificates have been issued on the account,
or (vii) to protect against fraud, if the caller is unable to provide the account number, the name and address registered
on the account and the social security number registered on the account. The Fund and its service providers will not be liable
for any loss, liability, cost or expense for acting upon telephone instructions that are reasonably believed to be genuine in accordance
with such procedures. Before telephone requests will be honored, signature approval from all shareholders of record on the account
must be obtained. The Fund may refuse a telephone redemption request if it believes it is advisable to do so. During periods of
substantial economic or market change, telephone redemptions may be difficult to complete. Please find below alternative redemption
methods.
The Funds or the Transfer Agent may temporarily suspend
telephone transactions at any time.
Redeem by VRU:
Investor class shares may also be
redeemed by use of the Fund’s automated voice response unit service (“VRU”). Payment for Investor class shares
redeemed by VRU may be made for non-retirement accounts in amounts up to $25,000, either through check, ACH or wire.
Redeem by Internet:
You may redeem in your account,
by logging onto the BlackRock website at www.blackrock.com/funds. Proceeds from Internet redemptions may be sent via check, ACH
or wire to the bank account of record. Payment for Investor class shares redeemed by Internet may be made for non-retirement accounts
in amounts up to $25,000, either through check, ACH or wire. Different maximums may apply to investors in Institutional Shares.
Redeem in Writing:
If you hold shares with the Transfer
Agent you may redeem such shares without charge by writing to the Fund’s Transfer Agent, BNY Mellon Investment Servicing
(US) Inc., P.O. Box 9819, Providence, Rhode Island 02940-8019. Redemption requests delivered other than by mail should be sent
to the Fund’s Transfer Agent, BNY Mellon Investment Servicing (US) Inc., 4400 Computer Drive, Westborough, Massachusetts
01588. If you hold share certificates issued by your Fund, the letter must be accompanied by certificates for the shares. All shareholders
on the account must sign the letter. A medallion signature guarantee may be required but may be waived in certain circumstances.
You can obtain a medallion signature guarantee stamp from a bank, securities dealer, securities broker, credit union, savings and
loan association, national securities exchange or registered securities association. A notary public seal will not be acceptable.
If you hold stock certificates, return the certificates with the letter. Proceeds from redemptions may be sent via check, ACH or
wire to the bank account of record.
Redemptions of Service Shares, Class K Shares and BlackRock
Shares may be made in the manner and amounts described in the Prospectuses.
If you redeem shares directly with the Transfer Agent,
payments will generally be mailed within seven days of receipt of the proper notice of redemption. A Fund may delay the mailing
of a redemption check until good payment (that is, cash, Federal funds or certified check drawn on a U.S. bank) has been collected
for the purchase of Fund shares, which delay will usually not exceed 10 days. If your account is held directly with the Transfer
Agent and contains a fractional share balance following a redemption, the fractional share balance will be automatically redeemed
by the Fund.
Note on Low Balance Accounts.
Because of the high cost of
maintaining smaller shareholder accounts, BlackRock has set a minimum balance of $500 in each Fund position you hold within your
account (“Fund Minimum”), and may take one of two actions if the balance in your Fund falls below the Fund Minimum.
First, the Fund may redeem the shares in your account (without charging any deferred sales charge) if the net asset value of your
account falls below $250 for any reason, including market fluctuation. You will be notified that the value of your account is less
than $250 before the Fund makes an involuntary redemption. The notification will provide you with a 90 calendar day period to make
an additional investment in order to bring the value of your account to at least $250 before the Fund makes an involuntary redemption
or to the Fund Minimum in order not to be assessed an annual low balance fee of $20, as set forth below. This involuntary redemption
may not apply to accounts of authorized qualified employee benefit plans,
selected fee-based programs, accounts established under the Uniform
Gifts or Transfers to Minors Acts, and certain intermediary accounts.
Second, the Fund charges an annual $20 low balance fee
on all Fund accounts that have a balance below the Fund Minimum for any reason, including market fluctuation. The fee will be deducted
from the Fund account only once per calendar year. You will be
notified that the value of your account is less than the
Fund Minimum before the fee is imposed. You will then have a 90 calendar day period to make an additional investment to bring the
value of your account to the Fund Minimum before the Fund imposes the low balance fee. This low balance fee does not apply to accounts
of authorized qualified employee benefit plans, selected fee-based programs, or accounts established under the Uniform Gifts or
Transfers to Minors Acts.
Repurchase
A Fund normally will accept orders to repurchase shares
from Selling Dealers for their customers. Shares will be priced at the net asset value of the Fund next determined after receipt
of the repurchase order by a Selling Dealer that has been authorized by the Distributor by contract to accept such orders. As to
repurchase orders received by Selling Dealers prior to the close of business on the NYSE (generally, the NYSE closes at 4:00 p.m.
Eastern time), on the day the order is placed, which includes orders received after the close of business on the previous day,
the repurchase price is the net asset value determined as of the close of business on the NYSE on that day. If the orders for repurchase
are not received by the Selling Dealer before the close of business on the NYSE, such orders are deemed received on the next business
day.
These repurchase arrangements are for your convenience
and do not involve a charge by the Fund (other than any applicable CDSC or redemption fee). However, Selling Dealers may charge
a processing fee in connection with such transactions. In addition, securities firms that do not have selected dealer agreements
with the Distributor may impose a transaction charge for transmitting the notice of repurchase to the Fund. Each Fund reserves
the right to reject any order for repurchase. A shareholder whose order for repurchase is rejected by a Fund, however, may redeem
shares as set forth above.
Reinstatement Privilege — Investor A Shares
Upon redemption of Investor A, Investor A1 or Institutional
Shares, as applicable, shareholders may reinvest all or a portion of their redemption proceeds (after paying any applicable CDSC)
in Investor A Shares of the same or another BlackRock fund without paying a front-end sales charge. This right may be exercised
once a year and within 60 days of the redemption, provided that the Investor A Share class of that fund is currently open
to new investors or the shareholder has a current account in that closed fund. Shares will be purchased at the NAV calculated at
the close of trading on the day the request is received in good order. To exercise this privilege, the Fund must receive written
notification from the shareholder of record or the financial professional of record, at the time of the purchase. Investors should
consult a tax adviser concerning the tax consequences of exercising this reinstatement privilege.
Shareholder
Services
Each Fund offers one or more of the shareholder services
described below that are designed to facilitate investment in its shares. You can obtain more information about these services
from each Fund by calling the telephone number on the cover page, or from the Distributor, your financial adviser, your selected
securities dealer or other financial intermediary. Certain of these services are available only to U.S. investors.
Investment Account
If your account is maintained at the Transfer Agent (an
“Investment Account”) you will receive statements, at least quarterly, from the Transfer Agent. These statements will
serve as confirmations for automatic investment purchases and the reinvestment of dividends. The statements also will show any
other activity in your Investment Account since the last statement. You also will receive separate confirmations for each purchase
or sale transaction other than automatic investment purchases and the reinvestment of dividends. If your Investment Account is
held at the Transfer Agent you may make additions to it at any time by mailing a check directly to the Transfer Agent. You may
also maintain an account through a selected securities dealer or other financial intermediary. If you transfer shares out of an
account maintained with a selected securities dealer or other financial intermediary, an Investment Account in your name may be
opened automatically at the Transfer Agent.
You may transfer Fund shares from a selected securities
dealer or other financial intermediary to another securities dealer or other financial intermediary that has entered into an agreement
with the Distributor. Certain shareholder services may not be available for the transferred shares. All future trading of these
assets must be coordinated by the new firm. If you wish to transfer your shares to a securities dealer or other financial intermediary
that has not entered into an agreement with the Distributor, you must either (i) redeem your shares, paying any applicable
CDSC or (ii) continue to maintain an Investment Account at the Transfer Agent for those shares. You also may request that
the new securities dealer or other financial intermediary maintain the shares in an account at the Transfer Agent registered in
the name of the securities dealer or other financial intermediary for your benefit whether the securities dealer or other financial
intermediary has entered into a selected dealer agreement or not. In the interest of economy and convenience and because of the
operating procedures of each Fund, share certificates will not be issued physically. Shares are maintained by each Fund
on its register maintained by the Transfer Agent and the
holders thereof will have the same rights and ownership with respect to such shares as if certificates had been issued.
If you are considering transferring a tax-deferred retirement
account, such as an individual retirement account, from one selected securities dealer to another securities dealer or other financial
intermediary, you should be aware that if the new firm will not take delivery of shares of the Fund, you must either redeem the
shares (paying any applicable CDSC) so that the cash proceeds can be transferred to the account at the new firm, or you must continue
to maintain a retirement account at the original selected securities dealer for those shares.
Exchange Privilege
U.S. shareholders of Investor A, Investor A1, Investor
B, Investor B1, Investor B2, Investor B3, Investor C, Investor C1, Investor C2, Investor C3 and Institutional Shares of each Fund
have an exchange privilege with certain other Funds. The minimum amount for exchanges of Investor class shares is $1,000, although
you may exchange less than $1,000 if you already have an account in the Fund into which you are exchanging. You may only exchange
into a share class and a Fund that are open to new investors or in which you have a current account if the class or fund is closed
to new investors. If you held the shares used in the exchange for 30 days or less, you may be charged a redemption fee at the time
of the exchange. Before effecting an exchange, you should obtain a currently effective prospectus of the fund into which you wish
to make the exchange. Exercise of the exchange privilege is treated as a sale of the exchanged shares and a purchase of the acquired
shares for Federal income tax purposes.
Exchanges of Investor A, Investor A1 and Institutional
Shares.
Institutional Shares are exchangeable with shares of the same class of other Funds. Investor A and Investor A1 Shares
are exchangeable for Investor A Shares of other Funds.
Exchanges of Institutional Shares outstanding (“outstanding
Institutional Shares”) for Institutional Shares of a second Fund or for shares of a money market fund (“new Institutional
Shares”) are effected on the basis of relative net asset value per Institutional Share. Exchanges of Investor A or Investor
A1 Shares outstanding (“outstanding Investor A Shares”) for Investor A Shares of a second Fund, or for shares of a
money market fund (“new Investor A Shares”) are effected on the basis of relative net asset value per share.
Exchanges of Investor B, Investor B1, Investor B2, Investor
B3, Investor C, Investor C1, Investor C2 and Investor C3 Shares.
Shareholders of certain Funds with Investor B, Investor B1,
Investor B2, Investor B3, Investor C, Investor C1, Investor C2 and Investor C3 Shares outstanding (“outstanding Investor
B or Investor C Shares”) may exchange their shares for Investor B or Investor C Shares, respectively, of a second Fund or
for shares of a money market fund (“new Investor B or Investor C Shares”) on the basis of relative net asset value
per Investor B or Investor C Share, without the payment of any CDSC. Certain Funds impose different CDSC schedules. If you exchange
your Investor B Shares for shares of a fund with a different CDSC schedule, the CDSC schedule that applies to the shares exchanged
will continue to apply. For purposes of computing the CDSC upon redemption of new Investor B or Investor C Shares, the time you
held both the exchanged Investor B or Investor C Shares and the new Investor B Shares or Investor C Shares will count towards the
holding period of the new Investor B or Investor C Shares. For example, if you exchange Investor B Shares of a Fund with a six-year
CDSC for those of a second Fund after having held the first Fund’s Investor B Shares for two-and-a-half years, the 3.50%
CDSC that generally would apply to a redemption would not apply to the exchange. Four years later if you decide to redeem the Investor
B Shares of the second Fund and receive cash, there will be no CDSC due on this redemption since by adding the two-and-a-half year
holding period of the first Fund’s Investor B Shares to the four year holding period for the second Fund’s Investor
B Shares, you will be deemed to have held the second Fund’s Investor B Shares for more than six years.
Exchanges for Shares of a Money Market Fund.
You
may exchange any class of Investor class shares for shares of an affiliated money market fund. If you exchange into BlackRock Summit
Cash Reserves Fund (“Summit”), a series of BlackRock Financial Institutions Series Trust, you will receive one
of two classes of shares: exchanges of Investor A, Investor A1 and Institutional Shares of a Fund will receive Investor A Shares
of Summit and exchanges of Investor B, Investor B1, Investor B2, Investor B3, Investor C, Investor C1, Investor C2 and Investor
C3 Shares of a Fund will receive Investor B Shares of Summit. You may exchange Investor A Shares of Summit back into Investor A
or Institutional Shares of a Fund. You may exchange Investor B Shares of Summit back into Investor B or Investor C Shares of a
Fund and, in the event of such an exchange, the period of time that you held Investor B Shares of Summit will count toward satisfaction
of the holding period requirement for purposes of reducing any CDSC and toward satisfaction of any Conversion Period with respect
to Investor B Shares. Investor B Shares of Summit are subject to a distribution fee at an annual rate of 0.75% of average daily
net assets of such Investor B Shares. Exchanges of Investor B or Investor C Shares of a money market fund other than Summit for
Investor B or Investor C Shares of a Fund will be exercised at net asset value. However, a CDSC may be charged in connection with
any subsequent redemption of the Investor B or Investor C Shares of the Fund received in the exchange. In determining the holding
period for calculating the CDSC payable on redemption of Investor B and Investor C Shares of the Fund
received in exchange, the holding period of the money market
fund Investor B or Investor C Shares originally held will be added to the holding period of the Investor B or Investor C Shares
acquired through exchange.
Exchanges by Participants in Certain Programs.
The
exchange privilege may be modified with respect to certain participants in mutual fund advisory programs and other fee-based programs
sponsored by the Manager, an affiliate of the Manager, or selected securities dealers or other financial intermediaries that have
an agreement with the Distributor. See “Fee-Based Programs” below.
Exercise of the Exchange Privilege.
To exercise
the exchange privilege, you should contact your financial adviser or the Transfer Agent, who will advise each Fund of the exchange.
If you do not hold share certificates, you may exercise the exchange privilege by wire through your securities dealer or other
financial intermediary. Each Fund reserves the right to require a properly completed exchange application.
A shareholder who wishes to make an exchange may do so
by sending a written request to the Fund c/o the Transfer Agent at the following address: P.O. Box 9819, Providence, Rhode Island
02940-8019. Shareholders are automatically provided with telephone exchange privileges when opening an account, unless they indicate
on the Application that they do not wish to use this privilege. To add this feature to an existing account that previously did
not provide this option, a Telephone Exchange Authorization Form must be filed with the Transfer Agent. This form is available
from the Transfer Agent. Once this election has been made, the shareholder may simply contact the Fund by telephone at (800) 441-7762
to request the exchange. During periods of substantial economic or market change, telephone exchanges may be difficult to complete
and shareholders may have to submit exchange requests to the Transfer Agent in writing.
If the exchanging shareholder does not currently own shares
of the investment portfolio whose shares are being acquired, a new account will be established with the same registration, dividend
and capital gain options and broker of record as the account from which shares are exchanged, unless otherwise specified in writing
by the shareholder with all signatures guaranteed by an eligible guarantor institution as defined below. In order to participate
in the Automatic Investment Program or establish a Systematic Withdrawal Plan for the new account, however, an exchanging shareholder
must file a specific written request.
Any share exchange must satisfy the requirements relating
to the minimum initial investment requirement, and must be legally available for sale in the state of the investor’s residence.
For Federal income tax purposes, a share exchange is a taxable event and, accordingly, a capital gain or loss may be realized.
Before making an exchange request, shareholders should consult a tax or other financial adviser and should consider the investment
objective, policies and restrictions of the investment portfolio into which the shareholder is making an exchange. Brokers may
charge a fee for handling exchanges.
The Fund reserves the right to suspend, modify or terminate
the exchange privilege at any time. Notice will be given to shareholders of any material modification or termination except where
notice is not required. The Fund reserves the right to reject any telephone exchange request. Telephone exchanges may be subject
to limitations as to amount or frequency, and to other restrictions that may be established from time to time to ensure that exchanges
do not operate to the disadvantage of any portfolio or its shareholders.
The Fund, the administrators and BRIL will employ reasonable
procedures to confirm that instructions communicated by telephone are genuine. The Fund, the administrators and BRIL will not be
liable for any loss, liability, cost or expense for acting upon telephone instructions reasonably believed to be genuine in accordance
with such procedures. By use of the exchange privilege, the investor authorizes the Fund’s Transfer Agent to act on telephonic
or written exchange instructions from any person representing himself to be the investor and believed by the Fund’s Transfer
Agent to be genuine. The records of the Fund’s Transfer Agent pertaining to such instructions are binding. The exchange privilege
may be modified or terminated at any time upon 60 days’ notice to affected shareholders. The exchange privilege is only
available in states where the exchange may legally be made.
Each Fund reserves the right to limit the number of times
an investor may exercise the exchange privilege. Certain Funds may suspend the continuous offering of their shares to the general
public at any time and may resume such offering from time to time. The exchange privilege is available only to U.S. shareholders
in states where the exchange legally may be made. The exchange privilege may be applicable to other new mutual funds whose shares
may be distributed by the Distributor.
Fee-Based Programs
If you participate in certain fee-based programs offered
by BlackRock or an affiliate of BlackRock, or selected securities dealers or other financial intermediaries that have agreements
with the Distributor or in certain fee-based programs in which BlackRock participates, you may be able to buy Institutional Shares,
including by exchanges from other share classes. Sales charges on the shares
being exchanged may be reduced or waived under certain
circumstances. You generally cannot transfer shares held through a fee-based program into another account. Instead, you will have
to redeem your shares held through the program and purchase shares of another class, which may be subject to distribution and service
fees. This may be a taxable event and you will pay any applicable sales charges or redemption fee.
Shareholders that participate in a fee-based program generally
have two options at termination. The program can be terminated and the shares liquidated or the program can be terminated and the
shares held in an account. In general, when a shareholder chooses to continue to hold the shares, whatever share class was held
in the program can be held after termination. Shares that have been held for less than specified periods within the program may
be subject to a fee upon redemption. Shareholders that held Investor A or Institutional Shares in the program are eligible to purchase
additional shares of the respective share class of a Fund, but may be subject to upfront sales charges with respect to Investor
A Shares. Additional purchases of Institutional Shares are available only if you have an existing position at the time of purchase
or are otherwise eligible to purchase Institutional Shares.
Details about these features and the relevant charges are
included in the client agreement for each fee-based program and are available from your financial professional, selected securities
dealer or other financial intermediary.
Retirement and Education Savings Plans
Individual retirement accounts and other retirement and
education savings plans are available from your financial intermediary. Under these plans, investments may be made in a Fund and
certain of the other mutual funds sponsored by the Manager or its affiliates as well as in other securities. There may be fees
associated with investing through these plans. Information with respect to these plans is available on request from your financial
intermediary.
Dividends received in each of the plans referred to above
are exempt from Federal taxation until distributed from the plans and, in the case of Roth IRAs and education savings plans, may
be exempt from taxation when distributed as well. Investors considering participation in any retirement or education savings plan
should review specific tax laws relating to the plan and should consult their attorneys or tax advisers with respect to the establishment
and maintenance of any such plan.
Automatic Investment Plans
Investor class shareholders and certain Service Share shareholders
who were shareholders of the Compass Capital Group of Funds at the time of its combination with The PNC
®
Fund in 1996 may arrange for periodic investments in that Fund through automatic deductions from a checking or savings account.
The minimum pre-authorized investment amount is $50. If you buy shares of a Fund through certain accounts, no minimum charge to
your bank account is required. Contact your financial adviser or other financial intermediary for more information. The automatic
investment plan for Investor B Shares terminated effective July 1, 2009. Shareholders who currently are enrolled in the plan may
redirect their automatic investments into Investor A Shares or Investor C Shares.
Automatic Dividend Reinvestment Plan
Each Fund will distribute substantially all of its net
investment income and net realized capital gains, if any, to shareholders. All distributions are reinvested at net asset value
in the form of additional full and fractional shares of the same class of shares of the relevant Fund unless a shareholder elects
otherwise. Such election, or any revocation thereof, must be made in writing to the Transfer Agent, and will become effective with
respect to dividends paid after its receipt by the Transfer Agent. Each Fund declares a dividend each day on “settled”
shares (
i.e.
, shares for which the particular Fund has received payment in Federal funds) on the first business day after
a purchase order is placed with the Fund. Payments by check are normally converted to Federal funds within two business days of
receipt. Over the course of a year, substantially all of the Fund’s net investment income will be declared as dividends.
The amount of the daily dividend for each Fund will be based on periodic projections of its net investment income. All dividends
are paid within ten days after the end of each month. Net realized capital gains (including net short-term capital gains), if any,
will be distributed by each Fund at least annually.
Systematic Withdrawal Plans
Shareholders may receive regular distributions from their
accounts via a Systematic Withdrawal Plan (“SWP”). Upon commencement of the SWP, the account must have a current value
of $10,000 or more in a Fund. Shareholders may elect to receive automatic cash payments of $50 or more at any interval. You may
choose any day for the withdrawal. If no day is specified, the withdrawals will be processed on the 25th day of the month or, if
such day is not a business day, on the prior business day and are paid promptly
thereafter. An investor may utilize the SWP by completing
the Systematic Withdrawal Plan Application Form which may be obtained by visiting our website at www.blackrock.com/funds.
Shareholders should realize that if withdrawals exceed
income dividends their invested principal in the account will be depleted. To participate in the SWP, shareholders must have their
dividends automatically reinvested. Shareholders may change or cancel the SWP at any time, upon written notice to the Fund, or
by calling the Fund at (800) 441-7762. Purchases of additional Investor A Shares of the Fund concurrently with withdrawals
may be disadvantageous to investors because of the sales charges involved and, therefore, are discouraged. No CDSC will be assessed
on redemptions of Investor B, Investor B1, Investor B2, Investor B3, Investor C, Investor C1, Investor C2 or Investor C3 Shares
made through the SWP that do not exceed 12% of the original investment on an annualized basis. For example, monthly, quarterly
and semi-annual SWP redemptions of Investor B, Investor B1, Investor B2, Investor B3, Investor C, Investor C1, Investor C2 or Investor
C3 Shares will not be subject to the CDSC if they do not exceed 1% (monthly), 3% (quarterly) and 6% (semi-annually), respectively,
of an account’s net asset value on the redemption date. SWP redemptions of Investor B, Investor B1, Investor B2, Investor
B3, Investor C, Investor C1, Investor C2 or Investor C3 Shares in excess of this limit are still subject to the applicable CDSC.
For this reason, a shareholder may not participate in the
Automatic Investment Plan described above (see “How to Buy, Sell, Transfer and Exchange Shares” in the Fund’s
Prospectus) and the SWP at the same time.
Dividend Allocation Plan
The Dividend Allocation Plan allows shareholders to elect
to have all their dividends and any other distributions from any Eligible Fund (which means funds so designated by the Distributor
from time to time) automatically invested at net asset value in one other such Eligible Fund designated by the shareholder, provided
the account into which the dividends and distributions are directed is initially funded with the requisite minimum amount.
Pricing
of Shares
Determination of Net Asset Value
Valuation of Shares.
The net asset value
for each class of shares of each Fund is generally calculated as of the close of regular trading hours on the NYSE (currently 4:00
p.m. Eastern Time) on each business day the NYSE is open.
Valuation of securities held by each Fund is as follows:
Equity Investments.
Equity securities traded
on a recognized securities exchange (
e.g.
, NYSE), separate trading boards of a securities exchange or through a market system
that provides contemporaneous transaction pricing information (an “Exchange”) are valued via independent pricing services
generally at the Exchange closing price or if an Exchange closing price is not available, the last traded price on that Exchange
prior to the time as of which the assets or liabilities are valued, however, under certain circumstances other means of determining
current market value may be used. If an equity security is traded on more than one Exchange, the current market value of the security
where it is primarily traded generally will be used. In the event that there are no sales involving an equity security held by
a Fund on a day on which the Fund values such security, the last bid (long positions) or ask (short positions) price, if available,
will be used as the value of such security. If a Fund holds both long and short positions in the same security, the last bid price
will be applied to securities held long and the last ask price will be applied to securities sold short. If no bid or ask price
is available on a day on which a Fund values such security, the prior day’s price will be used, unless BlackRock determines
that such prior day’s price no longer reflects the fair value of the security, in which case such asset would be treated
as a fair value asset.
Fixed Income Investments.
Fixed income securities
for which market quotations are readily available are generally valued using such securities’ most recent bid prices provided
directly from one or more broker-dealers, market makers, or independent third-party pricing services which may use matrix pricing
and valuation models to derive values, each in accordance with valuation procedures approved by the Fund’s Board. The amortized
cost method of valuation may be used with respect to debt obligations with sixty days or less remaining to maturity unless the
Manager and/or Sub-Adviser determine such method does not represent fair value. Loan participation notes are generally valued at
the mean of the last available bid prices from one or more brokers or dealers as obtained from independent third-party pricing
services. Certain fixed income investments including asset-backed and mortgage-related securities may be valued based on valuation
models that consider the estimated cash flows of each tranche of the entity, establish a benchmark yield and develop an estimated
tranche specific spread to the benchmark yield based on the unique attributes of the tranche. Fixed income securities for which
market quotations are not readily available may be valued by third-party pricing services that make a valuation determination by
securing transaction data (
e.g.
, recent representative bids), credit quality information,
perceived market movements, news, and other relevant information
and by other methods, which may include consideration of: yields or prices of securities of comparable quality, coupon, maturity
and type; indications as to values from dealers; and general market conditions.
Options, Futures, Swaps and Other Derivatives.
Exchange-traded equity options for which market quotations are readily available are valued at the mean of the last bid and ask
prices as quoted on the Exchange or the board of trade on which such options are traded. In the event that there is no mean price
available for an exchange traded equity option held by a Fund on a day on which the Fund values such option, the last bid (long
positions) or ask (short positions) price, if available, will be used as the value of such option. If no bid or ask price is available
on a day on which a Fund values such option, the prior day’s price will be used, unless BlackRock determines that such prior
day’s price no longer reflects the fair value of the option in which case such option will be treated as a fair value asset.
OTC derivatives may be valued using a mathematical model which may incorporate a number of market data factors. Financial futures
contracts and options thereon, which are traded on exchanges, are valued at their last sale price or settle price as of the close
of such exchanges. Swap agreements and other derivatives are generally valued daily based upon quotations from market makers or
by a pricing service in accordance with the valuation procedures approved by the Board.
Underlying Funds.
Shares of underlying open-end
funds are valued at net asset value. Shares of underlying exchange-traded closed-end funds or other exchange-traded funds will
be valued at their most recent closing price.
General Valuation Information
In determining the market value of portfolio investments,
the Fund may employ independent third party pricing services, which may use, without limitation, a matrix or formula method that
takes into consideration market indexes, matrices, yield curves and other specific adjustments. This may result in the securities
being valued at a price different from the price that would have been determined had the matrix or formula method not been used.
All cash, receivables and current payables are carried on each Fund’s books at their face value.
Prices obtained from independent third party pricing services,
broker-dealers or market makers to value each Fund’s securities and other assets and liabilities are based on information
available at the time the Fund values its assets and liabilities. In the event that a pricing service quotation is revised or updated
subsequent to the day on which the Fund valued such security, the revised pricing service quotation generally will be applied prospectively.
Such determination shall be made considering pertinent facts and circumstances surrounding such revision.
In the event that application of the methods of valuation
discussed above result in a price for a security which is deemed not to be representative of the fair market value of such security,
the security will be valued by, under the direction of or in accordance with a method specified by the Fund’s Board as reflecting
fair value. All other assets and liabilities (including securities for which market quotations are not readily available) held
by a Fund (including restricted securities) are valued at fair value as determined in good faith by the Fund’s Board or by
BlackRock (its delegate). Any assets and liabilities which are denominated in a foreign currency are translated into U.S. dollars
at the prevailing rates of exchange.
Certain of the securities acquired by the Funds may be
traded on foreign exchanges or over-the-counter markets on days on which a Fund’s net asset value is not calculated. In such
cases, the net asset value of a Fund’s shares may be significantly affected on days when investors can neither purchase nor
redeem shares of the Fund.
Fair Value.
When market quotations are not
readily available or are believed by BlackRock to be unreliable, a Fund’s investments are valued at fair value (“Fair
Value Assets”). Fair Value Assets are valued by BlackRock in accordance with procedures approved by the Fund’s Board.
BlackRock may conclude that a market quotation is not readily available or is unreliable if a security or other asset or liability
does not have a price source due to its complete lack of trading, if BlackRock believes a market quotation from a broker-dealer
or other source is unreliable (
e.g.
, where it varies significantly from a recent trade, or no longer reflects the fair value
of the security or other asset or liability subsequent to the most recent market quotation), where the security or other asset
or liability is only thinly traded or due to the occurrence of a significant event subsequent to the most recent market quotation.
For this purpose, a “significant event” is deemed to occur if BlackRock determines, in its business judgment prior
to or at the time of pricing a Fund’s assets or liabilities, that it is likely that the event will cause a material change
to the last exchange closing price or closing market price of one or more assets or liabilities held by the Fund. On any date the
NYSE is open and the primary exchange on which a foreign asset or liability is traded is closed, such asset or liability will be
valued using the prior day’s price, provided that BlackRock is not aware of any significant event or other information that
would cause such price to no longer reflect the fair value of the asset or liability, in which case such asset or liability would
be treated as a Fair Value Asset. For certain foreign securities, a third-party vendor supplies evaluated, systematic fair value
pricing based upon the movement of a proprietary multi-factor model after the relevant foreign
markets have closed. This systematic fair value pricing
methodology is designed to correlate the prices of foreign securities following the close of the local markets to the price that
might have prevailed as of a Fund’s pricing time.
BlackRock, with input from the BlackRock Portfolio Management
Group, will submit its recommendations regarding the valuation and/or valuation methodologies for Fair Value Assets to BlackRock’s
Valuation Committee. The Valuation Committee may accept, modify or reject any recommendations. In addition, the Funds’ accounting
agent periodically endeavors to confirm the prices it receives from all third party pricing services, index providers and broker-dealers,
and, with the assistance of BlackRock, to regularly evaluate the values assigned to the securities and other assets and liabilities
held by the Funds. The pricing of all Fair Value Assets is subsequently reported to and ratified by the Board or a Committee thereof.
When determining the price for a Fair Value Asset, the
BlackRock Valuation Committee (or the Pricing Group) shall seek to determine the price that a Fund might reasonably expect to receive
from the current sale of that asset or liability in an arm’s-length transaction. The price generally may not be determined
based on what a Fund might reasonably expect to receive for selling an asset or liability at a later time or if it holds the asset
or liability to maturity. Fair value determinations shall be based upon all available factors that the Valuation Committee (or
Pricing Group) deems relevant at the time of the determination, and may be based on analytical values determined by BlackRock using
proprietary or third party valuation models.
Fair value represents a good faith approximation of the
value of an asset or liability. The fair value of one or more assets or liabilities may not, in retrospect, be the price at which
those assets or liabilities could have been sold during the period in which the particular fair values were used in determining
a Fund’s net asset value. As a result, a Fund’s sale or redemption of its shares at net asset value, at a time when
a holding or holdings are valued at fair value, may have the effect of diluting or increasing the economic interest of existing
shareholders.
Each Fund’s annual audited financial statements,
which are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”),
follow the requirements for valuation set forth in Financial Accounting Standards Board Accounting Standards Codification Topic
820, “Fair Value Measurements and Disclosures” (“ASC 820”), which defines and establishes a framework for
measuring fair value under US GAAP and expands financial statement disclosure requirements relating to fair value measurements.
Generally, ASC 820 and other accounting rules applicable
to mutual funds and various assets in which they invest are evolving. Such changes may adversely affect a Fund. For
example, the evolution of rules governing the determination of the fair market value of assets or liabilities to the extent such
rules become more stringent would tend to increase the cost and/or reduce the availability of third-party determinations of fair
market value. This may in turn increase the costs associated with selling assets or affect their liquidity due to the Fund’s
inability to obtain a third-party determination of fair market value.
Computation of Offering Price Per Share
See Part I, Section VI “Computation of
Offering Price” of each Fund’s Statement of Additional Information for an illustration of the computation of the offering
price for shares of your Fund.
Portfolio
Transactions and Brokerage
Transactions in Portfolio Securities
Subject to policies established by the Board of Directors,
BlackRock is primarily responsible for the execution of a Fund’s portfolio transactions and the allocation of brokerage.
BlackRock does not execute transactions through any particular broker or dealer, but seeks to obtain the best net results for the
Fund, taking into account such factors as price (including the applicable brokerage commission or dealer spread), size of order,
difficulty of execution, operational facilities of the firm and the firm’s risk and skill in positioning blocks of securities.
While BlackRock generally seeks reasonable trade execution
costs, a Fund does not necessarily pay the lowest spread or commission available, and payment of the lowest commission or spread
is not necessarily consistent with obtaining the best price and execution in particular transactions. Subject to applicable legal
requirements, BlackRock may select a broker based partly upon brokerage or research services provided to BlackRock and its clients,
including a Fund. In return for such services, BlackRock may cause a Fund to pay a higher commission than other brokers would charge
if BlackRock determines in good faith that the commission is reasonable in relation to the services provided.
In the case of Feeder Funds, because each Feeder Fund
generally invests exclusively in beneficial interests of a Master Portfolio, it is expected that all transactions in portfolio
securities will be entered into by the Master Portfolio.
In selecting brokers or dealers to execute portfolio transactions,
the Manager and Sub-Adviser seek to obtain the best price and most favorable execution for a Fund, taking into account a variety
of factors including: (i) the size, nature and character of the security or instrument being traded and the markets in which
it is purchased or sold; (ii) the desired timing of the transaction; (iii) BlackRock’s knowledge of the expected commission
rates and spreads currently available; (iv) the activity existing and expected in the market for the particular security or
instrument, including any anticipated execution difficulties; (v) the full range of brokerage services provided; (vi) the
broker’s or dealer’s capital (vii) the quality of research and research services provided; (viii) the reasonableness
of the commission, dealer spread or its equivalent for the specific transaction; and (ix) BlackRock’s knowledge of any
actual or apparent operational problems of a broker or dealer.
Section 28(e) of the Exchange Act (“Section 28(e)”)
permits an investment adviser, under certain circumstances, to cause an account to pay a broker or dealer a commission for effecting
a transaction that exceeds the amount another broker or dealer would have charged for effecting the same transaction in recognition
of the value of brokerage and research services provided by that broker or dealer. This includes commissions paid on riskless principal
transactions under certain conditions. Brokerage and research services include: (1) furnishing advice as to the value of securities,
including pricing and appraisal advice, credit analysis, risk measurement analysis, performance and other analysis, as well as
the advisability of investing in, purchasing or selling securities, and the availability of securities or purchasers or sellers
of securities; (2) furnishing analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio
strategy, and the performance of accounts; and (3) effecting securities transactions and performing functions incidental to
securities transactions (such as clearance, settlement, and custody). BlackRock believes that access to independent investment
research is beneficial to its investment decision-making processes and, therefore, to the Funds.
BlackRock may participate in client commission arrangements
under which BlackRock may execute transactions through a broker-dealer and request that the broker-dealer allocate a portion of
the commissions or commission credits to another firm that provides research to BlackRock. BlackRock believes that research services
obtained through soft dollar or commission sharing arrangements enhance its investment decision-making capabilities, thereby increasing
the prospects for higher investment returns. BlackRock will engage only in soft dollar or commission sharing transactions that
comply with the requirements of Section 28(e). BlackRock regularly evaluates the soft dollar products and services utilized,
as well as the overall soft dollar and commission sharing arrangements to ensure that trades are executed by firms that are regarded
as best able to execute trades for client accounts, while at the same time providing access to the research and other services
BlackRock views as impactful to its trading results.
BlackRock may utilize soft dollars and related services,
including research (whether prepared by the broker-dealer or prepared by a third-party and provided to BlackRock by the broker-dealer)
and execution or brokerage services within applicable rules and BlackRock’s policies to the extent that such permitted services
do not compromise BlackRock’s ability to seek to obtain best execution. In this regard, the portfolio management investment
and/or trading teams may consider a variety of factors, including the degree to which the broker-dealer: (a) provides access
to company management; (b) provides access to their analysts; (c) provides meaningful/insightful research notes on companies
or other potential investments; (d) facilitates calls on which meaningful or insightful ideas about companies or potential
investments are discussed; (e) facilitates conferences at which meaningful or insightful ideas about companies or potential
investments are discussed; or (f) provides research tools such as market data, financial analysis, and other third party related
research and brokerage tools that aid in the investment process.
Research-oriented services for which BlackRock might pay
with Fund commissions may be in written form or through direct contact with individuals and may include information as to particular
companies or industries and securities or groups of securities, as well as market, economic, or institutional advice and statistical
information, political developments and technical market information that assists in the valuation of investments. Except as noted
immediately below, research services furnished by brokers may be used in servicing some or all client accounts and not all services
may be used in connection with the Fund or account that paid commissions to the broker providing such services. In some cases,
research information received from brokers by mutual fund management personnel, or personnel principally responsible for BlackRock’s
individually managed portfolios, is not necessarily shared by and between such personnel. Any investment advisory or other fees
paid by a Fund to BlackRock are not reduced as a result of BlackRock’s receipt of research services. In some cases, BlackRock
may receive a service from a broker that has both a “research” and a “non-research” use. When this occurs
BlackRock makes a good faith allocation, under all the circumstances, between the research and non-research uses of the service.
The percentage of the service that is used for research purposes may be paid for with client commissions, while BlackRock will
use its own funds to pay for the percentage of the service that is used for non-research purposes. In making this good faith allocation,
BlackRock faces a potential conflict of interest, but BlackRock believes that its allocation procedures are reasonably designed
to ensure that it appropriately allocates the anticipated use of such services to their research and non-research uses.
Payments of commissions to brokers who are affiliated
persons of the Fund, or the Master Portfolio with respect to the Feeder Fund (or affiliated persons of such persons), will be made
in accordance with Rule 17e-1 under the Investment Company Act. Subject to policies established by the Board of Directors
of the Master Portfolio, BlackRock is primarily responsible for the execution of the Master Portfolio’s portfolio transactions
and the allocation of brokerage.
From time to time, a Fund may purchase new issues of securities
in a fixed price offering. In these situations, the broker may be a member of the selling group that will, in addition to selling
securities, provide BlackRock with research services. FINRA has adopted rules expressly permitting these types of arrangements
under certain circumstances. Generally, the broker will provide research “credits” in these situations at a rate that
is higher than that available for typical secondary market transactions. These arrangements may not fall within the safe harbor
of Section 28(e).
BlackRock does not consider sales of shares of the mutual
funds it advises as a factor in the selection of brokers or dealers to execute portfolio transactions for a Fund; however, whether
or not a particular broker or dealer sells shares of the mutual funds advised by BlackRock neither qualifies nor disqualifies such
broker or dealer to execute transactions for those mutual funds.
Each Fund anticipates that its brokerage transactions
involving foreign securities generally will be conducted primarily on the principal stock exchanges of the applicable country.
Foreign equity securities may be held by a Fund in the form of depositary receipts, or other securities convertible into foreign
equity securities. Depositary receipts may be listed on stock exchanges, or traded in over-the-counter markets in the United States
or Europe, as the case may be. American Depositary Receipts, like other securities traded in the United States, will be subject
to negotiated commission rates. Because the shares of each Fund are redeemable on a daily basis in U.S. dollars, each Fund intends
to manage its portfolio so as to give reasonable assurance that it will be able to obtain U.S. dollars to the extent necessary
to meet anticipated redemptions. Under present conditions, it is not believed that these considerations will have a significant
effect on a Fund’s portfolio strategies.
See “Portfolio Transactions and Brokerage”
in the Statement of Additional Information for information about the brokerage commissions paid by your Fund, including commissions
paid to affiliates, if any, for the periods indicated.
Each Fund may invest in certain securities traded in the
OTC market and intends to deal directly with the dealers who make a market in the particular securities, except in those circumstances
in which better prices and execution are available elsewhere. Under the Investment Company Act, persons affiliated with a Fund
and persons who are affiliated with such affiliated persons are prohibited from dealing with the Fund as principal in the purchase
and sale of securities unless a permissive order allowing such transactions is obtained from the Commission. Since transactions
in the OTC market usually involve transactions with the dealers acting as principal for their own accounts, the Funds will not
deal with affiliated persons, including PNC and its affiliates, in connection with such transactions. However, an affiliated person
of a Fund may serve as its broker in OTC transactions conducted on an agency basis provided that, among other things, the fee or
commission received by such affiliated broker is reasonable and fair compared to the fee or commission received by non-affiliated
brokers in connection with comparable transactions. In addition, a Fund may not purchase securities during the existence of any
underwriting syndicate for such securities of which PNC is a member or in a private placement in which PNC serves as placement
agent except pursuant to procedures approved by the Board of Directors that either comply with rules adopted by the Commission
or with interpretations of the Commission staff.
Over-the-counter issues, including most fixed income securities
such as corporate debt and U.S. Government securities, are normally traded on a “net” basis without a stated commission,
through dealers acting for their own account and not as brokers. The Funds will primarily engage in transactions with these dealers
or deal directly with the issuer unless a better price or execution could be obtained by using a broker. Prices paid to a dealer
with respect to both foreign and domestic securities will generally include a “spread,” which is the difference between
the prices at which the dealer is willing to purchase and sell the specific security at the time, and includes the dealer’s
normal profit.
Purchases of money market instruments by a Fund are made
from dealers, underwriters and issuers. The Funds do not currently expect to incur any brokerage commission expense on such transactions
because money market instruments are generally traded on a “net” basis with dealers acting as principal for their own
accounts without a stated commission. The price of the security, however, usually includes a profit to the dealer. Each money market
fund intends to purchase only securities with remaining maturities of 13 months or less as determined in accordance with the
rules of the SEC. As a result, the portfolio turnover rates of a money market fund will be relatively high. However, because brokerage
commissions will not normally be paid with respect to investments made by a money market fund, the turnover rates should not adversely
affect the Fund’s net asset values or net income.
Securities purchased in underwritten offerings include
a fixed amount of compensation to the underwriter, generally referred to as the underwriter’s concession or discount. When
securities are purchased or sold directly from or to an issuer, no commissions or discounts are paid.
The Manager or Sub-Advisers may seek to obtain an undertaking
from issuers of commercial paper or dealers selling commercial paper to consider the repurchase of such securities from a Fund
prior to maturity at their original cost plus interest (sometimes adjusted to reflect the actual maturity of the securities), if
it believes that a Fund’s anticipated need for liquidity makes such action desirable. Any such repurchase prior to maturity
reduces the possibility that a Fund would incur a capital loss in liquidating commercial paper, especially if interest rates have
risen since acquisition of such commercial paper.
Investment decisions for each Fund and for other investment
accounts managed by the Manager or Sub-Advisers are made independently of each other in light of differing conditions. BlackRock
allocates investments among client accounts in a fair and equitable manner. A variety of factors will be considered in making such
allocations. These factors include: (i) investment objectives or strategies for particular accounts, including sector, industry,
country or region and capitalization weightings, (ii) tax considerations of an account, (iii) risk or investment concentration
parameters for an account, (iv) supply or demand for a security at a given price level, (v) size of available investment,
(vi) cash availability and liquidity requirements for accounts, (vii) regulatory restrictions, (viii) minimum investment
size of an account, (ix) relative size of account, and (x) such other factors as may be approved by BlackRock’s general
counsel. Moreover, investments may not be allocated to one client account over another based on any of the following considerations:
(i) to favor one client account at the expense of another, (ii) to generate higher fees paid by one client account over
another or to produce greater performance compensation to BlackRock, (iii) to develop or enhance a relationship with a client
or prospective client, (iv) to compensate a client for past services or benefits rendered to BlackRock or to induce future
services or benefits to be rendered to BlackRock, or (v) to manage or equalize investment performance among different client
accounts.
Equity securities will generally be allocated among client
accounts within the same investment mandate on a pro rata basis. This pro rata allocation may result in a Fund receiving less of
a particular security than if pro-ration had not occurred. All allocations of equity securities will be subject, where relevant,
to share minimums established for accounts and compliance constraints.
Initial public offerings of securities may be over-subscribed
and subsequently trade at a premium in the secondary market. When BlackRock is given an opportunity to invest in such an initial
offering or “new” or “hot” issue, the supply of securities available for client accounts is often less
than the amount of securities the accounts would otherwise take. In order to allocate these investments fairly and equitably among
client accounts over time, each portfolio manager or a member of his or her respective investment team will indicate to BlackRock’s
trading desk their level of interest in a particular offering with respect to eligible clients accounts for which that team is
responsible. Initial public offerings of U.S. equity securities will be identified as eligible for particular client accounts that
are managed by portfolio teams who have indicated interest in the offering based on market capitalization of the issuer of the
security and the investment mandate of the client account and in the case of international equity securities, the country where
the offering is taking place and the investment mandate of the client account. Generally, shares received during the initial public
offering will be allocated among participating client accounts within each investment mandate on a pro rata basis. In situations
where supply is too limited to be allocated among all accounts for which the investment is eligible, portfolio managers may rotate
such investment opportunities among one or more accounts so long as the rotation system provides for fair access for all client
accounts over time. Other allocation methodologies that are considered by BlackRock to be fair and equitable to clients may be
used as well.
Because different accounts may have differing investment
objectives and policies, BlackRock may buy and sell the same securities at the same time for different clients based on the particular
investment objective, guidelines and strategies of those accounts. For example, BlackRock may decide that it may be entirely appropriate
for a growth fund to sell a security at the same time a value fund is buying that security. To the extent that transactions on
behalf of more than one client of BlackRock or its affiliates during the same period may increase the demand for securities being
purchased or the supply of securities being sold, there may be an adverse effect on price. For example, sales of a security by
BlackRock on behalf of one or more of its clients may decrease the market price of such security, adversely impacting other BlackRock
clients that still hold the security. If purchases or sales of securities arise for consideration at or about the same time that
would involve a Fund or other clients or funds for which BlackRock or an affiliate act as investment manager, transactions in such
securities will be made, insofar as feasible, for the respective funds and clients in a manner deemed equitable to all.
In certain instances, BlackRock may find it efficient
for purposes of seeking to obtain best execution, to aggregate or “bunch” certain contemporaneous purchases or sale
orders of its advisory accounts. In general, all contemporaneous trades for client accounts under management by the same portfolio
manager or investment team will be bunched in a single order if the trader believes the bunched trade would provide each client
with an opportunity to achieve a more favorable execution at a potentially lower execution cost. The
costs associated with a bunched order will be shared pro
rata among the clients in the bunched order. Generally, if an order for a particular portfolio manager or management team is filled
at several different prices through multiple trades, all accounts participating in the order will receive the average price except
in the case of certain international markets where average pricing is not permitted. While in some cases this practice could have
a detrimental effect upon the price or value of the security as far as a Fund is concerned, in other cases it could be beneficial
to the Fund. Transactions effected by BlackRock on behalf of more than one of its clients during the same period may increase the
demand for securities being purchased or the supply of securities being sold, causing an adverse effect on price. The trader will
give the bunched order to the broker dealer that the trader has identified as being able to provide the best execution of the order.
Orders for purchase or sale of securities will be placed within a reasonable amount of time of the order receipt and bunched orders
will be kept bunched only long enough to execute the order.
A Fund will not purchase securities during the existence
of any underwriting or selling group relating to such securities of which BlackRock, PNC, BRIL or any affiliated person (as defined
in the Investment Company Act) thereof is a member except pursuant to procedures adopted by the Board of Directors in accordance
with Rule 10f-3 under the Investment Company Act. In no instance will portfolio securities be purchased from or sold to BlackRock,
PNC, BRIL or any affiliated person of the foregoing entities except as permitted by Commission exemptive order or by applicable
law.
Portfolio Turnover
While a Fund generally does not expect to engage in trading
for short-term gains, it will effect portfolio transactions without regard to any holding period if, in Fund management’s
judgment, such transactions are advisable in light of a change in circumstances of a particular company or within a particular
industry or in general market, economic or financial conditions. The portfolio turnover rate is calculated by dividing the lesser
of a Fund’s annual sales or purchases of portfolio securities (exclusive of purchases or sales of U.S. government securities
and all other securities whose maturities at the time of acquisition were one year or less) by the monthly average value of the
securities in the portfolio during the year. A high rate of portfolio turnover results in certain tax consequences, such as increased
capital gain dividends and/or ordinary income dividends, and in correspondingly greater transaction costs in the form of dealer
spreads and brokerage commissions, which are borne directly by a Fund.
Dividends
and Taxes
Dividends
Each Fund intends to distribute substantially all of its
net investment income, if any. Dividends from such net investment income are paid as set forth in each Fund’s Prospectus.
Each Fund, except the Exchange Portfolio, will also distribute all net realized capital gains, if any, as set forth in such Fund’s
Prospectus. From time to time, a Fund may declare a special distribution at or about the end of the calendar year in order to comply
with Federal tax requirements that certain percentages of its ordinary income and capital gains be distributed during the year.
If in any fiscal year a Fund has net income from certain foreign currency transactions, such income will be distributed at least
annually.
For information concerning the manner in which dividends
may be reinvested automatically in shares of each Fund, see “Shareholder Services — Automatic Dividend Reinvestment
Plan.” Shareholders may also elect in writing to receive any such dividends in cash. Dividends are taxable to shareholders,
as discussed below, whether they are reinvested in shares of the Fund or received in cash. The per share dividends on front-end
load shares, CDSC shares and Service Shares will be lower than the per share dividends on Institutional Shares as a result of the
service, distribution and higher transfer agency fees applicable to CDSC shares, the service fees applicable to front-end load
shares and Service Shares, and the service and distribution fees applicable to Class R Shares. Similarly, the per share dividends
on CDSC shares and Class R Shares will be lower than the per share dividends on front-end load shares and Service Shares as
a result of the distribution fees and higher transfer agency fees applicable to CDSC shares and the distribution fees applicable
to Class R Shares, and the per share dividends on CDSC shares will be lower than the per share dividends on Class R Shares
as a result of the higher distribution fees and higher transfer agency fees applicable to CDSC shares.
Taxes
Each Fund intends to continue to qualify for the special
tax treatment afforded to regulated investment companies (“RICs”) under the Code. As long as a Fund so qualifies, the
Fund (but not its shareholders) will not be subject to Federal income tax on the part of its investment company taxable income
and net realized capital gains that it distributes to its shareholders in years in which it distributes at least 90% of its investment
company taxable income and 90% of its net tax-exempt interest income, if any, for the year. To qualify as a RIC, a Fund must meet
certain requirements regarding the source of its income and the composition and diversification of its assets. See Part II,
“Investment Risks and Considerations—Investment Restrictions (All Funds)” for a discussion of the asset
diversification requirements. In the case of a Feeder Fund,
such Fund may look to the underlying assets of the Master Portfolio in which it has invested for purposes of satisfying the asset
diversification requirement and various other requirements of the Code applicable to RICs.
Each Fund intends to distribute substantially all of
such income and gains. If, in any taxable year, a Fund fails to qualify as a RIC under the Code, notwithstanding the availability
of certain relief provisions, such Fund would be taxed in the same manner as an ordinary corporation and all distributions from
earnings and profits (as determined under Federal income tax principles) to its shareholders would be taxable as ordinary dividend
income eligible for taxation at a reduced tax rate for non-corporate shareholders and the dividends-received deduction for corporate
shareholders. Each Fund that is a series of a RIC that consists of multiple series is treated as a separate corporation for Federal
income tax purposes, and therefore is considered to be a separate entity in determining its treatment under the rules for RICs.
Losses in one series of a RIC do not offset gains in another, and the requirements (other than certain organizational requirements)
for qualifying for RIC status will be determined at the level of the individual series. In the following discussion, the term “Fund”
means each individual series, if applicable.
The Code requires a RIC to pay a nondeductible 4% excise
tax to the extent the RIC does not distribute, during each calendar year, 98% of its ordinary income, determined on a calendar
year basis, and 98.2% of its capital gain net income, determined, in general, as if the RIC’s taxable year ended on October 31,
plus certain undistributed amounts from the previous years. While each Fund intends to distribute its income and capital gains
in the manner necessary to avoid imposition of the 4% excise tax, there can be no assurance that a sufficient amount of the Fund’s
taxable income and capital gains will be distributed to avoid entirely the imposition of the tax. In such event, a Fund will be
liable for the tax only on the amount by which it does not meet the foregoing distribution requirements.
Dividends paid by a Fund from its ordinary income or
from an excess of net short-term capital gain over net long-term capital loss (together referred to as “ordinary income dividends”)
are taxable to shareholders as ordinary income. Distributions made from an excess of net long-term capital gain over net short-term
capital loss (including gains or losses from certain transactions in futures and options) (“capital gain dividends”)
are taxable to shareholders as long-term capital gains, regardless of the length of time the shareholder has owned Fund shares.
Distributions paid by a Fund that are reported as exempt-interest dividends will not be subject to regular federal income tax.
Certain dividend income and long-term capital gains are eligible for taxation at a reduced rate that applies to non-corporate shareholders.
Under these rules, the portion of ordinary income dividends constituting “qualified dividend income” when paid by a
RIC to non-corporate shareholders may be taxable to such shareholders at long-term capital gain rates. However, to the extent a
Fund’s distributions are derived from income on debt securities, certain types of preferred stock treated as debt for Federal
income tax purposes and short-term capital gains, such distributions will not constitute “qualified dividend income.”
In addition, distributions that are derived from securities lending income, such as substitute dividend payments, will not constitute
“qualified dividend income.”
Recently enacted legislation will impose a 3.8% tax on the net investment
income (which includes taxable dividends and redemption proceeds) of certain individuals, trusts and estates, for taxable years
beginning after December 31, 2012.
A Fund’s net capital gain (the excess of net long-term
capital gains over net short-term capital losses) is not subject to the 90% distribution requirement for taxation as a RIC, described
above. If a Fund retains net capital gain, it is subject to tax on that gain, and may designate the retained amount as undistributed
capital gain in a written statement furnished to its shareholders, who will be required to include in income, as long-term capital
gain, their proportionate shares of such undistributed net capital gain, will be deemed to have paid and may claim as a credit
against their Federal income tax liability (and as a refund to the extent it exceeds that liability) their proportionate shares
of the tax paid by the Fund on that gain, and may increase the basis of their shares in the Fund by the excess of the amount included
in income over the amount allowed as a credit against their taxes.
Distributions in excess of a Fund’s current and
accumulated earnings and profits will first reduce the adjusted tax basis of a holder’s shares and after such adjusted tax
basis is reduced to zero, will constitute capital gains to such holder (assuming the shares are held as a capital asset). Distributions
in excess of a Fund’s minimum distribution requirements (or taxable income) but not in excess of a Fund’s earnings
and profits will be taxable to shareholders and will not constitute nontaxable returns of capital. In the case of a Fund with a
non-calendar taxable year, a Fund’s earnings and profits are allocated first to distributions made on or before December
31 of the taxable year, and then to distributions made after December 31 of the taxable year. Any loss upon the sale or exchange
of Fund shares held for six months or less will be treated as long-term capital loss to the extent of any capital gain dividends
received by the shareholder.
Ordinary income and capital gain dividends are taxable
to shareholders even if they are reinvested in additional shares of a Fund. Distributions by a Fund, whether from ordinary income
or capital gains, generally will not be eligible for the dividends received deduction allowed to corporations under the Code. If
a Fund pays a dividend in January that was declared in the previous October,
November or December to shareholders of record on a specified
date in one of such months, then such dividend will be treated for tax purposes as being paid by the Fund and received by its shareholders
on December 31 of the year in which the dividend was declared. In the case of a Fund with a non-calendar taxable year, if
the Fund reports more capital gain dividends than it earns in such taxable year, then the Fund will reduce the amounts reported
as capital gains. Where possible, such reduction will first be allocated to dividends made after December 31 of such taxable year.
In the case of taxable years of a Fund beginning after December 22, 2010, a Fund may elect to defer recognizing, until the following
taxable year, certain net capital losses arising after October 31 of the current taxable year, and certain net ordinary losses
arising after October 31 and/or December 31 of the current taxable year. This may have the effect of increasing the amount of dividends
otherwise includible in the shareholder’s income with respect to the current taxable year.
No gain or loss will be recognized by Investor B or Investor
B1 shareholders on the conversion of their Investor B Shares into Investor A Shares or Investor B1 Shares into Investor A1 Shares.
A shareholder’s tax basis in the Investor A or Investor A1 Shares acquired upon conversion will be the same as the shareholder’s
tax basis in the converted Investor B or Investor B1 Shares, and the holding period of the acquired Investor A or Investor A1 Shares
will include the holding period for the converted Investor B or Investor B1 Shares.
If a shareholder of a Fund exercises an exchange privilege
within 90 days of acquiring the shares of a Fund, then the loss that the shareholder recognizes on the exchange will be reduced
(or the gain increased) to the extent any sales charge paid on the exchanged shares reduces any sales charge the shareholder would
have owed upon the purchase of the new shares in the absence of the exchange privilege. Instead, such sales charge will be treated
as an amount paid for the new shares.
A loss realized on a sale or exchange of shares of a Fund
will be disallowed if other substantially identical shares are acquired (whether through the automatic reinvestment of dividends
or otherwise) within a 61-day period beginning 30 days before and ending 30 days after the date on which the shares are
sold or exchanged. In such case, the basis of the shares acquired will be adjusted to reflect the disallowed loss.
A Fund is also generally required by law to report to each
shareholder and to the IRS cost basis information for shares of the Fund acquired on or after January 1, 2012, and sold or redeemed
after that date. This information includes the adjusted cost basis of the shares, the gross proceeds from disposition, and whether
the gain or loss is long-term or short-term. The adjusted cost basis of shares will be based on the default cost basis reporting
method selected by the Fund, unless a shareholder, before the sale or redemption, informs the Fund that it has selected a different
IRS-accepted method offered by the Fund. These requirements, however, will not apply for investments through an IRA or other tax-advantaged
account. Shareholders should consult their tax advisors to determine the best cost basis method for their tax situation, and to
obtain more information about how these new cost basis reporting requirements apply to them. For shares of a Fund acquired before
January 1, 2012, these new requirements will not apply, but the Fund will continue to report to the IRS the gross proceeds received
by a shareholder from the sale or redemption of such shares.
Certain Funds may invest in derivative contracts such
as options, futures contracts, forward contracts and swap agreements. The federal income tax treatment of a derivative contract
may not be as favorable as a direct investment in the underlying security and may adversely affect the timing, character and amount
of income the Fund realizes from its investments. As a result, a larger portion of the Fund's distributions may be treated as ordinary
income rather than capital gains. In addition, “section 1256 contracts” held by a Fund at the end of each taxable year
(and, for purposes of the 4% excise tax, certain other dates as prescribed under the Code) are generally “marked-to-market,”
and unrealized gains or losses are treated as though they were realized, which may increase the amount that must be distributed
to meet distribution requirements and avoid the excise tax. In addition, the tax treatment of certain derivative contracts, such
as swap agreements, is unsettled and may be subject to future legislation, regulation or administrative pronouncements issued by
the Internal Revenue Service (the “IRS”). If such future guidance limits the Fund’s ability to use derivatives,
the Fund may have to find other ways of achieving its investment objectives.
A provision added to the Code by the Dodd-Frank Wall Street
Reform and Consumer Protection Act clarifies that certain swap agreements, including exchange-traded swap agreements, are treated
as notional principal contracts rather than as section 1256 contracts. This can affect the type of income earned by such swap agreements.
Although all of the income on a notional principal contract is ordinary income, only some of the income on a section 1256 contract
is short-term capital gain, which is generally taxable at ordinary income rates. The rest is long-term capital gain, which may
be taxable at more favorable rates than ordinary income. Recently proposed regulations interpret what types of swap agreements
are to be treated as notional principal contracts rather than as section 1256 contracts. When finalized, these regulations could
result in the Fund having to treat more of its income on swap agreements and more of the distributions made to shareholders as
ordinary income and less as long-term capital gains.
Certain Funds may invest in zero coupon U.S. Treasury bonds
and other debt securities that are issued at a discount or provide for deferred interest. Even though a Fund receives no actual
interest payments on these securities, it will be deemed to receive income equal, generally, to a portion of the excess of the
face value of the securities over their issue price (“original issue discount”) each year that the securities are held.
Since the original issue discount income earned by a Fund in a taxable year may not be represented by cash income, the Fund may
have to dispose of securities, which it might otherwise have continued to hold, or borrow to generate cash in order to satisfy
its distribution requirements. In addition, a Fund’s investment in foreign currencies or foreign currency denominated or
referenced debt securities, certain asset-backed securities and contingent payment and inflation-indexed debt instruments also
may increase or accelerate the Fund’s recognition of income, including the recognition of taxable income in excess of cash
generated by such investments.
Ordinary income dividends paid to shareholders who are
nonresident aliens or foreign entities generally will be subject to a 30% U.S. withholding tax under existing provisions of the
Code applicable to foreign individuals and entities unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Dividends derived by a RIC from short-term capital gains and qualifying net interest income (including
income from original issue discount and market discount) and paid to shareholders who are nonresident aliens or foreign entities,
with respect to taxable years of the RIC which begin before January 1, 2014, if and to the extent properly reported as “interest-related
dividends” or “short-term capital gain dividends,” generally will not be subject to U.S. withholding tax. Where
possible, the Funds intend to report such dividends as interest-related dividends or short-term capital gain dividends. However,
depending on its circumstances, a Fund may report all, some or none of its potentially eligible dividends as interest-related or
as short-term capital gain dividends, and/or treat such dividends, in whole or in part, as ineligible for this exemption from withholding.
In order to qualify for this exemption from withholding, a foreign shareholder must comply with applicable certification requirements
relating to its foreign status (including, in general, furnishing an IRS Form W-8BEN or substitute Form). In the case of shares
held through an intermediary, the intermediary may withhold even if the Fund reports the payment as an interest-related or short-term
capital gain dividend. Foreign shareholders should contact their intermediaries with respect to the application of these rules
to their accounts. It is not possible to predict what portion, if any, of a Fund’s distributions will be reported as interest-related
dividends or short-term capital gain dividends under these rules.
Recently enacted legislation will impose a 30% withholding tax
on dividends paid after December 31, 2013 and redemption proceeds paid after December 31, 2016, to (i) foreign financial institutions
(as defined in Section 1471(d)(4) of the Code) unless they agree to collect and disclose to the IRS information regarding their
direct and indirect United States account holders and (ii) certain other foreign entities unless they certify certain information
regarding their direct and indirect United States owners. Under some circumstances, a foreign shareholder may be eligible for refunds
or credits of such taxes.
Distributions to certain foreign shareholders by a Fund
at least 50% of whose assets are “U.S. real property interests,” as defined in the Code and Treasury regulations, to
the extent the distributions are attributable to gains from sales or exchanges of U.S. real property interests (including certain
REIT capital gain dividends and gains on the sale or exchange of shares in certain “U.S. real property holding corporations,”
which may include certain REITS, among other entities), generally must be treated by such foreign shareholders as income effectively
connected to a trade or business within the United States, generally subject to tax at the graduated rates applicable to U.S. shareholders.
Such distributions may be subject to U.S. withholding tax and may require the foreign shareholder to file a U.S. federal income
tax return. Unless extended by Congress, this rule will not apply to distributions after December 31, 2013, except to the
extent the distribution is attributable to a distribution to the Fund by a REIT. In addition, sales or redemptions of shares held
by certain foreign shareholders in such a Fund may be subject to U.S. withholding tax and may require the foreign shareholder to
file a U.S. federal income tax return.
Shareholders that are nonresident aliens or foreign entities
are urged to consult their own tax advisers concerning the particular tax consequences to them of an investment in a Fund.
Under certain provisions of the Code, some shareholders
may be subject to a withholding tax on ordinary income dividends, capital gain dividends and redemption payments (“backup
withholding”). Generally, shareholders subject to backup withholding will be non-corporate shareholders for whom no certified
taxpayer identification number is on file with the Fund or who, to the Fund’s knowledge, have furnished an incorrect number.
When establishing an account, an investor must certify under penalty of perjury that such number is correct and that such investor
is not otherwise subject to backup withholding. Backup withholding is not an additional tax. Any amount withheld generally may
be allowed as a refund or a credit against a shareholder’s Federal income tax liability, provided that the required information
is timely forwarded to the IRS.
If a shareholder recognizes a loss with respect to a Fund’s
shares of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder in any
single taxable year (or a greater amount in any combination of taxable years), the shareholder must file a disclosure statement
on Form 8886 with the IRS. Direct shareholders of portfolio securities are in many cases exempted.
That a loss is reportable under these regulations does
not affect the legal determination of whether the taxpayer’s treatment of the loss is proper. Shareholders should consult
their tax advisers to determine the applicability of these regulations in light of their individual circumstances.
Dividends and interest received by a Fund may give rise
to withholding and other taxes imposed by foreign countries. Tax conventions between certain foreign countries and the United States
may reduce or eliminate such taxes. Shareholders of a Fund more than 50% by value of the assets of which at the close of a taxable
year are foreign securities may be able to claim U.S. foreign tax credits with respect to such foreign taxes paid by the Fund,
subject to certain requirements and limitations contained in the Code. For example, certain retirement accounts and certain tax-exempt
organizations cannot claim foreign tax credits on investments in foreign securities held in a Fund. In addition, a foreign tax
credit may be claimed with respect to withholding tax on payments with respect to a security only if the holder of the security
meets certain holding period requirements. Both the shareholder and the Fund must meet these holding period requirements, and if
a Fund fails to do so, it will not be able to “pass through” to shareholders the ability to claim a credit or a deduction
for the related foreign taxes paid by the Fund. Further, to the extent that a Fund engages in securities lending with respect to
a security paying income subject to foreign taxes, it may not be able to pass through to its shareholders the ability to take a
foreign tax credit for those taxes. If a Fund satisfies the applicable requirements, such Fund will be eligible to file an election
with the IRS pursuant to which shareholders of the Fund will be required to include their proportionate shares of such foreign
taxes in their U.S. income tax returns as gross income, treat such proportionate shares as taxes paid by them, and deduct such
proportionate shares in computing their taxable incomes or, alternatively, use them as foreign tax credits against their U.S. income
taxes. No deductions for foreign taxes, however, may be claimed by noncorporate shareholders who do not itemize deductions. A shareholder
that is a nonresident alien individual or a foreign corporation may be subject to U.S. withholding tax on the income resulting
from a Fund’s election described in this paragraph but may not be able to claim a credit or deduction against such U.S. tax
for the foreign taxes treated as having been paid by such shareholder. A Fund will report annually to its shareholders the amount
per share of such foreign taxes and other information needed to claim the foreign tax credit.
Certain transactions entered into by the Funds are subject
to special tax rules of the Code that may, among other things, (a) affect the character of gains and losses realized, (b) disallow,
suspend or otherwise limit the allowance of certain losses or deductions, and (c) accelerate the recognition of income without
a corresponding receipt of cash (with which to make the necessary distributions to satisfy distribution requirements applicable
to RICs). Operation of these rules could, therefore, affect the character, amount and timing of distributions to shareholders.
Special tax rules also may require a Fund to mark to market certain types of positions in its portfolio (
i.e.
, treat them
as sold on the last day of the taxable year), and may result in the recognition of income without a corresponding receipt of cash.
Funds engaging in transactions affected by these provisions intend to monitor their transactions, make appropriate tax elections
and make appropriate entries in their books and records to lessen the effect of these tax rules and avoid any possible disqualification
from the special treatment afforded RICs under the Code.
A Fund that invests in commodities-linked instruments
may take certain positions through a wholly-owned (or majority-owned), foreign subsidiary (the “Subsidiary”). Based
on the anticipated structure and activities of the Subsidiary, it is expected that the Subsidiary will be a “controlled foreign
corporation” and that all of its net income will be “subpart F income” for U.S. federal income tax purposes.
If that is the case, the Fund will be required to report all of the Subsidiary’s net income as ordinary income regardless
of whether that income would be treated differently (for example, as capital gain) at the Subsidiary level and regardless of whether
that income is distributed to the Fund. (Previously taxed income will not, however, be taxable again when distributed). If a net
loss is realized by the Subsidiary in any taxable year, the loss will generally not be available to offset the Fund’s other
income for that year. It is not expected that the Subsidiary will be subject to an entity level tax.
If a Fund purchases shares of an investment company (or
similar investment entity) organized under foreign law, the Fund will generally be treated as owning shares in a passive foreign
investment company (“PFIC”) for Federal income tax purposes. A Fund may be subject to Federal income tax, and interest
charges (at the rate applicable to tax underpayments) on tax liability treated as having been deferred with respect to certain
distributions from such a company and on gain from the disposition of the shares of such a company (collectively referred to as
“excess distributions”), even if such excess distributions are paid by the Fund as a dividend to its shareholders.
However, a Fund may elect to “mark to market” at the end of each taxable year shares that it holds in PFICs. The election
is made separately for each PFIC held and, once made, would be effective for all subsequent taxable years, unless revoked with
consent from the IRS. Under this election, a Fund would recognize as ordinary income any increase in the value of its shares as
of the close of the taxable year over their adjusted tax basis and as ordinary loss any decrease in such value, but only to the
extent of previously recognized “mark-to-market” gains. By making the mark-to-market election, a Fund could avoid imposition
of the interest charge with respect to excess distributions from PFICs, but in any particular year might be required to recognize
income in excess of the distributions it received from PFICs.
If the Fund were to invest in a PFIC and elect to treat
the PFIC as a “qualified electing fund” under the Code, in lieu of the foregoing requirements, the Fund would be required
to include in income each year a portion of the ordinary earnings and net capital gains of the qualified electing fund, even if
not distributed to the Fund, and such amounts would be subject to the 90% and excise tax distribution requirements described above.
In order to make this election, the Fund would be required to obtain certain annual information from the PFICs in which it invests,
which may be difficult or impossible to obtain.
The foregoing general discussion of Federal income tax
consequences is based on the Code and the regulations issued thereunder as in effect on the date of this Statement of Additional
Information. Future legislative or administrative changes or court decisions may significantly change the conclusions expressed
in this discussion, and any such changes or decisions may have a retroactive effect.
An investment in a Fund may have consequences under state,
local or foreign tax law, about which investors should consult their tax advisers.
Performance
Data
From time to time a Fund may include its average annual
total return and other total return data, and, if applicable, yield and tax-equivalent yield in advertisements or information furnished
to present or prospective shareholders. Total return, yield and tax-equivalent yield each is based on a Fund’s historical
performance and is not intended to indicate future performance. Average annual total return is determined separately for each class
of shares in accordance with a formula specified by the Commission.
Quotations of average annual total return, before tax,
for the specified periods are computed by finding the average annual compounded rates of return (based on net investment income
and any realized and unrealized capital gains or losses on portfolio investments over such periods) that would equate the initial
amount invested to the redeemable value of such investment at the end of each period. Average annual total return before taxes
is computed assuming all dividends are reinvested and taking into account all applicable recurring and nonrecurring expenses, including
the maximum sales charge, in the case of front-end load shares, and the CDSC that would be applicable to a complete redemption
of the investment at the end of the specified period in the case of Investor B and Investor C Shares, but does not take into account
taxes payable on dividends or on redemption.
Quotations of average annual total return after taxes
on distributions for the specified periods are computed by finding the average annual compounded rates of return that would equate
the initial amount invested to the ending value of such investment at the end of each period assuming payment of taxes on distributions
received during such period. Average annual total return after taxes on distributions is computed assuming all distributions, less
the taxes due on such distributions, are reinvested and taking into account all applicable recurring and nonrecurring expenses,
including the maximum sales charge, in the case of Investor A Shares and the CDSC that would be applicable to a complete redemption
of the investment at the end of the specified period in the case of Investor B and Investor C Shares. The taxes due on distributions
are calculated by applying to each distribution the highest applicable marginal Federal individual income tax rates in effect on
the reinvestment date for that distribution. The rates used correspond to the tax character (including eligibility for the maximum
20% tax rate applicable to qualified dividend income) of each distribution. The taxable amount and tax character of each distribution
are specified by each Fund on the distribution declaration date, but may be adjusted to reflect subsequent recharacterizations
of distributions. The applicable tax rates may vary over the measurement period. The effects of state and local taxes are not reflected.
Applicable tax credits, such as foreign credits, are taken into account according to Federal law. The ending value is determined
assuming complete redemption at the end of the applicable periods with no tax consequences associated with such redemption.
Quotations of average annual total return after taxes
on distributions and sale of Fund shares for the specified periods are computed by finding the average annual compounded rates
of return that would equate the initial amount invested to the ending value of such investment at the end of each period assuming
payment of taxes on distributions received during such period as well as on complete redemption. Average annual total return after
taxes on distributions and sale of Fund shares is computed assuming all distributions, less the taxes due on such distributions,
are reinvested and taking into account all applicable recurring and nonrecurring expenses, including the maximum sales charge in
the case of Investor A Shares and the CDSC that would be applicable to a complete redemption of the investment at the end of the
specified period in the case of Investor B and Investor C Shares and assuming, for all classes of shares, complete redemption and
payment of taxes due on such redemption. The ending value is determined assuming complete redemption at the end of the applicable
periods, subtracting capital gains taxes resulting from the redemption and adding the presumed tax benefit from capital losses
resulting from redemption. The taxes due on distributions and on the deemed redemption are calculated by applying the highest applicable
marginal Federal individual income tax rates in effect on the reinvestment and/or the redemption date. The rates used correspond
to the tax character (including eligibility for the maximum 20% tax rate applicable to qualified dividend income) of each component
of each dividend and/or the redemption payment. The applicable tax rates may vary
over the measurement period. The effects of state and local
taxes are not reflected. Applicable tax credits, such as foreign tax credits, are taken into account according to federal law.
A Fund also may quote annual, average annual and annualized
total return and aggregate total return performance data, both as a percentage and as a dollar amount based on a hypothetical investment
of $1,000 or some other amount, for various periods other than those noted in Part I, Section VII “Fund Performance”
of each Fund’s SAI. Such data will be computed as described above, except that (1) as required by the periods of the
quotations, actual annual, annualized or aggregate data, rather than average annual data, may be quoted and (2) the maximum
applicable sales charges will not be included with respect to annual or annualized rates of return calculations. Aside from the
impact on the performance data calculations of including or excluding the maximum applicable sales charges, actual annual or annualized
total return data generally will be lower than average annual total return data since the average rates of return reflect compounding
of return; aggregate total return data generally will be higher than average annual total return data since the aggregate rates
of return reflect compounding over a longer period of time.
Yield quotations will be computed based on a 30-day period
by dividing (a) the net income based on the yield of each security earned during the period by (b) the average daily
number of shares outstanding during the period that were entitled to receive dividends multiplied by the maximum offering price
per share on the last day of the period. Tax equivalent yield quotations will be computed by dividing (a) the part of a Fund’s
yield that is tax-exempt by (b) one minus a stated tax rate and adding the result to that part, if any, of the Fund’s
yield that is not tax-exempt.
A Fund’s total return will vary depending on market
conditions, the securities comprising a Fund’s portfolio, a Fund’s operating expenses and the amount of realized and
unrealized net capital gains or losses during the period. The value of an investment in a Fund will fluctuate and an investor’s
shares, when redeemed, may be worth more or less than their original cost.
In order to reflect the reduced sales charges in the case
of front-end load shares or the waiver of the CDSC in the case of CDSC shares applicable to certain investors, as described under
“Purchase of Shares” and “Redemption of Shares,” respectively, the total return data quoted by a Fund in
advertisements directed to such investors may take into account the reduced, and not the maximum, sales charge or may take into
account the CDSC waiver and, therefore, may reflect greater total return since, due to the reduced sales charges or the waiver
of sales charges, a lower amount of expenses is deducted.
On occasion, a Fund may compare its performance to, among
other things, the Fund’s benchmark index indicated in the Prospectus, the Value Line Composite Index, the Dow Jones Industrial
Average, or to other published indices, or to performance data published by Lipper Inc., Morningstar, Inc. (“Morningstar”),
Money Magazine, U.S. News & World Report, BusinessWeek, Forbes Magazine, Fortune Magazine
or other industry publications.
When comparing its performance to a market index, a Fund may refer to various statistical measures derived from the historical
performance of a Fund and the index, such as standard deviation and beta. As with other performance data, performance comparisons
should not be considered indicative of a Fund’s relative performance for any future period. In addition, from time to time
a Fund may include the Fund’s Morningstar risk-adjusted performance ratings assigned by Morningstar in advertising or supplemental
sales literature. From time to time a Fund may quote in advertisements or other materials other applicable measures of Fund performance
and may also make reference to awards that may be given to the Manager. Certain Funds may also compare their performance to composite
indices developed by Fund management. A Fund may provide information designed to help investors understand how the Fund is seeking
to achieve its investment objectives. This may include information about past, current or possible economic, market, political
or other conditions, descriptive information or general principles of investing such as asset allocation, diversification and risk
tolerance, discussion of a Fund’s portfolio composition, investment philosophy, strategy or investment techniques, comparisons
of the Fund’s performance or portfolio composition to that of other funds or types of investments, indices relevant to the
comparison being made, or to a hypothetical or model portfolio. A Fund may also quote various measures of volatility and benchmark
correlation in advertising and other materials, and may compare these measures to those of other funds or types of investments.
Proxy
Voting Policies and Procedures
The Board of Directors of the Funds has delegated the voting
of proxies for the Funds’ securities to the Manager pursuant to the Manager’s proxy voting guidelines. Under these
guidelines, the Manager will vote proxies related to Fund securities in the best interests of the Fund and its stockholders. From
time to time, a vote may present a conflict between the interests of the Fund’s stockholders, on the one hand, and those
of the Manager, or any affiliated person of the Fund or the Manager, on the other. In such event, provided that the Manager’s
Equity Investment Policy Oversight Committee, or a sub-committee thereof (the “Committee”) is aware of the real or
potential conflict or material non-routine matter and if the Committee does not reasonably believe it is able to follow its general
voting guidelines (or if the particular proxy matter is not addressed in the guidelines) and vote impartially, the Committee may
retain an independent fiduciary to advise the Committee on how to vote or to cast votes on behalf of the Manager’s
clients. If the Manager determines not to retain an independent
fiduciary, or does not desire to follow the advice of such independent fiduciary, the Committee shall determine how to vote the
proxy after consulting with the Manager’s Portfolio Management Group and/or the Manager’s Legal and Compliance Department
and concluding that the vote cast is in its client’s best interest notwithstanding the conflict. A copy of the Funds’
Proxy Voting Policy is attached as Appendix B.
Information on how each Fund voted proxies relating to
portfolio securities during the most recent 12-month period ended June 30 is available without charge, (i) at www.blackrock.com
and (ii) on the Commission’s website at http://www.sec.gov.
General
Information
Description of Shares
Shareholders of a Fund are entitled to one vote for each
full share held and fractional votes for fractional shares held in the election of Directors and generally on other matters submitted
to the vote of shareholders of the Fund. Shareholders of a class that bears distribution and/or shareholder servicing expenses
have exclusive voting rights with respect to matters relating to such distribution and shareholder servicing expenditures (except
that Investor B and Investor B1 shareholders may vote upon any material changes to such expenses charged under the Investor A Distribution
Plan). Voting rights are not cumulative, so that the holders of more than 50% of the shares voting in the election of Directors
can, if they choose to do so, elect all the Directors of a Fund, in which event the holders of the remaining shares would be unable
to elect any person as a Director.
No Fund intends to hold annual meetings of shareholders
in any year in which the Investment Company Act does not require shareholders to act upon any of the following matters: (i) election
of Directors; (ii) approval of a management agreement; (iii) approval of a distribution agreement; and (iv) ratification
of selection of independent accountants. Shares issued are fully paid and non-assessable and have no preemptive rights. Redemption
and conversion rights are discussed elsewhere herein and in each Fund’s Prospectus. Each share of each class of Common Stock
is entitled to participate equally in dividends and distributions declared by a Fund and in the net assets of the Fund upon liquidation
or dissolution after satisfaction of outstanding liabilities.
For Funds organized as Maryland corporations, the by-laws
of the Fund require that a special meeting of shareholders be held upon the written request of a minimum percentage of the outstanding
shares of the Fund entitled to vote at such meeting, if they comply with applicable Maryland law.
Certain of the Funds are organized as “Massachusetts
business trusts.” Under Massachusetts law, shareholders of such a trust may, under certain circumstances, be held personally
liable as partners for its obligations. However, the Declaration of Trust establishing a trust, a copy of which for each applicable
Fund, together with all amendments thereto (the “Declaration of Trust”), is on file in the office of the Secretary
of the Commonwealth of Massachusetts, contains an express disclaimer of shareholder liability for acts or obligations of the trust
and provides for indemnification and reimbursement of expenses out of the trust property for any shareholder held personally liable
for the obligations of the trust. The Declaration of Trust also provides that a trust may maintain appropriate insurance (for example,
fidelity bond and errors and omissions insurance) for the protection of the trust, its shareholders, Trustees, officers, employees
and agents covering possible tort and other liabilities. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which both inadequate insurance existed and the trust itself was unable to
meet its obligations.
Certain Funds are organized as Delaware statutory trusts.
See “Additional Information — Description of
Shares” in Part I of each Fund’s Statement of Additional Information for additional capital stock information for your
Fund.
Additional Information
Under a separate agreement, BlackRock has granted certain
Funds the right to use the “BlackRock” name and has reserved the right to (i) withdraw its consent to the use
of such name by a Fund if the Fund ceases to retain BlackRock Advisors, LLC as investment adviser and (ii) to grant the use
of such name to any other company.
See Part I, Section VIII “Additional Information
— Principal Shareholders” section of each Fund’s Statement of Additional Information for information on the holders
of 5% or more of any class of shares of your Fund.
APPENDIX A
Description of Bond Ratings
A Description of Moody’s Investors Service, Inc.’s
(“Moody’s”) Global Rating Scales
Ratings assigned on Moody’s
global long-term and short-term rating scales are forward-looking opinions of the relative credit risks of financial obligations
issued by non-financial corporates, financial institutions, structured finance vehicles, project finance vehicles, and public sector
entities. Long-term ratings are assigned to issuers or obligations with an original maturity of one year or more and reflect both
on the likelihood of a default on contractually promised payments and the expected financial loss suffered in the event of default.
Short-term ratings are assigned to obligations with an original maturity of thirteen months or less and reflect the likelihood
of a default on contractually promised payments.
Description of Moody’s Long-Term Obligation Ratings
Aaa
|
Obligations rated Aaa are judged to be of the highest quality, subject to the lowest level of credit risk.
|
Aa
|
Obligations rated Aa are judged to be of high quality and are subject to very low credit risk.
|
A
|
Obligations rated A are considered upper-medium grade and are subject to low credit risk.
|
Baa
|
Obligations rated Baa are judged to be medium-grade and subject to moderate credit risk and as such may possess certain speculative characteristics.
|
Ba
|
Obligations rated Ba are judged to be speculative and are subject to substantial credit risk.
|
B
|
Obligations rated B are considered speculative and are subject to high credit risk.
|
Caa
|
Obligations rated Caa are judged to be speculative of poor standing and are subject to very high credit risk.
|
Ca
|
Obligations rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest.
|
C
|
Obligations rated C are the lowest rated class and are typically in default, with little prospect for recovery of principal or interest.
|
Note
: Moody’s appends numerical modifiers
1, 2, and 3 to each generic rating classification from Aaa through Caa. The modifier 1 indicates that the obligation ranks in the
higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking
in the lower end of that generic rating category.
Hybrid Indicator (hyb)
The hybrid indicator (hyb) is appended to all ratings of
hybrid securities issued by banks, insurers, finance companies, and securities firms. By their terms, hybrid securities allow for
the omission of scheduled dividends, interest, or principal payments, which can potentially result in impairment if such an omission
occurs. Hybrid securities may also be subject to contractually allowable write-downs of principal that could result in impairment.
Together with the hybrid indicator, the long-term obligation rating assigned to a hybrid security is an expression of the relative
credit risk associated with that security.
Description of Short-Term Obligation Ratings
Moody’s employs the following designations to indicate
the relative repayment ability of rated issuers:
P-1
|
Issuers (or supporting institutions) rated Prime-1 have a superior ability to repay short-term debt obligations.
|
P-2
|
Issuers (or supporting institutions) rated Prime-2 have a strong ability to repay short-term debt obligations.
|
P-3
|
Issuers (or supporting institutions) rated Prime-3 have an acceptable ability to repay short-term obligations.
|
NP
|
Issuers (or supporting institutions) rated Not Prime do not fall
within any of the Prime rating categories.
|
Description of Moody’s US Municipal Short-Term
Obligation Ratings
The Municipal Investment
Grade (“MIG”) scale is used to rate US municipal bond anticipation notes of up to three years maturity. Municipal notes
rated on the MIG scale may be secured by either pledged revenues or proceeds of a take-out financing received prior to note maturity.
MIG ratings expire at the maturity of the obligation, and the issuer’s long-term rating is only one consideration in assigning
the MIG rating. MIG ratings are divided into three levels—MIG 1 through MIG 3—while speculative grade short-term obligations
are designated SG.
MIG 1
|
This designation denotes superior credit quality. Excellent protection is afforded by established cash flows, highly reliable liquidity support, or demonstrated broad-based access to the market for refinancing.
|
MIG 2
|
This designation denotes strong credit quality. Margins of protection are ample, although not as large as in the preceding group.
|
MIG 3
|
This designation denotes acceptable credit quality. Liquidity and cash-flow protection may be narrow, and market access for refinancing is likely to be less well-established.
|
SG
|
This designation denotes speculative-grade credit quality. Debt
instruments in this category may lack sufficient margins of protection.
|
Description of Moody’s Demand Obligation Ratings
In the case of variable
rate demand obligations (“VRDOs”), a two-component rating is assigned: a long or short-term debt rating and a demand
obligation rating. The first element represents Moody’s evaluation of risk associated with scheduled principal and interest
payments. The second element represents Moody’s evaluation of risk associated with the ability to receive purchase price
upon demand (“demand feature”). The second element uses a rating from a variation of the MIG scale called the Variable
Municipal Investment Grade (“VMIG”) scale.
VMIG 1
|
This designation denotes superior credit quality. Excellent protection is afforded by the superior short-term credit strength of the liquidity provider and structural and legal protections that ensure the timely payment of purchase price upon demand.
|
VMIG 2
|
This designation denotes strong credit quality. Good protection is afforded by the strong short-term credit strength of the liquidity provider and structural and legal protections that ensure the timely payment of purchase price upon demand.
|
VMIG 3
|
This designation denotes acceptable credit quality. Adequate protection is afforded by the satisfactory short-term credit strength of the liquidity provider and structural and legal protections that ensure the timely payment of purchase price upon demand.
|
SG
|
This designation denotes speculative-grade credit quality. Demand
features rated in this category may be supported by a liquidity provider that does not have an investment grade short-term rating
or may lack the structural and/or legal protections necessary to ensure the timely payment of purchase price upon demand.
|
Description of Standard & Poor’s, a Division
of The McGraw-Hill Companies, Inc. (“Standard & Poor’s”), Issue Credit Ratings
A Standard & Poor's issue credit rating
is a forward-looking opinion about the creditworthiness of an obligor with respect to a specific financial obligation, a specific
class of financial obligations, or a specific financial program (including ratings on medium-term note programs and commercial
paper programs). It takes into consideration the creditworthiness of guarantors, insurers, or other forms of credit enhancement
on the obligation and takes into account the currency in which the obligation is denominated. The opinion reflects Standard &
Poor's view of the obligor's capacity and willingness to meet its financial commitments as they come due, and may assess terms,
such as collateral security and subordination, which could affect ultimate payment in the event of default.
Issue credit ratings can be either long-term or short-term.
Short-term ratings are generally assigned to those obligations considered short-term in the relevant market. In the U.S., for example,
that means obligations with an original maturity of no more than 365 days—including commercial paper. Short-term ratings
are also used to indicate the creditworthiness of an obligor with respect to put features on long-term obligations. The result
is a dual rating, in which the short-term rating addresses the put feature, in addition to the usual long-term rating. Medium-term
notes are assigned long-term ratings.
Issue credit ratings are
based, in varying degrees, on Standard & Poor’s analysis of the following considerations:
|
·
|
Likelihood of payment—capacity and willingness of the obligor to meet
its financial commitment on an obligation in accordance with the terms of the obligation;
|
|
·
|
Nature of and provisions of the obligation;
|
|
·
|
Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors’
rights.
|
Long-Term Issue Credit Ratings*
AAA
|
An obligation rated ‘AAA’ has the highest rating assigned by Standard & Poor’s. The obligor’s capacity to meet its financial commitment on the obligation is extremely strong.
|
AA
|
An obligation rated ‘AA’ differs from the highest-rated obligations only to a small degree. The obligor’s capacity to meet its financial commitment on the obligation is very strong.
|
A
|
An obligation rated ‘A’ is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligor’s capacity to meet its financial commitment on the obligation is still strong.
|
BBB
|
An obligation rated ‘BBB’ exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
|
BB
B
CCC
CC
C
|
Obligations rated ‘BB’, ‘B’, ‘CCC’, ‘CC’, and ‘C’ are regarded as having significant speculative characteristics. ‘BB’ indicates the least degree of speculation and ‘C’ the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions.
|
BB
|
An obligation rated ‘BB’ is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions, which could lead to the obligor’s inadequate capacity to meet its financial commitment on the obligation.
|
B
|
An obligation rated ‘B’ is more vulnerable to nonpayment than obligations rated ‘BB’, but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor’s capacity or willingness to meet its financial commitment on the obligation.
|
CCC
|
An obligation rated ‘CCC’ is currently vulnerable to nonpayment, and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.
|
CC
|
An obligation rated ‘CC’ is currently highly vulnerable to nonpayment.
|
C
|
A ‘C’ rating is assigned to obligations that are currently highly vulnerable to nonpayment, obligations that have payment arrearages allowed by the terms of the documents, or obligations of an issuer that is the subject of a bankruptcy petition or similar action which have not experienced a payment default. Among others, the ‘C’ rating may be assigned to subordinated debt, preferred stock or other obligations on which cash payments have been suspended in accordance with the instrument’s terms or when preferred stock is the subject of a distressed exchange offer, whereby some or all of the issue is either repurchased for an amount of cash or replaced by other instruments having a total value that is less than par.
|
D
|
An obligation rated ‘D’ is in payment default. The ‘D’ rating category is used when payments on an obligation are not made on the date due, unless Standard & Poor’s believes that such payments will be made within five business days, irrespective of any grace period. The ‘D’ rating also will be used upon the filing of a bankruptcy petition or the taking of similar action if payments on an
|
|
obligation are jeopardized. An obligation’s rating is lowered to ‘D’ upon completion of a distressed exchange offer, whereby some or all of the issue is either repurchased for an amount of cash or replaced by other instruments having a total value that is less than par.
|
NR
|
This indicates that no rating has been requested, that there is insufficient information on which to base a rating, or that Standard & Poor’s does not rate a particular obligation as a matter of policy.
|
*The ratings from ‘AA’
to ‘CCC’ may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major
rating categories.
Short-Term Issue Credit Ratings
A-1
|
A short-term obligation rated ‘A-1’ is rated in the highest category by Standard & Poor’s. The obligor’s capacity to meet its financial commitment on the obligation is strong. Within this category, certain obligations are designated with a plus sign (+). This indicates that the obligor’s capacity to meet its financial commitment on these obligations is extremely strong.
|
A-2
|
A short-term obligation rated ‘A-2’ is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligor’s capacity to meet its financial commitment on the obligation is satisfactory.
|
A-3
|
A short-term obligation rated ‘A-3’ exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
|
B
|
A short-term obligation rated ‘B’ is regarded as vulnerable and has significant speculative characteristics. The obligor currently has the capacity to meet its financial commitments; however, it faces major ongoing uncertainties which could lead to the obligor’s inadequate capacity to meet its financial commitments.
|
C
|
A short-term obligation rated ‘C’ is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation.
|
D
|
A short-term obligation rated ‘D’ is in payment default. The ‘D’ rating category is used when payments on an obligation are not made on the date due, unless Standard & Poor’s believes that such payments will be made within any stated grace period. However, any stated grace period longer than five business days will be treated as five business days. The ‘D’ rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized.
|
Description of Standard & Poor’s Municipal
Short-Term Note Ratings
A Standard & Poor’s U.S. municipal note rating
reflects Standard & Poor’s opinion about the liquidity factors and market access risks unique to the notes. Notes due
in three years or less will likely receive a note rating. Notes with an original maturity of more than three years will most likely
receive a long-term debt rating. In determining which type of rating, if any, to assign, Standard & Poor’s analysis will
review the following considerations:
|
·
|
Amortization schedule—the larger the final maturity relative to other maturities, the more likely it will be treated
as a note; and
|
|
·
|
Source of payment—the more dependent the issue is on the market for its refinancing, the more likely it will be treated
as a note.
|
Standard & Poor’s municipal short-term note rating
symbols are as follows:
SP-1
|
Strong capacity to pay principal and interest. An issue determined to possess a very strong capacity to pay debt service is given a plus (+) designation.
|
SP-2
|
Satisfactory capacity to pay principal and interest, with some vulnerability to adverse financial and economic changes over the term of the notes.
|
SP-3
|
Speculative capacity to pay principal and interest.
|
Description of Fitch Ratings’ (“Fitch’s”)
Credit Ratings Scales
Fitch’s credit ratings provide an opinion on the
relative ability of an entity to meet financial commitments, such as interest, preferred dividends, repayment of principal, insurance
claims or counterparty obligations. Credit ratings are used by investors as indications of the likelihood of receiving the money
owed to them in accordance with the terms on which they invested.
The terms “investment grade” and “speculative
grade” have established themselves over time as shorthand to describe the categories ‘AAA’ to ‘BBB’
(investment grade) and ‘BB’ to ‘D’ (speculative grade). The terms “investment grade” and “speculative
grade” are market conventions, and do not imply any recommendation or endorsement of a specific security for investment purposes.
“Investment grade” categories indicate relatively low to moderate credit risk, while ratings in the “speculative”
categories either signal a higher level of credit risk or that a default has already occurred.
Fitch’s credit ratings do not directly address any
risk other than credit risk. In particular, ratings do not deal with the risk of a market value loss on a rated security due to
changes in interest rates, liquidity and other market considerations. However, in terms of payment obligation on the rated liability,
market risk may be considered to the extent that it influences the
ability
of an issuer to pay upon a commitment. Ratings
nonetheless do not reflect market risk to the extent that they influence the size or other conditionality of the
obligation
to pay upon a commitment (for example, in the case of index-linked bonds).
In the default components of ratings assigned to individual
obligations or instruments, the agency typically rates to the likelihood of non-payment or default in accordance with the terms
of that instrument’s documentation. In limited cases, Fitch may include additional considerations (
i.e.
, rate to a
higher or lower standard than that implied in the obligation’s documentation). In such cases, the agency will make clear
the assumptions underlying the agency’s opinion in the accompanying rating commentary.
Description of Fitch’s Long-Term Corporate Finance
Obligations Rating Scales
Fitch long-term obligations rating scales are as follows:
AAA
|
Highest credit quality. ‘AAA’ ratings denote the lowest expectation of credit risk. They are assigned only in cases of exceptionally strong capacity for payment
|
|
of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.
|
AA
|
Very high credit quality. ‘AA’ ratings denote expectations of very low credit risk. They indicate very strong capacity for payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.
|
A
|
High credit quality. ‘A’ ratings denote expectations of low credit risk. The capacity for payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to adverse business or economic conditions than is the case for higher ratings.
|
BBB
|
Good credit quality. ‘BBB’ ratings indicate that expectations of credit risk are currently low. The capacity for payment of financial commitments is considered adequate but adverse business or economic conditions are more likely to impair this capacity.
|
BB
|
Speculative. ‘BB’ ratings indicate an elevated vulnerability to credit risk, particularly in the event of adverse changes in business or economic conditions over time; however, business or financial alternatives may be available to allow financial commitments to be met.
|
B
|
Highly speculative. ‘B’ ratings indicate that material credit risk is present.
|
CCC
|
‘CCC’ ratings indicate that substantial credit risk is present.
|
CC
|
‘CC’ ratings indicate very high levels of credit risk.
|
C
|
‘C’ ratings indicate exceptionally high levels of credit risk.
|
NR
|
This designation is used to denote securities not rated by Fitch where Fitch has rated some, but not all, securities comprising an issuance capital structure.
|
WD
|
This designation indicates that the rating has been withdrawn and the issue or issuer is no longer rated by Fitch.
|
Note:
The modifiers “+” or “-”
may be appended to a rating to denote relative status within major rating categories. Such suffixes are not added to the ‘AAA’
obligation rating category, or to corporate finance obligation ratings in the categories below ‘B’.
Description of Fitch’s Short-Term Ratings
A short-term issuer or obligation rating is based in all
cases on the short-term vulnerability to default of the rated entity or security stream and relates to the capacity to meet financial
obligations in accordance with the documentation governing the relevant obligation. Short-Term Ratings are assigned to obligations
whose initial maturity is viewed as “short term” based on market convention. Typically, this means up to 13 months
for corporate, sovereign, and structured obligations and up to 36 months for obligations in U.S. public finance markets.
Fitch short-term ratings are as follows:
F1
|
Highest short-term credit quality. Indicates the strongest intrinsic capacity for timely payment of financial commitments; may have an added “+” to denote any exceptionally strong credit feature.
|
F2
|
Good short-term credit quality.
Good intrinsic capacity for timely payment of financial commitments.
|
F3
|
Fair short-term credit quality.
The intrinsic capacity for timely payment of financial commitments is adequate.
|
B
|
Speculative short-term credit quality. Minimal capacity for timely payment of financial commitments, plus heightened vulnerability to near term adverse changes in financial and economic conditions.
|
C
|
High short-term default risk.
Default is a real possibility.
|
RD
|
Restricted default. Indicates an entity that has defaulted on one or more of its financial commitments, although it continues to meet other financial obligations. Applicable to entity ratings only.
|
D
|
Default. Indicates a broad-based default event for an entity, or the default of a short-term obligation.
|
NR
|
This designation is used to denote securities not rated by Fitch where Fitch has rated some, but not all, securities comprising an issuance capital structure.
|
|
|
WD
|
This designation indicates that the rating has been withdrawn and the issue or issuer is no longer rated by Fitch.
|
APPENDIX B
BlackRock
U.S. Registered Funds
Proxy Voting Policy
Procedures Governing Delegation of Proxy
Voting to Fund Adviser
July 1, 2011
The Trustees/Directors (“Directors”) of the BlackRock-Advised
Funds (the “Funds”) have the responsibility for voting proxies relating to portfolio securities of the Funds, and have
determined that it is in the best interests of the Funds and their shareholders to delegate that responsibility to BlackRock Advisors,
LLC and its affiliated U.S. registered investment advisers (“BlackRock”), the investment adviser to the Funds, as part
of BlackRock’s authority to manage, acquire and dispose of account assets. The Directors hereby direct BlackRock to vote
such proxies in accordance with this Policy, and any proxy voting guidelines that the Adviser determines are appropriate and in
the best interests of the Funds’ shareholders and which are consistent with the principles outlined in this Policy. The Directors
have authorized BlackRock to utilize an unaffiliated third-party as its agent to vote portfolio proxies in accordance with this
Policy and to maintain records of such portfolio proxy voting.
Rule 206(4)-6 under the Investment Advisers Act of 1940 requires,
among other things, that an investment adviser that exercises voting authority over clients’ proxy voting adopt policies
and procedures reasonably designed to ensure that the adviser votes proxies in the best interests of clients, discloses to its
clients information about those policies and procedures and also discloses to clients how they may obtain information on how the
adviser has voted their proxies.
BlackRock has adopted separate but substantially similar guidelines
and procedures that are consistent with the principles of this Policy. BlackRock’s Corporate Governance Committee (the “Committee”),
addresses proxy voting issues on behalf of BlackRock and its clients, including the Funds. The Committee is comprised of senior
members of BlackRock’s Portfolio Management and Administration Groups and is advised by BlackRock’s Legal and Compliance
Department.
BlackRock votes (or refrains from voting) proxies for each Fund
in a manner that BlackRock, in the exercise of its independent business judgment, concludes are in the best economic interests
of such Fund. In some cases, BlackRock may determine that it is in the best economic interests of a Fund to refrain from exercising
the Fund’s proxy voting rights (such as, for example, proxies on certain non-U.S. securities that might impose costly or
time-consuming in-person voting requirements). With regard to the relationship between securities lending and proxy voting, BlackRock’s
approach is also driven by our clients’ economic interests. The evaluation of the economic desirability of recalling loans
involves balancing the revenue producing value of loans against the likely economic value of casting votes. Based on our evaluation
of this relationship, BlackRock believes that the likely economic value of casting a vote generally is less than the securities
lending income, either because the votes will not have significant economic consequences or because the outcome of the vote would
not be affected by BlackRock recalling loaned securities in order to ensure they are voted. Periodically, BlackRock analyzes the
process and benefits of voting proxies for securities on loan, and will consider whether any modification of its proxy voting policies
or procedures are necessary in light of any regulatory changes.
BlackRock will normally vote on specific proxy issues in accordance
with BlackRock’s proxy voting guidelines. BlackRock’s proxy voting guidelines provide detailed guidance as to how to
vote proxies on certain important or commonly raised issues. BlackRock may, in the exercise of its business judgment, conclude
that the proxy voting guidelines do not cover the specific matter upon which a proxy vote is requested, or that an exception to
the proxy voting guidelines would be in the best economic interests of a Fund. BlackRock votes (or refrains from voting) proxies
without regard to the relationship of the issuer of the proxy (or any shareholder of such issuer) to the Fund, the Fund’s
affiliates (if any), BlackRock or BlackRock’s affiliates. When voting proxies, BlackRock attempts to encourage companies
to follow practices that enhance shareholder value and increase transparency and allow the market to place a proper value on their
assets.
|
II.
|
Proxy Voting Policies
|
A.
Boards of Directors
The Funds generally support the board’s nominees in the election
of directors and generally supports proposals that strengthen the independence of boards of directors. As a general matter, the
Funds believe that a company’s board of directors (rather than shareholders) is most likely to have access to important,
nonpublic information regarding a company’s business and prospects, and is therefore best-positioned to set corporate policy
and oversee management. The Funds therefore believe that the foundation of good corporate governance is the election of responsible,
qualified, independent corporate directors who are likely to diligently represent the interests of shareholders and oversee management
of the corporation in a manner that will seek to maximize shareholder value over time. In individual cases, consideration may be
given to a director nominee’s history of representing shareholder interests as a director of the company issuing the proxy
or other companies, or other factors to the extent deemed relevant by the Committee.
B.
Auditors
These proposals concern those issues submitted to shareholders related
to the selection of auditors. As a general matter, the Funds believe that corporate auditors have a responsibility to represent
the interests of shareholders and provide an independent view on the propriety of financial reporting decisions of corporate management.
While the Funds anticipate that BlackRock will generally defer to a corporation’s choice of auditor, in individual cases,
consideration may be given to an auditors’ history of representing shareholder interests as auditor of the company issuing
the proxy or other companies, to the extent deemed relevant.
C.
Compensation and Benefits
These proposals concern those issues submitted to shareholders related
to management compensation and employee benefits. As a general matter, the Funds favor disclosure of a company’s compensation
and benefit policies and oppose excessive compensation, but believe that compensation matters are normally best determined by a
corporation’s board of directors, rather than shareholders. Proposals to “micro-manage” a company’s compensation
practices or to set arbitrary restrictions on compensation or benefits should therefore generally not be supported.
D.
Capital Structure
These proposals relate to various requests, principally from management,
for approval of amendments that would alter the capital structure of a company, such as an increase in authorized shares. As a
general matter, the Funds expect that BlackRock will support requests that it believes enhance the rights of common shareholders
and oppose requests that appear to be unreasonably dilutive.
E.
Corporate Charter and By-Laws
These proposals relate to various requests for approval of amendments
to a corporation’s charter or by-laws. As a general matter, the Funds generally vote against anti-takeover proposals and
proposals that would create additional barriers or costs to corporate transactions that are likely to deliver a premium to shareholders.
F.
Environmental and Social Issues
These are shareholder proposals addressing either corporate social
and environmental policies or requesting specific reporting on these issues. The Funds generally do not support proposals on social
issues that lack a demonstrable economic benefit to the issuer and the Fund investing in such issuer. BlackRock seeks to make proxy
voting decisions in the manner most likely to protect and promote the long-term economic value of the securities held in client
accounts. We intend to support economically advantageous corporate practices while leaving direct oversight of company management
and strategy to boards of directors. We seek to avoid micromanagement of companies, as we believe that a company’s board
of directors is best
positioned to represent shareholders and oversee management on shareholders
behalf. Issues of corporate social and environmental responsibility are evaluated on a case-by-case basis within this framework.
|
III.
|
Conflicts Management
|
BlackRock maintains policies and procedures that are designed to
prevent any relationship between the issuer of the proxy (or any shareholder of the issuer) and a Fund, a Fund’s affiliates
(if any), BlackRock or BlackRock’s affiliates, from having undue influence on BlackRock’s proxy voting activity. In
certain instances, BlackRock may determine to engage an independent fiduciary to vote proxies as a further safeguard against potential
conflicts of interest or as otherwise required by applicable law. The independent fiduciary may either vote such proxies or provide
BlackRock with instructions as to how to vote such proxies. In the latter case, BlackRock votes the proxy in accordance with the
independent fiduciary’s determination.
BlackRock will report to the Directors on proxy
votes it has made on behalf of the Funds at least annually.
PART C. OTHER INFORMATION
Item 28.
Exhibits.
|
|
|
Exhibit
Number
|
Description
|
1
|
|
Articles of Incorporation
|
|
(a)
|
Declaration of Trust of the Registrant dated December 22, 1988 is incorporated herein by reference to Exhibit (1)(a)
of Post-Effective Amendment No. 33 to Registrants Registration Statement on Form N-1A (File No. 33-26305) (the
Registration Statement) filed on January 27, 1998.
|
|
(b)
|
Amendment No. 1 to Declaration of Trust dated May 4, 1989 is incorporated herein by reference to Exhibit (1)(b)
of Post-Effective Amendment No. 33 to Registrants Registration Statement filed on January 27, 1998.
|
|
(c)
|
Amendment No. 2 to the Declaration of Trust dated December 23, 1993 is incorporated herein by reference to Exhibit
(1)(c) of Post-Effective Amendment No. 33 to Registrants Registration Statement filed on January 27, 1998.
|
|
(d)
|
Amendment No. 3 to the Declaration of Trust dated January 5, 1996 is incorporated herein by reference to Exhibit
1(d) of Post-Effective Amendment No. 23 to Registrants Registration Statement filed on October 18, 1996.
|
|
(e)
|
Amendment No. 4 to the Declaration of Trust dated December 23, 1997 is incorporated herein by reference to Exhibit
(1)(e) of Post-Effective Amendment No. 33 to Registrants Registration Statement filed on January 27, 1998.
|
|
(f)
|
Certification of Classification of Shares dated September 15, 2008 is incorporated by reference to Exhibit 1(g)
of Post-Effective Amendment No. 116 to Registrants Registration Statement filed on November 24, 2009.
|
|
(g)
|
Certification of Classification of Shares dated March 10, 2009 is incorporated herein by reference to Exhibit 1(f)
of Post-Effective Amendment No. 116 to Registrants Registration Statement filed on November 24, 2009.
|
|
(h)
|
Certification of Classification of Shares dated May 21, 2010 is incorporated herein by reference to Exhibit 1(h)
of Post-Effective Amendment No. 134 to Registrants Registration Statement filed on May 25, 2010.
|
|
(i)
|
Certification of Classification of Shares dated November 16, 2010 is incorporated herein by reference to an Exhibit
of Post-Effective Amendment No. 163 to Registrants Registration Statement filed on April 29, 2011.
|
|
(j)
|
Certification of Classification of Shares dated September 23, 2011 is incorporated herein by reference to an Exhibit
of Post-Effective Amendment No. 186 to Registrants Registration Statement filed on September 29, 2011.
|
|
(k)
|
Certification of Classification of Shares dated May 15, 2012 is incorporated herein by reference to an Exhibit of Post-Effective
Amendment No. 219 to Registrant’s Registration Statement filed on May 15, 2012.
|
|
(l)
|
Certification of Classification of Shares dated July 31, 2012 is incorporated herein by reference to an Exhibit of Post-Effective
Amendment No. 259 to Registrant’s Registration Statement filed on December 21, 2012.
|
|
(m)
|
Certification of Classification of Shares dated September 21, 2012 is incorporated herein by reference to an Exhibit of Post-Effective
Amendment No. 259 to Registrant’s Registration Statement filed on December 21, 2012.
|
|
(n)
|
Certification of Classification of Shares dated March 11, 2013 is filed herewith.
|
2
|
|
By-laws
|
|
(a)
|
Amended and Restated Code of Regulations of the Registrant, effective December 2008 is incorporated by reference
to Exhibit 2 of Post-Effective Amendment No. 116 to Registrants Registration Statement filed on November 24, 2009.
|
3
|
|
Instruments Defining Rights of Security Holders
|
|
(a)
|
Sections V, VIII and IX of Registrants Declaration of Trust dated December 22, 1988 are incorporated herein
by reference to Exhibit (1)(a) of Post-Effective Amendment No. 33 to Registrants Registration Statement filed on
January 27, 1998; Article II of Registrants Code of Regulations is incorporated herein by reference to Exhibit
2(a) of Post-Effective Amendment No. 116 to Registrant’s Registration Statement filed on November 24, 2009.
|
Exhibit
Number
|
Description
|
4
|
|
Investment Advisory Contracts.
|
|
(a)
|
Form of Investment Advisory Agreement between Registrant and BlackRock Advisors, LLC relating to existing Portfolios
except Index Equity Portfolio is incorporated herein by reference to Exhibit 4(a) of Post-Effective Amendment No. 100
to Registrants Registration Statement filed on October 13, 2006.
|
|
(b)
|
Form of Addendum No. 2 to Investment Advisory Agreement between Registrant and BlackRock Advisors, LLC is incorporated
herein by reference to Exhibit 4(c) of Post-Effective Amendment No. 110 to Registrants Registration Statement filed
on September 24, 2008.
|
|
(c)
|
Form of Addendum No. 3 to Investment Advisory Agreement between Registrant and BlackRock Advisors, LLC is incorporated
herein by reference to Exhibit 4(c) of Post-Effective Amendment No. 134 to Registrants Registration Statement filed
on May 25, 2010.
|
|
(d)
|
Form of Addendum No. 4 to Investment Advisory Agreement between Registrant and BlackRock Advisors, LLC is incorporated
herein by reference to Exhibit 4(d) of Post-Effective Amendment No. 163 to Registrants Registration Statement filed
on April 29, 2011.
|
|
(e)
|
Form of Addendum No. 6 to Investment Advisory Agreement between Registrant and BlackRock Advisors, LLC is incorporated
herein by reference to Exhibit 4(e) of Post-Effective Amendment No. 186 to Registrants Registration Statement filed on
September 29, 2011.
|
|
(f)
|
Form of Addendum No. 7 to Investment Advisory Agreement between Registrant and BlackRock Advisors, LLC is incorporated herein by reference to an Exhibit of Post-Effective Amendment No. 259 to Registrant’s
Registration Statement filed on December 21, 2012.
|
|
(g)
|
Form of Addendum No. 8 to Investment Advisory Agreement between Registrant and BlackRock Advisors, LLC is filed herewith.
|
|
(h)
|
Form of Investment Advisory Agreement between Registrant, on behalf of BlackRock India Fund, BlackRock India Fund
(Mauritius) Limited and BlackRock Advisors, LLC is incorporated herein by reference to Exhibit 4(e) of Post-Effective
Amendment No. 164 to Registrants Registration Statement filed on April 29, 2011.
|
|
(i)
|
Form of Sub-Advisory Agreement between BlackRock Advisors, LLC and BlackRock Institutional Management Corporation
with respect to the Money Market Portfolios is incorporated herein by reference to Exhibit 4(d) of Post-Effective Amendment
No. 100 to Registrants Registration Statement filed on October 13, 2006.
|
|
(j)
|
Form of Sub-Advisory Agreement between BlackRock Advisors, LLC and BlackRock International, Ltd. with respect to
the International Opportunities Portfolio is incorporated herein by reference to Exhibit 4(e) of Post-Effective Amendment
No. 100 to Registrants Registration Statement filed on October 13, 2006.
|
|
(k)
|
Form of Sub-Advisory Agreement between BlackRock Advisors, LLC and BlackRock Financial Management, Inc. with respect
to the Asset Allocation Portfolio, Global Opportunities Portfolio and BlackRock Global Long/Short Credit Fund is incorporated
herein by reference to Exhibit 4(f) of Post-Effective Amendment No. 100 to Registrants Registration Statement filed on October 13, 2006.
|
Exhibit
Number
|
Description
|
|
|
|
|
(l)
|
Form of Sub-Advisory Agreement between BlackRock Advisors, LLC and BlackRock Financial Management, Inc. with respect
to International Diversification Fund is incorporated herein by reference to Exhibit 4(d) of Post-Effective Amendment No.
110 to Registrants Registration Statement filed on September 24, 2008.
|
|
(m)
|
Form of Sub-Advisory Agreement between BlackRock Advisors, LLC and BlackRock International Limited with respect to
BlackRock World Gold Fund, BlackRock Global Long/Short Credit Fund and BlackRock Commodity Strategies Fund is incorporated
herein by reference to Exhibit 4(h) of Post-Effective Amendment No. 144 to Registrants Registration Statement filed
on January 28, 2011.
|
|
(n)
|
Form of Sub-Advisory Agreement between BlackRock Advisors, LLC and BlackRock Fund Advisors with respect to BlackRock
Emerging Markets Long/Short Equity Fund is incorporated herein by reference to Exhibit 4(l) of Post-Effective Amendment No.
188 to Registrant’s Registration Statement filed on October 6, 2011.
|
|
(o)
|
Form of Sub-Advisory Agreement between BlackRock Advisors, LLC and BlackRock Fund Advisors with respect to BlackRock
Global Long/Short Equity Fund is incorporated herein by reference to Exhibit 4(n) of Post-Effective Amendment No. 257 to
Registrant’s Registration Statement filed on December 19, 2012.
|
|
(p)
|
Form of Sub-Advisory Agreement between BlackRock Advisors, LLC and BlackRock Financial Management, Inc. with respect
to BlackRock Real Estate Securities Fund, BlackRock Multi-Asset Real Return Fund and BlackRock Strategic Risk Allocation
Fund is incorporated herein by reference to an Exhibit of Post-Effective Amendment No. 259 to Registrant’s
Registration Statement filed on December 21, 2012.
|
|
(q)
|
Form of Sub-Advisory Agreement between BlackRock Advisors, LLC and BlackRock International Limited with respect to
BlackRock Strategic Risk Allocation Fund is incorporated herein by reference to an Exhibit of Post-Effective Amendment No. 259 to Registrant’s
Registration Statement filed on December 21, 2012.
|
|
(r)
|
Form of Sub-Advisory Agreement between BlackRock Advisors, LLC and BlackRock (Hong Kong) Limited with respect
to BlackRock China Fund, BlackRock India Fund and BlackRock Managed Volatility Portfolio is incorporated herein by reference to
an Exhibit of Post-Effective Amendment No. 269 to Registrant’s Registration Statement filed on January 28, 2013.
|
|
(s)
|
Form of Sub-Advisory Agreement between BlackRock Advisors, LLC and BlackRock (Singapore) Limited with respect
to BlackRock Managed Volatility Portfolio is incorporated herein by reference to an Exhibit of Post-Effective Amendment No. 269
to Registrant’s Registration Statement filed on January 28, 2013.
|
|
(t)
|
Form of Sub-Advisory Agreement between BlackRock Advisors, LLC and BlackRock Fund Advisors with respect to BlackRock
Disciplined Small Cap Core Fund is filed herewith.
|
5
|
|
Underwriting Contracts
|
|
(a)
|
Form of Distribution Agreement between Registrant and BlackRock Investments, LLC (formerly BlackRock Investments,
Inc.) is incorporated herein by reference to Exhibit 5(a) to Post-Effective Amendment No. 111 to Registrants Registration
Statement filed on January 28, 2009.
|
|
(b)
|
Exhibit A to Distribution Agreement between Registrant and BlackRock Investments, LLC is incorporated herein by reference to an Exhibit of Post-Effective Amendment No. 259 to Registrant’s
Registration Statement filed on December 21, 2012.
|
|
(c)
|
Form of Cooperation Agreement among the Registrant, on behalf of All-Cap Energy & Resources Portfolio, BlackRock
Advisors, LLC and UBS AG is incorporated by reference to Exhibit 5(b) of Post-Effective Amendment No. 116 to Registrants
Registration Statement filed on November 24, 2009.
|
6
|
|
Bonus or Profit Sharing Contracts
|
|
(a)
|
None
|
7
|
|
Custodian Agreements
|
|
(a)
|
Amended and Restated Custodian Agreement dated February 10, 2004 between BlackRock Funds and PFPC Trust Company is
incorporated herein by reference to Exhibit 7(a) of Post-Effective Amendment No. 86 to Registrants Registration Statement
filed on November 3, 2004.
|
|
(b)
|
Reserved
|
|
(c)
|
Reserved
|
|
(d)
|
Reserved
|
|
(e)
|
Sub-Custodian Agreement dated April 27, 1992 among the Registrant, PNC Bank, National Association and The Chase Manhattan
Bank is incorporated herein by reference to Exhibit(8)(e) of Post-Effective Amendment No. 34 to Registrants Registration
Statement filed on February 13, 1998.
|
|
(f)
|
Global Custody Agreement between Barclays Bank PLC and PNC Bank, National Association dated October 28, 1992 is incorporated
herein by reference to Exhibit(8)(f) of Post-Effective Amendment No. 33 to Registrants Registration Statement filed
on January 27, 1998.
|
|
(g)
|
Form of Custodian Agreement between the Registrant and State Street Bank and Trust Company is incorporated herein
by reference to Exhibit 7(a) of Post-Effective Amendment No. 110 to Registrants Registration Statement filed on September
24, 2008.
|
Exhibit
Number
|
Description
|
|
(h)
|
Custodian Agreement between State Street Bank and Trust Company and PNC Bank, National Association dated June 13,
1983 is incorporated herein by reference to Exhibit(8)(g) of Post-Effective Amendment No. 34 to Registrants Registration
Statement filed on February 13, 1998.
|
|
(i)
|
Amendment No. 1 to Custodian Agreement between State Street Bank and Trust Company and PNC Bank, National Association
dated November 21, 1989 is incorporated herein by reference to Exhibit(8)(h) of Post-Effective Amendment No. 34 to Registrants
Registration Statement filed on February 13, 1998
|
|
(j)
|
Subcustodial Services Agreement dated October 1, 1996 between PNC Bank, National Association and Citibank, N.A. is
incorporated herein by reference to Exhibit 8(j) of Post-Effective Amendment No. 27 to Registrants Registration Statement
filed on January 28, 1997.
|
8
|
|
Other Material Contracts
|
|
(a)
|
Amended and Restated Administration Agreement dated February 10, 2004 among Registrant, BlackRock Advisors, LLC and
PNC Global Investment Servicing (U.S.) Inc. (formerly PFPC Inc.) is incorporated herein by reference to Exhibit 8(a) of
Post-Effective Amendment No. 86 to Registrants Registration Statement filed on November 3, 2004.
|
|
(b)
|
Form of Administration Agreement dated June 1, 2007 among Registrant, BlackRock Advisors, LLC and State Street Bank
and Trust Company is incorporated herein by reference to Exhibit 8(j) of Post-Effective Amendment No. 112 to Registrants
Registration Statement filed on April 30, 2009.
|
|
(c)
|
Amended and Restated Transfer Agency Agreement dated February 10, 2004 between Registrant and PNC Global Investment
Servicing (U.S.) Inc. (formerly PFPC Inc.) is incorporated herein by reference to Exhibit 8(c) of Post-Effective Amendment
No. 86 to Registrants Registration Statement filed on November 3, 2004.
|
|
(d)
|
Exhibit A to Amended and Restated Transfer Agency Agreement dated February 10, 2004 between Registrant and PNC Global
Investment Servicing (U.S.) Inc. (formerly PFPC Inc.) is incorporated herein by reference to Exhibit 8(h) of Post-Effective
Amendment No. 86 to Registrants Registration Statement filed on November 3, 2004.
|
|
(e)
|
Share Acquisition Agreement dated April 29, 1998 by and among Registrant and PNC Bank, National Association and PNC
Bank, Delaware, respectively, each as trustee for certain of the common trust funds listed therein is incorporated herein
by reference to Exhibit 9(l) of Post-Effective Amendment No. 36 to Registrants Registration Statement filed on April
29, 1998.
|
|
(f)
|
Form of Third Amended and Restated Expense Limitation Agreement by and between Registrant and BlackRock Advisors,
LLC is incorporated herein by reference to Exhibit 8(g) of Amendment No. 46 to Registrant’s Registration Statement filed on July 27, 2012.
|
|
(g)
|
Form of Shareholders Administrative Services Agreement between Registrant and BlackRock Advisors, LLC is incorporated
herein by reference to Exhibit 8(p) of Post-Effective Amendment No. 91 to Registrants Registration Statement filed
on January 31, 2005.
|
|
(h)
|
Form of Seventh Amended and Restated Credit Agreement among the Registrant, a syndicate of banks and certain other
parties is incorporated herein by reference to Exhibit 8(b)(7) to Post-Effective Amendment No. 18 to the Registration Statement
on Form N-1A of BlackRock Fundamental Growth Fund, Inc. (File No. 33-47875), filed on December 21, 2006.
|
|
(i)
|
Form of Termination, Replacement and Restatement Agreement among the Registrant, a syndicate of banks and certain
other parties is incorporated herein by reference to Exhibit 8(b) to Post-Effective Amendment No. 14 to the Registration
Statement on Form N-1A of BlackRock Global Growth Fund, Inc. (File No. 333-32899), filed on December 17, 2007.
|
Exhibit
Number
|
Description
|
|
(j)
|
Form of Termination, Replacement and Restatement Agreement between the Registrant and a syndicate of banks dated as
of November 19, 2008, relating to the Credit Agreement dated as of November 21, 2007 is incorporated herein by reference
to Exhibit 8(c) to Post-Effective Amendment No. 20 to the Registrant Statement on Form N-1A of BlackRock Fundamental Growth
Fund, Inc. (File No. 33-47875), filed on December 22, 2008.
|
|
(k)
|
Form of Termination, Replacement and Restatement Agreement between the Registrant and a syndicate of banks dated as
of November 18, 2009, relating to the Credit Agreement dated as of November 19, 2008, is incorporated herein by reference
to Exhibit 8(c) to Post-Effective Amendment No. 22 to the Registration Statement on Form N-1A of BlackRock Fundamental Growth
Fund, Inc. (File No. 33-47875) filed on December 23, 2009.
|
|
(l)
|
Form of Termination, Replacement and Restatement Agreement between the Registrant and a syndicate of banks dated as
of November 17, 2010, relating to the Credit Agreement dated as of November 18, 2009, is incorporated herein by reference
to Exhibit 8(k) to Post-Effective Amendment No. 36 to the Registration Statement on Form N-1A of BlackRock Funds II (File
No. 333-142592), filed on November 22, 2010.
|
|
(m)
|
Form of Termination, Replacement and Restatement Agreement between the Registrant and a syndicate of banks as of November
16, 2011, relating to the Credit Agreement dated as of November 17, 2010 is incorporated by reference to Exhibit 8(e)(6) to
Post-Effective Amendment No. 25 to the Registration Statement on Form N-1A of BlackRock Large Cap Series Funds, Inc. (File
No. 333-89389), filed on January 27, 2012.
|
|
(n)
|
Form of Termination, Replacement and Restatement Agreement between the Registrant, on behalf of Core Plus Fund, and a syndicate of banks dated as of November 14, 2012, relating to the Credit Agreement dated as of November 16, 2011 is incorporated herein by reference to Exhibit 8(e)(7) to Post-Effective Amendment No. 27 to the Registration Statement on Form N-1A of BlackRock Large Cap Series Funds, Inc. (File No. 333-89389), filed on January 28, 2013.
|
|
(o)
|
Form of Amended and Restated Securities Lending Agreement between the Registrant and BlackRock Investment Management,
LLC is incorporated by reference to Exhibit 8(a) to Post-Effective Amendment No. 54 to the Registration Statement on Form
N-1A of BlackRock Variable Series Funds, Inc. (File No. 002-74452), filed on April 15, 2011.
|
9
|
|
Legal Opinion
|
|
(a)
|
Opinion of Bingham McCutchen LLP is filed herewith.
|
10
|
|
Other Opinions
|
|
(a)
|
None
|
11
|
|
Omitted Financial Statements
|
|
(a)
|
None
|
12
|
|
Initial Capital Agreements
|
|
(a)
|
Form of Purchase Agreement between Registrant and Registrants distributor relating to Classes A-1, B-1, C-1, D-2,
E-2, F-2, G-2, H-2, I-1, I-2, J-1, J-2, K-2, L-2, M-2, N-2, O-2, P-2, D-1, E-1, F-1, G-1, H-1, K-1, L-1, M-1, N-1, O-1, P-1, A-2,
B-2, C-2, I-2, J-2, A-3, B-3, C-3, D-3, E-3, F-3, G-3, H-3, I-3, J-3, K-3, L-3, M-3, N-3, O-3, P-3, Q-1, Q-2, Q-3, R-1, R-2, R-3,
S-1, S-2, S-3, T-1, T-2, T-3, U-1, U-2, U-3, A-4, D-4, E-4, F-4, G-4, H-4, K-4, L-4, M-4, N-4, O-4, P-4, R-4, S-4, T-4, U-4, W-4,
X-4, Y-4, V-1, V-2, V-3, W-1, W-2, W-3, X-1, X-2, X-3, Y-1, Y-2, Y-3, Z-1, Z-2, Z-3, AA-1, AA-2, AA-3, AA-4, AA-5, BB-1, BB-2,
BB-3, BB-4, BB-5, CC-3, A-5, B-4, B-5, C-4, C-5, I-4, I-5, J-4, J-5, Q-4, Q-5, V-4, V-5, Z-4, Z-5, X-1, X-3, D-5, E-5, F-5, G-5,
H-5, K-5, L-5, M-5, N-5, O-5, P-5, R-5, S-5, T-5, U-5, W-5, X-5, Y-5, DD-1, DD-2, DD-3, DD-4, DD-5, EE-1, EE-2, EE-3, EE-4, EE-5,
R-6, BB-6, FF-3, GG-3, HH-1, HH-2, HH-3, HH-4, HH-5, II-1, II-2, II-3, II-4, II-5, S-6, JJ-1, JJ-2, JJ-3, JJ-4, JJ-5, KK-1, KK-2,
KK-3, KK-4, KK-5, LL-1, LL-2, LL-3, LL-4 and LL-5 is incorporated herein by reference to Exhibit (13)(a) of Post-Effective Amendment
No. 34 to Registrants Registration Statement filed on February 13, 1998
|
|
(b)
|
Form of Purchase Agreement between Registrant and Registrants distributor relating to Classes MM-1, MM-2, MM-3,
MM-4, MM-5 and MM-6 is incorporated herein by reference to Exhibit 13(b) of Post-Effective Amendment No. 37 to Registrants
Registration Statement filed on August 7, 1998.
|
|
|
|
Exhibit
Number
|
Description
|
|
(c)
|
Form of Purchase Agreement between Registrant and Registrants distributor relating to Class NN-3 is incorporated herein by reference to Exhibit 12(c) of Post-Effective Amendment No. 42 to Registrants Registration Statement filed on June 11, 1999.
|
|
(d)
|
Form of Purchase Agreement between Registrant and Registrants distributor relating to Classes A-7 and C-7 is incorporated herein by reference to Exhibit 12(d) of Post-Effective Amendment No. 43 to Registrants Registration Statement filed on August 6, 1999.
|
|
(e)
|
Form of Purchase Agreement between Registrant and Registrants distributor relating to Classes OO-1, OO-2, OO-3, OO-4 and OO-5 is incorporated herein by reference to Exhibit 12(e) of Post-Effective Amendment No. 54 to Registrants Registration Statement filed on May 10, 2000.
|
|
(f)
|
Form of Purchase Agreement between Registrant and Registrants distributor relating to Classes PP-1, PP-2, PP-3, PP-4 and PP-5, QQ-1, QQ-2, QQ-3, QQ-4, QQ-5 and U-6 is incorporated herein by reference to Exhibit 12(f) of Post-Effective Amendment No. 55 to Registrants Registration Statement filed on June 6, 2000.
|
|
(g)
|
Form of Purchase Agreement between Registrant and Registrants distributor relating to Class RR-3 is incorporated herein by reference to Exhibit 12(g) of Post-Effective Amendment No. 56 to Registrants Registration Statement filed on August 16, 2000.
|
|
(h)
|
Form of Purchase Agreement between Registrant and BlackRock Distributors, Inc. relating to shares of Classes SS-1, SS-2, SS-3, SS-4 and SS-5 is incorporated herein by reference to Exhibit 12(h) of Post-Effective Amendment No. 58 to Registrants Registration Statement filed on November 14, 2000.
|
|
(i)
|
Form of Purchase Agreement between Registrant and BlackRock Distributors, Inc. relating to shares of Classes TT-1, TT-2, TT-3, TT-4, TT-5 and TT-6 is incorporated herein by reference to Exhibit 12(i) of Post-Effective Amendment No. 58 to Registrants Registration Statement filed on November 14, 2000.
|
|
(j)
|
Form of Purchase Agreement between Registrant and BlackRock Distributors, Inc. relating to shares of Class UU-1, UU-2, UU-3, UU-4 and UU-5 is incorporated herein by reference to Exhibit 12(j) of Post-Effective Amendment No. 60 to Registrants Registration Statement filed on November 14, 2001.
|
|
(k)
|
Form of Purchase Agreement between Registrant and BlackRock Distributors, Inc. relating to shares of Class H-6 is incorporated herein by reference to Exhibit 12(k) of Post-Effective Amendment No. 63 to Registrants Registration Statement filed on September 26, 2002.
|
|
(l)
|
Form of Purchase Agreement between Registrant and BlackRock Distributors, Inc. relating to shares of Class JJ-6 is incorporated herein by reference to Exhibit 12(l) of Post-Effective Amendment No. 64 to Registrants Registration Statement filed on September 30, 2002.
|
|
(m)
|
Form of Purchase Agreement between Registrant and BlackRock Distributors, Inc. relating to shares of Classes G-6, O-6 and X-6 is incorporated herein by reference to Exhibit 12(m) of Post-Effective Amendment No. 67 to Registrants Registration Statement filed on November 27, 2002.
|
|
(n)
|
Form of Purchase Agreement between Registrant and BlackRock Distributors, Inc. relating to shares of Classes VV-1, VV-2, VV-3, VV-6, WW-1, WW-2, WW-3, and WW-6 is incorporated herein by reference to Exhibit 12(n) of Post-Effective Amendment No. 72 to the Registrants Registration Statement filed on February 11, 2004.
|
|
(o)
|
Form of Purchase Agreement between Registrant and BlackRock Distributors, Inc. relating to shares of Class P-6 is incorporated herein by reference to Exhibit 12(o) of Post-Effective Amendment No. 76 to Registrants Registration Statement filed on April 8, 2004.
|
|
(p)
|
Form of Purchase Agreement between Registrant and BlackRock Distributors, Inc. relating to shares of Class W-6 is incorporated herein by reference to Exhibit 12(p) of Post-Effective Amendment No. 77 to Registrants Registration Statement filed on May 18, 2004.
|
Exhibit
Number
|
Description
|
|
(q)
|
Form of Purchase Agreement between Registrant and BlackRock Distributors, Inc. relating to shares of Classes XX-1, XX-2, XX-3, XX-4, XX-5, XX-6, YY-1, YY-2, YY-3, YY-4, YY-5 and YY-6 is incorporated herein by reference to Exhibit 12(q) of Post-Effective Amendment No. 79 to Registrants Registration Statement filed on June 18, 2004.
|
|
(r)
|
Form of Purchase Agreement between Registrant and BlackRock Distributors, Inc. relating to shares of Classes ZZ-1, ZZ-2, ZZ-3, ZZ-4 and ZZ-5 is incorporated herein by reference to Exhibit 12(r) of Post-Effective Amendment No. 82 to Registrants Registration Statement filed on August 24, 2004.
|
|
(s)
|
Form of Purchase Agreement between Registrant and BlackRock Distributors, Inc. relating to shares of Class X-1 is incorporated herein by reference to Exhibit 12(s) of Post-Effective Amendment No. 85 to Registrants Registration Statement filed on October 27, 2004.
|
|
(t)
|
Form of Purchase Agreement between Registrant and BlackRock Distributors, Inc. relating to shares of Classes AAA-6, BBB-1, BBB-2, BBB-3, BBB-4, BBB-5, CCC-1, CCC-2, CCC-3, CCC-4, CCC-5, EEE-1, EEE-2, EEE-3, EEE-4, EEE-5, EEE-6, EEE-8, FFF-1, FFF-2, FFF-3, FFF-4, FFF-5, GGG-1, GGG-2, GGG-3, GGG-4 and GGG-5 is incorporated herein by reference to Exhibit 12(t) of Post-Effective Amendment No. 86 to Registrants Registration Statement filed on November 3, 2004.
|
|
(u)
|
Form of Purchase Agreement between Registrant and BlackRock Distributors, Inc. relating to shares of Classes HHH-1,
HHH-2, HHH-3, HHH-4, HHH-5 and HHH-6 is incorporated herein by reference to Exhibit 12(u) of Post-Effective Amendment
No. 87 to Registrants Registration Statement filed on November 19, 2004.
|
|
(v)
|
Form of Purchase Agreement between Registrant and BlackRock Distributors, Inc. relating to shares of Classes III-1,
III-2, III-3, III-4 and III-5 is incorporated herein by reference to Exhibit 12(v) of Post-Effective Amendment No. 94
to Registrants Registration Statement filed on January 27, 2006.
|
|
(w)
|
Form of Purchase Agreement between Registrant and BlackRock Distributors, Inc. relating to shares of Classes JJJ-2,
JJJ-3, JJJ-6 and JJJ-13 is incorporated herein by reference to Exhibit 12(w) of Post-Effective Amendment No. 100 to Registrants
Registration Statement filed on October 13, 2006.
|
|
(x)
|
Form of Purchase Agreement between Registrant and BlackRock Distributors, Inc. relating to shares of Classes X-3,
R-8, R-9, X-9, MM-9, R-10, R-11, X-11, MM-11, R-12 and R shares of certain Portfolios is incorporated herein by reference
to Exhibit 12(x) of Post-Effective Amendment No. 97 to Registrants Registration Statement filed on September 19,
2006.
|
|
(y)
|
Form of Purchase Agreement between Registrant and BlackRock Investments, LLC (formerly BlackRock Investments, Inc.)
relating to the International Diversification Fund is incorporated herein by reference to Exhibit 12(a) of Post-Effective
Amendment No. 110 to Registrants Registration Statement filed on September 24, 2008
|
|
(z)
|
Form of Purchase Agreement between Registrant and BlackRock Investments, LLC relating to BlackRock World Gold Fund
is incorporated herein by reference to Exhibit 12(z) of Post-Effective Amendment No. 135 to Registrants Registration
Statement filed on July 29, 2010.
|
|
(aa)
|
Form of Purchase Agreement between Registrant and BlackRock Investments, LLC relating to BlackRock China Fund incorporated
herein by reference to an Exhibit of Post-Effective Amendment No. 163 to Registrants Registration Statement filed
on April 29, 2011.
|
|
(bb)
|
Form of Purchase Agreement between Registrant and BlackRock Investments, LLC relating to BlackRock India Fund is
incorporated herein by reference to an Exhibit of Post-Effective Amendment No. 163 to Registrants Registration
Statement filed on April 29, 2011.
|
Exhibit
Number
|
Description
|
|
(cc)
|
Form of Purchase Agreement between Registrant and BlackRock Investments, LLC relating to BlackRock Global Long/Short
Credit Fund is incorporated herein by reference to an Exhibit of Post-Effective Amendment No. 186 to Registrants
Registration Statement filed on September 29, 2011
|
|
(dd)
|
Form of Purchase Agreement between Registrant and BlackRock Investments, LLC relating to BlackRock Commodity Strategies
Fund is incorporated herein by reference to an Exhibit of Post-Effective Amendment No. 187 to Registrants Registration
Statement filed on September 29, 2011.
|
|
(ee)
|
Form of Purchase Agreement between Registrant and BlackRock Investments, LLC relating to BlackRock Emerging Markets
Long/Short Equity Fund is incorporated herein by reference to an Exhibit of Post-Effective Amendment No. 188 to Registrant’s
Registration Statement filed on October 6, 2011.
|
|
(ff)
|
Form of Purchase Agreement between Registrant and BlackRock Investments, LLC relating to BlackRock Real Estate Securities
Fund to be filed by amendment.
|
|
(gg)
|
Form of Purchase Agreement between Registrant and BlackRock Investments, LLC relating to BlackRock Short-Term
Treasury Fund is incorporated herein by reference to an Exhibit of Post-Effective Amendment No. 241 to Registrant’s Registration
Statement filed on October 15, 2012.
|
|
(hh)
|
Form of Purchase Agreement between Registrant and BlackRock Investments, LLC relating to BlackRock Short Obligations
Fund and BlackRock Ultra-Short Obligations Fund is incorporated herein by reference to an Exhibit of Post-Effective Amendment No.
243 to Registrant’s Registration Statement filed on November 2, 2012.
|
|
(ii)
|
Form of Purchase Agreement between Registrant and BlackRock Holdco 2, Inc. relating to BlackRock Global Long/Short
Equity Fund is incorporated by reference to Exhibit 12(ii) of Post-Effective Amendment No. 257 to Registrant’s
Registration Statement filed on December 19, 2012.
|
|
(jj)
|
Form of Purchase Agreement between Registrant and BlackRock
Holdco 2, Inc. relating to BlackRock Multi-Asset Real Return Fund is incorporated by reference to Exhibit 12(jj) of Post-Effective
Amendment No. 258 to Registrant’s Registration Statement filed on December 21, 2012.
|
|
(kk)
|
Form of Purchase Agreement between Registrant and BlackRock
Holdco 2, Inc. relating to BlackRock Strategic Risk Allocation Fund is incorporated herein by reference to an Exhibit of Post-Effective Amendment No. 259 to Registrant’s
Registration Statement filed on December 21, 2012.
|
|
(ll)
|
Form of Purchase Agreement between Registrant and BlackRock
Holdco 2, Inc. relating to BlackRock Disciplined Small Cap Core Fund is filed herewith.
|
13
|
|
Rule 12b-1 Plan.
|
|
(a)
|
Form of Distribution and Service Plan for Institutional, Service, Investor A, Investor B, Investor C, Hilliard
Lyons, R and BlackRock Shares is incorporated herein by reference to Exhibit 13(a) to Post-Effective Amendment 111 to
the Registrants Registration Statement filed on January 28, 2009
|
|
(b)
|
Form of Exhibit A to Distribution and Service Plan is incorporated herein by reference to an Exhibit of Post-Effective Amendment No. 259 to Registrant’s
Registration Statement filed on December 21, 2012.
|
14
|
|
Rule 18f-3 Plan.
|
|
(a)
|
Amended and Restated Plan Pursuant to Rule 18f-3 for Operation of a Multi-Class Distribution System is incorporated
herein by reference to Exhibit 14(a) of Post-Effective Amendment No. 241 to Registrants Registration Statement filed
on October 15, 2012.
|
15
|
|
Reserved
|
16
|
|
Codes of Ethics.
|
|
(a)
|
Code of Ethics of BlackRock Funds is incorporated herein by reference to Exhibit 15(a) of Post-Effective Amendment
No. 44 to the Registration Statement on Form N-1A of Ready Assets Prime Money Fund (formerly known as Merrill Lynch Ready
Assets Trust) (File No. 2-52711), filed on April 29, 2009.
|
|
(b)
|
Code of Ethics of BlackRock Investments, LLC (formerly BlackRock Investments, Inc.) is incorporated herein by reference
to Exhibit 15(b) to Post-Effective Amendment No. 44 to the Registration Statement on Form N-1A of Ready Assets Prime
Money Fund (formerly known as Merrill Lynch Ready Assets Trust) (File No. 2-52711), filed on April 29, 2009.
|
|
(c)
|
Code of Ethics of BlackRock Advisors, LLC is incorporated herein by reference to Exhibit 15(c) to Post-Effective
Amendment No. 44 to the Registration Statement on Form N-1A of Ready Assets Prime Money Fund (formerly known as Merrill
Lynch Ready Assets Trust) (File No. 2-52711), filed on April 29, 2009.
|
99
|
|
Power of Attorney.
|
|
(a)
|
Power of Attorney is incorporated herein by reference to Exhibit h(5) to Post-Effective Amendment No. 94 to
the Registration Statement on Form N-1A of BlackRock Liquidity Funds,
filed on February 28, 2013.
|
Item 29.
Persons Controlled by or under Common Control with the Fund.
The Registrant does not control and is not under common control with any person.
Item 30.
Indemnification.
Indemnification of
Registrants principal underwriter against certain losses is provided for
in Section 9 of the Distribution Agreement incorporated by reference herein as
Exhibit 5(a). Indemnification of Registrants Custodian, Transfer Agent and
Administrators is provided for, respectively, in Section 12 of the Custodian
Agreement incorporated by reference herein as Exhibit 7(a), Section 12 of the
Transfer Agency Agreement incorporated by reference herein as Exhibit 8(c) and
Section 9 of the Administration Agreement incorporated by reference herein as
Exhibit 8(k). Registrant intends to obtain from a major insurance carrier a
trustees and officers liability policy covering certain types of
errors and omissions. In addition, Section 9.3 of the Registrants
Declaration of Trust incorporated by reference herein as Exhibit 1(a) provides
as follows:
Indemnification of Trustees, Officers, Representatives and
Employees. The Trust shall indemnify each of its Trustees against all
liabilities and expenses (including amounts paid in satisfaction of judgments,
in compromise, as fines and penalties, and as counsel fees) reasonably incurred
by him in connection with the defense or disposition of any action, suit or
other proceeding, whether civil or criminal, in which he may be involved or with
which he may be threatened, while as a Trustee or thereafter, by reason of his
being or having been such a Trustee except with respect to any matter as to
which he shall have been adjudicated to have acted in bad faith, willful
misfeasance, gross negligence or reckless disregard of his duties, provided that
as to any matter disposed of by a compromise payment by such person, pursuant to
a consent decree or otherwise, no indemnification either for said payment or for
any other expenses shall be provided unless the Trust shall have received a
written opinion from independent legal counsel approved by the Trustees to the
effect that if either the matter of willful misfeasance, gross negligence or
reckless disregard of duty, or the matter of bad faith had been adjudicated, it
would in the opinion of such counsel have been adjudicated in favor of such
person. The rights accruing to any person under these provisions shall not
exclude any other right to which he may be lawfully entitled, provided that no
person may satisfy any right of indemnity or reimbursement hereunder except out
of the property of the Trust. The Trustees may make advance payments in
connection with the indemnification under this Section 9.3, provided that the
indemnified person shall have given a written undertaking to reimburse the Trust
in the event it is subsequently determined that he is not entitled to such
indemnification.
The Trustee shall indemnify officers, representatives and employees of the Trust to the same extent that Trustees are entitled to indemnification pursuant to this Section 9.3.
Insofar as
indemnification for liability arising under the Securities Act of 1933 may be
permitted to trustees, officers and controlling persons of Registrant pursuant
to the foregoing provisions, or otherwise, Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by Registrant of expenses incurred or paid by a trustee,
officer or controlling person of Registrant in the successful defense of any
action, suit or proceeding) is asserted by such trustee, officer or controlling
person in connection with the securities being registered, Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
Section 9.6 of the
Registrants Declaration of Trust, filed herein as Exhibit 1(a), also
provides for the indemnification of shareholders of the Registrant. Section 9.6
states as follows:
Indemnification of Shareholders. In case any Shareholder or
former Shareholder shall be held to be personally liable solely by reason of his
being or having been a Shareholder and not because of his acts or omissions or
for some other reason, the Shareholder or former Shareholder (or his heirs,
executors, administrators or other legal representatives or, in the case of a
corporation or other entity, its corporate or other general successor) shall be
entitled out of the assets belonging to the classes of Shares with the same
alphabetical designation as that of the Shares owned by such Shareholder to be
held harmless from and indemnified against all loss and expense arising from
such liability. The Trust shall, upon request by the Shareholder, assume the
defense of any claim made against any Shareholder for any act or obligations of
the Trust and satisfy any judgment thereon from such assets.
Item 31.
Business and Other Connections of Investment Advisers.
(a)
BlackRock Advisors, LLC is an indirect wholly-owned subsidiary of BlackRock, Inc. BlackRock Advisors, LLC was organized in 1994 for the purpose of providing advisory services to investment companies. The information required by this Item 31 about officers and directors of BlackRock Advisors, LLC, together with information as to any other business, profession, vocation or employment of a substantial nature engaged in by such officers and directors during the past two years, is incorporated by reference to Schedules A and D of Form ADV, filed by BlackRock Advisors, LLC pursuant to the Investment Advisers Act of 1940 (SEC File No. 801-47710).
(b)
BlackRock Financial Management, Inc. (BFM). BFM currently offers investment advisory services to institutional investors such as pension and profit-sharing plans or trusts, insurance companies and banks. The information required by this Item 31 about officers and directors of BFM, together with information as to any other business, profession, vocation or employment of a substantial nature engaged in by such officers and directors during the past two years, is incorporated by reference to Schedules A and D of Form ADV, filed by BFM pursuant to the Investment Advisers Act of 1940 (SEC File No. 801-48433).
(c)
BlackRock International Limited (formerly BlackRock International, Ltd. and prior to that Castle International Asset Management Limited) (BIL). The information required by this Item 31 of officers and directors of BIL, together with information as to any other business, profession, vocation or employment of a substantial nature engaged in by such officers and directors during the past two years, is incorporated by reference to Schedules A and D of Form ADV, filed by BIL pursuant to the Investment Advisers Act of 1940 (SEC File No. 801-51087).
(d)
BlackRock Investment Management, LLC (BIM). The information required by this Item 31 about officers and directors of BIM, together with information as to any other business, profession, vocation or employment of a substantial nature engaged in by such officers and directors during the past two years, is incorporated by reference to Schedules A and D of Form ADV, filed by BIM pursuant to the Investment Advisers Act of 1940 (SEC File No. 801-56972).
(e) BlackRock Fund Advisors
(“BFA”). The information required by this Item 31 about officers and directors of BFA, together with
information as to any other business profession, vocation or employment of a substantial nature engaged in by such officers
and directors during the past two years, is incorporated by reference to Schedule A and D of Form ADV, filed by BFA pursuant
to the Investment Advisers Act of 1940 (SEC File No. 801-22609).
(f)
BlackRock (Hong Kong) Limited (“BHK”) is a wholly-owned subsidiary of BlackRock, Inc. BHK currently offers investment
advisory services to pooled investment vehicles, corporations or other businesses and government agencies or quasi-government
agencies. The information required by this Item 31 about officers and directors of BHK, together with information as to any other
business, profession, vocation or employment of a substantial nature engaged in by such officers and directors during the past
two years, is incorporated by reference to Schedules A and D of Form ADV, filed by BHK pursuant to the Investment Advisers Act
of 1940 (SEC File No. 801-76927).
(g)
BlackRock (Singapore) Limited (“BRS”) is a wholly-owned subsidiary of BlackRock, Inc. BRS currently offers investment
advisory services to pooled investment vehicles, state or municipal government entities and insurance companies. The information
required by this Item 31 about officers and directors of BRS, together with information as to any other business, profession,
vocation or employment of a substantial nature engaged in by such officers and directors during the past two years, is incorporated
by reference to Schedules A and D of Form ADV, filed by BRS pursuant to the Investment Advisers Act of 1940 (SEC File No. 801-76926).
Item 32.
Principal Underwriters.
(a)
BlackRock Investments, LLC (BRIL) acts as the principal underwriter or placement agent, as applicable, for each of the following open-end registered investment companies including the Registrant:
|
|
BBIF Government Securities Fund
|
BlackRock Municipal Bond Fund, Inc.
|
BBIF Money Fund
|
BlackRock Municipal Series Trust
|
BBIF Tax-Exempt Fund
|
BlackRock Natural Resources Trust
|
BBIF Treasury Fund
|
BlackRock Pacific Fund, Inc.
|
BIF Government Securities Fund
|
BlackRock Series Fund, Inc.
|
BIF Money Fund
|
BlackRock Series, Inc.
|
BIF Multi-State Municipal Series Trust
|
BlackRock Value Opportunities Fund, Inc.
|
BIF Tax-Exempt Fund
|
BlackRock Variable Series Funds, Inc.
|
BIF Treasury Fund
|
BlackRock World Income Fund, Inc.
|
BlackRock Balanced Capital Fund, Inc.
|
FDP Series, Inc.
|
BlackRock Basic Value Fund, Inc.
|
Funds for Institutions Series
|
BlackRock Bond Allocation Target Shares
|
iShares, Inc.
|
BlackRock Bond Fund, Inc.
|
iShares MSCI Russia Capped Index Fund, Inc.
|
BlackRock California Municipal Series Trust
|
iShares Trust
|
BlackRock Capital Appreciation Fund, Inc.
|
iShares U.S. ETF Trust
|
BlackRock Emerging Markets Fund, Inc.
|
Managed Account Series
|
BlackRock Equity Dividend Fund
|
Master Basic Value LLC
|
BlackRock EuroFund
|
Master Bond LLC
|
BlackRock Financial Institutions Series Trust
|
Master Focus Growth LLC
|
BlackRock Focus Growth Fund, Inc.
|
Master Government Securities LLC
|
BlackRock Funds
|
Master Institutional Money Market LLC
|
BlackRock Funds II
|
Master Investment Portfolio
|
BlackRock Funds III
|
Master Large Cap Series LLC
|
BlackRock Global Allocation Fund, Inc.
|
Master Money LLC
|
BlackRock Global SmallCap Fund, Inc.
|
Master Tax-Exempt LLC
|
BlackRock Index Funds, Inc.
|
Master Treasury LLC
|
BlackRock Large Cap Series Funds, Inc.
|
Master Value Opportunities LLC
|
BlackRock Latin America Fund, Inc.
|
Quantitative Master Series LLC
|
BlackRock Liquidity Funds
|
Ready Assets Prime Money Fund
|
BlackRock Long-Horizon Equity Fund
|
Ready Assets U.S. Treasury Money Fund
|
BlackRock Master LLC
|
Ready Assets U.S.A. Government Money Fund
|
BlackRock Mid Cap Value Opportunities Series, Inc.
|
Retirement Series Trust
|
BlackRock Multi-State Municipal Series Trust
|
|
BRIL also acts as the principal underwriter or placement agent, as applicable, for the following closed-end registered investment company: BlackRock Fixed Income Value Opportunities
(b)
Set forth below is information concerning each director and officer of BRIL. The principal business address for each such person is 40 East 52
nd
Street, New York, New York 10022.
|
|
|
|
|
Name
|
|
Position(s) and Office(s) with BRIL
|
|
Position(s) and
Office(s)
with Registrant
|
Laurence Fink
|
|
Chairman and Member, Board of Managers
|
|
None
|
Robert Fairbairn
|
|
Chief Executive Officer and Senior Managing Director
|
|
None
|
Anne Ackerley
|
|
Managing Director
|
|
None
|
Matthew Mallow
|
|
General Counsel and Senior Managing Director
|
|
None
|
Russell McGranahan
|
|
Secretary and Managing Director
|
|
None
|
James Smith
|
|
Chief Compliance Officer and Director
|
|
None
|
Saurabh Pathak
|
|
Chief Financial Officer and Director
|
|
None
|
Sally George
|
|
Managing Director
|
|
None
|
Francis Porcelli
|
|
Managing Director
|
|
None
|
Brenda Sklar
|
|
Managing Director
|
|
None
|
Lisa Hill
|
|
Managing Director
|
|
None
|
Joseph Craven
|
|
Managing Director
|
|
None
|
Melissa Walker
|
|
Vice President and Assistant Secretary
|
|
None
|
Chris Nugent
|
|
Director
|
|
None
|
Robert Kapito
|
|
Member, Board of Managers
|
|
None
|
Daniel Waltcher
|
|
Member, Board of Managers
|
|
None
|
(c)
Not Applicable.
Item 33.
Location of Accounts and Records.
All accounts, books and other documents required to be maintained by Section 31(a) of the Investment Company Act and the rules thereunder are maintained at the offices of:
(a)
Registrant, 100 Bellevue Parkway, Wilmington, Delaware 19809.
(b)
BlackRock Investments, LLC, 40 East 52
nd
Street, New York, New York 10022 (records relating to its functions as distributor and placement agent, as applicable).
(c)
BlackRock Advisors, LLC, 100 Bellevue Parkway, Wilmington, Delaware 19809 (records relating to its functions as investment adviser and co-administrator).
(d)
BlackRock Financial Management, Inc., 55 East 52
nd
Street, New York, New York 10055 (records relating to its functions as investment adviser and sub-adviser).
(e)
BlackRock International Limited, 40 Torphichen Street, Edinburgh, Scotland, EH3 8JB (records relating to its functions as sub-adviser).
(f)
BlackRock Investment Management,
LLC, 1 University Square Drive, Princeton, NJ 08540-6455 (records relating to its functions as sub-adviser).
(g) BlackRock Fund Advisors, 1 University Square Drive, Princeton,
New Jersey 08540-6455 (records relating to its function as sub-adviser).
(h) BlackRock (Hong Kong) Limited, 16/F Cheung Kong Center, 2 Queen's
Road Central, Hong Kong, China (records relating to its functions as sub-adviser).
(i) BlackRock (Singapore) Limited, 20 Anson Road, #18-01, Twenty
Anson Singapore, 079912 Singapore (records relating to its functions as sub-adviser).
(j)
BNY Mellon Investment Servicing
(US) Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809 (records relating to its functions as co-administrator, transfer agent,
dividend disbursing agent and accounting services provider).
(k) State Street Bank and Trust Company, 100 Summer Street, Boston,
Massachusetts 02110 (records relating to its functions as co-administrator, accounting services provider and custodian).
(l)
The Bank of New York Mellon,
One Wall Street, New York, New York 10286 (records relating to its functions as custodian).
(m)
The Chase Manhattan Bank,
N.A., 1285 Avenue of the Americas, New York, New York 10019 (records relating to its functions as sub-custodian).
(n)
Citibank, N.A., 111 Wall
Street, 23
rd
Floor, Zone 6, New York, NY 10043 (records relating to its functions as sub-custodian).
(o)
BlackRock Advisors, LLC,
100 Bellevue Parkway, Wilmington, Delaware 19809 (Registrants declaration of trust, code of regulations and minute books).
Item 34.
Management Services.
None.
Item 35.
Undertakings.
None.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940, the Registrant certifies that it meets all the requirements for effectiveness of
this Post-Effective Amendment to the Registration Statement pursuant to Rule 485(b) under the Securities Act and has duly
caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of
New York, and the State of New York, on March 13, 2013.
|
|
|
|
B
LACK
R
OCK
F
UNDS
SM
|
|
on
behalf of its series, BlackRock Disciplined Small Cap Core Fund
|
|
|
(Registrant)
|
|
|
|
|
|
By:
|
/s/ John M. Perlowski
|
|
|
John M. Perlowski,
President and Chief Executive Officer
|
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective Amendment to its Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
|
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
/s/
J
OHN
M. P
ERLOWSKI
|
|
President and Chief Executive Officer
|
|
March 13, 2013
|
|
(John M. Perlowski)
|
|
(Principal Executive Officer)
|
|
|
|
|
/s/ N
EAL
J. A
NDREWS
|
|
Chief Financial Officer
|
|
March 13, 2013
|
|
(Neal J. Andrews)
|
|
(Principal Financial and Accounting Officer)
|
|
|
|
|
D
AVID
O. B
EIM
*
|
|
Trustee
|
|
|
|
(David O. Beim)
|
|
|
|
|
|
|
R
ONALD
W. F
ORBES
*
|
|
Trustee
|
|
|
|
(Ronald W. Forbes)
|
|
|
|
|
|
|
D
R
. M
ATINA
S. H
ORNER
*
|
|
Trustee
|
|
|
|
(Dr. Matina S. Horner)
|
|
|
|
|
|
|
R
ODNEY
D. J
OHNSON
*
|
|
Trustee
|
|
|
|
(Rodney D. Johnson)
|
|
|
|
|
|
|
|
|
|
|
|
H
ERBERT
I. L
ONDON
*
|
|
Trustee
|
|
|
|
(Herbert I. London)
|
|
|
|
|
|
|
|
|
|
|
|
I
AN
A. M
AC
K
INNON
*
|
|
Trustee
|
|
|
|
(Ian A. MacKinnon)
|
|
|
|
|
|
|
|
|
|
|
|
C
YNTHIA
A. M
ONTGOMERY
*
|
|
Trustee
|
|
|
|
(Cynthia A. Montgomery)
|
|
|
|
|
|
|
|
|
|
|
|
J
OSEPH
P. P
LATT
*
|
|
Trustee
|
|
|
|
(Joseph P. Platt)
|
|
|
|
|
|
|
|
|
|
|
|
R
OBERT
C. R
OBB,
J
R.
*
|
|
Trustee
|
|
|
|
(Robert C. Robb, Jr.)
|
|
|
|
|
|
|
|
|
|
|
|
T
OBY
R
OSENBLATT
*
|
|
Trustee
|
|
|
|
(Toby Rosenblatt)
|
|
|
|
|
|
|
|
|
|
|
|
K
ENNETH
L. U
RISH
*
|
|
Trustee
|
|
|
|
(Kenneth L. Urish)
|
|
|
|
|
|
|
|
|
|
|
|
F
REDERICK
W. W
INTER
*
|
|
Trustee
|
|
|
|
(Frederick W. Winter)
|
|
|
|
|
|
|
|
|
|
|
|
P
AUL
A
UDET
*
|
|
Trustee
|
|
|
|
(Paul Audet)
|
|
|
|
|
|
|
|
|
|
|
|
H
ENRY
G
ABBAY
*
|
|
Trustee
|
|
|
|
(Henry Gabbay)
|
|
|
|
|
|
|
|
|
|
|
*By:
|
/s/ B
ENJAMIN
A
RCHIBALD
|
|
|
|
March 13, 2013
|
|
(Benjamin Archibald, Attorney-In-Fact)
|
|
|
|
|
EXHIBIT INDEX
Exhibit Number
|
Description
|
|
|
1(n)
|
Certification of Classification of Shares.
|
4(g)
|
Form of Addendum No. 8 to Investment Advisory Agreement between Registrant and BlackRock Advisors, LLC.
|
4(t)
|
Form of Sub-Advisory Agreement between BlackRock Advisors, LLC and BlackRock Fund Advisors with respect to BlackRock
Disciplined Small Cap Core Fund.
|
9(a)
|
Opinion of Bingham McCutchen LLP.
|
12(ll)
|
Form of Purchase Agreement between Registrant and BlackRock
Holdco 2, Inc. relating to BlackRock Disciplined Small Cap Core Fund.
|