STATEMENT OF ADDITIONAL INFORMATION
DATED FEBRUARY 29, 2012, AS AMENDED
MARCH 27, 2013
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FUND
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CLASS A
SHARES
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CLASS C
SHARES
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CLASS R
SHARES
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CLASS IR
SHARES
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INSTITUTIONAL
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GOLDMAN SACHS MANAGED FUTURES STRATEGY FUND
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GMSAX
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GMSCX
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GFFRX
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GFIRX
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GMSSX
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(Select Satellite Fund of Goldman Sachs Trust)
71 South Wacker Drive
Chicago, Illinois 60606
This Statement of Additional Information (the
SAI) is not a Prospectus. This SAI should be read in conjunction with the Prospectus for the Goldman Sachs Managed Futures Strategy Fund, dated February 29, 2012, as it may be further amended and/or supplemented from time to time
(the Prospectus), which may be obtained without charge from Goldman, Sachs & Co. by calling the telephone numbers, or writing to one of the addresses, listed below or from institutions (Authorized Institutions)
acting on behalf of their customers.
The Funds Annual Report may be obtained upon request and without charge by calling
Goldman, Sachs & Co. toll-free at 1-800-526-7384 (for Class A, Class C, Class R and Class IR Shareholders) or 1-800-621-2550 (for Institutional Shareholders).
GSAM
®
is a registered service mark of Goldman, Sachs & Co.
TABLE OF CONTENTS
The date of this SAI is February 29, 2012, as amended March 27, 2013.
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GOLDMAN SACHS ASSET MANAGEMENT, L.P.
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GOLDMAN, SACHS & CO.
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Investment Adviser
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Distributor
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200 West Street
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200 West Street
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New York, New York 10282
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New York, New York 10282
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GOLDMAN, SACHS & CO.
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Transfer Agent
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71 South Wacker Drive
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Chicago, Illinois 60606
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Toll-free (in U.S.) 800-621-2550 (for Institutional Shareholders) or 800-526-7384 (for Class A,
Class C, Class R and Class IR Shareholders)
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INTRODUCTION
Goldman Sachs Trust (the Trust) is an open-end, management investment company. The Trust is organized as a Delaware statutory
trust and was established by a Declaration of Trust dated January 28, 1997. The following series of the Trust is described in this SAI: Goldman Sachs Managed Futures Strategy Fund (the Fund).
The Trustees of the Trust have authority under the Declaration of Trust to create and classify shares into separate series and to classify
and reclassify any series or portfolio of shares into one or more classes without further action by shareholders. Pursuant thereto, the Trustees have created the Fund and other series. Additional series may be added in the future from time to time.
The Fund currently offers five classes of shares: Class A Shares, Class C Shares, Class R Shares, Class IR Shares and Institutional Shares. See SHARES OF THE TRUST.
Goldman Sachs Asset Management, L.P. (GSAM or the Investment Adviser), an affiliate of Goldman, Sachs &
Co. (Goldman Sachs), serves as the investment adviser to the Fund. In addition, Goldman Sachs serves as the Funds distributor and transfer agent. The Funds custodian is JPMorgan Chase Bank, N.A. (JPMorganChase).
The following information relates to and supplements the description of the Funds investment policies contained in the
Prospectus. See the Prospectus for a more complete description of the Funds investment objectives and policies. Investing in the Fund entails certain risks and there is no assurance that the Fund will achieve its objective. Capitalized terms
used but not defined herein have the same meaning as in the Prospectus.
INVESTMENT OBJECTIVES AND
POLICIES
The Fund has a distinct investment objective and policies. There can be no assurance that the Funds
objective will be achieved. The Fund is a non-diversified, open-end management company as defined in the Investment Company Act of 1940, as amended (the Act). The investment objective and policies of the Fund, and the associated risks of
the Fund, are discussed in the Funds Prospectus, which should be read carefully before an investment is made. All investment objectives and investment policies not specifically designated as fundamental may be changed without shareholder
approval. Additional information about the Fund, its policies, and the investment instruments it may hold, is provided below.
The Funds share price will fluctuate with market, economic and, to the extent applicable, foreign exchange conditions, so that an
investment in the Fund may be worth more or less when redeemed than when purchased. The Fund should not be relied upon as a complete investment program.
The following discussion supplements the information in the Funds Prospectus.
General
Information Regarding the Fund
The Funds investment objective is to generate long-term absolute return. The Fund
implements a trend-following strategy that takes long and/or short positions in a wide range of asset classes, including equities, fixed income, and currencies, among others, to seek long-term absolute return. The Fund seeks to achieve its
investment objective by investing primarily in a portfolio of equities, equity index futures, bonds, bond futures, equity swaps, interest rate swaps, currency forwards and non-deliverable forwards, options, ETFs, and structured securities. As a
result of the Funds use of derivatives, the Fund may also hold significant amounts of U.S. Treasuries or short-term investments, including money market funds, repurchase agreements, cash and time deposits. The Funds investments will be
made without restriction as to issuer capitalization, country, currency, maturity, or credit rating.
The Investment Adviser
seeks to identify price trends in various asset classes via a proprietary investment model. Upon identifying a trend in a given instrument or asset, the Fund will take a long or short position in the instrument or asset. Long positions benefit from
an increase in price of the underlying instrument or asset, while short positions benefit from a decrease in price of the underlying instrument or asset. The size of the Funds position in an instrument or asset will primarily be related to the
strength of the overall trend identified by the investment model.
The Fund may implement short positions and may do so by
using swaps or futures, or through short sales of any instrument that the Fund may purchase for investment. For example, the Fund may enter into a futures contract pursuant to which it agrees to sell an asset
(that it does not currently own) at a specified price at a specified point in the future. This gives the Fund a short position with respect to that asset.
B-1
The Fund may use leverage (e.g., by borrowing or through derivatives). As a result, the sum
of the Funds investment exposures may at times exceed the amount of assets invested in the Fund, although these exposures may vary over time.
The Fund may take long and/or short position in commodities by investing in other investment companies, ETFs or other pooled investment vehicles. Although it does not currently intend to do so, the Fund
may also invest through a wholly-owned subsidiary, which would be advised by the Investment Adviser and would have the same investment objective as the Fund, or in commodity-linked notes. Such investments would be made only to the extent permissible
under applicable law then in effect, or in reliance upon a private letter ruling from the Internal Revenue Service (IRS), or other applicable guidance or relief provided by the IRS or other agencies.
From time to time, the Investment Adviser will monitor, and may make changes to, the selection or weight of individual or groups of
securities, currencies or markets in the Fund. Such changes (which may be the result of changes in the proprietary investment model, the method of applying the model or the judgment of the Investment Adviser) may include: (i) evolutionary changes to
the structure of the model (e.g., the addition of new factors or a new means of weighting the factors); (ii) changes in trading procedures (e.g., trading frequency or the manner in which a Fund uses futures); or (iii) changes to the weight of
individual or groups of securities, currencies or markets in a Fund based on the Investment Advisers judgment. Any such changes will preserve a Funds basic investment philosophy of combining qualitative and quantitative methods of
selecting investments using a disciplined investment process.
The Investment Adviser is expected to be subject to registration
and regulation as a commodity pool operator under the Commodity Exchange Act (CEA) with respect to its service as investment adviser to the Fund. However, as a result of proposed rulemaking by the Commodity Futures Trading
Commission (CFTC) that has not yet been adopted, the Investment Adviser is not yet subject to CFTC recordkeeping, reporting and disclosure requirements with respect to this Fund, and therefore the impact of these requirements remains
uncertain. When the Investment Adviser becomes subject to these requirements, as well as related National Futures Association (NFA) rules, the Fund may incur additional compliance and other expenses.
THE FUND IS NON-DIVERSIFIED UNDER THE ACT AND MAY INVEST MORE OF ITS ASSETS IN FEWER ISSUERS THAN DIVERSIFIED
MUTUAL FUNDS.
DESCRIPTION OF INVESTMENT SECURITIES AND PRACTICES
Futures Contracts and Options on Futures Contracts
The Fund may purchase and sell futures contracts and may also purchase and write call and put options on futures contracts. The Fund may purchase and sell futures contracts based on various securities,
securities indices, foreign currencies and other financial instruments and indices. The Fund will engage in futures and related options transactions in order to seek to increase total return or to hedge against changes in interest rates, securities
prices or, to the extent the Fund invests in foreign securities, currency exchange rates, or to otherwise manage its term structure, sector selection and duration in accordance with its investment objective and policies. The Fund may also enter into
closing purchase and sale transactions with respect to such contracts and options.
Futures contracts entered into by the Fund
have historically been traded on U.S. exchanges or boards of trade that are licensed and regulated by the CFTC or with respect to certain funds on foreign exchanges. More recently, certain futures may also be traded either over-the-counter or on
trading facilities such as derivatives transaction execution facilities, exempt boards of trade or electronic trading facilities that are licensed and/or regulated to varying degrees by the CFTC. Also, certain single stock futures and narrow based
security index futures may be traded either over-the-counter or on trading facilities such as contract markets, derivatives transaction execution facilities and electronic trading facilities that are licensed and/or regulated to varying degrees by
both the CFTC and the SEC or on foreign exchanges.
Neither the CFTC, NFA, SEC nor any domestic exchange regulates activities
of any foreign exchange or boards of trade, including the execution, delivery and clearing of transactions, or has the power to compel enforcement of the rules of a foreign exchange or board of trade or any applicable foreign law. This is true even
if the exchange is formally linked to a domestic market so that a position taken on the market may be liquidated by a transaction on another market. Moreover, such laws or regulations will vary depending on the foreign country in which the foreign
futures or foreign options transaction occurs. For these reasons, the Funds investments in foreign futures or foreign options transactions may not be provided the same protections in respect of transactions on United States exchanges. In
particular, persons who trade foreign futures or foreign options contracts may not be afforded certain of the protective measures provided by the CEA, the CFTCs regulations and the rules of the NFA and any domestic exchange, including the
right to use reparations proceedings before the CFTC and arbitration proceedings provided by the NFA or any domestic futures exchange. Similarly, those persons may not have the protection of the United States securities laws.
B-2
Futures Contracts.
A futures contract may generally be described as an agreement
between two parties to buy and sell particular financial instruments for an agreed price during a designated month (or to deliver the final cash settlement price, in the case of a contract relating to an index or otherwise not calling for physical
delivery at the end of trading in the contract).
When interest rates are rising or securities prices are falling, the Fund can
seek through the sale of futures contracts to offset a decline in the value of its current portfolio securities. When interest rates are falling or securities prices are rising, the Fund, through the purchase of futures contracts, can attempt to
secure better rates or prices than might later be available in the market when it effects anticipated purchases. Similarly, the Fund can purchase and sell futures contracts on a specified currency in order to seek to increase total return or to
protect against changes in currency exchange rates. For example, the Fund can purchase futures contracts on foreign currency to establish the price in U.S. dollars of a security quoted or denominated in such currency that the Fund has acquired or
expects to acquire. As another example, the Fund may enter into futures transactions to seek a closer correlation between the Funds overall currency exposures and the currency exposures of the Funds performance benchmark.
Positions taken in the futures market are not normally held to maturity, but are instead liquidated through offsetting transactions which
may result in a profit or a loss. While the Fund will usually liquidate futures contracts on securities or currency in this manner, the Fund may instead make or take delivery of the underlying securities or currency whenever it appears economically
advantageous for the Fund to do so. A clearing corporation associated with the exchange on which futures are traded guarantees that, if still open, the sale or purchase will be performed on the settlement date.
Hedging Strategies Using Futures Contracts.
Hedging, by use of futures contracts, seeks to establish with more certainty than would
otherwise be possible the effective price, rate of return or currency exchange rate on portfolio securities or securities that the Fund owns or proposes to acquire. The Fund may, for example, take a short position in the futures market
by selling futures contracts to seek to hedge against an anticipated rise in interest rates or a decline in market prices or foreign currency rates that would adversely affect the dollar value of the Funds portfolio securities. Similarly, the
Fund may sell futures contracts on a currency in which its portfolio securities are quoted or denominated, or sell futures contracts on one currency to seek to hedge against fluctuations in the value of securities quoted or denominated in a
different currency if there is an established historical pattern of correlation between the two currencies. If, in the opinion of the Investment Adviser, there is a sufficient degree of correlation between price trends for the Funds portfolio
securities and futures contracts based on other financial instruments, securities indices or other indices, the Fund may also enter into such futures contracts as part of its hedging strategy. Although under some circumstances prices of securities
in the Funds portfolio may be more or less volatile than prices of such futures contracts, the Investment Adviser will attempt to estimate the extent of this volatility difference based on historical patterns and compensate for any such
differential by having the Fund enter into a greater or lesser number of futures contracts or by attempting to achieve only a partial hedge against price changes affecting the Funds portfolio securities. When hedging of this character is
successful, any depreciation in the value of portfolio securities will be substantially offset by appreciation in the value of the futures position. On the other hand, any unanticipated appreciation in the value of the Funds portfolio
securities would be substantially offset by a decline in the value of the futures position.
On other occasions, the Fund may
take a long position by purchasing such futures contracts. This may be done, for example, when the Fund anticipates the subsequent purchase of particular securities when it has the necessary cash, but expects the prices or currency
exchange rates then available in the applicable market to be less favorable than prices or rates that are currently available.
Options on Futures Contracts.
The acquisition of put and call options on futures contracts will give the Fund the right (but not
the obligation), for a specified price, to sell or to purchase, respectively, the underlying futures contract at any time during the option period. As the purchaser of an option on a futures contract, the Fund obtains the benefit of the futures
position if prices move in a favorable direction but limits its risk of loss in the event of an unfavorable price movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium which may partially offset a decline in the value of the Funds assets. By writing a call option, the Fund becomes obligated, in
exchange for the premium, to sell a futures contract if the option is exercised, which may have a value higher than the exercise price. The writing of a put option on a futures contract generates a premium, which may partially offset an increase in
the price of securities that the Fund intends to purchase. However, the Fund becomes obligated (upon the exercise of the option) to purchase a futures contract if the option is exercised, which may have a value lower than the exercise price. Thus,
the loss incurred by the Fund in writing options on futures is potentially unlimited and may exceed the amount of the premium received. The Fund will incur transaction costs in connection with the writing of options on futures.
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The holder or writer of an option on a futures contract may terminate its position by
selling or purchasing an offsetting option on the same financial instrument. There is no guarantee that such closing transactions can be effected. The Funds ability to establish and close out positions on such options will be subject to the
development and maintenance of a liquid market.
Other Considerations.
The Fund will engage in transactions in futures
contracts and related options transactions only to the extent such transactions are consistent with the requirements of the Internal Revenue Code of 1986, as amended (the Code) for maintaining its qualification as a regulated investment
company for federal income tax purposes. Transactions in futures contracts and options on futures involve brokerage costs, require margin deposits and, in certain cases, require the Fund to segregate cash or liquid assets. The Fund may cover its
transactions in futures contracts and related options through the segregation of cash or liquid assets or by other means, in any manner permitted by applicable law.
While transactions in futures contracts and options on futures may reduce certain risks, such transactions themselves entail certain other risks. Thus, unanticipated changes in interest rates, securities
prices or currency exchange rates may result in a poorer overall performance for the Fund than if it had not entered into any futures contracts or options transactions. When futures contracts and options are used for hedging purposes, perfect
correlation between the Funds futures positions and portfolio positions may be impossible to achieve, particularly where futures contracts based on individual equity or corporate fixed income securities are currently not available. In the
event of imperfect correlation between a futures position and a portfolio position which is intended to be protected, the desired protection may not be obtained and the Fund may be exposed to risk of loss. In addition, it is not possible for the
Fund to hedge fully or perfectly against currency fluctuations affecting the value of securities quoted or denominated in foreign currencies because the value of such securities is likely to fluctuate as a result of independent factors unrelated to
currency fluctuations. The profitability of the Funds trading in futures depends upon the ability of the Investment Adviser to analyze correctly the futures markets.
Options on Securities and Securities Indices
Writing Covered Options.
The Fund may write (sell) covered call and put options on any securities in which it may invest. The Fund may also, to the extent it invests in foreign securities, write (sell) put and call options on foreign currencies. A call option
written by the Fund obligates the Fund to sell specified securities to the holder of the option at a specified price if the option is exercised on or before the expiration date. Depending upon the type of call option, the purchaser of the call
option either (i) has the right to any appreciation in the value of the security over a fixed price (the exercise price) on a certain date in the future (the expiration date) or (ii) has the right to any
appreciation in the value of the security over the exercise price at any time prior to the expiration of the option. If the purchaser does not exercise the option, the Fund pays the purchaser the difference between the price of the security and the
exercise price of the option. The premium, the exercise price and the market value of the security determine the gain or loss realized by the Fund as the seller of the call option. The Fund can also repurchase the call option prior to the expiration
date, ending its obligation. In this case, the cost of entering into closing purchase transactions will determine the gain or loss realized by the Fund. All call options written by the Fund are covered, which means that the Fund will own the
securities subject to the option as long as the option is outstanding or the Fund will use the other methods described below. The Funds purpose in writing covered call options is to realize greater income than would be realized on portfolio
securities transactions alone. However, the Fund may forego the opportunity to profit from an increase in the market price of the underlying security.
A put option written by the Fund would obligate the Fund to purchase specified securities from the option holder at a specified price if, depending upon the type of put option, either (i) the option
is exercised at any time on or before the expiration date or (ii) the option is exercised on the expiration date. All put options written by the Fund would be covered, which means that the Fund will segregate cash or liquid assets with a value
at least equal to the exercise price of the put option (less any margin on deposit) or will use the other methods described below. The purpose of writing such options is to generate additional income for the Fund. However, in return for the option
premium, the Fund accepts the risk that it may be required to purchase the underlying securities at a price in excess of the securities market value at the time of purchase.
In the case of a call option, the option is covered if the Fund owns the instrument underlying the call or has an absolute and
immediate right to acquire that instrument without additional cash consideration (or, if additional cash consideration is required, liquid assets in such amount are segregated) upon conversion or exchange of other instruments held by it. A call
option is also covered if the Fund holds a call on the same instrument as the option written where the exercise price of the option held is (i) equal to or less than the exercise price of the option written, or (ii) greater than the
exercise price of the option written provided the Fund segregates liquid assets in the amount of the difference. The Fund may also cover options on securities by segregating cash or liquid assets, as permitted by applicable law, with a value, when
added to any margin on deposit, that is equal to the market value of the securities in the case of a call option. A put option is also covered if the Fund holds a put on the same instrument as the option written where the exercise price of the
option held is (i) equal to or higher than the exercise price of the option written, or (ii) less than the exercise price of the option written provided the Fund segregates liquid assets in the amount of the difference.
B-4
The Fund may also write (sell) covered call and put options on any securities index
comprised of securities in which it may invest. Options on securities indices are similar to options on securities, except that the exercise of securities index options requires cash payments and does not involve the actual purchase or sale of
securities. In addition, securities index options are designed to reflect price fluctuations in a group of securities or segment of the securities market rather than price fluctuations in a single security.
The Fund may cover call options on a securities index by owning securities whose price changes are expected to be similar to those of the
underlying index, or by having an absolute and immediate right to acquire such securities without additional cash consideration (or for additional consideration which has been segregated by the Fund) upon conversion or exchange of other securities
in its portfolio. The Fund may also cover call and put options on a securities index by segregating cash or liquid assets, as permitted by applicable law, with a value, when added to any margin on deposit, that is equal to the market value of the
underlying securities in the case of a call option or the exercise price in the case of a put option, or by owning offsetting options as described above.
The Fund may terminate its obligations under an exchange traded call or put option by purchasing an option identical to the one it has written. Obligations under over-the-counter options may be terminated
only by entering into an offsetting transaction with the counterparty to such option. Such purchases are referred to as closing purchase transactions.
Purchasing Options.
The Fund may purchase covered put and call options on any securities in which it may invest on any securities index comprised of securities in which it may invest. The Fund may
also, to the extent that it invests in foreign securities, purchase put and call options on foreign currencies. The Fund may also enter into closing sale transactions in order to realize gains or minimize losses on options it had purchased.
The Fund may purchase call options in anticipation of an increase in the market value of securities of the type in which it
may invest. The purchase of a call option would entitle the Fund, in return for the premium paid, to purchase specified securities at a specified price during the option period. The Fund would ordinarily realize a gain on the purchase of a call
option if, during the option period, the value of such securities exceeded the sum of the exercise price, the premium paid and transaction costs; otherwise the Fund would realize either no gain or a loss on the purchase of the call option.
The Fund may purchase put options in anticipation of a decline in the market value of securities in its portfolio
(protective puts) or in securities in which it may invest. The purchase of a put option would entitle the Fund, in exchange for the premium paid, to sell specified securities at a specified price during the option period. The purchase of
protective puts is designed to offset or hedge against a decline in the market value of the Funds securities. Put options may also be purchased by the Fund for the purpose of affirmatively benefiting from a decline in the price of securities
which it does not own. The Fund would ordinarily realize a gain if, during the option period, the value of the underlying securities decreased below the exercise price sufficiently to more than cover the premium and transaction costs; otherwise the
Fund would realize either no gain or a loss on the purchase of the put option. Gains and losses on the purchase of protective put options would tend to be offset by countervailing changes in the value of the underlying portfolio securities.
The Fund would purchase put and call options on securities indices for the same purposes as it would purchase options on
individual securities. For a description of options on securities indices, see Writing Covered Options above.
Yield Curve Options.
The Fund may enter into options on the yield spread or differential between two securities. Such
transactions are referred to as yield curve options. In contrast to other types of options, a yield curve option is based on the difference between the yields of designated securities, rather than the prices of the individual securities,
and is settled through cash payments. Accordingly, a yield curve option is profitable to the holder if this differential widens (in the case of a call) or narrows (in the case of a put), regardless of whether the yields of the underlying securities
increase or decrease.
The Fund may purchase or write yield curve options for the same purposes as other options on securities.
For example, the Fund may purchase a call option on the yield spread between two securities if they own one of the securities and anticipate purchasing the other security and want to hedge against an adverse change in the yield spread between the
two securities. The Fund may also purchase or write yield curve options in an effort to increase current income if, in the judgment of the Investment Adviser, the Fund will be able to profit from movements in the spread between the yields of the
underlying securities. The trading of yield curve options is subject to all of the risks associated with the trading of other types of options. In addition, however, such options present risk of loss even if the yield of one of the underlying
securities remains constant, or if the spread moves in a direction or to an extent which was not anticipated.
B-5
Yield curve options written by the Fund will be covered. A call (or put) option
is covered if the Fund holds another call (or put) option on the spread between the same two securities and segregates cash or liquid assets sufficient to cover the Funds net liability under the two options. Therefore, the Funds
liability for such a covered option is generally limited to the difference between the amount of the Funds liability under the option written by the Fund less the value of the option held by the Fund. Yield curve options may also be covered in
such other manner as may be in accordance with the requirements of the counterparty with which the option is traded and applicable laws and regulations. Yield curve options are traded over-the-counter and established trading markets for these
options may not exist.
Risks Associated with Options Transactions.
There is no assurance that a liquid secondary market
on an options exchange will exist for any particular exchange-traded option or at any particular time. If the Fund is unable to effect a closing purchase transaction with respect to covered options it has written, the Fund will not be able to sell
the underlying securities or dispose of segregated assets until the options expire or are exercised. Similarly, if the Fund is unable to effect a closing sale transaction with respect to options it has purchased, it will have to exercise the options
in order to realize any profit and will incur transaction costs upon the purchase or sale of underlying securities.
Reasons
for the absence of a liquid secondary market on an exchange include the following: (i) there may be insufficient trading interest in certain options; (ii) restrictions may be imposed by an exchange on opening or closing transactions or
both; (iii) trading halts, suspensions or other restrictions may be imposed with respect to particular classes or series of options; (iv) unusual or unforeseen circumstances may interrupt normal operations on an exchange; (v) the
facilities of an exchange or the Options Clearing Corporation may not at all times be adequate to handle current trading volume; or (vi) one or more 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 exchange (or in that class or series of options) would cease to exist, although outstanding options on that exchange that
had been issued by the Options Clearing Corporation as a result of trades on that exchange would continue to be exercisable in accordance with their terms.
There can be no assurance that higher trading activity, order flow or other unforeseen events might not, at times, render certain of the facilities of the Options Clearing Corporation or various exchanges
inadequate. Such events have, in the past, resulted in the institution by an exchange of special procedures, such as trading rotations, restrictions on certain types of order or trading halts or suspensions with respect to one or more options. These
special procedures may limit liquidity.
The Fund may purchase and sell both options that are traded on U.S. and foreign
exchanges and options traded over-the-counter with broker-dealers who make markets in these options. The ability to terminate over-the-counter options is more limited than with exchange-traded options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations.
Transactions by the Fund in options on securities and
indices will be subject to limitations established by each of the exchanges, boards of trade or other trading facilities on which such options are traded governing the maximum number of options in each class which may be written or purchased by a
single investor or group of investors acting in concert regardless of whether the options are written or purchased on the same or different exchanges, boards of trade or other trading facility or are held in one or more accounts or through one or
more brokers. Thus, the number of options which the Fund may write or purchase may be affected by options written or purchased by other investment advisory clients of the Investment Adviser. An exchange, board of trade or other trading facility may
order the liquidation of positions found to be in excess of these limits, and it may impose certain other sanctions.
The
writing and purchase of options is a highly specialized activity which involves investment techniques and risks different from those associated with ordinary portfolio securities transactions. The use of options to seek to increase total return
involves the risk of loss if the Investment Adviser is incorrect in its expectation of fluctuations in securities prices or interest rates. The successful use of options for hedging purposes also depends in part on the ability of the Investment
Adviser to manage future price fluctuations and the degree of correlation between the options and securities (or currency) markets. If the Investment Adviser is incorrect in its expectation of changes in securities prices or determination of the
correlation between the securities or securities indices on which options are written and purchased and the securities in the Funds investment portfolio, the Fund may incur losses that it would not otherwise incur. The writing of options could
increase the Funds portfolio turnover rate and, therefore, associated brokerage commissions or spreads.
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Preferred Stock, Warrants and Stock Purchase Rights
The Fund may invest in preferred stock and in warrants and stock purchase rights (rights) (in addition to those acquired in
units or attached to other securities). Preferred stocks are securities that represent an ownership interest providing the holder with claims on the issuers earnings and assets before common stock owners but after bond owners. Unlike debt
securities, the obligations of an issuer of preferred stock, including dividend and other payment obligations, may not typically be accelerated by the holders of such preferred stock on the occurrence of an event of default (such as a covenant
default or filing of a bankruptcy petition) or other non-compliance by the issuer with the terms of the preferred stock. Often, however, on the occurrence of any such event of default or non-compliance by the issuer, preferred stockholders will be
entitled to gain representation on the issuers board of directors or increase their existing board representation. In addition, preferred stockholders may be granted voting rights with respect to certain issues on the occurrence of any event
of default.
Warrants and other rights are options that entitle the holder to buy equity securities at a specific price for a
specific period of time. The Fund will invest in warrants and rights only if such equity securities are deemed appropriate by the Investment Adviser for investment by the Fund. Warrants and rights have no voting rights, receive no dividends and have
no rights with respect to the assets of the issuer.
Index Swaps, Interest Rate Swaps, Mortgage Swaps, Credit Swaps, Currency Swaps, Total
Return Swaps and Options on Swaps
The Fund may enter into
i
ndex, interest rate, mortgage, credit, currency and
total return swaps for both hedging purposes and to seek to increase total return. The Fund may also purchase and write (sell) options on swaps, commonly referred to as swaptions. Swap agreements are two party contracts entered into primarily
by institutional investors. In a standard swap transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments, which may be adjusted
for an interest factor. The gross returns to be exchanged or swapped between the parties are generally calculated with respect to a notional amount,
i.e.
, the return on or increase in value of a particular dollar
amount invested at a particular interest rate, in a particular foreign currency or security, or in a basket of securities representing a particular index. Currency swaps involve an exchange by the Fund with another party of their
respective rights to make or receive payments in specified currencies. Interest rate swaps involve an exchange by the Fund with another party of their respective commitments to pay or receive interest, such as an exchange of fixed rate payments for
floating rate payments. Mortgage swaps are similar to interest rate swaps in that they represent commitments to pay and receive interest. The notional principal amount, however, is tied to a reference pool or pools of mortgages. Index swaps involve
an exchange by the Fund with another party of the respective amounts payable with respect to a notional principal amount at interest rates equal to two specified indices. Credit swaps involve the receipt of floating or fixed rate payments in
exchange for assuming potential credit losses of an underlying security, or pool of securities. Credit swaps give one party to a transaction the right to dispose of or acquire an asset (or group of assets), or the right to receive from or make a
payment to the other party, upon the occurrence of specified credit events. Total return swaps are contracts that obligate a party to pay or receive interest in exchange for the payment by the other party of the total return generated by a security,
a basket of securities, an index or an index component. A swaption is an option to enter into a swap agreement. Like other types of options, the buyer of a swaption pays a non-refundable premium for the option and obtains the right, but not the
obligation, to enter into an underlying swap on agreed-upon terms. The seller of a swaption, in exchange for the premium, becomes obligated (if the option is exercised) to enter into an underlying swap on agreed-upon terms. The purchase of an
interest rate cap entitles the purchaser, to the extent that a specified index exceeds a predetermined interest rate, to receive payment of interest on a notional principal amount from the party selling such interest rate cap.
A great deal of flexibility is possible in the way swap transactions are structured. However, generally the Fund will enter into interest
rate, total return, credit, mortgage and index swaps only on a net basis, which means that 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. Interest rate, total
return, credit, index and mortgage swaps do not normally involve the delivery of securities, other underlying assets or principal. Accordingly, the risk of loss with respect to interest rate, total return, credit, index and mortgage swaps is
normally limited to the net amount of interest payments that the Fund is contractually obligated to make. If the other party to an interest rate, total return, credit, index or mortgage swap defaults, the Funds risk of loss consists of the net
amount of interest payments that the Fund is contractually entitled to receive. In contrast, currency swaps usually involve the delivery of a gross payment stream in one designated currency in exchange for the gross payment stream in another
designated currency. Therefore, the entire payment stream under a currency swap is subject to the risk that the other party to the swap will default on its contractual delivery obligations. A credit swap may have as reference obligations one or more
securities that may, or may not, be currently held by the Fund. The protection buyer in a credit swap is generally obligated to pay the protection seller an upfront or a periodic stream of payments over the term of the swap
provided that no credit event, such as a
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default, 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. The Fund may be either the buyer or seller in the
transaction. If the Fund is a buyer and no credit event occurs, the Fund may recover nothing if the swap is held through its termination date. However, if a credit event occurs, the buyer generally 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 whose value may have significantly decreased. As a seller, the Fund generally receives an upfront payment or a rate of income throughout the term of the
swap provided that there is no credit event. As the seller, the Fund would effectively add leverage to its portfolio because, in addition to its total net assets, the Fund would be subject to investment exposure on the notional amount of the swap.
If a credit event occurs, the value of any deliverable obligation received by the Fund as seller, coupled with the upfront 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. To the extent that the Funds exposure in a transaction involving a swap, a swaption, or an interest rate floor, cap or collar is covered by the segregation of cash or liquid assets or is covered by other means in
accordance with SEC guidance or otherwise, the Fund and the Investment Adviser believe that swaps do not constitute senior securities under the Act and, accordingly, will not treat them as being subject to the Funds borrowing restrictions.
The Fund will not enter into transactions involving swaps unless the unsecured commercial paper, senior debt or claims paying
ability of the other party thereto is considered to be investment grade by the Investment Adviser.
The use of swaps and
swaptions is a highly specialized activity which involves investment techniques and risks different from those associated with ordinary portfolio securities transactions. The use of a swap requires an understanding not only of the referenced asset,
reference rate, or index but also of the swap itself, without the benefit of observing the performance of the swap under all possible market conditions. If the Investment Adviser is incorrect in its forecasts of market values, credit quality,
interest rates and currency exchange rates, the investment performance of the Fund would be less favorable than it would have been if this investment technique were not used.
In addition, these transactions can involve greater risks than if the Fund had invested in the reference obligation directly because, in addition to general market risks, swaps are subject to illiquidity
risk, counterparty risk, credit risk and pricing risk. Because they are two party contracts and because they may have terms of greater than seven days, swap transactions may be considered to be illiquid. Moreover, the Fund bears the risk of loss of
the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap counterparty. Many swaps are complex and often valued subjectively. Swaps may be subject to pricing or basis risk, which exists
when a particular swap becomes extraordinarily expensive relative to historical prices or the price of corresponding cash market instruments. Under certain market conditions it may not be economically feasible to imitate a transaction or liquidate a
position in time to avoid a loss or take advantage of an opportunity. If a swap transaction is particularly large or if the relevant market is illiquid, it may not be possible to initiate a transaction or liquidate a position at an advantageous time
or price, which may result in significant losses.
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 in comparison with the markets for other similar instruments which are
traded in the interbank market. The Investment Adviser, under the supervision of the Board of Trustees, is responsible for determining and monitoring the liquidity of the Funds transactions in swaps, swaptions, caps, floors and collars.
Equity Swaps
The Fund may enter into equity swap contracts to invest in a market without owning or taking physical custody of securities in various
circumstances, including circumstances where direct investment in the securities is restricted for legal reasons or is otherwise impracticable. Equity swaps may also be used for hedging purposes or to seek to increase total return. The counterparty
to an equity swap contract will typically be a bank, investment banking firm or broker/dealer. Equity swap contracts may be structured in different ways. For example, a counterparty may agree to pay the Fund the amount, if any, by which the notional
amount of the equity swap contract would have increased in value had it been invested in the particular stocks (or an index of stocks), plus the dividends that would have been received on those stocks. In these cases, the Fund may agree to pay to
the counterparty a floating rate of interest on the notional amount of the equity swap contract plus the amount, if any, by which that notional amount would have decreased in value had it been invested in such stocks. Therefore, the return to the
Fund on the equity swap contract should be the gain or loss on the notional amount plus dividends on the stocks less the interest paid by the Fund on the notional amount. In other cases, the counterparty and the Fund may each agree to pay the other
the difference between the relative investment performances that would have been achieved if the notional amount of the equity swap contract had been invested in different stocks (or indices of stocks).
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The Fund will generally enter into equity swaps on a net basis, which means that 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. Payments may be made at the conclusion of an equity swap contract or periodically during its term. Equity swaps normally
do not involve the delivery of securities or other underlying assets. Accordingly, the risk of loss with respect to equity swaps is normally limited to the net amount of payments that the Fund is contractually obligated to make. If the other party
to an equity swap defaults, the Funds risk of loss consists of the net amount of payments that the Fund is contractually entitled to receive, if any. Inasmuch as these transactions are entered into for hedging purposes or are offset by
segregated cash or liquid assets to cover the Funds exposure, the Fund and its Investment Adviser believe that transactions do not constitute senior securities under the Act and, accordingly, will not treat them as being subject to the
Funds borrowing restrictions.
The Fund will not enter into swap transactions unless the unsecured commercial paper,
senior debt or claims paying ability of the other party thereto is considered to be investment grade by the Investment Adviser. The Funds ability to enter into certain swap transactions may be limited by tax considerations.
Commodity-Linked Investments
The Fund may seek to provide exposure to the investment returns of real assets that trade in the commodity markets through commodity-linked derivative securities, such as structured notes, discussed
below, which are designed to provide this exposure without direct investment in physical commodities or commodities futures contracts. Real assets are assets such as oil, gas, industrial and precious metals, livestock, and agricultural or meat
products, or other items that have tangible properties, as compared to stocks or bonds, which are financial instruments. In choosing investments, the Investment Adviser seeks to provide exposure to various commodities and commodity sectors. The
value of commodity-linked derivative securities held by the Fund may be affected by a variety of factors, including, but not limited to, overall market movements and other factors affecting the value of particular industries or commodities, such as
weather, disease, embargoes, acts of war or terrorism, or political and regulatory developments.
The prices of
commodity-linked derivative securities 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 Funds investments may be expected to underperform an investment in traditional
securities. Over the long term, the returns on the Funds investments are expected to exhibit low or negative correlation with stocks and bonds.
Because commodity-linked investments are available from a relatively small number of issuers, the Funds investments will be particularly subject to counterparty risk, which is the risk that the
issuer of the commodity-linked derivative (which issuer may also serve as counterparty to a substantial number of the Funds commodity-linked and other derivative investments) will not fulfill its contractual obligations.
Structured Notes
The
Fund may invest in structured notes. In one type of structured note in which the Fund intends to invest, the issuer of the note will be a highly creditworthy party. The terms of such notes will be in accordance with applicable IRS guidelines. The
amount payable at maturity, early redemption or knockout (as defined below) of the note will depend directly on the performance of a commodity index. As described more precisely below, the amount payable at maturity will be computed
using a formula under which the issue price paid for the note is adjusted to reflect the percentage appreciation or depreciation of the index over the term of the note in excess of a specified interest factor, and an agreed-upon multiple (the
leverage factor) of three. The note will also bear interest at a floating rate that is pegged to LIBOR. The interest rate will be based generally on the issuers funding spread and prevailing interest rates. The interest may be
payable monthly, quarterly or at maturity. The issuer of the note will be entitled to an annual fee for issuing the note, which will be payable at maturity, and which may be netted against payments otherwise due under the note. The amount payable at
maturity, early redemption or knockout of each note will be calculated by starting with an amount equal to the face amount of the note plus any remaining unpaid interest on the note and minus any accumulated fee amount, and then adding (or
subtracting, in the case of a negative number) the amount equal to the product of (i) the percentage increase (or decrease) of a commodity index over
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the applicable period, less a specified interest percentage, multiplied by (ii) the face amount of the
note, and, generally, by (iii) the leverage factor of three (although the leverage factor may vary, and some notes may have no leverage factor). The holder of the note will have a right to put the note to the issuer for redemption at any time
before maturity. The note will become automatically payable (
i.e.
, will knockout) if the relevant index declines by 15%. In the event that the index has declined to the knockout level (or below) during any day, the redemption
price of the note will be based on the closing index value of the next day. The issuer of the note will receive payment in full of the purchase price of the note substantially contemporaneously with the delivery of the note. The Fund, while holding
the note, will not be required to make any payment to the issuer of the note in addition to the purchase price paid for the note, whether as margin, settlement payment, or otherwise, during the life of the note or at maturity. The issuer of the note
will not be subject by the terms of the instrument to mark-to-market margining requirements of the CEA. The note will not be marketed as a contract of sale of a commodity for future delivery (or option on such a contract) subject to the CEA.
With respect to a second type of structured note in which the Fund intends to invest, the issuer of the note will be a highly
creditworthy party. The term of the note will be for six months. The note will be issued at par value. The amount payable at maturity or early redemption of the note will depend directly on the performance of a specified basket of 6-month futures
contracts with respect to all of the commodities in a commodity index, with weightings of the different commodities similar to the weightings in a commodity index. As described more precisely below, the amount payable at maturity will be computed
using a formula under which the issue price paid for the note is adjusted to reflect the percentage appreciation or depreciation of the value of the specified basket of commodities futures over the term of the note in excess of a specified interest
factor, and the leverage factor of three, but in no event will the amount payable at maturity be less than 51% of the issue price of the note. The note will also bear interest at a floating rate that is pegged to LIBOR. The interest rate will be
based generally on the issuers funding spread and prevailing interest rates. The interest may be payable monthly, quarterly or at maturity. The issuer of the note will be entitled to a fee for issuing the note, which will be payable at
maturity, and which may be netted against payments otherwise due under the note. The amount payable at maturity or early redemption of each note will be the greater of (i) 51% of the issue price of the note and (ii) the amount calculated
by starting with an amount equal to the face amount of the note plus any remaining unpaid interest on the note and minus any accumulated fee amount, and then adding (or subtracting, in the case of a negative number) the amount equal to the product
of (A) the percentage increase (or decrease) of the specified basket of commodities futures over the applicable period, less a specified interest percentage, multiplied by (B) the face amount of the note, and, generally, by (C) the
leverage factor of three (although the leverage factor may vary, and some notes may have no leverage factor). The holder of the note will have a right to put the note to the issuer for redemption at any time before maturity. The issuer of the note
will receive payment in full of the purchase price of the note substantially contemporaneously with the delivery of the note. The Fund, while holding the note, will not be required to make any payment to the issuer of the note in addition to the
purchase price paid for the note, whether as margin, settlement payment, or otherwise, during the life of the note or at maturity. The issuer of the note will not be subject by the terms of the instrument to mark-to-market margining requirements of
the CEA. The note will not be marketed as a contract of sale of a commodity for future delivery (or option on such a contract) subject to the CEA.
Commercial Paper and Other Short-Term Corporate Obligations
The Fund may
invest in commercial paper and other short-term obligations issued or guaranteed by U.S. corporations, non-U.S. corporations or other entities. Commercial paper represents short-term unsecured promissory notes issued in bearer form by banks or bank
holding companies, corporations and finance companies.
U.S. Government Securities
The Fund may invest in U.S. Government Securities. Some U.S. Government Securities (such as Treasury bills, notes and bonds, which differ
only in their interest rates, maturities and times of issuance) are supported by the full faith and credit of the United States. Others, such as obligations issued or guaranteed by U.S. government agencies, instrumentalities or sponsored
enterprises, are supported either by (i) the right of the issuer to borrow from the U.S. Treasury, (ii) the discretionary authority of the U.S. government to purchase certain obligations of the issuer or (iii) only the credit of the
issuer. The U.S. government is under no legal obligation, in general, to purchase the obligations of its agencies, instrumentalities or sponsored enterprises. No assurance can be given that the U.S. government will provide financial support to U.S.
government agencies, instrumentalities or sponsored enterprises in the future.
U.S. Government Securities include (to the
extent consistent with the Act) securities for which the payment of principal and interest is backed by an irrevocable letter of credit issued by the U.S. government, or its agencies, instrumentalities or sponsored enterprises. U.S. Government
Securities may also include (to the extent consistent with the Act) participations in loans made to foreign governments or their agencies that are guaranteed as to principal and interest by the U.S. government or its agencies, instrumentalities or
sponsored enterprises. The secondary market for certain of these participations is extremely limited. In the absence of a suitable secondary market, such participations are regarded as illiquid.
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The Fund may also purchase U.S. Government Securities in private placements and may also
invest in separately traded principal and interest components of securities guaranteed or issued by the U.S. Treasury that are traded independently under the separate trading of registered interest and principal of securities program
(STRIPS). The Fund may also invest in zero coupon U.S. Treasury Securities and in zero coupon securities issued by financial institutions which represent a proportionate interest in underlying U.S. Treasury Securities. A zero coupon
security pays no interest to its holder during its life and its value consists of the difference between its face value at maturity and its cost. The market prices of zero coupon securities generally are more volatile than the market prices of
securities that pay interest periodically.
Treasury Inflation-Protected Securities.
The Fund may invest in U.S.
Government securities, called Treasury inflation-protected securities or TIPS, which are fixed income securities whose principal value is periodically adjusted according to the rate of inflation. The interest rate on TIPS is
fixed at issuance, but over the life of the bond this interest may be paid on an increasing or decreasing principal value that has been adjusted for inflation. Although repayment of the original bond principal upon maturity is guaranteed, the market
value of TIPS is not guaranteed, and will fluctuate.
The values of TIPS generally fluctuate in response to changes in real
interest rates, which are in turn tied to the relationship between nominal interest rates and the rate of inflation. If inflation were to rise at a faster rate than nominal interest rates, real interest rates might decline, leading to an increase in
the value of TIPS. In contrast, if nominal interest rates were to increase at a faster rate than inflation, real interest rates might rise, leading to a decrease in the value of TIPS. If inflation is lower than expected during the period the Fund
holds TIPS, the Fund may earn less on the TIPS than on a conventional bond. If interest rates rise due to reasons other than inflation (for example, due to changes in the currency exchange rates), investors in TIPS may not be protected to the extent
that the increase is not reflected in the bonds inflation measure. There can be no assurance that the inflation index for TIPS will accurately measure the real rate of inflation in the prices of goods and services.
Any increase in principal value of TIPS caused by an increase in the consumer price index is taxable in the year the increase occurs, even
though the Fund holding TIPS will not receive cash representing the increase at that time. As a result, the Fund could be required at times to liquidate other investments, including when it is not advantageous to do so, in order to satisfy its
distribution requirements as a regulated investment company.
If the Fund invests in TIPS, it will be required to treat as
original issue discount any increase in the principal amount of the securities that occurs during the course of its taxable year. If the Fund purchases such inflation protected securities that are issued in stripped form either as stripped bonds or
coupons, it will be treated as if it had purchased a newly issued debt instrument having original issue discount.
Because the
Fund is required to distribute substantially all of its net investment income (including accrued original issue discount), the Funds investment in either zero coupon bonds or TIPS may require it to distribute to shareholders an amount greater
than the total cash income it actually receives. Accordingly, in order to make the required distributions, the Fund may be required to borrow or liquidate securities.
Bank Obligations
The Fund may invest in obligations issued or guaranteed
by U.S. or foreign banks. Bank obligations, including without limitation, time deposits, bankers acceptances and certificates of deposit, may be general obligations of the parent bank or may be limited to the issuing branch by the terms of the
specific obligations or by government regulation. Banks are subject to extensive but different governmental regulations which may limit both the amount and types of loans which may be made and interest rates which may be charged. In addition, the
profitability of the banking industry is largely dependent upon the availability and cost of funds for the purpose of financing lending operations under prevailing money market conditions. General economic conditions as well as exposure to credit
losses arising from possible financial difficulties of borrowers play an important part in the operation of this industry.
Certificates of deposit are certificates evidencing the obligation of a bank to repay funds deposited with it for a specified period of
time at a specified rate. Certificates of deposit are negotiable instruments and are similar to saving deposits but have a definite maturity and are evidenced by a certificate instead of a passbook entry. Banks are required to keep reserves against
all certificates of deposit. Fixed time deposits are bank obligations payable at a stated maturity date and bearing interest at a fixed rate. Fixed time deposits may be withdrawn on demand by the investor, but may be subject to early withdrawal
penalties which vary depending upon market conditions and the remaining maturity of the obligation. The Fund may invest in deposits in U.S. and European banks satisfying the standards set forth above.
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Zero Coupon Bonds
The Funds investments in fixed income securities may include zero coupon bonds. Zero coupon bonds are debt obligations issued or purchased at a discount from face value. The discount approximates
the total amount of interest the bonds would have accrued and compounded over the period until maturity. Zero coupon bonds do not require the periodic payment of interest. Such 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 such cash. Such investments may experience greater volatility in market value than debt obligations which provide for regular payments of
interest. In addition, if an issuer of zero coupon bonds held by the Fund defaults, the Fund may obtain no return at all on its investment. The Fund will accrue income on such investments for each taxable year which (net of deductible expenses, if
any) is distributable to shareholders and which, because no cash is generally received at the time of accrual, may require the liquidation of other portfolio securities to obtain sufficient cash to satisfy the Funds distribution obligations.
Variable and Floating Rate Securities
The interest rates payable on certain debt securities in which the Fund may invest are not fixed and may fluctuate based upon changes in market rates. A variable rate obligation has an interest rate which
is adjusted at pre-designated periods in response to changes in the market rate of interest on which the interest rate is based. Variable and floating rate obligations are less effective than fixed rate instruments at locking in a particular yield.
Nevertheless, such obligations may fluctuate in value in response to interest rate changes if there is a delay between changes in market interest rates and the interest reset date for the obligation, or for other reasons.
Mortgage Loans and Mortgage-Backed Securities
The Fund may invest in mortgage loans and mortgage pass-through securities and other securities representing an interest in or collateralized by adjustable and fixed rate mortgage loans
(Mortgage-Backed Securities).
Mortgage-Backed Securities are subject to both call risk and extension risk. Because
of these risks, these securities can have significantly greater price and yield volatility than traditional fixed income securities.
General Characteristics of Mortgage Backed Securities
.
In general, each mortgage pool underlying Mortgage-Backed Securities consists of mortgage loans evidenced by promissory notes secured by first mortgages or first deeds of trust or other similar security
instruments creating a first lien on owner occupied and non-owner occupied one-unit to four-unit residential properties, multi-family (i.e., five-units or more) properties, agricultural properties, commercial properties and mixed use properties (the
Mortgaged Properties). The Mortgaged Properties may consist of detached individual dwelling units, multi-family dwelling units, individual condominiums, townhouses, duplexes, triplexes, fourplexes, row houses, individual units in planned
unit developments, other attached dwelling units (Residential Mortgaged Properties) or commercial properties, such as office properties, retail properties, hospitality properties, industrial properties, healthcare related properties or
other types of income producing real property (Commercial Mortgaged Properties). Residential Mortgaged Properties may also include residential investment properties and second homes. In addition, the Mortgage-Backed Securities which are
residential mortgage-backed securities may also consist of mortgage loans evidenced by promissory notes secured entirely or in part by second priority mortgage liens on Residential Mortgaged Properties.
The investment characteristics of adjustable and fixed rate Mortgage-Backed Securities differ from those of traditional fixed income
securities. The major differences include the payment of interest and principal on Mortgage-Backed Securities on a more frequent (usually monthly) schedule, and the possibility that principal may be prepaid at any time due to prepayments on the
underlying mortgage loans or other assets. These differences can result in significantly greater price and yield volatility than is the case with traditional fixed income securities. As a result, if the Fund purchases Mortgage-Backed Securities at a
premium, a faster than expected prepayment rate will reduce both the market value and the yield to maturity from those which were anticipated. A prepayment rate that is slower than expected will have the opposite effect, increasing yield to maturity
and market value. Conversely, if the Fund purchases Mortgage-Backed Securities at a discount, faster than expected prepayments will increase, while slower than expected prepayments will reduce yield to maturity and market value. To the extent that
the Fund invests in Mortgage-Backed Securities, the Investment Adviser may seek to manage these potential risks by investing in a variety of Mortgage-Backed Securities and by using certain hedging techniques.
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Prepayments on a pool of mortgage loans are influenced by changes in current interest rates
and a variety of economic, geographic, social and other factors (such as changes in mortgagor housing needs, job transfers, unemployment, mortgagor equity in the mortgage properties and servicing decisions). The timing and level of prepayments
cannot be predicted. A predominant factor affecting the prepayment rate on a pool of mortgage loans is the difference between the interest rates on outstanding mortgage loans and prevailing mortgage loan interest rates (giving consideration to the
cost of any refinancing). Generally, prepayments on mortgage loans will increase during a period of falling mortgage interest rates and decrease during a period of rising mortgage interest rates. Accordingly, the amounts of prepayments available for
reinvestment by the Fund are likely to be greater during a period of declining mortgage interest rates. If general interest rates decline, such prepayments are likely to be reinvested at lower interest rates than the Fund was earning on the
mortgage-backed securities that were prepaid. Due to these factors, mortgage-backed securities may be less effective than U.S. Treasury and other types of debt securities of similar maturity at maintaining yields during periods of declining interest
rates. Because the Funds investments in Mortgage-Backed Securities are interest-rate sensitive, the Funds performance will depend in part upon the ability of the Fund to anticipate and respond to fluctuations in market interest rates and
to utilize appropriate strategies to maximize returns to the Fund, while attempting to minimize the associated risks to its investment capital. Prepayments may have a disproportionate effect on certain mortgage-backed securities and other multiple
class pass-through securities, which are discussed below.
The rate of interest paid on mortgage-backed securities is normally
lower than the rate of interest paid on the mortgages included in the underlying pool due to (among other things) the fees paid to any servicer, special servicer and trustee for the trust fund which holds the mortgage pool, other costs and expenses
of such trust fund, fees paid to any guarantor, such as Ginnie Mae (as defined below) or to any credit enhancers, mortgage pool insurers, bond insurers and/or hedge providers, and due to any yield retained by the issuer. Actual yield to the holder
may vary from the coupon rate, even if adjustable, if the mortgage-backed securities are purchased or traded in the secondary market at a premium or discount. In addition, there is normally some delay between the time the issuer receives mortgage
payments from the servicer and the time the issuer (or the trustee of the trust fund which holds the mortgage pool) makes the payments on the mortgage-backed securities, and this delay reduces the effective yield to the holder of such securities.
The issuers of certain mortgage-backed obligations may elect to have the pool of mortgage loans (or indirect interests in
mortgage loans) underlying the securities treated as a REMIC, which is subject to special federal income tax rules. A description of the types of mortgage loans and mortgage-backed securities in which the Fund may invest is provided below. The
descriptions are general and summary in nature, and do not detail every possible variation of the types of securities that are permissible investments for the Fund.
Certain General Characteristics of Mortgage Loans
Adjustable Rate
Mortgage Loans (ARMs)
. The Fund may invest in ARMs. ARMs generally provide for a fixed initial mortgage interest rate for a specified period of time. Thereafter, the interest rates (the Mortgage Interest Rates) may be
subject to periodic adjustment based on changes in the applicable index rate (the Index Rate). The adjusted rate would be equal to the Index Rate plus a fixed percentage spread over the Index Rate established for each ARM at the time of
its origination. ARMs allow the Fund to participate in increases in interest rates through periodic increases in the securities coupon rates. During periods of declining interest rates, coupon rates may readjust downward resulting in lower yields to
the Fund.
Adjustable interest rates can cause payment increases that some mortgagors may find difficult to make. However,
certain ARMs may provide that the Mortgage Interest Rate may not be adjusted to a rate above an applicable lifetime maximum rate or below an applicable lifetime minimum rate for such ARM. Certain ARMs may also be subject to limitations on the
maximum amount by which the Mortgage Interest Rate may adjust for any single adjustment period (the Maximum Adjustment). Other ARMs (Negatively Amortizing ARMs) may provide instead or as well for limitations on changes in the
monthly payment on such ARMs. Limitations on monthly payments can result in monthly payments which are greater or less than the amount necessary to amortize a Negatively Amortizing ARM by its maturity at the Mortgage Interest Rate in effect in any
particular month. In the event that a monthly payment is not sufficient to pay the interest accruing on a Negatively Amortizing ARM, any such excess interest is added to the principal balance of the loan, causing negative amortization, and will be
repaid through future monthly payments. It may take borrowers under Negatively Amortizing ARMs longer periods of time to build up equity and may increase the likelihood of default by such borrowers. In the event that a monthly payment exceeds the
sum of the interest accrued at the applicable Mortgage Interest Rate and the principal payment which would have been necessary to amortize the outstanding principal balance over the remaining term of the loan, the excess (or accelerated
amortization) further reduces the principal balance of the ARM. Negatively Amortizing ARMs do not provide for the extension of their original maturity to accommodate changes in their Mortgage Interest Rate. As a result, unless there is a
periodic recalculation of the payment amount (which there generally is), the final payment may be substantially larger than the other payments. After the expiration of the initial fixed rate period and upon the periodic recalculation of the payment
to cause timely amortization of the related mortgage loan, the monthly payment on such mortgage loan may increase substantially which may, in turn,
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increase the risk of the borrower defaulting in respect of such mortgage loan. These limitations on periodic
increases in interest rates and on changes in monthly payments protect borrowers from unlimited interest rate and payment increases, but may result in increased credit exposure and prepayment risks for lenders. When interest due on a mortgage loan
is added to the principal balance of such mortgage loan, the related mortgaged property provides proportionately less security for the repayment of such mortgage loan. Therefore, if the related borrower defaults on such mortgage loan, there is a
greater likelihood that a loss will be incurred upon any liquidation of the mortgaged property which secures such mortgage loan.
ARMs also have the risk of prepayment. The rate of principal prepayments with respect to ARMs has fluctuated in recent years. The value of
Mortgage-Backed Securities collateralized by ARMs is less likely to rise during periods of declining interest rates than the value of fixed-rate securities during such periods. Accordingly, ARMs may be subject to a greater rate of principal
repayments in a declining interest rate environment resulting in lower yields to the Fund. For example, if prevailing interest rates fall significantly, ARMs could be subject to higher prepayment rates (than if prevailing interest rates remain
constant or increase) because the availability of low fixed-rate mortgages may encourage mortgagors to refinance their ARMs to lock-in a fixed-rate mortgage. On the other hand, during periods of rising interest rates, the value of ARMs
will lag behind changes in the market rate. ARMs are also typically subject to maximum increases and decreases in the interest rate adjustment which can be made on any one adjustment date, in any one year, or during the life of the security. In the
event of dramatic increases or decreases in prevailing market interest rates, the value of the Funds investment in ARMs may fluctuate more substantially because these limits may prevent the security from fully adjusting its interest rate to
the prevailing market rates. As with fixed-rate mortgages, ARM prepayment rates vary in both stable and changing interest rate environments.
There are two main categories of indices which provide the basis for rate adjustments on ARMs: those based on U.S. Treasury securities and those derived from a calculated measure, such as a cost of funds
index or a moving average of mortgage rates. Indices commonly used for this purpose include the one-year, three-year and five-year constant maturity Treasury rates, the three-month Treasury bill rate, the 180-day Treasury bill rate, rates on
longer-term Treasury securities, the 11th District Federal Home Loan Bank Cost of Funds, the National Median Cost of Funds, the one-month, three-month, six-month or one-year London Interbank Offered Rate, the prime rate of a specific bank, or
commercial paper rates. Some indices, such as the one-year constant maturity Treasury rate, closely mirror changes in market interest rate levels. Others, such as the 11th District Federal Home Loan Bank Cost of Funds index, tend to lag behind
changes in market rate levels and tend to be somewhat less volatile. The degree of volatility in the market value of ARMs in the Funds portfolio and, therefore, in the net asset value of the Funds shares, will be a function of the length
of the interest rate reset periods and the degree of volatility in the applicable indices.
Fixed-Rate Mortgage Loans
.
Generally, fixed-rate mortgage loans included in mortgage pools (the Fixed-Rate Mortgage Loans) will bear simple interest at fixed annual rates and have original terms to maturity ranging from 5 to 40 years. Fixed-Rate Mortgage
Loans generally provide for monthly payments of principal and interest in substantially equal installments for the term of the mortgage note in sufficient amounts to fully amortize principal by maturity, although certain Fixed-Rate Mortgage Loans
provide for a large final balloon payment upon maturity.
Certain Legal Considerations of Mortgage Loans
.
The following is a discussion of certain legal and regulatory aspects of the mortgage loans in which the Fund may invest. This discussion is not exhaustive, and does not address all of the legal or regulatory aspects affecting mortgage loans. These
regulations may impair the ability of a mortgage lender to enforce its rights under the mortgage documents. These regulations may also adversely affect the Funds investments in Mortgage-Backed Securities (including those issued or guaranteed
by the U.S. government, its agencies or instrumentalities) by delaying the Funds receipt of payments derived from principal or interest on mortgage loans affected by such regulations.
1.
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Foreclosure
. A foreclosure of a defaulted mortgage loan may be delayed due to compliance with statutory notice or service of process provisions,
difficulties in locating necessary parties or legal challenges to the mortgagees right to foreclose. Depending upon market conditions, the ultimate proceeds of the sale of foreclosed property may not equal the amounts owed on the
Mortgage-Backed Securities. Furthermore, courts in some cases have imposed general equitable principles upon foreclosure generally designed to relieve the borrower from the legal effect of default and have required lenders to undertake affirmative
and expensive actions to determine the causes for the default and the likelihood of loan reinstatement.
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2.
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Rights of Redemption
. In some states, after foreclosure of a mortgage loan, the borrower and foreclosed junior lienors are given a statutory period in
which to redeem the property, which right may diminish the mortgagees ability to sell the property.
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3.
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Legislative Limitations
. In addition to anti-deficiency and related legislation, numerous other federal and state statutory provisions, including the
federal bankruptcy laws and state laws affording relief to debtors, may interfere with or affect the ability of a secured mortgage lender to enforce its security interest. For example, a bankruptcy court may grant the debtor a reasonable time to
cure a default on a mortgage loan, including a payment default. The court in certain instances may also reduce the monthly payments due under such mortgage loan, change the rate of interest, reduce the principal balance of the loan to the
then-current appraised value of the related mortgaged property, alter the mortgage loan repayment schedule and grant priority of certain liens over the lien of the mortgage loan. If a court relieves a borrowers obligation to repay amounts
otherwise due on a mortgage loan, the mortgage loan servicer will not be required to advance such amounts, and any loss may be borne by the holders of securities backed by such loans. In addition, numerous federal and state consumer protection laws
impose penalties for failure to comply with specific requirements in connection with origination and servicing of mortgage loans.
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4.
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Due-on-Sale Provisions
. Fixed-rate mortgage loans may contain a so-called due-on-sale clause permitting acceleration of the
maturity of the mortgage loan if the borrower transfers the property. The Garn-St. Germain Depository Institutions Act of 1982 sets forth nine specific instances in which no mortgage lender covered by that Act may exercise a due-on-sale
clause upon a transfer of property. The inability to enforce a due-on-sale clause or the lack of such a clause in mortgage loan documents may result in a mortgage loan being assumed by a purchaser of the property that bears an interest
rate below the current market rate.
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5.
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Usury Laws
. Some states prohibit charging interest on mortgage loans in excess of statutory limits. If such limits are exceeded, substantial penalties may
be incurred and, in some cases, enforceability of the obligation to pay principal and interest may be affected.
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Recent Governmental Action, Legislation and Regulation
. The rise in the rate of foreclosures of properties in certain states or localities has resulted in
legislative, regulatory and enforcement action in such states or localities seeking to prevent or restrict foreclosures, particularly in respect of residential mortgage loans. Actions have also been brought against issuers and underwriters of
residential mortgage-backed securities collateralized by such residential mortgage loans and investors in such residential mortgage-backed securities. Legislative or regulatory initiatives by federal, state or local legislative bodies or
administrative agencies, if enacted or adopted, could delay foreclosure or the exercise of other remedies, provide new defenses to foreclosure, or otherwise impair the ability of the loan servicer to foreclose or realize on a defaulted residential
mortgage loan included in a pool of residential mortgage loans backing such residential mortgage-backed securities. While the nature or extent of limitations on foreclosure or exercise of other remedies that may be enacted cannot be predicted, any
such governmental actions that interfere with the foreclosure process could increase the costs of such foreclosures or exercise of other remedies in respect of residential mortgage loans which collateralize Mortgage-Backed Securities held by the
Fund, delay the timing or reduce the amount of recoveries on defaulted residential mortgage loans which collateralize Mortgage-Backed Securities held by the Fund, and consequently, could adversely impact the yields and distributions the Fund may
receive in respect of its ownership of Mortgage-Backed Securities collateralized by residential mortgage loans. For example, the Helping Families Save Their Homes Act of 2009 authorizes bankruptcy courts to assist bankrupt borrowers by restructuring
residential mortgage loans secured by a lien on the borrowers primary residence. Bankruptcy judges are permitted to reduce the interest rate of the bankrupt borrowers residential mortgage loan, extend its term to maturity to up to
40 years or take other actions to reduce the borrowers monthly payment. As a result, the value of, and the cash flows in respect of, the Mortgage-Backed Securities collateralized by these residential mortgage loans may be adversely
impacted, and, as a consequence, the Funds investment in such Mortgage-Backed Securities could be adversely impacted. Other federal legislation, including the Home Affordability Modification Program (
HAMP
), encourages
servicers to modify residential mortgage loans that are either already in default or are at risk of imminent default. Furthermore, HAMP provides incentives for servicers to modify residential mortgage loans that are contractually current. This
program, as well other legislation and/or governmental intervention designed to protect consumers, may have an adverse impact on servicers of residential mortgage loans by increasing costs and expenses of these servicers while at the same time
decreasing servicing cash flows. Such increased financial pressures may have a negative effect on the ability of servicers to pursue collection on residential mortgage loans that are experiencing increased delinquencies and defaults and to maximize
recoveries on the sale of underlying residential mortgaged properties following foreclosure. Other legislative or regulatory actions include insulation of servicers from liability for modification of residential mortgage loans without regard to the
terms of the applicable servicing agreements. The foregoing legislation and current and future governmental regulation activities may have the effect of reducing returns to the Fund to the extent it has invested in Mortgage-Backed Securities
collateralized by these residential mortgage loans.
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Mortgage Pass-Through Securities
To the extent consistent with its investment policies, the Fund may invest in both government guaranteed and privately issued mortgage
passthrough securities (Mortgage Pass-Throughs) that are fixed or adjustable rate Mortgage-Backed Securities which provide for monthly payments that are a pass-through of the monthly interest and principal payments (including
any prepayments)
B-15
made by the individual borrowers on the pooled mortgage loans, net of any fees or other amounts paid to any
guarantor, administrator and/or servicer of the underlying mortgage loans. The seller or servicer of the underlying mortgage obligations will generally make representations and warranties to certificate-holders as to certain characteristics of the
mortgage loans and as to the accuracy of certain information furnished to the trustee in respect of each such mortgage loan. Upon a breach of any representation or warranty that materially and adversely affects the interests of the related
certificate-holders in a mortgage loan, the seller or servicer generally may be obligated either to cure the breach in all material respects, to repurchase the mortgage loan or, if the related agreement so provides, to substitute in its place a
mortgage loan pursuant to the conditions set forth therein. Such a repurchase or substitution obligation may constitute the sole remedy available to the related certificate-holders or the trustee for the material breach of any such representation or
warranty by the seller or servicer.
The following discussion describes certain aspects of only a few of the wide variety of
structures of Mortgage Pass-Throughs that are available or may be issued.
General Description of Certificates
. Mortgage
Pass-Throughs may be issued in one or more classes of senior certificates and one or more classes of subordinate certificates. Each such class may bear a different pass-through rate. Generally, each certificate will evidence the specified interest
of the holder thereof in the payments of principal or interest or both in respect of the mortgage pool comprising part of the trust fund for such certificates.
Any class of certificates may also be divided into subclasses entitled to varying amounts of principal and interest. If a REMIC election has been made, certificates of such subclasses may be entitled to
payments on the basis of a stated principal balance and stated interest rate, and payments among different subclasses may be made on a sequential, concurrent, pro rata or disproportionate basis, or any combination thereof. The stated interest rate
on any such subclass of certificates may be a fixed rate or one which varies in direct or inverse relationship to an objective interest index.
Generally, each registered holder of a certificate will be entitled to receive its pro rata share of monthly distributions of all or a portion of principal of the underlying mortgage loans or of interest
on the principal balances thereof, which accrues at the applicable mortgage pass-through rate, or both. The difference between the mortgage interest rate and the related mortgage pass-through rate (less the amount, if any, of retained yield) with
respect to each mortgage loan will generally be paid to the servicer as a servicing fee. Because certain adjustable rate mortgage loans included in a mortgage pool may provide for deferred interest (i.e., negative amortization), the amount of
interest actually paid by a mortgagor in any month may be less than the amount of interest accrued on the outstanding principal balance of the related mortgage loan during the relevant period at the applicable mortgage interest rate. In such event,
the amount of interest that is treated as deferred interest will generally be added to the principal balance of the related mortgage loan and will be distributed pro rata to certificate-holders as principal of such mortgage loan when paid by the
mortgagor in subsequent monthly payments or at maturity.
Government Guaranteed Mortgage-Backed Securities
. There are
several types of government guaranteed Mortgage-Backed Securities currently available, including guaranteed mortgage pass-through certificates and multiple class securities, which include guaranteed Real Estate Mortgage Investment Conduit
Certificates (REMIC Certificates) and other collateralized mortgage obligations. The Fund is permitted to invest in other types of Mortgage-Backed Securities that may be available in the future to the extent consistent with its
investment policies and objective.
The Funds investments in Mortgage-Backed Securities may include securities issued or
guaranteed by the U.S. Government or one of its agencies, authorities, instrumentalities or sponsored enterprises, 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). Ginnie Mae securities are backed by the full faith and credit of the U.S. Government, which means that the U.S. Government guarantees that the interest and
principal will be paid when due. Fannie Mae and Freddie Mac securities are not backed by the full faith and credit of the U.S. Government. Fannie Mae and Freddie Mac have the ability to borrow from the U.S. Treasury, and as a result, they are
generally viewed by the market as high quality securities with low credit risks. From time to time, proposals have been introduced before Congress for the purpose of restricting or eliminating federal sponsorship of Fannie Mae and Freddie Mac that
issue guaranteed Mortgage-Backed Securities. The Trust cannot predict what legislation, if any, may be proposed in the future in Congress as regards such sponsorship or which proposals, if any, might be enacted. Such proposals, if enacted, might
materially and adversely affect the availability of government guaranteed Mortgage-Backed Securities and the liquidity and value of the Funds portfolio.
B-16
There is risk that the U.S. Government will not provide financial support to its agencies,
authorities, instrumentalities or sponsored enterprises. The Fund may purchase U.S. Government Securities that are not backed by the full faith and credit of the U.S. Government, such as those issued by Fannie Mae and Freddie Mac. The maximum
potential liability of the issuers of some U.S. Government Securities held by the Fund may greatly exceed such issuers current resources, including such issuers legal right to support from the U.S. Treasury. It is possible that these
issuers will not have the funds to meet their payment obligations in the future.
Below is a general discussion of certain
types of guaranteed Mortgage-Backed Securities in which the Fund may invest.
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Ginnie Mae Certificates
. Ginnie Mae is a wholly-owned corporate instrumentality of the United States. Ginnie Mae is authorized to
guarantee the timely payment of the principal of and interest on certificates that are based on and backed by a pool of mortgage loans insured by the Federal Housing Administration (FHA), or guaranteed by the Veterans Administration
(VA), or by pools of other eligible mortgage loans. In order to meet its obligations under any guaranty, Ginnie Mae is authorized to borrow from the United States Treasury in an unlimited amount. The National Housing Act provides that
the full faith and credit of the U.S. Government is pledged to the timely payment of principal and interest by Ginnie Mae of amounts due on Ginnie Mae certificates.
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Fannie Mae Certificates
. Fannie Mae is a stockholder-owned corporation chartered under an act of the United States Congress. Generally,
Fannie Mae Certificates are issued and guaranteed by Fannie Mae and represent an undivided interest in a pool of mortgage loans (a Pool) formed by Fannie Mae. A Pool consists of residential mortgage loans either previously owned by
Fannie Mae or purchased by it in connection with the formation of the Pool. The mortgage loans may be either conventional mortgage loans (i.e., not insured or guaranteed by any U.S. Government agency) or mortgage loans that are either insured by the
FHA or guaranteed by the VA. However, the mortgage loans in Fannie Mae Pools are primarily conventional mortgage loans. The lenders originating and servicing the mortgage loans are subject to certain eligibility requirements established by Fannie
Mae. Fannie Mae has certain contractual responsibilities. With respect to each Pool, Fannie Mae is obligated to distribute scheduled installments of principal and interest after Fannie Maes servicing and guaranty fee, whether or not received,
to Certificate holders. Fannie Mae also is obligated to distribute to holders of Certificates an amount equal to the full principal balance of any foreclosed mortgage loan, whether or not such principal balance is actually recovered. The obligations
of Fannie Mae under its guaranty of the Fannie Mae Certificates are obligations solely of Fannie Mae. See Certain Additional Information with Respect to Freddie Mac and Fannie Mae below.
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Freddie Mac Certificates
. Freddie Mac is a publicly held U.S. Government sponsored enterprise. A principal activity of Freddie Mac
currently is the purchase of first lien, conventional, residential and multifamily mortgage loans and participation interests in such mortgage loans and their resale in the form of mortgage securities, primarily Freddie Mac Certificates. A Freddie
Mac Certificate represents a pro rata interest in a group of mortgage loans or participations in mortgage loans (a Freddie Mac Certificate group) purchased by Freddie Mac. Freddie Mac guarantees to each registered holder of a Freddie Mac
Certificate the timely payment of interest at the rate provided for by such Freddie Mac Certificate (whether or not received on the underlying loans). Freddie Mac also guarantees to each registered Certificate holder ultimate collection of all
principal of the related mortgage loans, without any offset or deduction, but does not, generally, guarantee the timely payment of scheduled principal. The obligations of Freddie Mac under its guaranty of Freddie Mac Certificates are obligations
solely of Freddie Mac. See Certain Additional Information with Respect to Freddie Mac and Fannie Mae below.
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The mortgage loans underlying the Freddie Mac and Fannie Mae Certificates consist of adjustable rate or fixed-rate mortgage loans with original terms to maturity of up to forty years. These mortgage loans
are usually secured by first liens on one-to-four-family residential properties or multi-family projects. Each mortgage loan must meet the applicable standards set forth in the law creating Freddie Mac or Fannie Mae. A Freddie Mac Certificate group
may include whole loans, participation interests in whole loans, undivided interests in whole loans and participations comprising another Freddie Mac Certificate group.
Conventional Mortgage Loans
. The conventional mortgage loans underlying the Freddie Mac and Fannie Mae Certificates consist of adjustable rate or fixed-rate mortgage loans normally with original
terms to maturity of between five and thirty years. Substantially all of these mortgage loans are secured by first liens on one- to four-family residential properties or multi-family projects. Each mortgage loan must meet the applicable standards
set forth in the law creating Freddie Mac or Fannie Mae. A Freddie Mac Certificate group may include whole loans, participation interests in whole loans, undivided interests in whole loans and participations comprising another Freddie Mac
Certificate group.
Certain Additional Information with Respect to Freddie Mac and Fannie Mae
. The volatility and
disruption that impacted the capital and credit markets during late 2008 and into 2009 have led to increased market concerns about Freddie Macs and Fannie Maes ability to withstand future credit losses associated with securities held in
their investment portfolios, and on which they provide
B-17
guarantees, without the direct support of the federal government. On September 6, 2008,
both Freddie Mac and Fannie Mae were placed under the conservatorship of the Federal Housing Finance Agency (FHFA). Under the plan of conservatorship, the FHFA has assumed control of, and generally has the power to direct, the operations
of Freddie Mac and Fannie Mae, and is empowered to exercise all powers collectively held by their respective shareholders, directors and officers, including the power to (1) take over the assets of and operate Freddie Mac and Fannie Mae with
all the powers of the shareholders, the directors, and the officers of Freddie Mac and Fannie Mae and conduct all business of Freddie Mac and Fannie Mae; (2) collect all obligations and money due to Freddie Mac and Fannie Mae; (3) perform
all functions of Freddie Mac and Fannie Mae which are consistent with the conservators appointment; (4) preserve and conserve the assets and property of Freddie Mac and Fannie Mae; and (5) contract for assistance in fulfilling any
function, activity, action or duty of the conservator. In addition, in connection with the actions taken by the FHFA, the U.S. Treasury Department (the Treasury) has entered into certain preferred stock purchase agreements with each of
Freddie Mac and Fannie Mae which establish the Treasury as the holder of a new class of senior preferred stock in each of Freddie Mac and Fannie Mae, which stock was issued in connection with financial contributions from the Treasury to Freddie Mac
and Fannie Mae. The conditions attached to the financial contribution made by the Treasury to Freddie Mac and Fannie Mae and the issuance of this senior preferred stock place significant restrictions on the activities of Freddie Mac and Fannie Mae.
Freddie Mac and Fannie Mae must obtain the consent of the Treasury to, among other things, (i) make any payment to purchase or redeem its capital stock or pay any dividend other than in respect of the senior preferred stock to the Treasury,
(ii) issue capital stock of any kind, (iii) terminate the conservatorship of the FHFA except in connection with a receivership, or (iv) increase its debt beyond certain specified levels. In addition, significant restrictions are
placed on the maximum size of each of Freddie Macs and Fannie Maes respective portfolios of mortgages and Mortgage-Backed Securities, and the purchase agreements entered into by Freddie Mac and Fannie Mae provide that the maximum size of
their portfolios of these assets must decrease by a specified percentage each year. On June 16, 2010, FHFA ordered Fannie Mae and Freddie Macs stock de-listed from the New York Stock Exchange (NYSE) after the price of common
stock in Fannie Mae fell below the NYSE minimum average closing price of $1 for more than 30 days.
The future status and
role of Freddie Mac and Fannie Mae could be impacted by (among other things) the actions taken and restrictions placed on Freddie Mac and Fannie Mae by the FHFA in its role as conservator, the restrictions placed on Freddie Macs and Fannie
Maes operations and activities as a result of the senior preferred stock investment made by the Treasury, market responses to developments at Freddie Mac and Fannie Mae, and future legislative and regulatory action that alters the operations,
ownership, structure and/or mission of these institutions, each of which may, in turn, impact the value of, and cash flows on, any Mortgage-Backed Securities guaranteed by Freddie Mac and Fannie Mae, including any such Mortgage-Backed Securities
held by the Fund.
Privately Issued Mortgage-Backed Securities
. The Fund may invest in privately issued Mortgage-Backed
Securities. Privately issued Mortgage-Backed Securities are generally backed by pools of conventional (i.e., non-government guaranteed or insured) mortgage loans. The seller or servicer of the underlying mortgage obligations will generally make
representations and warranties to certificate-holders as to certain characteristics of the mortgage loans and as to the accuracy of certain information furnished to the trustee in respect of each such mortgage loan. Upon a breach of any
representation or warranty that materially and adversely affects the interests of the related certificate-holders in a mortgage loan, the seller or servicer generally will be obligated either to cure the breach in all material respects, to
repurchase the mortgage loan or, if the related agreement so provides, to substitute in its place a mortgage loan pursuant to the conditions set forth therein. Such a repurchase or substitution obligation may constitute the sole remedy available to
the related certificate-holders or the trustee for the material breach of any such representation or warranty by the seller or servicer.
Mortgage Pass-Through Securities
To the extent consistent with its investment policies, the Fund may invest in both government guaranteed and privately issued mortgage passthrough securities (Mortgage Pass-Throughs) that are
fixed or adjustable rate Mortgage-Backed Securities which provide for monthly payments that are a pass-through of the monthly interest and principal payments (including any prepayments) made by the individual borrowers on the pooled
mortgage loans, net of any fees or other amounts paid to any guarantor, administrator and/or servicer of the underlying mortgage loans. The seller or servicer of the underlying mortgage obligations will generally make representations and warranties
to certificate-holders as to certain characteristics of the mortgage loans and as to the accuracy of certain information furnished to the trustee in respect of each such mortgage loan. Upon a breach of any representation or warranty that materially
and adversely affects the interests of the related certificate-holders in a mortgage loan, the seller or servicer generally may be obligated either to cure the breach in all material respects, to repurchase the mortgage loan or, if the related
agreement so provides, to substitute in its place a mortgage loan pursuant to the conditions set forth therein. Such a repurchase or substitution obligation may constitute the sole remedy available to the related certificate-holders or the trustee
for the material breach of any such representation or warranty by the seller or servicer.
B-18
The following discussion describes certain aspects of only a few of the wide variety of
structures of Mortgage Pass-Throughs that are available or may be issued.
General Description of Certificates
. Mortgage
Pass-Throughs may be issued in one or more classes of senior certificates and one or more classes of subordinate certificates. Each such class may bear a different pass-through rate. Generally, each certificate will evidence the specified interest
of the holder thereof in the payments of principal or interest or both in respect of the mortgage pool comprising part of the trust fund for such certificates.
Any class of certificates may also be divided into subclasses entitled to varying amounts of principal and interest. If a REMIC election has been made, certificates of such subclasses may be entitled to
payments on the basis of a stated principal balance and stated interest rate, and payments among different subclasses may be made on a sequential, concurrent, pro rata or disproportionate basis, or any combination thereof. The stated interest rate
on any such subclass of certificates may be a fixed rate or one which varies in direct or inverse relationship to an objective interest index.
Generally, each registered holder of a certificate will be entitled to receive its pro rata share of monthly distributions of all or a portion of principal of the underlying mortgage loans or of interest
on the principal balances thereof, which accrues at the applicable mortgage pass-through rate, or both. The difference between the mortgage interest rate and the related mortgage pass-through rate (less the amount, if any, of retained yield) with
respect to each mortgage loan will generally be paid to the servicer as a servicing fee. Because certain adjustable rate mortgage loans included in a mortgage pool may provide for deferred interest (i.e., negative amortization), the amount of
interest actually paid by a mortgagor in any month may be less than the amount of interest accrued on the outstanding principal balance of the related mortgage loan during the relevant period at the applicable mortgage interest rate. In such event,
the amount of interest that is treated as deferred interest will generally be added to the principal balance of the related mortgage loan and will be distributed pro rata to certificate-holders as principal of such mortgage loan when paid by the
mortgagor in subsequent monthly payments or at maturity.
Ratings
. The ratings assigned by a rating organization to
Mortgage Pass-Throughs generally address the likelihood of the receipt of distributions on the underlying mortgage loans by the related certificate-holders under the agreements pursuant to which such certificates are issued. A rating
organizations ratings normally take into consideration the credit quality of the related mortgage pool, including any credit support providers, structural and legal aspects associated with such certificates, and the extent to which the payment
stream on such mortgage pool is adequate to make payments required by such certificates. A rating organizations ratings on such certificates do not, however, constitute a statement regarding frequency of prepayments on the related mortgage
loans. In addition, the rating assigned by a rating organization to a certificate may not address the possibility that, in the event of the insolvency of the issuer of certificates where a subordinated interest was retained, the issuance and sale of
the senior certificates may be recharacterized as a financing and, as a result of such recharacterization, payments on such certificates may be affected. A rating organization may downgrade or withdraw a rating assigned by it to any Mortgage
Pass-Through at any time, and no assurance can be made that any ratings on any Mortgage Pass-Throughs included in the Fund will be maintained, or that if such ratings are assigned, they will not be downgraded or withdrawn by the assigning rating
organization.
Recently, rating agencies have placed on credit watch or downgraded the ratings previously assigned to a large
number of mortgage-backed securities (which may include certain of the Mortgage-Backed Securities in which the Fund may have invested or may in the future be invested), and may continue to do so in the future. In the event that any Mortgage-Backed
Security held by the Fund is placed on credit watch or downgraded, the value of such Mortgage-Backed Security may decline and the Fund may consequently experience losses in respect of such Mortgage-Backed Security.
Credit Enhancement
. Mortgage pools created by non-governmental issuers generally offer a higher yield than government and
government-related pools because of the absence of direct or indirect government or agency payment guarantees. To lessen the effect of failures by obligors on underlying assets to make payments, Mortgage Pass-Throughs may contain elements of credit
support. Credit support falls generally into two categories: (i) liquidity protection and (ii) protection against losses resulting from default by an obligor on the underlying assets. Liquidity protection refers to the provision of
advances, generally by the entity administering the pools of mortgages, the provision of a reserve fund, or a combination thereof, to ensure, subject to certain limitations, that scheduled payments on the underlying pool are made in a timely
fashion. Protection against losses resulting from default ensures ultimate payment of the obligations on at least a portion of the assets in the pool. Such credit support can be provided by, among other things, payment guarantees, letters of credit,
pool insurance, subordination, or any combination thereof.
B-19
Subordination; Shifting of Interest; Reserve Fund
. In order to achieve ratings on one
or more classes of Mortgage Pass-Throughs, one or more classes of certificates may be subordinate certificates which provide that the rights of the subordinate certificate-holders to receive any or a specified portion of distributions with respect
to the underlying mortgage loans may be subordinated to the rights of the senior certificate holders. If so structured, the subordination feature may be enhanced by distributing to the senior certificate-holders on certain distribution dates, as
payment of principal, a specified percentage (which generally declines over time) of all principal payments received during the preceding prepayment period (shifting interest credit enhancement). This will have the effect of accelerating
the amortization of the senior certificates while increasing the interest in the trust fund evidenced by the subordinate certificates. Increasing the interest of the subordinate certificates relative to that of the senior certificates is intended to
preserve the availability of the subordination provided by the subordinate certificates. In addition, because the senior certificate-holders in a shifting interest credit enhancement structure are entitled to receive a percentage of principal
prepayments which is greater than their proportionate interest in the trust fund, the rate of principal prepayments on the mortgage loans may have an even greater effect on the rate of principal payments and the amount of interest payments on, and
the yield to maturity of, the senior certificates.
In addition to providing for a preferential right of the senior
certificate-holders to receive current distributions from the mortgage pool, a reserve fund may be established relating to such certificates (the Reserve Fund). The Reserve Fund may be created with an initial cash deposit by the
originator or servicer and augmented by the retention of distributions otherwise available to the subordinate certificate-holders or by excess servicing fees until the Reserve Fund reaches a specified amount.
The subordination feature, and any Reserve Fund, are intended to enhance the likelihood of timely receipt by senior certificate-holders of
the full amount of scheduled monthly payments of principal and interest due to them and will protect the senior certificate-holders against certain losses; however, in certain circumstances the Reserve Fund could be depleted and temporary shortfalls
could result. In the event that the Reserve Fund is depleted before the subordinated amount is reduced to zero, senior certificate-holders will nevertheless have a preferential right to receive current distributions from the mortgage pool to the
extent of the then outstanding subordinated amount. Unless otherwise specified, until the subordinated amount is reduced to zero, on any distribution date any amount otherwise distributable to the subordinate certificates or, to the extent
specified, in the Reserve Fund will generally be used to offset the amount of any losses realized with respect to the mortgage loans (Realized Losses). Realized Losses remaining after application of such amounts will generally be applied
to reduce the ownership interest of the subordinate certificates in the mortgage pool. If the subordinated amount has been reduced to zero, Realized Losses generally will be allocated pro rata among all certificate-holders in proportion to their
respective outstanding interests in the mortgage pool.
Alternative Credit Enhancement
. As an alternative, or in
addition to the credit enhancement afforded by subordination, credit enhancement for Mortgage Pass-Throughs may be provided through bond insurers, or at the mortgage loan-level through mortgage insurance, hazard insurance, or through the deposit of
cash, certificates of deposit, letters of credit, a limited guaranty or by such other methods as are acceptable to a rating agency. In certain circumstances, such as where credit enhancement is provided by bond insurers, guarantees or letters of
credit, the security is subject to credit risk because of its exposure to the credit risk of an external credit enhancement provider.
Voluntary Advances
. Generally, in the event of delinquencies in payments on the mortgage loans underlying the Mortgage Pass-Throughs, the servicer may agree to make advances of cash for the benefit
of certificate-holders, but generally will do so only to the extent that it determines such voluntary advances will be recoverable from future payments and collections on the mortgage loans or otherwise.
Optional Termination
. Generally, the servicer may, at its option with respect to any certificates, repurchase all of the underlying
mortgage loans remaining outstanding at such time if the aggregate outstanding principal balance of such mortgage loans is less than a specified percentage (generally 5-10%) of the aggregate outstanding principal balance of the mortgage loans as of
the cut-off date specified with respect to such series.
Multiple Class Mortgage-Backed Securities and Collateralized
Mortgage Obligations
. The Fund may invest in multiple class securities including collateralized mortgage obligations (CMOs) and REMIC Certificates. These securities may be issued by U.S. Government agencies, instrumentalities or
sponsored enterprises such as Fannie Mae or Freddie Mac or by trusts formed by private originators of, or investors in, mortgage loans, including savings and loan associations, mortgage bankers, commercial banks, insurance companies, investment
banks and special purpose subsidiaries of the foregoing. In general, CMOs are debt obligations of a legal entity that are collateralized by, and multiple class Mortgage-Backed Securities represent direct ownership interests in, a pool of mortgage
loans or Mortgage-Backed Securities the payments on which are used to make payments on the CMOs or multiple class Mortgage-Backed Securities.
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Fannie Mae REMIC Certificates are issued and guaranteed as to timely distribution of
principal and interest by Fannie Mae. In addition, Fannie Mae will be obligated to distribute the principal balance of each class of REMIC Certificates in full, whether or not sufficient funds are otherwise available.
Freddie Mac guarantees the timely payment of interest on Freddie Mac REMIC Certificates and also guarantees the payment of principal as
payments are required to be made on the underlying mortgage participation certificates (PCs). PCs represent undivided interests in specified level payment, residential mortgages or participations therein purchased by Freddie Mac and
placed in a PC pool. With respect to principal payments on PCs, Freddie Mac generally guarantees ultimate collection of all principal of the related mortgage loans without offset or deduction but the receipt of the required payments may be delayed.
Freddie Mac also guarantees timely payment of principal of certain PCs.
CMOs and guaranteed REMIC Certificates issued by
Fannie Mae and Freddie Mac are types of multiple class Mortgage-Backed Securities. The REMIC Certificates represent beneficial ownership interests in a REMIC trust, generally consisting of mortgage loans or Fannie Mae, Freddie Mac or Ginnie Mae
guaranteed Mortgage-Backed Securities (the Mortgage Assets). The obligations of Fannie Mae or Freddie Mac under their respective guaranty of the REMIC Certificates are obligations solely of Fannie Mae or Freddie Mac, respectively. See
Certain Additional Information with Respect to Freddie Mac and Fannie Mae.
CMOs and REMIC Certificates are issued
in multiple classes. Each class of CMOs or REMIC Certificates, often referred to as a tranche, is issued at a specific adjustable or fixed interest rate and must be fully retired no later than its final distribution date. Principal
prepayments on the mortgage loans or the Mortgage Assets underlying the CMOs or REMIC Certificates may cause some or all of the classes of CMOs or REMIC Certificates to be retired substantially earlier than their final distribution dates. Generally,
interest is paid or accrues on all classes of CMOs or REMIC Certificates on a monthly basis.
The principal of and interest on
the Mortgage Assets may be allocated among the several classes of CMOs or REMIC Certificates in various ways. In certain structures (known as sequential pay CMOs or REMIC Certificates), payments of principal, including any principal
prepayments, on the Mortgage Assets generally are applied to the classes of CMOs or REMIC Certificates in the order of their respective final distribution dates. Thus, no payment of principal will be made on any class of sequential pay CMOs or REMIC
Certificates until all other classes having an earlier final distribution date have been paid in full.
Additional structures
of CMOs and REMIC Certificates include, among others, parallel pay CMOs and REMIC Certificates. Parallel pay CMOs or REMIC Certificates are those which are structured to apply principal payments and prepayments of the Mortgage Assets to
two or more classes concurrently on a proportionate or disproportionate basis. These simultaneous payments are taken into account in calculating the final distribution date of each class.
A wide variety of REMIC Certificates may be issued in parallel pay or sequential pay structures. These securities include accrual
certificates (also known as Z-Bonds), which only accrue interest at a specified rate until all other certificates having an earlier final distribution date have been retired and are converted thereafter to an interest-paying security,
and planned amortization class (PAC) certificates, which are parallel pay REMIC Certificates that generally require that specified amounts of principal be applied on each payment date to one or more classes or REMIC Certificates (the
PAC Certificates), even though all other principal payments and prepayments of the Mortgage Assets are then required to be applied to one or more other classes of the PAC Certificates. The scheduled principal payments for the 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 tend to have market prices and yields that are much more volatile than other PAC classes.
Commercial Mortgage-Backed Securities
. Commercial mortgage-backed securities (CMBS) are a type of Mortgage Pass-Through
that are primarily backed by a pool of commercial mortgage loans. The commercial mortgage loans are, in turn, generally secured by commercial mortgaged properties (such as office properties, retail properties, hospitality properties, industrial
properties, healthcare related properties or other types of income producing real property). CMBS generally entitle the holders thereof to receive payments that depend primarily on the cash flow from a specified pool of commercial or multifamily
mortgage loans. CMBS will be affected by payments, defaults, delinquencies and losses on the underlying mortgage loans. The underlying mortgage loans generally are secured by income producing properties such as office properties, retail properties,
multifamily properties, manufactured housing, hospitality properties, industrial properties and self storage properties. Because issuers of CMBS have no significant assets other than the underlying commercial real estate loans and because of the
significant credit risks inherent in the underlying collateral, credit risk is a correspondingly important consideration with respect to the related CMBS Securities. Certain of the mortgage loans underlying CMBS Securities constituting part of the
collateral interests may be delinquent, in default or in foreclosure.
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Commercial real estate lending may expose a lender (and the related Mortgage-Backed
Security) to a greater risk of loss than certain other forms of lending because it typically involves making larger loans to single borrowers or groups of related borrowers. In addition, in the case of certain commercial mortgage loans, repayment of
loans secured by commercial and multifamily properties depends upon the ability of the related real estate project to generate income sufficient to pay debt service, operating expenses and leasing commissions and to make necessary repairs, tenant
improvements and capital improvements, and in the case of loans that do not fully amortize over their terms, to retain sufficient value to permit the borrower to pay off the loan at maturity through a sale or refinancing of the mortgaged property.
The net operating income from and value of any commercial property is subject to various risks, including changes in general or local economic conditions and/or specific industry segments; declines in real estate values; declines in rental or
occupancy rates; increases in interest rates, real estate tax rates and other operating expenses; changes in governmental rules, regulations and fiscal policies; acts of God; terrorist threats and attacks and social unrest and civil disturbances. In
addition, certain of the mortgaged properties securing the pools of commercial mortgage loans underlying CMBS may have a higher degree of geographic concentration in a few states or regions. Any deterioration in the real estate market or economy or
adverse events in such states or regions, may increase the rate of delinquency and default experience (and as a consequence, losses) with respect to mortgage loans related to properties in such state or region. Pools of mortgaged properties securing
the commercial mortgage loans underlying CMBS may also have a higher degree of concentration in certain types of commercial properties. Accordingly, such pools of mortgage loans represent higher exposure to risks particular to those types of
commercial properties. Certain pools of commercial mortgage loans underlying CMBS consist of a fewer number of mortgage loans with outstanding balances that are larger than average. If a mortgage pool includes mortgage loans with larger than average
balances, any realized losses on such mortgage loans could be more severe, relative to the size of the pool, than would be the case if the aggregate balance of the pool were distributed among a larger number of mortgage loans. Certain borrowers or
affiliates thereof relating to certain of the commercial mortgage loans underlying CMBS may have had a history of bankruptcy. Certain mortgaged properties securing the commercial mortgage loans underlying CMBS may have been exposed to environmental
conditions or circumstances. The ratings in respect of certain of the CMBS comprising the Mortgage-Backed Securities may have been withdrawn, reduced or placed on credit watch since issuance. In addition, losses and/or appraisal reductions may be
allocated to certain of such CMBS and certain of the collateral or the assets underlying such collateral may be delinquent and/or may default from time to time.
CMBS held by the Fund may be subordinated to one or more other classes of securities of the same series for purposes of, among other things, establishing payment priorities and offsetting losses and other
shortfalls with respect to the related underlying mortgage loans. Realized losses in respect of the mortgage loans included in the CMBS pool and trust expenses generally will be allocated to the most subordinated class of securities of the related
series. Accordingly, to the extent any CMBS is or becomes the most subordinated class of securities of the related series, any delinquency or default on any underlying mortgage loan may result in shortfalls, realized loss allocations or extensions
of its weighted average life and will have a more immediate and disproportionate effect on the related CMBS than on a related more senior class of CMBS of the same series. Further, even if a class is not the most subordinate class of securities,
there can be no assurance that the subordination offered to such class will be sufficient on any date to offset all losses or expenses incurred by the underlying trust. CMBS are typically not guaranteed or insured, and distributions on such CMBS
generally will depend solely upon the amount and timing of payments and other collections on the related underlying commercial mortgage loans.
Asset-Backed Securities
The Fund may invest in asset-backed securities. Asset-backed securities represent participations in, or are secured by and payable from,
assets such as motor vehicle installment sales, installment loan contracts, leases of various types of real and personal property, receivables from revolving credit (credit card) agreements and other categories of receivables. Such assets are
securitized through the use of trusts and special purpose corporations. Payments or distributions of principal and interest may be guaranteed up to certain amounts and for a certain time period by a letter of credit or a pool insurance policy issued
by a financial institution unaffiliated with the trust or corporation, or other credit enhancements may be present.
Such
securities are often subject to more rapid repayment than their stated maturity date would indicate as a result of the pass-through of prepayments of principal on the underlying loans. During periods of declining interest rates, prepayment of loans
underlying asset-backed securities can be expected to accelerate. Accordingly, the Funds ability to maintain positions in such securities will be affected by reductions in the principal amount of such securities resulting from prepayments, and
its ability to reinvest the returns of principal at comparable yields is subject to generally prevailing interest rates at that time. To the extent that the Fund invests in asset-backed securities, the values of the Funds portfolio securities
will vary with changes in market interest rates generally and the differentials in yields among various kinds of asset-backed securities.
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Asset-backed securities present certain additional risks because asset-backed securities
generally do not have the benefit of a security interest in collateral that is comparable to mortgage assets. Credit card receivables are generally unsecured and the debtors on such receivables are entitled to the protection of a number of state and
federal consumer credit laws, many of which give such debtors the right to set-off certain amounts owed on the credit cards, thereby reducing the balance due. Automobile receivables generally are secured, but by automobiles rather than residential
real property. Most issuers of automobile receivables permit the loan servicers to retain possession of the underlying obligations. If the servicer were to sell these obligations to another party, there is a risk that the purchaser would acquire an
interest superior to that of the holders of the asset-backed securities. In addition, because of the large number of vehicles involved in a typical issuance and technical requirements under state laws, the trustee for the holders of the automobile
receivables may not have a proper security interest in the underlying automobiles. Therefore, if the issuer of an asset-backed security defaults on its payment obligations, there is the possibility that, in some cases, the Fund will be unable to
possess and sell the underlying collateral and that the Funds recoveries on repossessed collateral may not be available to support payments on these securities.
Recent Events Relating to the Mortgage- and Asset-Backed Securities Markets and the Overall Economy
The recent and unprecedented disruption in the residential mortgage-backed securities market (and in particular, the subprime residential mortgage market), the broader mortgage-backed
securities market and the asset-backed securities market have resulted (and continue to result) in downward price pressures and increasing foreclosures and defaults in residential and commercial real estate. Concerns over inflation, energy costs,
geopolitical issues, the availability and cost of credit, the mortgage market and a depressed real estate market have contributed to increased volatility and diminished expectations for the economy and markets going forward, and have contributed to
dramatic declines in the housing market, with falling home prices and increasing foreclosures and unemployment, and significant asset write-downs by financial institutions. These conditions have prompted a number of financial institutions to seek
additional capital, to merge with other institutions and, in some cases, to fail or seek bankruptcy protection. Since 2008, the market for Mortgage-Backed Securities (as well as other asset-backed securities) has been particularly adversely impacted
by, among other factors, the failure and subsequent sale of Bear, Stearns & Co. Inc. to J.P. Morgan Chase, the merger of Bank of America Corporation and Merrill Lynch & Co., the insolvency of Washington Mutual Inc., the failure and
subsequent bankruptcy of Lehman Brothers Holdings, Inc., the extension of approximately $152 billion in emergency credit by the U.S. Department of the Treasury to American International Group Inc., and, as described above, the conservatorship
and the control by the U.S. government of Freddie Mac and Fannie Mae. Furthermore, the global markets have seen an increase in volatility due to uncertainty surrounding the level and sustainability of sovereign debt of certain countries that are
part of the European Union, including Greece, Spain, Portugal, Ireland and Italy, as well as the sustainability of the European Union itself. Recent concerns over the level and sustainability of the sovereign debt of the United States have
aggravated this volatility. No assurance can be made that this uncertainty will not lead to further disruption of the credit markets in the United States or around the globe. These events, coupled with the general global economic downturn, have
resulted in a substantial level of uncertainty in the financial markets, particularly with respect to mortgage-related investments.
The continuation or worsening of this general economic downturn may lead to further declines in income from, or the value of, real estate, including the real estate which secures the Mortgage-Backed
Securities held by the Fund. Additionally, a lack of credit liquidity, adjustments of mortgages to higher rates and decreases in the value of real property have occurred and may continue to occur or worsen, and potentially prevent borrowers from
refinancing their mortgages, which may increase the likelihood of default on their mortgage loans. These economic conditions, coupled with high levels of real estate inventory and elevated incidence of underwater mortgages, may also adversely affect
the amount of proceeds the holder of a mortgage loan or mortgage-backed securities (including the Mortgaged-Backed Securities in which the Fund may invest) would realize in the event of a foreclosure or other exercise of remedies. Moreover, even if
such Mortgage-Backed Securities are performing as anticipated, the value of such securities in the secondary market may nevertheless fall or continue to fall as a result of deterioration in general market conditions for such Mortgage-Backed
Securities or other asset-backed or structured products. Trading activity associated with market indices may also drive spreads on those indices wider than spreads on Mortgage-Backed Securities, thereby resulting in a decrease in value of such
Mortgage-Backed Securities, including the Mortgage-Backed Securities owned by the Fund.
The U.S. Government, the Federal
Reserve, the Treasury, the Securities and Exchange Commission, the Federal Deposit Insurance Corporation and other governmental and regulatory bodies have recently taken or are considering taking actions to address the financial crisis. These
actions include, but are not limited to, the enactment by the United States Congress of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law on July 21, 2010 and imposes a new regulatory framework
over the U.S. financial services industry and the consumer credit markets in general, and proposed regulations by the Securities and Exchange Commission, which, if enacted, would significantly alter the manner in which asset-backed securities,
including Mortgage-
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Backed Securities, are issued. Given the broad scope, sweeping nature, and relatively recent enactment of some of these regulatory measures, the potential impact they could have on any of the
asset-backed or Mortgage-Backed Securities held by the Fund is unknown. There can be no assurance that these measures will not have an adverse effect on the value or marketability of any asset-backed or Mortgage-Backed Securities held by the Fund.
Furthermore, no assurance can be made that the U.S. Government or any U.S. regulatory body (or other authority or regulatory body) will not continue to take further legislative or regulatory action in response to the economic crisis or otherwise,
and the effect of such actions, if taken, cannot be known.
Among its other provisions, the Dodd-Frank Act creates a
liquidation framework under which the Federal Deposit Insurance Corporation (the FDIC), may be appointed as receiver following a systemic risk determination by the Secretary of Treasury (in consultation with the President)
for the resolution of certain nonbank financial companies and other entities, defined as covered financial companies, and commonly referred to as systemically important entities, in the event such a company is in default or
in danger of default and the resolution of such a company under other applicable law would have serious adverse effects on financial stability in the United States, and also for the resolution of certain of their subsidiaries. No assurances can be
given that this new liquidation framework would not apply to the originators of asset-backed securities, including Mortgage-Backed Securities, or their respective subsidiaries, including the issuers and depositors of such securities, although the
expectation embedded in the Dodd-Frank Act is that the framework will be invoked only very rarely. Recent guidance from the FDIC indicates that such new framework will largely be exercised in a manner consistent with the existing bankruptcy laws,
which is the insolvency regime that would otherwise apply to the sponsors, depositors and issuing entities with respect to asset-backed securities, including Mortgage-Backed Securities. The application of such liquidation framework to such entities
could result in decreases or delays in amounts paid on, and hence the market value of, the Mortgage-Backed or asset-backed securities that are owned by a Fund.
Recently, delinquencies, defaults and losses on residential mortgage loans have increased substantially and may continue to increase, which may affect the performance of the Mortgage-Backed Securities in
which the Fund may invest. Mortgage loans backing non-agency Mortgage-Backed Securities are more sensitive to economic factors that could affect the ability of borrowers to pay their obligations under the mortgage loans backing these securities. In
addition, in recent months housing prices and appraisal values in many states and localities have declined or stopped appreciating. A continued decline or an extended flattening of those values may result in additional increases in delinquencies and
losses on Mortgage-Backed Securities generally (including the Mortgaged-Backed Securities that the Fund may invest in as described above).
The foregoing adverse changes in market conditions and regulatory climate may reduce the cash flow which the Fund, to the extent it invests in Mortgage-Backed Securities or other asset-backed securities,
receives from such securities and increase the incidence and severity of credit events and losses in respect of such securities. In addition, interest rate spreads for Mortgage-Backed Securities have widened and are more volatile when compared to
the recent past due to these adverse changes in market conditions. In the event that interest rate spreads for Mortgage-Backed Securities and other asset-backed securities widen following the purchase of such assets by the Fund, the market value of
such securities is likely to decline and, in the case of a substantial spread widening, could decline by a substantial amount. Furthermore, these adverse changes in market conditions have resulted in reduced liquidity in the market for
Mortgage-Backed Securities and other asset-backed securities (including the Mortgaged-Backed Securities and other asset-backed securities in which the Fund may invest) and increasing unwillingness by banks, financial institutions and investors to
extend credit to servicers, originators and other participants in the market for Mortgage-Backed and other asset-backed securities. As a result, the liquidity and/or the market value of any Mortgage-Backed or asset-backed securities that are owned
by the Fund may experience further declines after they are purchased by the Fund.
Inverse Floating Rate Securities
The Fund may invest in leveraged inverse floating rate debt instruments (inverse floaters). The interest rate on an inverse
floater resets in the opposite direction from the market rate of interest to which the inverse floater is indexed. An inverse floater may be considered to be leveraged to the extent that its interest rate varies by a magnitude that exceeds the
magnitude of the change in the index rate of interest. The higher degree of leverage inherent in inverse floaters is associated with greater volatility in their market values. Accordingly, the duration of an inverse floater may exceed its stated
final maturity. Certain inverse floaters may be deemed to be illiquid securities for purposes of the Funds 15% limitation on investments in such securities.
High Yield Securities
The Fund may invest in bonds rated BB or below by
Standard & Poors or Ba or below by Moodys (or comparable rated and unrated securities). These bonds are commonly referred to as junk bonds and are considered speculative. The Fund may invest up to 10% of its net
assets in non-investment grade securities. The ability of issuers of non-investment grade securities to make principal
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and interest payments may be questionable. In some cases, such bonds may be highly speculative, have poor prospects for reaching investment grade standing and be in default. As a result,
investment in such bonds will entail greater risks than those associated with investment grade bonds (
i.e.
, bonds rated AAA, AA, A or BBB by Standard and Poors or Aaa, Aa, A or Baa by Moody s). Analysis of the creditworthiness of
issuers of high yield securities may be more complex than for issuers of higher quality debt securities, and the ability of the Fund to achieve its investment objective may, to the extent of its investments in high yield securities, be more
dependent upon such creditworthiness analysis than would be the case if the Fund were investing in higher quality securities. See Appendix A for a description of the corporate bond and preferred stock ratings by Standard & Poors,
Moodys, Fitch, Inc. (Fitch) and Dominion Bond Rating Service Limited (DBRS).
Risks associated
with acquiring the securities of such issuers generally are greater than is the case with higher rated securities because such issuers are often less creditworthy companies or are highly leveraged and generally less able than more established or
less leveraged entities to make scheduled payments of principal and interest. High yield securities are also issued by governmental issuers that may have difficulty in making all scheduled interest and principal payments.
The market values of high yield, fixed income securities tend to reflect individual corporate or municipal developments to a greater
extent than do those of higher rated securities, which react primarily to fluctuations in the general level of interest rates. Issuers of such high yield securities are often highly leveraged, and may not be able to make use of more traditional
methods of financing. Their ability to service debt obligations may be more adversely affected than issuers of higher rated securities by economic downturns, specific corporate or governmental developments or the issuers inability to meet
specific projected business forecasts. High yield securities also tend to be more sensitive to economic conditions than higher-rated securities. Negative publicity about the junk bond market and investor perceptions regarding lower-rated securities,
whether or not based on fundamental analysis, may depress the prices for such high yield securities.
Because investors
generally perceive that there are greater risks associated with non-investment grade securities of the type in which the Fund may invest, the yields and prices of such securities may tend to fluctuate more than those for higher-rated securities. In
the lower quality segments of the fixed income securities market, changes in perceptions of issuers creditworthiness tend to occur more frequently and in a more pronounced manner than do changes in higher quality segments of the fixed income
securities market, resulting in greater yield and price volatility.
Another factor which causes fluctuations in the prices of
high yield, fixed income securities is the supply and demand for similarly rated securities. In addition, the prices of fixed income securities fluctuate in response to the general level of interest rates. Fluctuations in the prices of portfolio
securities subsequent to their acquisition will not affect cash income from such securities but will be reflected in the Funds net asset value.
The risk of loss from default for the holders of high yield securities is significantly greater than is the case for holders of other debt securities because such high yield securities are generally
unsecured and are often subordinated to the rights of other creditors of the issuers of such securities. Investment by the Fund in already defaulted securities poses an additional risk of loss should nonpayment of principal and interest continue in
respect of such securities. Even if such securities are held to maturity, recovery by the Fund of its initial investment and any anticipated income or appreciation is uncertain. In addition, the Fund may incur additional expenses to the extent that
it is required to seek recovery relating to the default in the payment of principal or interest on such securities or otherwise protect its interests. The Fund may be required to liquidate other portfolio securities to satisfy annual distribution
obligations of the Fund in respect of accrued interest income on securities which are subsequently written off, even though the Fund has not received any cash payments of such interest.
The secondary market for high yield, fixed income securities is concentrated in relatively few markets and is dominated by institutional
investors, including mutual funds, insurance companies and other financial institutions. Accordingly, the secondary market for such securities is not as liquid as and is more volatile than the secondary market for higher-rated securities. In
addition, the trading volume for high-yield, fixed-income securities is generally lower than that of higher rated securities and the secondary market for high yield, fixed income securities could contract under adverse market or economic conditions
independent of any specific adverse changes in the condition of a particular issuer. These factors may have an adverse effect on the ability of the Fund to dispose of particular portfolio investments. Prices realized upon the sale of such lower
rated or unrated securities, under these circumstances, may be less than the prices used in calculating the net asset value of the Fund. A less liquid secondary market also may make it more difficult for the Fund to obtain precise valuations of the
high yield securities in its portfolio.
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The adoption of new legislation could adversely affect the secondary market for high yield
securities and the financial condition of issuers of these securities. The form of any future legislation, and the probability of such legislation being enacted, is uncertain.
Non-investment grade or high yield fixed income securities also present risks based on payment expectations. High yield, fixed income securities frequently contain call or buy-back features
which permit the issuer to call or repurchase the security from its holder. If an issuer exercises such a call option and redeems the security, the Fund may have to replace such security with a lower-yielding security, resulting in a
decreased return for investors. In addition, if the Fund experiences net redemptions of its shares, it may be forced to sell its higher-rated securities, resulting in a decline in the overall credit quality of the portfolios of the Fund and
increasing the exposure of the Fund to the risks of high yield securities.
Credit ratings issued by credit rating agencies are
designed to evaluate the safety of principal and interest payments of rated securities. They do not, however, evaluate the market value risk of non-investment grade securities and, therefore, may not fully reflect the true risks of an investment. In
addition, credit rating agencies may or may not make timely changes in a rating to reflect changes in the economy or in the conditions of the issuer that affect the market value of the security. Consequently, credit ratings are used only as a
preliminary indicator of investment quality. Investments in non-investment grade and comparable unrated obligations will be more dependent on the Investment Advisers credit analysis than would be the case with investments in investment-grade
debt obligations. The Investment Adviser employs its own credit research and analysis, which includes a study of an issuers existing debt, capital structure, ability to service debt and to pay dividends, sensitivity to economic conditions,
operating history and current trend of earnings. The Investment Adviser continually monitors the investments in the portfolios of the Fund and evaluates whether to dispose of or to retain non-investment grade and comparable unrated securities whose
credit ratings or credit quality may have changed.
Foreign Securities
The Fund may invest in foreign securities. Investments in foreign securities may offer potential benefits not available from investments
solely in U.S. dollar-denominated or quoted securities of domestic issuers. Such benefits may include the opportunity to invest in foreign issuers that appear, in the opinion of the Investment Adviser, to offer the potential for better long term
growth of capital and income than investments in U.S. securities, the opportunity to invest in foreign countries with economic policies or business cycles different from those of the United States and the opportunity to reduce fluctuations in
portfolio value by taking advantage of foreign securities markets that do not necessarily move in a manner parallel to U.S. markets. Investing in the securities of foreign issuers also involves, however, certain special risks, including those
discussed in the Funds Prospectus and those set forth below, which are not typically associated with investing in U.S. dollar-denominated securities or quoted securities of U.S. issuers.
With any investments in certain foreign securities, there exist certain economic, political and social risks, including the risk of
adverse political developments, nationalization, confiscation without fair compensation, or war. Individual foreign economies may differ favorably or unfavorably from the U.S. economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of payments position. Investments in foreign securities usually involve currencies of foreign countries. Accordingly, the Fund may be affected favorably or unfavorably by changes
in currency rates and in exchange control regulations and may incur costs in connection with conversions between various currencies. The Fund may be subject to currency exposure independent of its securities positions. To the extent that the Fund is
fully invested in foreign securities while also maintaining net currency positions, it may be exposed to greater combined risk.
Currency exchange rates may fluctuate significantly over short periods of time. They generally are determined by the forces of supply and
demand in the foreign exchange markets and the relative merits of investments in different countries, actual or anticipated changes in interest rates and other complex factors, as seen from an international perspective. Currency exchange rates also
can be affected unpredictably by intervention by U.S. or foreign governments or central banks or the failure to intervene or by currency controls or political developments in the United States or abroad.
Because foreign issuers generally are not subject to uniform accounting, auditing and financial reporting standards, practices and
requirements comparable to those applicable to U.S. companies, there may be less publicly available information about a foreign company than about a U.S. company. Volume and liquidity in most foreign securities markets are less than in the United
States and securities of many foreign companies are less liquid and more volatile than securities of comparable U.S. companies. The securities of foreign issuers may be listed on foreign securities exchanges or traded in foreign over-the-counter
markets. Fixed commissions on foreign securities exchanges are generally higher than negotiated commissions on U.S. exchanges, although the Fund endeavors to achieve the most favorable net results on its portfolio transactions. There is generally
less government supervision and regulation of foreign securities exchanges, brokers, dealers and listed and unlisted companies than in the United States, and the legal remedies for investors may be more limited than the remedies available in the
United States.
B-26
Foreign markets also have different clearance and settlement procedures, and in certain
markets there have been times when settlements have been unable to keep pace with the volume of securities transactions, making it difficult to conduct such transactions. Such delays in settlement could result in temporary periods when some of the
Funds assets are uninvested and no return is earned on such assets. The inability of the Fund to make intended security purchases due to settlement problems could cause the Fund to miss attractive investment opportunities. Inability to dispose
of portfolio securities due to settlement problems could result either in losses to the Fund due to subsequent declines in value of the portfolio securities or, if the Fund has entered into a contract to sell the securities could result in possible
liability to the purchaser. In addition, with respect to certain foreign countries, there is a possibility of expropriation or confiscatory taxation, limitations on the movements of funds and other assets between different countries, political or
social instability, or diplomatic developments which could adversely affect the Funds investments in those countries.
The Fund may invest in foreign securities which take the form of sponsored and unsponsored American Depositary Receipts
(ADRs), Global Depositary Receipts (GDRs), European Depositary Receipts (EDRs) or other similar instruments representing securities of foreign issuers (together, Depositary Receipts). ADRs represent
the right to receive securities of foreign issuers deposited in a domestic bank or a correspondent bank. ADRs are traded on domestic exchanges or in the U.S. over-the-counter market and, generally, are in registered form. EDRs and GDRs are receipts
evidencing an arrangement with a non-U.S. bank similar to that for ADRs and are designed for use in the non-U.S. securities markets. EDRs and GDRs are not necessarily quoted in the same currency as the underlying security.
To the extent the Fund acquires Depositary Receipts through banks which do not have a contractual relationship with the foreign issuer of
the security underlying the Depositary Receipts to issue and service such unsponsored Depositary Receipts, there may be an increased possibility that the Fund will not become aware of and be able to respond to corporate actions such as stock splits
or rights offerings involving the foreign issuer in a timely manner. In addition, the lack of information may result in inefficiencies in the valuation of such instruments. Investment in Depositary Receipts does not eliminate all the risks inherent
in investing in securities of non-U.S. issuers. The market value of Depositary Receipts is dependent upon the market value of the underlying securities and fluctuations in the relative value of the currencies in which the Depositary Receipts and the
underlying securities are quoted. However, by investing in Depositary Receipts, such as ADRs, that are quoted in U.S. dollars, the Fund may avoid currency risks during the settlement period for purchases and sales.
As described more fully below, the Fund may invest in countries with emerging economies or securities markets. Political and economic
structures in many of such countries may be undergoing significant evolution and rapid development, and such countries may lack the social, political and economic stability characteristic of more developed countries. Certain of such countries 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. See Investing in Emerging Countries below.
Foreign Government Obligations.
Foreign government
obligations include securities, instruments and obligations issued or guaranteed by a foreign government, its agencies, instrumentalities or sponsored enterprises. Investment in foreign government obligations can involve a high degree of risk. The
governmental entity that controls the repayment of foreign government obligations 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 entitys willingness or
ability to repay principal and interest due in a timely manner may be affected by, among other factors, its cash flow situation, the extent of its foreign reserves, the availability of sufficient foreign exchange on the date a payment is due, the
relative size of the debt service burden to the economy as a whole, the governmental entitys policy towards the 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 on their debt. The commitment on the part of these governments, agencies and others to make such
disbursements may be conditioned on a governmental entitys implementation of economic reforms and/or economic performance and the timely service of such debtors obligations. Failure to implement such reforms, achieve such levels of
economic performance or repay principal or interest when due may result in the cancellation of such third parties commitments to lend funds to the governmental entity, which may further impair such debtors ability or willingness to
services its debts in a timely manner. Consequently, governmental entities may default on their debt. Holders of foreign government obligations (including the Fund) may be requested to participate in the rescheduling of such debt and to extend
further loans to governmental agencies.
Investing in Emerging Countries.
The securities markets of emerging countries
are less liquid and subject to greater price volatility, and have a smaller market capitalization, than the U.S. securities markets. In certain countries, there may be fewer publicly traded securities and the market may be dominated by a few issues
or sectors. Issuers and securities markets in such countries are generally not subject to as extensive and frequent accounting, financial and other reporting requirements or as comprehensive
B-27
government regulations as are issuers and securities markets in the U.S. In particular, the assets and profits appearing on the financial statements of emerging country issuers may not reflect
their financial position or results of operations in the same manner as financial statements for U.S. issuers. Substantially less information may be publicly available about emerging country issuers than is available about issuers in the United
States.
Emerging country securities markets are typically marked by 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 ownership of such securities by a limited number of investors. The markets for securities in certain emerging countries are in the
earliest stages of their development. Even the markets for relatively widely traded securities in emerging countries may not be able to absorb, without price disruptions, a significant increase in trading volume or trades of a size customarily
undertaken by institutional investors in the securities markets of developed countries. The limited size of many of these securities markets can cause prices to be erratic for reasons apart from factors that affect the soundness and competitiveness
of the securities issuers. For example, prices may be unduly influenced by traders who control large positions in these markets. Additionally, market making and arbitrage activities are generally less extensive in such markets, which may contribute
to increased volatility and reduced liquidity of such markets. The limited liquidity of emerging country securities may also affect the Funds ability to accurately value its portfolio securities or to acquire or dispose of securities at the
price and time it wishes to do so or in order to meet redemption requests.
With respect to investments in certain emerging
market countries, antiquated legal systems 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
shareholders investment, the notion of limited liability is less clear in certain emerging market countries. Similarly, the rights of investors in emerging market companies may be more limited than those of shareholders of U.S. corporations.
Transaction costs, including brokerage commissions or dealer mark-ups, in emerging countries may be higher than in the United
States and other developed securities markets. In addition, existing laws and regulations are often inconsistently applied. As legal systems in emerging countries develop, foreign investors may be adversely affected by new or amended laws and
regulations. In circumstances where adequate laws exist, it may not be possible to obtain swift and equitable enforcement of the law.
Custodial and/or settlement systems in emerging markets countries may not be fully developed. To the extent the Fund invests in emerging markets, Fund assets that are traded in such markets and which have
been entrusted to such sub-custodians in those markets may be exposed to risks for which the sub-custodian will have no liability.
Foreign investment in the securities markets of certain emerging countries is restricted or controlled to varying degrees. These restrictions may limit the Funds investment in certain emerging
countries and may increase the expenses of the Fund. Certain emerging countries require governmental approval prior to investments by foreign persons or limit investment by foreign persons to only a specified percentage of an issuers
outstanding securities or a specific class of securities which may have less advantageous terms (including price) than securities of the company available for purchase by nationals. In addition, the repatriation of both investment income and capital
from emerging countries may be subject to restrictions which require governmental consents or prohibit repatriation entirely for a period of time. Even where there is no outright restriction on repatriation of capital, the mechanics of repatriation
may affect certain aspects of the operation of the Fund. The Fund may be required to establish special custodial or other arrangements before investing in certain emerging countries.
Emerging countries may be subject to a substantially greater degree of economic, political and social instability and disruption than is
the case in the United States, Japan and most Western European countries. This instability may result from, among other things, the following: (i) authoritarian governments or military involvement in political and economic decision making,
including changes or attempted changes in governments through extra-constitutional means; (ii) popular unrest associated with demands for improved political, economic or social conditions; (iii) internal insurgencies; (iv) hostile
relations with neighboring countries; (v) ethnic, religious and racial disaffection or conflict; and (vi) the absence of developed legal structures governing foreign private investments and private property. Such economic, political and
social instability could disrupt the principal financial markets in which the Fund may invest and adversely affect the value of the Funds assets. The Funds investments can also be adversely affected by any increase in taxes or by
political, economic or diplomatic developments.
The economies of emerging countries may differ unfavorably from the U.S.
economy in such respects as growth of gross domestic product, rate of inflation, capital reinvestment, resources, self-sufficiency and balance of payments. Many emerging countries have experienced in the past, and continue to experience, high rates
of inflation. In certain countries inflation has at times accelerated rapidly to hyperinflationary levels, creating a negative interest rate environment and sharply eroding the value of outstanding financial
B-28
assets in those countries. Other emerging countries, on the other hand, have recently experienced deflationary pressures and are in economic recessions. The economies of many emerging countries
are heavily dependent upon international trade particularly exports, and are accordingly affected by protective trade barriers and the economic conditions of their trading partners. In addition, the economies of some emerging countries are
vulnerable to weakness in world prices for their commodity exports.
The Funds income and, in some cases, capital gains
from foreign stocks and securities will be subject to applicable taxation in certain of the countries in which it invests, and treaties between the U.S. and such countries may not be available in some cases to reduce the otherwise applicable tax
rates. See TAXATION.
From time to time, certain of the companies in which a Fund may invest may operate in, or
have dealings with, countries subject to sanctions or embargoes imposed by the U.S. government and the United Nations and/or countries identified by the U.S. government as state sponsors of terrorism. A company may suffer damage to its reputation if
it is identified as a company which operates in, or has dealings with, countries subject to sanctions or embargoes imposed by the U.S. government as state sponsors of terrorism. As an investor in such companies, the Fund will be indirectly subject
to those risks. Iran is subject to several United Nations sanctions and is an embargoed country by the Office of Foreign Assets Control (OFAC) of the US Department of Treasury.
Forward Foreign Currency Exchange Contracts.
The Fund may enter into forward foreign currency exchange contracts for hedging
purposes and to seek to protect against anticipated changes in future foreign currency exchange rates. A forward foreign currency exchange contract involves an obligation to purchase or sell a specific currency at a future date, which may be any
fixed number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. These contracts are traded in the interbank market between currency traders (usually large commercial banks) and their
customers. A forward contract generally has no deposit requirement, and no commissions are generally charged at any stage for trades.
At the maturity of a forward contract the Fund may either accept or make delivery of the currency specified in the contract or, at or prior to maturity, enter into a closing transaction involving the
purchase or sale of an offsetting contract. Closing transactions with respect to forward contracts are often, but not always, effected with the currency trader who is a party to the original forward contract.
The Fund may enter into forward foreign currency exchange contracts in several circumstances. First, when the Fund enters into a contract
for the purchase or sale of a security denominated or quoted in a foreign currency, or when the Fund anticipates the receipt in a foreign currency of dividend or interest payments on such a security which it holds, the Fund may desire to lock
in the U.S. dollar price of the security or the U.S. dollar equivalent of such dividend or interest payment, as the case may be. By entering into a forward contract for the purchase or sale, for a fixed amount of dollars, of the amount of
foreign currency involved in the underlying transactions, the Fund will attempt to protect itself against an adverse change in the relationship between the U.S. dollar and the subject foreign currency during the period between the date on which the
security is purchased or sold, or on which the dividend or interest payment is declared, and the date on which such payments are made or received.
Additionally, when the Investment Adviser believes that the currency of a particular foreign country may suffer a substantial decline against the U.S. dollar, it may enter into a forward contract to sell,
for a fixed amount of U.S. dollars, the amount of foreign currency approximating the value of some or all of the Funds portfolio securities quoted or denominated in such foreign currency. The precise matching of the forward contract amounts
and the value of the securities involved will not generally be possible because the future value of such securities in foreign currencies will change as a consequence of market movements in the value of those securities between the date on which the
contract is entered into and the date it matures. Using forward contracts to protect the value of the Funds portfolio securities against a decline in the value of a currency does not eliminate fluctuations in the underlying prices of the
securities. It simply establishes a rate of exchange which the Fund can achieve at some future point in time. The precise projection of short-term currency market movements is not possible, and short-term hedging provides a means of fixing the U.S.
dollar value of only a portion of the Funds foreign assets.
The Fund may engage in cross-hedging by using forward
contracts in one currency to hedge against fluctuations in the value of securities quoted or denominated in a different currency. In addition, the Fund may enter into foreign currency transactions to seek a closer correlation between the Funds
overall currency exposure and the currency exposure of the Funds performance benchmark.
Unless otherwise covered in
accordance with applicable regulations, cash or liquid assets of the Fund will be segregated in an amount equal to the value of the Funds total assets committed to the consummation of forward foreign currency exchange contracts. If the value
of the segregated assets declines, additional cash or liquid assets will be segregated so that the value of the assets will equal the amount of the Funds commitments with respect to such contracts.
B-29
While the Fund may enter into forward contracts to reduce currency exchange rate risks,
transactions in such contracts involve certain other risks. Thus, while the Fund may benefit from such transactions, unanticipated changes in currency prices may result in a poorer overall performance for the Fund than if it had not engaged in any
such transactions. Moreover, there may be imperfect correlation between the Funds portfolio holdings of securities quoted or denominated in a particular currency and forward contracts entered into by the Fund. Such imperfect correlation may
cause the Fund to sustain losses which will prevent the Fund from achieving a complete hedge or expose the Fund to risk of foreign exchange loss.
Markets for trading foreign forward currency contracts offer less protection against defaults than is available when trading in currency instruments on an exchange. Forward contracts are subject to the
risk that the counterparty to such contract will default on its obligations. Because a forward foreign currency exchange contract is not guaranteed by an exchange or clearinghouse, a default on the contract would deprive the Fund of unrealized
profits, transaction costs or the benefits of a currency hedge or force the Fund to cover its purchase or sale commitments, if any, at the current market price. In addition, the institutions that deal in forward currency contracts are not required
to continue to make markets in the currencies they trade and these markets can experience periods of illiquidity. The Fund will not enter into forward foreign currency exchange contracts, currency swaps or other privately negotiated currency
instruments unless the credit quality of the unsecured senior debt or the claims-paying ability of the counterparty is considered to be investment grade by the Investment Adviser. To the extent that a portion of the Funds total assets,
adjusted to reflect the Funds net position after giving effect to currency transactions, is denominated or quoted in the currencies of foreign countries, the Fund will be more susceptible to the risk of adverse economic and political
developments within those countries.
Writing and Purchasing Currency Call and Put Options.
The Fund may, to the extent
that it invests in foreign securities, write and purchase put and call options on foreign currencies for the purpose of protecting against declines in the U.S. dollar value of foreign portfolio securities and against increases in the U.S. dollar
cost of foreign securities to be acquired. As with other kinds of option transactions, however, the writing of an option on foreign currency will constitute only a partial hedge, up to the amount of the premium received. If and when the Fund seeks
to close out an option, the Fund could be required to purchase or sell foreign currencies at disadvantageous exchange rates, thereby incurring losses. The purchase of an option on foreign currency may constitute an effective hedge against exchange
rate fluctuations; however, in the event of exchange rate movements adverse to the Funds position, the Fund may forfeit the entire amount of the premium plus related transaction costs. Options on foreign currencies may be traded on U.S. and
foreign exchanges or over-the-counter.
Options on currency may also be used for cross-hedging purposes, which involves writing
or purchasing options on one currency to seek to hedge against changes in exchange rates for a different currency with a pattern of correlation, or to seek to increase total return when the Investment Adviser anticipates that the currency will
appreciate or depreciate in value, but the securities quoted or denominated in that currency do not present attractive investment opportunities and are not included in the Funds portfolio.
A call option written by the Fund obligates the Fund to sell a specified currency to the holder of the option at a specified price if the
option is exercised before the expiration date. A put option written by the Fund obligates the Fund to purchase a specified currency from the option holder at a specified price if the option is exercised before the expiration date. The writing of
currency options involves a risk that the Fund will, upon exercise of the option, be required to sell currency subject to a call at a price that is less than the currencys market value or be required to purchase currency subject to a put at a
price that exceeds the currencys market value. Written put and call options on foreign currencies may be covered in a manner similar to written put and call options on securities and securities indices described under Options on
Securities and Securities IndicesWriting Covered Options above.
The Fund may terminate its obligations under a
call or put option by purchasing an option identical to the one it has written. Such purchases are referred to as closing purchase transactions. The Fund may enter into closing sale transactions in order to realize gains or minimize
losses on options purchased by the Fund.
The Fund may purchase call options on foreign currency in anticipation of an increase
in the U.S. dollar value of currency in which securities to be acquired by the Fund are quoted or denominated. The purchase of a call option would entitle the Fund, in return for the premium paid, to purchase specified currency at a specified price
during the option period. The Fund would ordinarily realize a gain if, during the option period, the value of such currency exceeded the sum of the exercise price, the premium paid and transaction costs; otherwise the Fund would realize either no
gain or a loss on the purchase of the call option.
The Fund may purchase put options in anticipation of a decline in the U.S.
dollar value of currency in which securities in its portfolio are quoted or denominated (protective puts). The purchase of a put option would entitle the Fund, in exchange for the premium paid, to sell specified currency at a specified
price during the option period. The purchase of protective puts is usually designed to offset or hedge against a decline in the dollar value of the Funds portfolio securities due to currency exchange rate
B-30
fluctuations. The Fund would ordinarily realize a gain if, during the option period, the value of the underlying currency decreased below the exercise price sufficiently to more than cover the
premium and transaction costs; otherwise the Fund would realize either no gain or a loss on the purchase of the put option. Gains and losses on the purchase of protective put options would tend to be offset by countervailing changes in the value of
underlying currency or portfolio securities.
In addition to using options for the hedging purposes described above, the Fund
may use options on currency to seek to increase total return. The Fund may write (sell) covered put and call options on any currency in order to realize greater income than would be realized on portfolio securities transactions alone. However,
in writing covered call options for additional income, the Fund may forego the opportunity to profit from an increase in the market value of the underlying currency. Also, when writing put options, the Fund accepts, in return for the option premium,
the risk that it may be required to purchase the underlying currency at a price in excess of the currencys market value at the time of purchase.
Special Risks Associated with Options on Currency.
An exchange traded options position may be closed out only on an options exchange that provides a secondary market for an option of the same
series. Although the Fund will generally purchase or write only those options for which there appears to be an active secondary market, there is no assurance that a liquid secondary market on an exchange will exist for any particular option, or at
any particular time. For some options no secondary market on an exchange may exist. In such event, it might not be possible to effect closing transactions in particular options, with the result that the Fund would have to exercise its options in
order to realize any profit and would incur transaction costs upon the sale of underlying securities pursuant to the exercise of put options. If the Fund as a covered call option writer is unable to effect a closing purchase transaction in a
secondary market, it will not be able to sell the underlying currency (or security quoted or denominated in that currency) or dispose of the segregated assets, until the option expires or it delivers the underlying currency upon exercise.
There is no assurance that higher than anticipated trading activity or other unforeseen events might not, at times, render
certain of the facilities of the Options Clearing Corporation inadequate, and thereby result in the institution by an exchange of special procedures which may interfere with the timely execution of customers orders.
The Fund may purchase and write over-the-counter options to the extent consistent with its limitation on investments in illiquid
securities. Trading in over-the-counter options is subject to the risk that the other party will be unable or unwilling to close out options purchased or written by the Fund.
The amount of the premiums which the Fund may pay or receive may be adversely affected as new or existing institutions, including other investment companies, engage in or increase their option purchasing
and writing activities.
Other Investment Companies
The Fund may invest in securities of other investment companies, including ETFs. The Fund will indirectly bear its proportionate share of any management fees and other expenses paid by investment
companies in which it invests, in addition to the management fees (and other expenses) paid by the Fund. The Funds investments in other investment companies are subject to statutory limitations prescribed by the Act, including in certain
circumstances a prohibition on the Fund acquiring more that 3% of the voting shares of any other investment company, and a prohibition on investing more than 5% of the Funds total assets in securities of any one investment company or more than
10% of its total assets in the securities of all investment companies. Many ETFs, however, have obtained exemptive relief from the SEC to permit unaffiliated funds (such as the Fund) to invest in their shares beyond these statutory limits, subject
to certain conditions and pursuant to contractual arrangements between the ETFs and the investing funds. The Fund may rely on these exemptive orders in investing in ETFs. Moreover, pursuant to an exemptive order obtained from the SEC or under an
exemptive rule adopted by the SEC, the Fund may invest in investment companies and money market funds for which an Investment Adviser, or any of its affiliates, serves as investment adviser, administrator and/or distributor. However, to the extent
that the Fund invests in a money market fund for which an Investment Adviser or any of its affiliates acts as investment adviser, the management fees payable by the Fund to the Investment Adviser will, to the extent required by the SEC, be reduced
by an amount equal to the Funds proportionate share of the management fees paid by such money market fund to its investment adviser. Although the Fund does not expect to do so in the foreseeable future, the Fund is authorized to invest
substantially all of its assets in a single open-end investment company or series thereof that has substantially the same investment objective, policies and fundamental restrictions as the Fund. Additionally, if the Fund serves as an
underlying Fund to another Goldman Sachs Fund, that Fund intends to comply with the requirements of Section 12(d)(1)(G)(i)(IV) of the Act.
The Fund may purchase shares of investment companies investing primarily in foreign securities, including country funds. Country funds have portfolios consisting primarily of securities of
issuers located in specified foreign countries or regions.
B-31
ETFs are shares of unaffiliated investment companies issuing shares which are traded like
traditional equity securities on a national stock exchange. An ETF represents a portfolio of securities, which is often designed to track a particular market segment or index. An investment in an ETF, like one in any investment company, carries the
same risks as those of its underlying securities. An ETF may fail to accurately track the returns of the market segment or index that it is designed to track, and the price of an ETFs shares may fluctuate or lose money. In addition, because
they, unlike other investment companies, are traded on an exchange, ETFs are subject to the following risks: (i) the market price of the ETFs shares may trade at a premium or discount to the ETFs net asset value; (ii) an active
trading market for an ETF may not develop or be maintained; and (iii) there is no assurance that the requirements of the exchange necessary to maintain the listing of the ETF will continue to be met or remain unchanged. In the event substantial
market or other disruptions affecting ETFs should occur in the future, the liquidity and value of the Funds shares could also be substantially and adversely affected.
Repurchase Agreements
The Fund may enter into repurchase agreements with
banks, brokers and securities dealers which furnish collateral at least equal in value or market price to the amount of their repurchase obligations. A repurchase agreement is an arrangement under which the Fund purchases securities and the seller
agrees to repurchase the securities within a particular time and at a specified price for the duration of the agreement. Custody of the securities is maintained by the Funds custodian (or subcustodian). The repurchase price may be higher than
the purchase price, the difference being income to the Fund, or the purchase and repurchase prices may be the same, with interest at a stated rate due to the Fund together with the repurchase price on repurchase. In either case, the income to the
Fund is unrelated to the interest rate on the security subject to the repurchase agreement.
For purposes of the Act and
generally for tax purposes, a repurchase agreement is deemed to be a loan from the Fund to the seller of the security. For other purposes, it is not always clear whether a court would consider the security purchased by the Fund subject to a
repurchase agreement as being owned by the Fund or as being collateral for a loan by the Fund to the seller. In the event of commencement of bankruptcy or insolvency proceedings with respect to the seller of the security before repurchase of the
security under a repurchase agreement, the Fund may encounter delay and incur costs before being able to sell the security. Such a delay may involve loss of interest or a decline in price of the security. If the court characterizes the transaction
as a loan and the Fund has not perfected a security interest in the security, the Fund may be required to return the security to the sellers estate and be treated as an unsecured creditor of the seller. As an unsecured creditor, the Fund would
be at risk of losing some or all of the principal and interest involved in the transaction.
Apart from the risk of bankruptcy
or insolvency proceedings, there is also the risk that the seller may fail to repurchase the security. However, if the market value of the security subject to the repurchase agreement becomes less than the repurchase price (including accrued
interest), the Fund will direct the seller of the security to deliver additional securities so that the market value of all securities subject to the repurchase agreement equals or exceeds the repurchase price. Certain repurchase agreements which
provide for settlement in more than seven days can be liquidated before the nominal fixed term on seven days or less notice. Such repurchase agreements will be regarded as liquid instruments.
The Fund, together with other registered investment companies having advisory agreements with the Investment Adviser or its affiliates,
may transfer uninvested cash balances into a single joint account, the daily aggregate balance of which will be invested in one or more repurchase agreements.
Short Sales
The Fund may engage in short sales. Short sales are
transactions in which the Fund sells a security it does not own in anticipation of a decline in the market value of that security. To complete such a transaction, the Fund must borrow the security to make delivery to the buyer. The Fund then is
obligated to replace the security borrowed by purchasing it at the market price at the time of replacement. The price at such time may be more or less than the price at which the security was sold by the Fund. Until the security is replaced, the
Fund is required to pay to the lender amounts equal to any dividend which accrues during the period of the loan. To borrow the security, the Fund also may be required to pay a premium, which would increase the cost of the security sold. There will
also be other costs associated with short sales.
The Fund will incur a loss as a result of the 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. The Fund will realize a gain if the security declines in price between those dates. This result is the opposite of what one would
expect from a cash purchase of a long position in a security. The amount of any
gain will be decreased, and the amount of any loss increased,
by the amount of any premium or amounts in lieu of interest the Fund may be required to pay in connection with a short sale, and will be also decreased by any transaction or other costs.
B-32
Until the Fund replaces a borrowed security in connection with a short sale, the Fund will
(a) segregate cash or liquid assets at such a level that the segregated assets plus any amount deposited with the broker as collateral will equal the current value of the security sold short or (b) otherwise cover its short position in
accordance with applicable law.
There is no guarantee that the Fund will be able to close out a short position at any
particular time or at an acceptable price. During the time that the Fund is short a security, it is subject to the risk that the lender of the security will terminate the loan at a time when the Fund is unable to borrow the same security from
another lender. If that occurs, the Fund may be bought in at the price required to purchase the security needed to close out the short position, which may be a disadvantageous price.
If the Fund effects a short sale of securities at a time when it has an unrealized gain on the securities, it may be required to recognize
that gain as if it had actually sold the securities (as a constructive sale) on the date it effects the short sale. However, such constructive sale treatment may not apply if the Fund closes out the short sale with securities other than
the appreciated securities held at the time of the short sale and if certain other conditions are satisfied. Uncertainty regarding the tax consequences of effecting short sales may limit the extent to which the Fund may effect short sales.
Non-Diversified Status
Because the Fund is non-diversified under the Act, it is subject only to certain federal tax diversification requirements. Under federal tax laws, the Fund may, with respect to 50% of its
total assets, invest up to 25% of its total assets in the securities of any issuer. With respect to the remaining 50% of its total assets, (i) the Fund may not invest more than 5% of its total assets in the securities of any one issuer, and
(ii) the Fund may not acquire more than 10% of the outstanding voting securities of any one issuer. These tests apply at the end of each quarter of the taxable year and are subject to certain conditions and limitations under the Code. These
tests do not apply to investments in United States Government Securities and regulated investment companies.
Temporary Investments
The Fund may, for temporary defensive purposes, invest a certain percentage of its total assets in: U.S. Government
Securities; commercial paper rated at least A-2 by Standard & Poors, P-2 by Moodys or having a comparable rating by another NRSRO (or, if unrated, determined by the Investment Adviser to be of comparable credit quality);
certificates of deposit; bankers acceptances; repurchase agreements; non-convertible preferred stocks and non-convertible corporate bonds with a remaining maturity of less than one year; ETFs; other investment companies; and cash items. When
the Funds assets are invested in such instruments, the Fund may not be achieving its investment objective.
Portfolio Turnover
The Fund may engage in active short-term trading to benefit from price disparities among different issues of securities or
among the markets for equity securities, or for other reasons. As a result of active management, it is anticipated that the portfolio turnover rate may vary greatly from year to year as well as within a particular year, and may be affected by
changes in the holdings of specific issuers, changes in country and currency weightings, cash requirements for redemption of shares and by requirements which enable the Fund to receive favorable tax treatment. The Fund is not restricted by policy
with regard to portfolio turnover and will make changes in its investment portfolio from time to time as business and economic conditions as well as market prices may dictate.
Special Note Regarding Market Events
Events in the financial
sector over the past several years have resulted in reduced liquidity in credit and fixed income markets and in an unusually high degree of volatility in the financial markets, both domestically and internationally. While entire markets have been
impacted, issuers that have exposure to the real estate, mortgage and credit markets have been particularly affected. These events and the potential for continuing market turbulence may have an adverse effect on the Funds investments. It is
uncertain how long these conditions will continue.
The instability in the financial markets led the U.S. government to take a
number of unprecedented actions designed to support certain financial institutions and certain segments of the financial markets. Federal, state, and foreign governments, regulatory agencies, and self -regulatory organizations may take actions that
affect the regulation of the instruments in which the Fund invests, or the issuers of such instruments, in ways that are unforeseeable. Such legislation or regulation could limit or preclude the Funds ability to achieve its investment
objectives.
B-33
Governments or their agencies may also acquire distressed assets from financial institutions
and acquire ownership interests in those institutions. The implications of government ownership and disposition of these assets are unclear, and such ownership or disposition may have positive or negative effects on the liquidity, valuation and
performance of the Funds portfolio holdings.
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INVESTMENT RESTRICTIONS
The investment restrictions set forth below have been adopted by the Trust as fundamental policies that cannot be changed with respect to
the Fund without the affirmative vote of the holders of a majority of the outstanding voting securities (as defined in the Act) of the Fund. The investment objective of the Fund and all other investment policies or practices of the Fund are
considered by the Trust not to be fundamental and accordingly may be changed without shareholder approval. For purposes of the Act, a majority of the outstanding voting securities means the lesser of the vote of (i) 67% or more of
the shares of the Trust or the Fund present at a meeting, if the holders of more than 50% of the outstanding shares of the Trust or the Fund are present or represented by proxy, or (ii) more than 50% of the shares of the Trust or the Fund.
For purposes of the following limitations, any limitation which involves a maximum percentage shall not be considered violated
unless an excess over the percentage occurs immediately after, and is caused by, an acquisition or encumbrance of securities or assets of, or borrowings by, the Fund. With respect to the Funds fundamental investment restriction number
(3) below, asset coverage of at least 300% (as defined in the Act), inclusive of any amounts borrowed, must be maintained at all times.
As a matter of fundamental policy, the Fund may not:
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(1)
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Invest 25% or more of its total assets in the securities of one or more issuers conducting their principal business activities in the same industry (excluding the U.S.
Government or any of its agencies or instrumentalities), except that this restriction shall not apply to the Funds counterparties in foreign currency transactions.
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(2)
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Borrow money, except that (a) to the extent permitted by applicable law, the Fund may borrow from banks (as defined in the Act), other affiliated investment
companies and other persons or through reverse repurchase agreements in amounts up to 33-1/3% of its total assets (including the amount borrowed); (b) the Fund may, to the extent permitted by applicable law, borrow up to an additional 5% of its
net assets for temporary purposes, (c) the Fund may obtain such short-term credits as may be necessary for the clearance of purchases and sales of portfolio securities, (d) the Fund may purchase securities on margin to the extent permitted
by applicable law and (e) the Fund may engage in transactions in mortgage dollar rolls which are accounted for as financings.
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The following interpretation applies to, but is not part of, this fundamental policy: In determining whether a particular investment in portfolio instruments or
participation in portfolio transactions is subject to this borrowing policy, the accounting treatment of such instrument or participation shall be considered, but shall not by itself be determinative. Whether a particular instrument or transaction
constitutes a borrowing shall be determined by the Board, after consideration of all of the relevant circumstances.
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(4)
|
Make loans, except through (a) the purchase of debt obligations in accordance with the Funds investment objective and policies, (b) repurchase
agreements with banks, brokers, dealers and other financial institutions, (c) loans of securities as permitted by applicable law and (d) loans to affiliates of the Fund to the extent permitted by law.
|
|
(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.
|
|
(6)
|
Purchase, hold or deal in real estate, although the Fund may purchase and sell securities or other investments that are secured by real estate or interests therein,
securities or other investments that reflect the return of or index of real estate values, securities of real estate investment trusts and mortgage-related securities and may hold and sell real estate acquired by the Fund as a result of the
ownership of securities.
|
|
(7)
|
Invest in commodities or commodity contracts, except that the Fund may invest in currency and financial instruments and contracts, including structured notes, futures
contracts and options on such contracts that are commodities or commodity contracts, or that represent indices of commodities prices, or that reflect the return of such indices.
|
|
(8)
|
Issue senior securities to the extent such issuance would violate applicable law.
|
B-35
The Fund may, notwithstanding any other fundamental investment restriction or policy, invest
some or all of its assets in a single open-end investment company or series thereof with substantially the same fundamental investment objective, restrictions and policies as the Fund.
In addition to the fundamental policies mentioned above, the Trustees have adopted the following non-fundamental policies which can be
changed or amended by action of the Trustees without approval of shareholders. Again, for purposes of the following limitations, any limitation which involves a maximum percentage shall not be considered violated unless an excess over the percentage
occurs immediately after, and is caused by, an acquisition of securities by the Fund.
The Fund may not:
|
(1)
|
Invest in companies for the purpose of exercising control or management.
|
|
(2)
|
Invest more than 15% of the Funds net assets in illiquid investments including illiquid repurchase agreements with a notice or demand period of more than seven
days, securities which are not readily marketable and restricted securities not eligible for resale pursuant to Rule 144A under the Securities Act of 1933 (1933 Act).
|
|
(3)
|
Purchase additional securities if the Funds borrowings, as permitted by the Funds borrowing policy, exceed 5% of its net assets.
|
TRUSTEES AND OFFICERS
The Trusts Leadership Structure
The business and affairs of the Fund
are managed under the direction of the Board of Trustees (the Board), subject to the laws of the State of Delaware and the Trusts Declaration of Trust. The Trustees are responsible for deciding matters of overall policy and
reviewing the actions of the Trusts service providers. The officers of the Trust conduct and supervise the Funds daily business operations. Trustees who are not deemed to be interested persons of the Trust as defined in the
Act are referred to as Independent Trustees. Trustees who are deemed to be interested persons of the Trust are referred to as Interested Trustees. The Board is currently composed of seven Independent Trustees and
two Interested Trustees. The Board has selected an Independent Trustee to act as Chairman, whose duties include presiding at meetings of the Board and acting as a focal point to address significant issues that may arise between regularly scheduled
Board and Committee meetings. In the performance of the Chairmans duties, the Chairman will consult with the other Independent Trustees and the Funds officers and legal counsel, as appropriate. The Chairman may perform other functions as
requested by the Board from time to time.
The Board meets as often as necessary to discharge its responsibilities. Currently,
the Board conducts regular, in-person meetings at least six times a year, and holds special in-person or telephonic meetings as necessary to address specific issues that require attention prior to the next regularly scheduled meeting. In addition,
the Independent Trustees meet at least annually to review, among other things, investment management agreements, distribution (Rule 12b-1) and/or service plans and related agreements, transfer agency agreements and certain other agreements
providing for the compensation of Goldman Sachs and/or its affiliates by the Fund, and to consider such other matters as they deem appropriate.
The Board has established six standing committees Audit, Governance and Nominating, Compliance, Valuation, Dividend and Contract Review Committees. The Board may establish other committees, or
nominate one or more Trustees to examine particular issues related to the Boards oversight responsibilities, from time to time. Each Committee meets periodically to perform its delegated oversight functions and reports its findings and
recommendations to the Board. For more information on the Committees, see the section STANDING BOARD COMMITTEES, below.
The Trustees have determined that the Trusts leadership structure is appropriate because it allows the Trustees to effectively perform their oversight responsibilities.
B-36
Trustees of the Trust
Information pertaining to the Trustees of the Trust as of August 24, 2012 is set forth below.
|
|
|
|
|
|
|
|
|
|
|
Independent Trustees
|
Name, Address
and Age
1
|
|
Position(s)
Held with
the Trust
|
|
Term of
Office and
Length of
Time
Served
2
|
|
Principal Occupation(s)
During Past 5 Years
|
|
Number of
Portfolios in
Fund
Complex
Overseen
by
Trustee
3
|
|
Other
Directorships
Held by Trustee
4
|
Ashok N.
Bakhru
Age: 70
|
|
Chairman of the Board of Trustees
|
|
Since 1996 (Trustee
since 1991)
|
|
Mr. Bakhru is retired. He is President, ABN Associates (19941996 and 1998Present); Director, Apollo Investment Corporation (a business development company)
(2008-Present); Member of Cornell University Council (19922004 and 2006Present); and was formerly Trustee, Scholarship America (19982005); Trustee, Institute for Higher Education Policy (20032008); Director, Private Equity
InvestorsIII and IV (19982007), and Equity-Linked Investors II (April 20022007).
|
|
109
|
|
Apollo Investment Corporation (a business development company)
|
|
|
|
|
|
|
|
|
|
|
|
|
Chairman of the Board of TrusteesGoldman Sachs Mutual Fund Complex.
|
|
|
|
|
|
|
|
|
|
|
Donald C.
Burke
Age: 52
|
|
Trustee
|
|
Since 2010
|
|
Mr. Burke is retired. He is Director, Avista Corp. (2011-Present); and was formerly a Director, BlackRock Luxembourg and Cayman Funds (20062010); President and Chief Executive
Officer, BlackRock U.S. Funds (20072009); Managing Director, BlackRock, Inc. (20062009); Managing Director, Merrill Lynch Investment Managers, L.P. (MLIM) (2006); First Vice President, MLIM (19972005); Chief Financial
Officer and Treasurer, MLIM U.S. Funds (19992006).
|
|
109
|
|
Avista Corp. (an energy company)
|
|
|
|
|
|
|
|
|
|
|
|
|
TrusteeGoldman Sachs Mutual Fund Complex.
|
|
|
|
|
|
|
|
|
|
|
John P.
Coblentz, Jr.
Age: 71
|
|
Trustee
|
|
Since 2003
|
|
Mr. Coblentz is retired. Formerly, he was Partner, Deloitte & Touche LLP (19752003); Director, Emerging Markets Group, Ltd. (20042006); and Director, Elderhostel,
Inc. (2006 Present).
|
|
109
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
TrusteeGoldman Sachs Mutual Fund Complex.
|
|
|
|
|
B-37
|
|
|
|
|
|
|
|
|
|
|
Independent Trustees
|
Name, Address
and Age
1
|
|
Position(s)
Held with
the Trust
|
|
Term of
Office and
Length of
Time
Served
2
|
|
Principal Occupation(s)
During Past 5 Years
|
|
Number of
Portfolios in
Fund
Complex
Overseen
by
Trustee
3
|
|
Other
Directorships
Held by Trustee
4
|
Diana M. Daniels
Age:
63
|
|
Trustee
|
|
Since 2007
|
|
Ms. Daniels is retired. Formerly, she was Vice President, General Counsel and Secretary, The Washington Post Company (19912006). Ms. Daniels is a Vice Chairman of the
Board of Trustees, Cornell University (2009Present); Member, Advisory Board, Psychology Without Borders (international humanitarian aid organization) (since 2007), and former Member of the Legal Advisory Board, New York Stock Exchange
(20032006) and of the Corporate Advisory Board, Standish Mellon Management Advisors (20062007).
|
|
109
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
TrusteeGoldman Sachs Mutual Fund Complex.
|
|
|
|
|
|
|
|
|
|
|
Joseph P. LoRusso Age: 55
|
|
Trustee
|
|
Since 2010
|
|
Mr. LoRusso is retired. Formerly, he was President, Fidelity Investments Institutional Services Co. (FIIS) (20022008); Director, FIIS (20022008); Director,
Fidelity Investments Institutional Operations Company (20032007); Executive Officer, Fidelity Distributors Corporation (20072008).
|
|
109
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
TrusteeGoldman Sachs Mutual Fund Complex.
|
|
|
|
|
|
|
|
|
|
|
Jessica
Palmer
Age: 63
|
|
Trustee
|
|
Since 2007
|
|
Ms. Palmer is retired. She is Director, Emerson Center for the Arts and Culture (2011Present); and was formerly a Consultant, Citigroup Human Resources Department (2007-2008);
Managing Director, Citigroup Corporate and Investment Banking (previously, Salomon Smith Barney/Salomon Brothers) (19842006). Ms. Palmer was a Member of the Board of Trustees of Indian Mountain School (private elementary and secondary
school) (20042009).
|
|
109
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
TrusteeGoldman Sachs Mutual Fund Complex.
|
|
|
|
|
|
|
|
|
|
|
Richard P. Strubel Age: 73
|
|
Trustee
|
|
Since 1987
|
|
Mr. Strubel is retired. Formerly, he was Director, Cardean Learning Group (provider of educational services via the internet) (20032008); Trustee Emeritus, The University of
Chicago (1987-Present).
|
|
109
|
|
The Northern Trust Mutual Fund Complex (64 Portfolios) (Chairman of the Board of Trustees); Gildan Activewear Inc. (a clothing marketing and
manufacturing company)
|
|
|
|
|
|
|
|
|
|
|
|
|
TrusteeGoldman Sachs Mutual Fund Complex.
|
|
|
|
|
B-38
|
|
|
|
|
|
|
|
|
|
|
Interested Trustees
|
Name, Address
and Age
1
|
|
Position(s)
Held with
the Trust
|
|
Term of
Office and
Length of
Time
Served
2
|
|
Principal Occupation(s)
During Past 5 Years
|
|
Number of
Portfolios in
Fund
Complex
Overseen
by
Trustee
3
|
|
Other
Directorships
Held by Trustee
4
|
|
|
|
|
|
|
James A.
McNamara*
Age: 49
|
|
President and Trustee
|
|
Since 2007
|
|
Managing Director, Goldman Sachs (December 1998Present); Director of Institutional Fund Sales, GSAM (April 1998December 2000); and Senior Vice
President and Manager, Dreyfus Institutional Service Corporation (January 1993April 1998). PresidentGoldman Sachs Mutual Fund Complex (November 2007 Present); Senior Vice President Goldman Sachs Mutual Fund Complex
(May 2007November 2007); and Vice PresidentGoldman Sachs Mutual Fund Complex (20012007).
|
|
109
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
TrusteeGoldman Sachs Mutual Fund Complex (November 2007 and December 2002May 2004).
|
|
|
|
|
|
|
|
|
|
|
Alan A.
Shuch
*
Age: 62
|
|
Trustee
|
|
Since 1990
|
|
Advisory DirectorGSAM (May 1999 Present); Consultant to GSAM (December 1994May 1999); and Limited Partner, Goldman Sachs
(December 1994May 1999).
|
|
109
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
TrusteeGoldman Sachs Mutual Fund Complex.
|
|
|
|
|
*
|
These persons are considered to be Interested Trustees because they hold positions with Goldman Sachs and own securities issued by The Goldman Sachs Group,
Inc. Each Interested Trustee holds comparable positions with certain other companies of which Goldman Sachs, GSAM or an affiliate thereof is the investment adviser, administrator and/or distributor.
|
1
|
Each Trustee may be contacted by writing to the Trustee, c/o Goldman Sachs, 200 West Street, New York, New York, 10282, Attn: Caroline Kraus.
|
2
|
Each Trustee holds office for an indefinite term until the earliest of: (a) the election of his or her successor; (b) the date the Trustee
resigns or is removed by the Board of Trustees or shareholders, in accordance with the Funds Declaration of Trust; (c) the conclusion of the first Board meeting held subsequent to the day the Trustee attains the age of 74 years (in
accordance with the current resolutions of the Board of Trustees, which may be changed by the Trustees without shareholder vote); or (d) the termination of the Fund.
|
3
|
The Goldman Sachs Mutual Fund Complex consists of the Trust, Goldman Sachs Municipal Opportunity Fund, Goldman Sachs Credit Strategies Fund and Goldman
Sachs Variable Insurance Trust. As of August 24, 2012, the Goldman Sachs Trust consisted of 95 portfolios (87 of which currently offer shares to the public), Goldman Sachs Variable Insurance Trust consisted of 12 portfolios, and the Goldman
Sachs Municipal Opportunity Fund did not offer shares to the public.
|
4
|
This column includes only directorships of companies required to report to the SEC under the Securities Exchange Act of 1934 (i.e., public
companies) or other investment companies registered under the Act.
|
The significance or relevance of a
Trustees particular experience, qualifications, attributes and/or skills is considered by the Board on an individual basis. Experience, qualifications, attributes and/or skills common to all Trustees include the ability to critically review,
evaluate and discuss information provided to them and to interact effectively with the other Trustees and with representatives
B-39
of the Investment Adviser and its affiliates, other service providers, legal counsel and the Funds
independent registered public accounting firm, the capacity to address financial and legal issues and exercise reasonable business judgment, and a commitment to the representation of the interests of the Fund and its shareholders. The Governance and
Nominating Committees charter contains certain other factors that are considered by the Governance and Nominating Committee in identifying and evaluating potential nominees to serve as Independent Trustees. Based on each Trustees
experience, qualifications, attributes and/or skills, considered individually and with respect to the experience, qualifications, attributes and/or skills of other Trustees, the Board has concluded that each Trustee should serve as a Trustee. Below
is a brief discussion of the experience, qualifications, attributes and/or skills of each individual Trustee as of April 27, 2012 that led the Board to conclude that such individual should serve as a Trustee.
Ashok N. Bakhru.
Mr. Bakhru has served as a Trustee since 1991 and Chairman of the Board since 1996. Mr. Bakhru serves as President of
ABN Associates, a management and financial consulting firm, and is a Director of Apollo Investment Corporation, a business development company. Previously, Mr. Bakhru was the Chief Financial Officer, Chief Administrative Officer and Director of
Coty Inc., a multinational cosmetics, fragrance and personal care company. Previously, Mr. Bakhru held several senior management positions at Scott Paper Company, a major manufacturer of paper products, including Senior Vice President and Chief
Financial Officer. Mr. Bakhru also serves on the Governing Council of the Independent Directors Council and the Board of Governors of the Investment Company Institute. He also serves on the Advisory Board of BoardIQ, an investment publication.
In addition, Mr. Bakhru has served as Director of Equity-Linked Investments II and Private Equity Investors III and IV, which are private equity partnerships based in New York City. Mr. Bakhru was also a Director of Arkwright Mutual
Insurance Company. Based on the foregoing, Mr. Bakhru is experienced with financial and investment matters.
Donald C. Burke.
Mr. Burke has served as Trustee since 2010. Mr. Burke serves as a Director of Avista Corp., an energy company. Mr. Burke was a Managing Director of BlackRock, Inc., where he was President and Chief Executive Officer of
BlackRocks U.S. funds and a director and chairman of several offshore funds advised by BlackRock. As President and Chief Executive Officer of BlackRocks U.S. funds, he was responsible for all accounting, tax and regulatory reporting
requirements for over 300 open-end and closed-end BlackRock funds. Previously, he was a Managing Director, First Vice President and Vice President of Merrill Lynch Investment Managers, L.P. (MLIM), where he worked for 16 years prior
to MLIMs merger with BlackRock, and was instrumental in the integration of BlackRocks and MLIMs operating infrastructure following the merger. While at MLIM, he was Chief Financial Officer and Treasurer of MLIMs U.S. funds
and Head of Global Operations and Client Services, where he was responsible for the development and maintenance of MLIMs operating infrastructure across the Americas, Europe and the Pacific Rim. He also developed controls for the MLIM U.S.
funds financial statement certification process to comply with the Sarbanes-Oxley Act of 2002, worked with fund auditors in connection with the funds annual audits and established the department responsible for all tax issues impacting
the MLIM U.S. funds. Previously, Mr. Burke was Tax Manager at Deloitte & Touche, where he was designated as one of the firms lead specialists in the investment company industry, and advised multinational corporations,
partnerships, universities and high net worth individuals in tax matters. Mr. Burke is a certified public accountant. Based on the foregoing, Mr. Burke is experienced with accounting, financial and investment matters.
John P. Coblentz, Jr.
Mr. Coblentz has served as Trustee since 2003. Mr. Coblentz has been designated as the Boards audit
committee financial expert given his extensive accounting and finance experience. Mr. Coblentz was a partner with Deloitte & Touche LLP for 28 years. While at Deloitte & Touche LLP, Mr. Coblentz was lead
partner responsible for all auditing and accounting services to a variety of large, global companies, a significant portion of which operated in the financial services industry. Mr. Coblentz was also the national managing partner for the
firms risk management function, a member of the firms Management Committee and the first managing partner of the firms Financial Advisory Services practice, which brought together the firms mergers and acquisition services,
forensic and dispute services, corporate finance, asset valuation and reorganization businesses under one management structure. He served as a member of the firms Board of Directors. Mr. Coblentz also currently serves as a Director of
Elderhostel, Inc., a not-for-profit organization. Mr. Coblentz is a certified public accountant. Based on the foregoing, Mr. Coblentz is experienced with accounting, financial and investment matters.
Diana M. Daniels.
Ms. Daniels has served as Trustee since 2007. Ms. Daniels also serves as Vice Chair of the Board of Trustees of Cornell
University. Ms. Daniels held several senior management positions at The Washington Post Company and its subsidiaries, where she worked for 29 years. While at The Washington Post Company, Ms. Daniels served as Vice Present, General
Counsel, Secretary to the Board of Directors and Secretary to the Audit Committee. Previously, Ms. Daniels served as Vice President and General Counsel of Newsweek, Inc. Ms. Daniels has also served as a member of the Corporate Advisory
Board of Standish Mellon Management Advisors and of the Legal Advisory Board of New York Stock Exchange. Ms. Daniels is also a member of the American Law Institute and of the Advisory Council of the Inter-American Press Association. Based on
the foregoing, Ms. Daniels is experienced with legal, financial and investment matters.
B-40
Joseph P. LoRusso.
Mr. LoRusso has served as Trustee since 2010. Mr. LoRusso held a number
of senior management positions at Fidelity Investments for over 15 years, where he was most recently President of Fidelity Investments Institutional Services Co. (FIIS). As President of FIIS, Mr. LoRusso oversaw the
development, distribution and servicing of Fidelitys investment and retirement products through various financial intermediaries. Previously, he served as President, Executive Vice President and Senior Vice President of Fidelity Institutional
Retirement Services Co., where he helped establish Fidelitys 401(k) business and built it into the largest in the U.S. In these positions, he oversaw sales, marketing, implementation, client services, operations and technology.
Mr. LoRusso also served on Fidelitys Executive Management Committee. Prior to his experience with Fidelity, he was Second Vice President in the Investment and Pension Group of John Hancock Mutual Life Insurance, where he had
responsibility for developing and running the companys 401(k) business. Previously, he worked at The Equitable (now a subsidiary of AXA Financial), where he was Product Manager of the companys then-nascent 401(k) business, and at Arthur
Andersen & Co. (now Accenture), as a Senior Consultant within the firms consulting practice. Based on the foregoing, Mr. LoRusso is experienced with financial and investment matters.
Jessica Palmer.
Ms. Palmer has served as Trustee since 2007. Ms. Palmer serves as a Director of Emerson Center for the Arts and Culture,
a not-for-profit organization. Ms. Palmer worked at Citigroup Corporate and Investment Banking (previously, Salomon Smith Barney/Salomon Brothers) for over 20 years, where she was a Managing Director. While at Citigroup Corporate and
Investment Banking, Ms. Palmer was Head of Global Risk Management, Chair of the Global Commitment Committee, Co-Chair of International Investment Banking (New York) and Head of Fixed Income Capital Markets. Ms. Palmer was also a member of
the Management Committee and Risk Management Operating Committee of Citigroup, Inc. Prior to that, Ms. Palmer was a Vice President at Goldman Sachs in its international corporate finance department. Ms. Palmer was also Assistant Vice
President of the International Division at Wells Fargo Bank, N.A. Ms. Palmer was also a member of the Board of Trustees of a private elementary and secondary school. Based on the foregoing, Ms. Palmer is experienced with financial and
investment matters.
Richard P. Strubel.
Mr. Strubel has served as Trustee since 1987. Mr. Strubel also serves as Chairman of
the Northern Funds, a family of retail and institutional mutual funds managed by The Northern Trust Company. He also serves on the board of Gildan Activewear Inc., which is listed on the New York Stock Exchange (NYSE). Mr. Strubel
was Vice-Chairman of the Board of Cardean Learning Group (formerly known as Unext), and previously served as Unexts President and Chief Operating Officer. Mr. Strubel was Managing Director of Tandem Partners, Inc., a privately-held
management services firm, and served as President and Chief Executive Officer of Microdot, Inc. Previously, Mr. Strubel served as President of Northwest Industries, then a NYSE-listed company, a conglomerate with various operating entities
located around the country. Before joining Northwest, Mr. Strubel was an associate and later managing principal of Fry Consultants, a management consulting firm based in Chicago. Mr. Strubel is also a Trustee Emeritus of the University of
Chicago and is an adjunct professor at the University of Chicago Booth School of Business. Based on the foregoing, Mr. Strubel is experienced with financial and investment matters.
James A. McNamara.
Mr. McNamara has served as Trustee and President of the Trust since 2007 and has served as an officer of the Trust since 2001. Mr. McNamara is a Managing Director at
Goldman Sachs. Mr. McNamara is currently head of Global Third Party Distribution at GSAM, where he was previously head of U.S. Third Party Distribution. Prior to that role, Mr. McNamara served as Director of Institutional Fund Sales. Prior
to joining Goldman Sachs, Mr. McNamara was Vice President and Manager at Dreyfus Institutional Service Corporation. Based on the foregoing, Mr. McNamara is experienced with financial and investment matters.
Alan A. Shuch.
Mr. Shuch has served as a Trustee since 1990. Mr. Shuch is an Advisory Director to Goldman Sachs. Mr. Shuch serves on
the Board of Trustees of a number of offshore funds managed by GSAM. He serves on GSAMs Valuation and Brokerage Allocation Committees. Prior to retiring as a general partner of Goldman Sachs in 1994, Mr. Shuch was president and chief
operating officer of GSAM which he founded in 1988. Mr. Shuch joined the Goldman Sachs Fixed Income Division in 1976. He was instrumental in building Goldman Sachs Corporate Bond Department and served as co-head of the Global Fixed Income
Sales and the High Yield Bond and Preferred Stock Departments. He headed the Portfolio Restructuring and Fixed Income Quantitative and Credit Research Departments. Mr. Shuch also served on a variety of firm-wide committees including the
International Executive, New Product and Strategic Planning Committees and was a member of the Stone Street/Bridge Street Private Equity Board. Mr. Shuch serves on Whartons Graduate Executive Board. Based on the foregoing, Mr. Shuch
is experienced with financial and investment matters.
B-41
Officers of the Trust
Information pertaining to the officers of the Trust as of August 24, 2012 is set forth below.
|
|
|
|
|
|
|
Officers of the Trust
|
Name, Age And
Address
|
|
Position(s)
Held
With the Trust
|
|
Term of
Office and
Length of
Time
Served
1
|
|
Principal Occupation(s) During Past 5
Years
|
James A. McNamara
200 West Street
New York, NY
10282
Age: 49
|
|
Trustee and President
|
|
Since
2007
|
|
Managing Director, Goldman Sachs (December 1998-Present); Director of Institutional Fund Sales, GSAM (April 1998December 2000); and Senior Vice President and
Manager, Dreyfus Institutional Service Corporation (January 1993 April 1998).
|
|
|
|
|
|
|
|
|
|
|
PresidentGoldman Sachs Mutual Fund Complex (November 2007 Present); Senior Vice President Goldman Sachs Mutual Fund Complex (May 2007
November 2007); and Vice PresidentGoldman Sachs Mutual Fund Complex (2001 2007).
|
|
|
|
|
|
|
|
|
|
|
Trustee Goldman Sachs Mutual Fund Complex (November 2007-Present and December 2002 May 2004).
|
|
|
|
|
Scott McHugh
200 West
Street
New York, NY
10282
Age: 40
|
|
Treasurer and Senior Vice President
|
|
Since
2009
|
|
Vice President, Goldman Sachs (February 2007Present); Assistant Treasurer of certain mutual funds administered by DWS Scudder (20052007); and Director (20052007),
Vice President (20002005), Assistant Vice President (19982000), Deutsche Asset Management or its predecessor (19982007).
|
|
|
|
|
|
|
|
|
|
|
TreasurerGoldman Sachs Mutual Fund Complex (October 2009-Present); Senior Vice PresidentGoldman Sachs Mutual Fund Complex (November 2009-Present); and
Assistant TreasurerGoldman Sachs Mutual Fund Complex (May 2007-October 2009).
|
|
|
|
|
George F. Travers
30 Hudson
Street
Jersey City, NJ
07302
Age: 44
|
|
Senior Vice President and Principal Financial Officer
|
|
Since
2009
|
|
Managing Director, Goldman Sachs (2007-Present); Managing Director, UBS Ag (2005-2007); and Partner, Deloitte & Touche LLP (1990-2005, partner from 2000-2005).
|
|
|
|
|
|
|
|
|
|
|
Senior Vice President and Principal Financial OfficerGoldman Sachs Mutual Fund Complex.
|
Philip V. Giuca, Jr.
30 Hudson
Street
Jersey City, NJ
07302
Age: 50
|
|
Assistant Treasurer
|
|
Since
1997
|
|
Vice President, Goldman Sachs (May 1992Present).
Assistant Treasurer Goldman Sachs Mutual Fund Complex.
|
B-42
|
|
|
|
|
|
|
Officers of the Trust
|
Name, Age And
Address
|
|
Position(s)
Held
With the Trust
|
|
Term of
Office and
Length of
Time
Served
1
|
|
Principal Occupation(s) During Past 5
Years
|
Peter Fortner
30 Hudson Street
Jersey
City, NJ
07302
Age:
54
|
|
Assistant Treasurer
|
|
Since
2000
|
|
Vice President, Goldman Sachs (July 2000Present); Principal Financial Officer, Commerce Bank Mutual Fund Complex (2008-Present); Associate, Prudential Insurance Company of
America (November 1985June 2000); and Assistant Treasurer, certain closed-end funds administered by Prudential (19992000).
|
|
|
|
|
|
|
|
|
|
|
Assistant Treasurer Goldman Sachs Mutual Fund Complex.
|
|
|
|
|
Kenneth G. Curran
30
Hudson Street
Jersey City, NJ
07302
Age: 48
|
|
Assistant Treasurer
|
|
Since
2001
|
|
Vice President, Goldman Sachs (November 1998Present); and Senior Tax Manager, KPMG Peat Marwick (accountants)
(August 1995October 1998).
Assistant TreasurerGoldman
Sachs Mutual Fund Complex.
|
|
|
|
|
Jesse Cole
71 South
Wacker
Drive
Chicago, IL
60606
Age: 49
|
|
Vice President
|
|
Since
1998
|
|
Managing Director, Goldman Sachs (December 2006Present); Vice President, GSAM (June 1998Present); and Vice President, AIM
Management Group, Inc. (investment adviser) (April 1996June 1998).
Vice PresidentGoldman Sachs Mutual Fund Complex.
|
|
|
|
|
Kerry K. Daniels
71 South
Wacker
Drive
Chicago, IL
60606
Age: 49
|
|
Vice President
|
|
Since
2000
|
|
Manager, Financial Control Shareholder Services, Goldman Sachs (1986 Present).
Vice PresidentGoldman Sachs Mutual Fund Complex.
|
|
|
|
|
Mark Hancock
71 South
Wacker
Drive
Chicago, IL
60606
Age: 44
|
|
Vice President
|
|
Since
2007
|
|
Managing Director, Goldman Sachs (November 2005Present); Vice President, Goldman Sachs (August 2000November 2005);
Senior Vice PresidentDreyfus Service Corp (19992000); and Vice PresidentDreyfus Service Corp (19961999).
Vice PresidentGoldman Sachs Mutual Fund Complex.
|
|
|
|
|
Jeffrey D. Matthes
30 Hudson
Street
Jersey City, NJ
07302
Age: 43
|
|
Vice President
|
|
Since
2007
|
|
Vice President, Goldman Sachs (December 2004Present); and Associate, Goldman Sachs
(December 2002December 2004).
Vice PresidentGoldman
Sachs Mutual Fund Complex.
|
|
|
|
|
Carlos W. Samuels
30
Hudson Street
Jersey City, NJ
07302
Age: 37
|
|
Vice President
|
|
Since
2007
|
|
Vice President, Goldman Sachs (December 2007Present); Associate, Goldman Sachs (December 2005December 2007);
Analyst, Goldman Sachs (January 2004December 2005).
Vice
PresidentGoldman Sachs Mutual Fund Complex.
|
B-43
|
|
|
|
|
|
|
Officers of the Trust
|
Name, Age And
Address
|
|
Position(s)
Held
With the Trust
|
|
Term of
Office and
Length of
Time
Served
1
|
|
Principal Occupation(s) During Past 5
Years
|
Miriam Cytryn
200 West
Street
New York, NY
10282
Age: 54
|
|
Vice President
|
|
Since
2008
|
|
Vice President, GSAM (2008-Present); Vice President of Divisional Management, Investment Management Division (2007-2008); Vice President
and Chief of Staff, GSAM US Distribution (2003-2007); and Vice President of Employee Relations, Goldman Sachs (1996-2003).
Vice PresidentGoldman Sachs Mutual Fund Complex.
|
|
|
|
|
Glen Casey
200 West
Street
New York, NY
10282
Age: 47
|
|
Vice President
|
|
Since
2008
|
|
Managing Director, Goldman Sachs (2007-Present); and Vice President, Goldman Sachs (1997-2007).
Vice PresidentGoldman Sachs Mutual Fund Complex.
|
|
|
|
|
Mark Heaney
Christchurch
Court
10-15 Newgate Street
London,
EC1A 7HD, UK
Age: 44
|
|
Vice President
|
|
Since
2010
|
|
Executive Director, GSAM (May 2005-Present); Director of Operations (UK and Ireland), Invesco Asset Management
(May 2004-March 2005); Global Head of Investment Administration, Invesco Asset Management (September 2001-May 2004); Managing Director (Ireland), Invesco Asset Management (March 2000-September 2001); Director of
Investment Administration, Invesco Asset Management (December 1998-March 2000).
Vice PresidentGoldman Sachs Mutual Fund Complex.
|
|
|
|
|
Caroline Kraus
200 West
Street
New York, NY 10282
Age:
35
|
|
Secretary
|
|
Since
2012
|
|
Vice President, Goldman Sachs (August 2006Present); Associate General Counsel, Goldman Sachs (2012Present); Assistant
General Counsel, Goldman Sachs (August 2006December 2011); Associate, Weil, Gotshal & MangesLLP (20022006)
SecretaryGoldman Sachs Mutual Fund Complex (August 2012Present); Assistant SecretaryGoldman Sachs Mutual Fund Complex (June
2012August 2012).
|
|
|
|
|
David Fishman
200 West
Street
New York, NY 10282
Age:
47
|
|
Assistant Secretary
|
|
Since
2001
|
|
Managing Director, Goldman Sachs (December 2001Present); and Vice President, Goldman Sachs
(1997December 2001).
Assistant SecretaryGoldman Sachs
Mutual Fund Complex.
|
|
|
|
|
Danny Burke
200 West
Street
New York, NY 10282
Age:
49
|
|
Assistant Secretary
|
|
Since
2001
|
|
Vice President, Goldman Sachs (1987Present).
Assistant SecretaryGoldman Sachs Mutual Fund Complex.
|
B-44
|
|
|
|
|
|
|
Officers of the Trust
|
Name, Age And
Address
|
|
Position(s)
Held
With the Trust
|
|
Term of
Office and
Length of
Time
Served
1
|
|
Principal Occupation(s) During Past 5
Years
|
Deborah Farrell
30 Hudson
Street
Jersey City, NJ
07302
Age: 41
|
|
Assistant Secretary
|
|
Since
2007
|
|
Vice President, Goldman Sachs (2005-Present); Associate, Goldman Sachs (2001-2005); and Analyst, Goldman Sachs (1994-2005).
Assistant SecretaryGoldman Sachs Mutual Fund Complex.
|
|
|
|
|
Patrick T. OCallaghan
200 West Street
New York,
NY 10282
Age: 40
|
|
Assistant Secretary
|
|
Since
2009
|
|
Vice President, Goldman Sachs (2000-Present); Associate, Goldman Sachs (1998-2000); Analyst, Goldman Sachs (1995-1998).
Assistant SecretaryGoldman Sachs Mutual Fund Complex.
|
|
|
|
|
James A. McCarthy
200 West
Street
New York, NY 10282
Age:
48
|
|
Assistant Secretary
|
|
Since
2009
|
|
Managing Director, Goldman Sachs (2003-Present); Vice President, Goldman Sachs (1996-2003); Portfolio Manager, Goldman Sachs
(1995-1996).
Assistant SecretaryGoldman Sachs Mutual Fund
Complex.
|
|
|
|
|
Andrew Murphy
200 West
Street
New York, NY 10282
Age:
39
|
|
Assistant Secretary
|
|
Since
2010
|
|
Vice President, Goldman Sachs (April 2009-Present); Assistant General Counsel, Goldman Sachs (April 2009-Present); Attorney, Axiom
Legal (2007-2009); Vice President and Counsel, AllianceBernstein, L.P. (2001-2007).
Assistant SecretaryGoldman Sachs Mutual Fund Complex.
|
|
|
|
|
Robert Griffith
200 West
Street
New York, NY 10282
Age:
37
|
|
Assistant Secretary
|
|
Since
2011
|
|
Vice President, Goldman Sachs (August 2011Present); Assistant General Counsel, Goldman Sachs (August 2011Present); Vice
President and Counsel, Nomura Holding America, Inc. (20102011); Associate, Simpson Thacher & Bartlett LLP (20052010).
Assistant SecretaryGoldman Sachs Mutual Fund Complex.
|
|
|
|
|
Matthew Wolfe
200 West
Street
New York, NY
10282
Age: 30
|
|
Assistant Secretary
|
|
Since
2012
|
|
Vice President, Goldman Sachs (July 2012Present); Assistant General Counsel, Goldman Sachs (July 2012Present); Associate,
Dechert LLP (20072012).
Assistant SecretaryGoldman Sachs
Mutual Fund Complex.
|
1
|
Officers hold office at the pleasure of the Board of Trustees or until their successors are duly elected and qualified. Each officer holds comparable
positions with certain other companies of which Goldman Sachs, GSAM or an affiliate thereof is the investment adviser, administrator and/or distributor.
|
B-45
Standing Board Committees
The Audit Committee oversees the audit process and provides assistance to the full Board of Trustees with respect to fund accounting, tax compliance and financial statement matters. In performing its
responsibilities, the Audit Committee selects and recommends annually to the Board an independent registered public accounting firm to audit the books and records of the Trust for the ensuing year, and reviews with the firm the scope and results of
each audit. All of the Independent Trustees serve on the Audit Committee. The Audit Committee held four meetings during the fiscal year ended December 31, 2011.
The Governance and Nominating Committee has been established to: (i) assist the Board in matters involving mutual fund governance, which includes making recommendations to the Board with respect to
the effectiveness of the Board in carrying out its responsibilities in governing the Fund and overseeing its management; (ii) select and nominate candidates for appointment or election to serve as Independent Trustees; and (iii) advise the
Board on ways to improve its effectiveness. All of the Independent Trustees serve on the Governance and Nominating Committee. The Governance and Nominating Committee held two meetings during the fiscal year ended December 31, 2011. As stated
above, each Trustee holds office for an indefinite term until the occurrence of certain events. In filling Board vacancies, the Governance and Nominating Committee will consider nominees recommended by shareholders. Nominee recommendations should be
submitted to the Trust at its mailing address stated in the Funds Prospectus and should be directed to the attention of the Goldman Sachs Trust Governance and Nominating Committee.
The Compliance Committee has been established for the purpose of overseeing the compliance processes: (i) of the Fund; and
(ii) insofar as they relate to services provided to the Fund, of the Funds investment adviser, distributor, administrator (if any), and transfer agent, except that compliance processes relating to the accounting and financial reporting
processes, and certain related matters, are overseen by the Audit Committee. In addition, the Compliance Committee provides assistance to the full Board with respect to compliance matters. The Compliance Committee met three times during the fiscal
year ended December 31, 2011. All of the Independent Trustees serve on the Compliance Committee.
The Valuation Committee
is authorized to act for the Board in connection with the valuation of portfolio securities held by the Fund in accordance with the Trusts Valuation Procedures. Messrs. McNamara and Shuch serve on the Valuation Committee, together with certain
employees of GSAM who are not Trustees. The Valuation Committee met twelve times during the fiscal year ended December 31, 2011. The Valuation Committee reports periodically to the Board.
The Dividend Committee is authorized, subject to the ratification of Trustees who are not members of the committee, to declare dividends
and capital gain distributions consistent with the Funds Prospectus. Messrs. McNamara and McHugh serve on the Dividend Committee. The Dividend Committee met twelve times during the fiscal year ended December 31, 2011.
The Contract Review Committee has been established for the purpose of overseeing the processes of the Board for reviewing and monitoring
performance under the Funds investment management, distribution, transfer agency, and certain other agreements with the Funds Investment Adviser and its affiliates. The Contract Review Committee is also responsible for overseeing the
Boards processes for considering and reviewing performance under the operation of the Funds distribution, service, shareholder administration and other plans, and any agreements related to the plans, whether or not such plans and
agreements are adopted pursuant to Rule 12b-1 under the Act. The Contract Review Committee also provides appropriate assistance to the Board in connection with the Boards approval, oversight and review of the Funds other service
providers including, without limitation, the Funds custodian/accounting agent, sub-transfer agents, professional (legal and accounting) firms and printing firms. The Contract Review Committee met three times during the fiscal year ended
December 31, 2011. All of the Independent Trustees serve on the Contract Review Committee.
Risk Oversight
The Board is responsible for the oversight of the activities of the Fund, including oversight of risk management. Day-to-day risk
management with respect to the Fund is the responsibility of GSAM or other service providers (depending on the nature of the risk), subject to supervision by GSAM. The risks of the Fund include, but are not limited to, investment risk, compliance
risk, operational risk, reputational risk, credit risk and counterparty risk. Each of GSAM and the other service providers have their own independent interest in risk management and their policies and methods of risk management may differ from the
Fund and each others in the setting of priorities, the resources available or the effectiveness of relevant controls. As a result, the Board recognizes that it is not possible to identify all of the risks that may affect the Fund or to develop
processes and controls to eliminate or mitigate their occurrence or effects, and that some risks are simply beyond the control of the Fund or GSAM, its affiliates or other service providers.
The Board effectuates its oversight role primarily through regular and special meetings of the Board and Board committees. In certain
cases, risk management issues are specifically addressed in presentations and discussions. For example, GSAM has an independent dedicated Market Risk Group that assists GSAM in managing investment risk. Representatives from the Market Risk
B-46
Group regularly meet with the Board to discuss their analysis and methodologies. In addition, investment risk is discussed in the context of regular presentations to the Board on Fund strategy
and performance. Other types of risk are addressed as part of presentations on related topics (e.g. compliance policies) or in the context of presentations focused specifically on one or more risks. The Board also receives reports from GSAM
management on operational risks, reputational risks and counterparty risks relating to the Fund.
Board oversight of risk
management is also performed by various Board committees. For example, the Audit Committee meets with both the Funds independent registered public accounting firm and GSAMs internal audit group to review risk controls in place that
support the Fund as well as test results, and the Compliance Committee meets with the CCO and representatives of GSAMs compliance group to review testing results of the Funds compliance policies and procedures and other compliance
issues. Board oversight of risk is also performed as needed between meetings through communications between GSAM and the Board. The Board may, at any time and in its discretion, change the manner in which it conducts risk oversight. The Boards
oversight role does not make the Board a guarantor of the Funds investments or activities.
Trustee Ownership of Fund Shares
The following table shows the dollar range of shares beneficially owned by each Trustee in the Fund and other portfolios
of the Goldman Sachs Trust, Goldman Sachs Variable Insurance Trust and Goldman Sachs Credit Strategies Fund as of December 31, 2011.
|
|
|
|
|
|
|
Name of Trustee
|
|
Dollar Range of
Equity Securities in the Fund
1
|
|
|
Aggregate Dollar Range of
Equity Securities in All
Portfolios in Fund Complex
Overseen By Trustee
2
|
Ashok N. Bakhru
|
|
|
|
|
|
Over $100,000
|
Donald C. Burke
|
|
|
|
|
|
Over $100,000
|
John P. Coblentz, Jr.
|
|
|
|
|
|
Over $100,000
|
Diana M. Daniels
|
|
|
|
|
|
Over $100,000
|
Joseph P. LoRusso
|
|
|
|
|
|
Over $100,000
|
James A. McNamara
|
|
|
|
|
|
Over $100,000
|
Jessica Palmer
|
|
|
|
|
|
Over $100,000
|
Alan A. Shuch
|
|
|
|
|
|
Over $100,000
|
Richard P. Strubel
|
|
|
|
|
|
Over $100,000
|
1
|
Includes the value of shares beneficially owned by each Trustee in the Fund.
|
2
|
As of December 31, 2011, the Goldman Sachs Mutual Fund Complex consisted of the Trust, Goldman Sachs Variable Insurance Trust, Goldman Sachs Credit Strategies Fund
and Goldman Sachs Municipal Opportunity Fund. As of December 31, 2011, the Trust consisted of 90 portfolios, the Goldman Sachs Variable Insurance Trust consisted of 11 portfolios, and the Goldman Sachs Municipal Opportunity Fund did not offer
shares to the public.
|
As of February 29, 2012, the Fund had not commenced operations, and the Trustees and
Officers of the Trust as a group owned less than 1% of the outstanding shares of beneficial interest of the Fund.
Board Compensation
Each Independent Trustee is compensated with a unitary annual fee for his or her services as a Trustee of the Trust and as
a member of the Governance and Nominating Committee, Compliance Committee, Contract Review Committee, and Audit Committee in lieu of each Independent Trustee receiving an annual fee plus additional fees for each meeting attended. Under this new
compensation structure, the Chairman and audit committee financial expert will continue to receive additional compensation for their services. The Independent Trustees are also reimbursed for travel expenses incurred in connection with
attending such meetings. The Trust may also pay the incidental costs of a Trustee to attend training or other types of conferences relating to the investment company industry.
B-47
The following tables set forth certain information with respect to the compensation of each
Trustee of the Trust for the fiscal year ended December 31, 2011:
Trustee Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
Name of Trustee
|
|
Aggregate
Compensation
from the Fund*
|
|
|
Pension or Retirement
Benefits Accrued as Part
Of the Trusts
Expenses
|
|
|
Total Compensation
From Fund Complex for the
fiscal
year 1/1/11 to 12/31/11 **
|
|
Ashok N. Bakhru
1
|
|
|
|
|
|
$
|
0
|
|
|
|
395,000
|
|
Donald C. Burke
|
|
|
|
|
|
|
0
|
|
|
|
255,000
|
|
John P. Coblentz, Jr.
2
|
|
|
|
|
|
|
0
|
|
|
|
295,000
|
|
Diana M. Daniels
|
|
|
|
|
|
|
0
|
|
|
|
255,000
|
|
Joseph P. LoRusso
|
|
|
|
|
|
|
0
|
|
|
|
255,000
|
|
James A. McNamara
3
|
|
|
|
|
|
|
0
|
|
|
|
|
|
Jessica Palmer
|
|
|
|
|
|
|
0
|
|
|
|
255,000
|
|
Alan A. Shuch
3
|
|
|
|
|
|
|
0
|
|
|
|
|
|
Richard P. Strubel
|
|
|
|
|
|
|
0
|
|
|
|
255,000
|
|
*
|
The Fund had not commenced operations as of the date of this SAI. Therefore, the Trustees received no compensation from the Fund during the fiscal year ended
December 31, 2011.
|
**
|
Represents fees paid to each Trustee during the fiscal year ended December 31, 2011 from the Goldman Sachs Mutual Fund Complex. As of December 31, 2011, the
Fund Complex consisted of the Trust, Goldman Sachs Municipal Opportunity Fund, Goldman Sachs Credit Strategies Fund and Goldman Sachs Variable Insurance Trust. The Trust consisted of 90 portfolios (83 of which offered shares to the public), and
Goldman Sachs Variable Insurance Trust consisted of 12 portfolios (11 of which offered shares to the public). The Goldman Sachs Municipal Opportunity Fund did not offer shares to the public.
|
1
|
Includes compensation as Board Chairman.
|
2
|
Includes compensation as audit committee financial expert, as defined in Item 3 of Form N-CSR.
|
3
|
Messrs. McNamara and Shuch are Interested Trustees, and as such, receive no compensation from the Fund or the Goldman Sachs Mutual Fund Complex.
|
Miscellaneous
Class A Shares of the Fund may be sold at NAV without payment of any sales charge to Goldman Sachs, its affiliates and their respective officers, partners, directors or employees (including retired
employees and former partners), any partnership of which Goldman Sachs is a general partner, any Trustee or officer of the Trust and designated family members of any of the above individuals. These and the Funds other sales load waivers are
due to the nature of the investors and/or the reduced sales effort and expense that are needed to obtain such investments.
The
Trust, its Investment Adviser and principal underwriter have adopted codes of ethics under Rule 17j-1 of the Act that permit personnel subject to their particular codes of ethics to invest in securities, including securities that may be
purchased or held by the Fund.
MANAGEMENT SERVICES
As stated in the Funds Prospectus, GSAM, 200 West Street, New York, New York 10282, serves as Investment Adviser to the Fund. GSAM
is a subsidiary of The Goldman Sachs Group, Inc. and an affiliate of Goldman Sachs. See Service Providers in the Funds Prospectus for a description of the Investment Advisers duties to the Fund.
Founded in 1869, Goldman Sachs Group, Inc. is a financial holding company and a leading global investment banking, securities and
investment management firm. Goldman Sachs is a leader in developing portfolio strategies and in many fields of investing and financing, participating in financial markets worldwide and serving individuals, institutions, corporations and governments.
Goldman Sachs is also among the principal market sources for current and thorough information on companies, industrial sectors, markets, economies and currencies, and trades and makes markets in a wide range of equity and debt securities 24 hours a
day. The firm is headquartered in New York with offices in countries throughout the world. It has trading professionals throughout the United States, as well as in London, Frankfurt, Tokyo, Seoul, Sao Paulo and other major financial centers around
the world. The active participation of Goldman Sachs in the worlds financial markets enhances its ability to identify attractive investments. Goldman Sachs has agreed to permit the Fund to use the name Goldman Sachs or a derivative
thereof as part of the Funds name for as long as the Funds Management Agreement is in effect.
The Investment
Adviser is able to draw on the substantial research and market expertise of Goldman Sachs, whose investment research effort is one of the largest in the industry. The Global Investment Research Department covers approximately 3,000 equity
securities, 350 fixed income securities and 25 stock markets in more than 50 economies and regions. The in depth information and analyses generated by Goldman Sachs research analysts are available to the Investment Adviser subject to Chinese
Wall restrictions.
B-48
In addition, many of Goldman Sachs economists, securities analysts, portfolio
strategists and credit analysts have consistently been highly ranked in respected industry surveys conducted in the United States and abroad. Goldman Sachs is also among the leading investment firms using quantitative analytics (now used by a
growing number of investors) to structure and evaluate portfolios. For example, Goldman Sachs options evaluation model analyzes a securitys term, coupon and call option, providing an overall analysis of the securitys value relative
to its interest risk.
In managing the Fund, the Investment Adviser has access to Goldman Sachs economics research. The
Economics Research Department, based in London, conducts economic, financial and currency markets research which analyzes economic trends and interest and exchange rate movements worldwide. The Economics Research Department tracks factors such as
inflation and money supply figures, balance of trade figures, economic growth, commodity prices, monetary and fiscal policies, and political events that can influence interest rates and currency trends. The success of Goldman Sachs
international research team has brought wide recognition to its members. The team has earned top rankings in various external surveys such as Pensions and Investments, Forbes and Dalbar. These rankings acknowledge the achievements of the firms
economists, strategists and equity analysts.
In allocating assets among foreign countries and currencies for the Fund, the
Investment Adviser will have access to the Global Asset Allocation Model. The model is based on the observation that the prices of all financial assets, including foreign currencies, will adjust until investors globally are comfortable holding the
pool of outstanding assets. Using the model, the Investment Adviser will estimate the total returns from each currency sector which are consistent with the average investor holding a portfolio equal to the market capitalization of the financial
assets among those currency sectors. These estimated equilibrium returns are then combined with the expectations of Goldman Sachs research professionals to produce an optimal currency and asset allocation for the level of risk suitable for the
Fund given its investment objectives and criteria.
The fixed income research capabilities of Goldman Sachs available to GSAM
include the Goldman Sachs Fixed Income Research Department and the Credit Department. The Fixed Income Research Department monitors developments in U.S. and foreign fixed income markets, assesses the outlooks for various sectors of the markets and
provides relative value comparisons, as well as analyzes trading opportunities within and across market sectors. The Fixed Income Research Department is at the forefront in developing and using computer-based tools for analyzing fixed income
securities and markets, developing new fixed income products and structuring portfolio strategies for investment policy and tactical asset allocation decisions. The Credit Department tracks specific governments, regions and industries and from time
to time may review the credit quality of the Funds investments.
The Management Agreement provides that GSAM, in its
capacity as Investment Adviser, may render similar services to others so long as the services under the Management Agreement are not impaired thereby. The Funds Management Agreement was most recently approved by the Trustees of the Trust,
including a majority of the Trustees of the Trust who are not parties to such agreement or interested persons (as such term is defined in the Act) of any party thereto (the non-interested Trustees), on October 20, 2011
with respect to the Fund. The management arrangements were last approved by the initial sole shareholder of the Fund prior to the Funds commencement of operations. A discussion regarding the Trustees basis for approving the Management
Agreement in 2012 with respect to the Fund will be available in the Funds semi-annual report for the period ended June 30, 2012.
The Management Agreement will remain in effect until June 30, 2012 and will continue in effect with respect to the Fund from year to year thereafter provided such continuance is specifically approved
at least annually by (i) the vote of a majority of the Funds outstanding voting securities or a majority of the Trustees of the Trust, and (ii) the vote of a majority of the non-interested Trustees of the Trust, cast in person at a
meeting called for the purpose of voting on such approval.
The Management Agreement will terminate automatically if assigned
(as defined in the Act). The Management Agreement is also terminable at any time without penalty by the Trustees of the Trust or by vote of a majority of the outstanding voting securities of the Fund on 60 days written notice to the
Investment Adviser or by the Investment Adviser on 60 days written notice to the Trust.
Pursuant to the Management
Agreement, the Investment Adviser is entitled to receive a fee, payable monthly, at the annual rate of 1.00% on the first $1 billion, 0.90% on the next $1 billion, 0.86% on the next $3 billion, 0.84% on the next $3 billion, and
0.82% on any amount over $8 billion.
In addition to providing advisory services, under its Management Agreement, the
Investment Adviser also: (i) supervises all non-advisory operations of the Fund; (ii) provides personnel to perform such executive, administrative and clerical services as are reasonably necessary to provide effective administration of the
Fund; (iii) arranges for at the Funds expense: (a) the preparation of all required tax returns, (b) the preparation and submission of reports to existing shareholders, (c) the periodic updating of prospectuses and
statements of additional information and (d) the preparation of reports to be filed with the SEC and other regulatory authorities; (iv) maintains the Funds records; and (v) provides office space and all necessary office
equipment and services.
B-49
Portfolio Managers Accounts Managed by the Portfolio Managers
The following table discloses accounts within each type of category listed below for which the portfolio managers are jointly and primarily responsible
for day to day portfolio management as of December 31, 2011.
For each portfolio manager listed below, the total number of accounts
managed is a reflection of accounts within the strategy they oversee or manage, as well as accounts which participate in the sector they manage. There are multiple portfolio managers involved with each account.
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|
Number of Accounts
Managed and Total Assets by Account Type
|
|
|
Number of Accounts and Total Assets for
Which Advisory Fee is Performance Based
|
|
Name of
Portfolio Manager
|
|
Registered
Investment
Companies
|
|
|
Other
Pooled
Investment Vehicles
|
|
|
Other
Accounts
|
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|
Registered
Investment
Companies
|
|
|
Other
Pooled
Investment
Vehicles
|
|
|
Other
Accounts
|
|
|
|
Number of
Accounts
|
|
|
Assets
Managed
|
|
|
Number of
Accounts
|
|
|
Assets
Managed
|
|
|
Number of
Accounts
|
|
|
Assets
Managed
|
|
|
Number of
Accounts
|
|
|
Assets
Managed
|
|
|
Number of
Accounts
|
|
|
Assets
Managed
|
|
|
Number of
Accounts
|
|
|
Assets
Managed
|
|
Managed Futures
Strategy Fund
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quantitative Investment
Strategies
Team
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William Fallon
|
|
|
36
|
|
|
$
|
11.0
|
|
|
|
62
|
|
|
$
|
5.8
|
|
|
|
1216
|
|
|
$
|
30.8
|
|
|
|
0
|
|
|
$
|
0.0
|
|
|
|
5
|
|
|
$
|
0.4
|
|
|
|
27
|
|
|
$
|
7.5
|
|
Steve Janeste
|
|
|
36
|
|
|
$
|
11.0
|
|
|
|
62
|
|
|
$
|
5.8
|
|
|
|
1216
|
|
|
$
|
30.8
|
|
|
|
0
|
|
|
$
|
0.0
|
|
|
|
5
|
|
|
$
|
0.4
|
|
|
|
27
|
|
|
$
|
7.5
|
|
Unless otherwise noted, assets are preliminary, in billions of USD, as of December 31, 2011.
|
Includes wrap as a single account.
|
B-50
Conflicts of Interest
. The Investment Advisers portfolio managers are often
responsible for managing the Fund as well as other accounts, including proprietary accounts, separate accounts and other pooled investment vehicles, such as unregistered hedge funds. A portfolio manager may manage a separate account or other pooled
investment vehicle which may have materially higher fee arrangements than the Fund and may also have a performance-based fee. The side-by-side management of these funds may raise potential conflicts of interest relating to cross trading, the
allocation of investment opportunities and the aggregation and allocation of trades.
The Investment Adviser has a fiduciary
responsibility to manage all client accounts in a fair and equitable manner. It seeks to provide best execution of all securities transactions and aggregate and then allocate securities to client accounts in a fair and timely manner. To this end,
the Investment Adviser has developed policies and procedures designed to mitigate and manage the potential conflicts of interest that may arise from side-by-side management. In addition, the Investment Adviser and the Fund have adopted policies
limiting the circumstances under which cross-trades may be effected between the Fund and another client account. The Investment Adviser conducts periodic reviews of trades for consistency with these policies. For more information about conflicts of
interests that may arise in connection with the portfolio managers management of the Funds investments and the investments of other accounts, see POTENTIAL CONFLICTS OF INTEREST Potential Conflicts Relating to the Allocation
of Investment Opportunities Among the Fund and Other Goldman Sachs Accounts and Potential Conflicts Relating to Goldman Sachs and the Investment Advisers Proprietary Activities and Activities on Behalf of Other Accounts.
Portfolio Managers Compensation
Compensation for portfolio managers of the Investment Adviser is comprised of a base salary and discretionary variable compensation. The base salary is fixed from year to year. Year-end discretionary
variable compensation is primarily a function of each portfolio managers individual performance and his or her contribution to overall team performance; the performance of the Investment Adviser and Goldman Sachs; the teams net revenues
for the past year which in part is derived from advisory fees, and for certain accounts, performance-based fees; and anticipated compensation levels among competitor firms. Portfolio managers are rewarded, in part, for their delivery of investment
performance, measured on a pre-tax basis, which is reasonably expected to meet or exceed the expectations of clients and fund shareholders in terms of: excess return over an applicable benchmark, peer group ranking, risk management and factors
specific to certain funds such as yield or regional focus. Performance is judged over 1-, 3- and 5-year time horizons.
The
benchmark for the Fund is the London Interbank Offered Rate (LIBOR).
The discretionary variable compensation for portfolio
managers is also significantly influenced by: (1) effective participation in team research discussions and process; and (2) management of risk in alignment with the targeted risk parameter and investment objective of the Fund. Other
factors may also be considered including: (1) general client/shareholder orientation and (2) teamwork and leadership. Portfolio managers may receive equity-based awards as part of their discretionary variable compensation.
Other CompensationIn addition to base salary and discretionary variable compensation, the Investment Adviser has a number of
additional benefits in place including (1) a 401k program that enables employees to direct a percentage of their pretax salary and bonus income into a tax-qualified retirement plan; and (2) investment opportunity programs in which certain
professionals may participate subject to certain eligibility requirements.
Portfolio Managers Portfolio Managers Ownership of
Securities in the Fund
The Fund was not in operation prior to the date of this SAI. Consequently, the portfolio managers
own no securities issued by the Fund.
Distributor and Transfer Agent
Goldman Sachs, 200 West Street, New York, New York 10282, serves as the exclusive distributor of shares of the Fund pursuant to a
best efforts arrangement as provided by a distribution agreement with the Trust on behalf of the Fund. Shares of the Fund are offered and sold on a continuous basis by Goldman Sachs, acting as agent. Pursuant to the distribution
agreement, after the Prospectus and periodic reports have been prepared, set in type and mailed to shareholders, Goldman Sachs will pay for the printing and distribution of copies thereof used in connection with the offering to prospective
investors. Goldman Sachs will also pay for other supplementary sales literature and advertising costs. Goldman Sachs may enter into sales agreements with certain investment dealers and other financial service firms (the Authorized
Dealers) to solicit subscriptions for Class A, Class C, Class R and Class IR Shares of the Fund. Goldman Sachs receives a portion of the sales charge imposed on the sale, in the case of Class A Shares, or redemption in
the case of Class C Shares (and in certain cases, Class A Shares), of Fund shares.
B-51
Dealer Reallowances.
Class A Shares of the Fund are sold subject to a front-end
sales charge, as described in the Prospectus and in this SAI in the section SHARES OF THE TRUST. Goldman Sachs pays commissions to Authorized Dealers who sell Class A shares of the Fund in the form of a reallowance of
all or a portion of the sales charge paid on the purchase of those shares. Goldman Sachs reallows 5.50% of the Funds offering price with respect to purchases under $50,000.
Dealer allowances may be changed periodically. During special promotions, the entire sales charge may be reallowed to Authorized Dealers.
Authorized Dealers to whom substantially the entire sales charge is reallowed may be deemed to be underwriters under the Securities Act of 1933.
Goldman Sachs, 71 South Wacker Drive, Chicago, IL 60606 serves as the Trusts transfer and dividend disbursing agent. Under its transfer agency agreement with the Trust, Goldman Sachs has undertaken
with the Trust with respect to the Fund to: (i) record the issuance, transfer and redemption of shares, (ii) provide purchase and redemption confirmations and quarterly statements, as well as certain other statements, (iii) provide
certain information to the Trusts custodian and the relevant sub-custodian in connection with redemptions, (iv) provide dividend crediting and certain disbursing agent services, (v) maintain shareholder accounts, (vi) provide
certain state Blue Sky and other information, (vii) provide shareholders and certain regulatory authorities with tax related information, (viii) respond to shareholder inquiries, and (ix) render certain other miscellaneous services.
For its transfer agency services, Goldman Sachs is entitled to receive a transfer agency fee equal, on an annualized basis, to 0.04% of average daily net assets with respect to the Funds Institutional Shares and 0.19% of average daily net
assets with respect to the Funds Class A, Class C, Class R and Class IR Shares. Goldman Sachs may pay to certain intermediaries who perform transfer agent services to shareholders a networking or sub-transfer agent fee.
These payments will be made from the transfer agency fees noted above and in the Funds Prospectus.
The Trusts
distribution and transfer agency agreements each provide that Goldman Sachs may render similar services to others so long as the services Goldman Sachs provides thereunder are not impaired thereby. Such agreements also provide that the Trust will
indemnify Goldman Sachs against certain liabilities.
Expenses
The Trust, on behalf of the Fund, is responsible for the payment of the Funds expenses. The expenses include, without limitation, the fees payable to the Investment Adviser, the fees and expenses of
the Trusts custodian and subcustodians, transfer agent fees and expenses, pricing service fees and expenses, brokerage fees and commissions, filing fees for the registration or qualification of the Trusts shares under federal or state
securities laws, expenses of the organization of the Fund, fees and expenses incurred by the Trust in connection with membership in investment company organizations including, but not limited to, the Investment Company Institute, taxes, interest,
costs of liability insurance, fidelity bonds or indemnification, any costs, expenses or losses arising out of any liability of, or claim for damages or other relief asserted against, the Trust for violation of any law, legal, tax and auditing fees
and expenses (including the cost of legal and certain accounting services rendered by employees of Goldman Sachs or its affiliates with respect to the Trust), expenses of preparing and setting in type Prospectuses, SAIs, proxy material, reports and
notices and the printing and distributing of the same to the Trusts shareholders and regulatory authorities, any expenses assumed by the Fund pursuant to its distribution and service plans, compensation and expenses of its
non-interested Trustees, the fees and expenses of pricing services, dividend expenses on short sales and extraordinary expenses, if any, incurred by the Trust. Except for fees and expenses under any distribution and service plan
applicable to a particular class and transfer agency fees and expenses, all Fund expenses are borne on a non-class specific basis.
The imposition of the Investment Advisers fees, as well as other operating expenses, will have the effect of reducing the total return to investors. From time to time, the Investment Adviser may
waive receipt of is fees and/or voluntarily assume certain expenses of the Fund, which would have the effect of lowering the Funds overall expense ratio and increasing total return to investors at the time such amounts are waived or assumed,
as the case may be.
The Investment Adviser has agreed to reduce or limit certain Other Expenses of the Fund
(excluding management fees, distribution and service fees, transfer agency fees and expenses, acquired fund fees and expenses, taxes, interest, brokerage fees, litigation, indemnification, shareholder meeting and other extraordinary expenses
exclusive of any custody or transfer agent fee credit reductions) to an annual percentage rate of 0.104% of the Funds average daily net assets through at least April 29, 2013.
B-52
Such reductions or limits, if any, are calculated monthly on a cumulative basis during the
Funds fiscal year and may be discontinued or modified by the Investment Adviser in its discretion at any time.
Fees and
expenses borne by the Fund relating to legal counsel, registering shares of the Fund, holding meetings and communicating with shareholders may include an allocable portion of the cost of maintaining an internal legal and compliance department. The
Fund may also bear an allocable portion of the Investment Advisers costs of performing certain accounting services not being provided by the Funds custodian.
Custodian and Sub-Custodians
JPMorganChase, is the custodian of the
Funds portfolio securities and cash. JPMorganChase also maintains the Funds accounting records. JPMorganChase may appoint domestic and foreign sub-custodians and use depositories from time to time to hold securities and other instruments
purchased by the Fund in foreign countries and to hold cash and currencies for the Fund.
Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP, 125 High Street, Boston, MA 02110, is the Funds independent registered public accounting
firm. In addition to audit services, PricewaterhouseCoopers LLP prepares the Funds federal and state tax returns and provides assistance on certain non-audit matters.
POTENTIAL CONFLICTS OF INTEREST
General Categories of
Conflicts Associated with the Funds
Goldman Sachs (which, for purposes of this
POTENTIAL CONFLICTS OF
INTEREST
section, shall mean, collectively, The Goldman Sachs Group, Inc., the Investment Adviser and their affiliates, directors, partners, trustees, managers, members, officers and employees) is a worldwide, full-service investment
banking, broker-dealer, asset management and financial services organization and a major participant in global financial markets. As such, Goldman Sachs provides a wide range of financial services to a substantial and diversified client base. In
those and other capacities, Goldman Sachs advises clients in all markets and transactions and purchases, sells, holds and recommends a broad array of investments for its own accounts and for the accounts of clients and of its personnel, through
client accounts and the relationships and products it sponsors, manages and advises (such Goldman Sachs or other client accounts (including the Funds), relationships and products collectively, the Accounts). Goldman Sachs has direct and
indirect interests in the global fixed income, currency, commodity, equities, bank loan and other markets, and the securities and issuers, in which the Funds may directly and indirectly invest. As a result, Goldman Sachs activities and
dealings, including on behalf of the Funds, may affect the Funds in ways that may disadvantage or restrict the Funds and/or benefit Goldman Sachs or other Accounts. For purposes of this
POTENTIAL CONFLICTS OF INTEREST
section,
Funds shall mean, collectively, the Funds and any of the other Goldman Sachs Funds.
The following are descriptions
of certain conflicts and potential conflicts that may be associated with the financial or other interests that the Investment Adviser and Goldman Sachs may have in transactions effected by, with, and on behalf of the Funds. They are not, and are not
intended to be, a complete enumeration or explanation of all of the potential conflicts of interest that may arise. Additional information about potential conflicts of interest regarding the Investment Adviser and Goldman Sachs is set forth in the
Investment Advisers Form ADV, which prospective shareholders should review prior to purchasing Fund shares. A copy of Part 1 and Part 2 of the Investment Advisers Form ADV is available on the SECs website
(
www.adviserinfo.sec.gov
). A copy of Part 2 of the Investment Advisers Form ADV will be provided to shareholders or prospective shareholders upon request.
Other Activities of Goldman Sachs, the Sale of Fund Shares and the Allocation of Investment Opportunities
Sales Incentives and Related Conflicts Arising from Goldman Sachs Financial and Other Relationships with Intermediaries
Goldman Sachs and its personnel, including employees of the Investment Adviser, may have relationships (both involving and not involving
the Funds, and including without limitation placement, brokerage, advisory and board relationships) with distributors, consultants and others who recommend, or engage in transactions with or for, the Funds. Such distributors, consultants and other
parties may receive compensation from Goldman Sachs or the Funds in connection with such relationships. As a result of these relationships, distributors, consultants and other parties may have conflicts that create incentives for them to promote the
Funds.
B-53
To the extent permitted by applicable law, Goldman Sachs and the Funds may make payments to
authorized dealers and other financial intermediaries and to salespersons (collectively, Intermediaries) from time to time to promote the Funds. These payments may be made out of Goldman Sachs assets, or amounts payable to Goldman
Sachs. These payments may create an incentive for a particular Intermediary to highlight, feature or recommend the Funds.
Allocation of
Investment Opportunities Among the Funds and Other Accounts
The Investment Adviser may manage or advise multiple Accounts
(including Accounts in which Goldman Sachs and its personnel have an interest) that have investment objectives that are similar to the Funds and may seek to make investments or sell investments in the same securities or other instruments, sectors or
strategies as the Funds. This may create potential conflicts, particularly in circumstances where the availability of such investment opportunities is limited (e.g., in local and emerging markets, high yield securities, fixed income securities,
regulated industries, small capitalization and initial public offerings/new issues) or where the liquidity of such investment opportunities is limited.
The Investment Adviser does not receive performance-based compensation in respect of its investment management activities on behalf of the Funds, but may simultaneously manage Accounts for which the
Investment Adviser receives greater fees or other compensation (including performance-based fees or allocations) than it receives in respect of the Funds. The simultaneous management of Accounts that pay greater fees or other compensation and the
Funds may create a conflict of interest as the Investment Adviser may have an incentive to favor Accounts with the potential to receive greater fees. For instance, the Investment Adviser may be faced with a conflict of interest when allocating
scarce investment opportunities given the possibly greater fees from Accounts that pay performance-based fees. To address these types of conflicts, the Investment Adviser has adopted policies and procedures under which it will allocate investment
opportunities in a manner that it believes is consistent with its obligations as an investment adviser. However, the amount, timing, structuring or terms of an investment by the Funds may differ from, and performance may be lower than, the
investments and performance of other Accounts.
To address these potential conflicts, the Investment Adviser has developed
allocation policies and procedures that provide that personnel of the Investment Adviser making portfolio decisions for Accounts will make purchase and sale decisions and allocate investment opportunities among Accounts consistent with its fiduciary
obligations. These policies and procedures may result in the pro rata allocation of limited opportunities across eligible Accounts managed by a particular portfolio management team, but in many other cases the allocations reflect numerous other
factors as described below. Accounts managed by different portfolio management teams are generally viewed separately for allocation purposes. There will be cases where certain Accounts receive an allocation of an investment opportunity when the
Funds do not.
Personnel of the Investment Adviser involved in decision-making for Accounts may make allocation related
decisions for the Funds and other Accounts by reference to one or more factors, including without limitation: the Accounts portfolio and its investment horizons, objectives, guidelines and restrictions (including legal and regulatory
restrictions); strategic fit and other portfolio management considerations, including different desired levels of investment for different strategies; the expected future capacity of the applicable Accounts; limits on the Investment Advisers
brokerage discretion; cash and liquidity considerations; and the availability of other appropriate investment opportunities. Suitability considerations, reputational matters and other considerations may also be considered. The application of these
considerations may cause differences in the performance of different Accounts that have similar strategies. In addition, in some cases the Investment Adviser may make investment recommendations to Accounts where the Accounts make the investment
independently of the Investment Adviser, which may result in a reduction in the availability of the investment opportunity for other Accounts (including the Funds) irrespective of the Investment Advisers policies regarding allocation of
investments. Additional information about the Investment Advisers allocation policies is set forth in Item 6 (PERFORMANCE-BASED FEES AND SIDE-BY-SIDE MANAGEMENTSide-by-Side Management) of the Investment Advisers
Form ADV.
The Investment Adviser may, from time to time, develop and implement new trading strategies or seek to
participate in new investment opportunities and trading strategies. These opportunities and strategies may not be employed in all Accounts or pro rata among Accounts where they are employed, even if the opportunity or strategy is consistent with the
objectives of such Accounts.
During periods of unusual market conditions, the Investment Adviser may deviate from its normal
trade allocation practices. For example, this may occur with respect to the management of unlevered and/or long-only Accounts that are typically managed on a side-by-side basis with levered and/or long-short Accounts.
Notwithstanding anything in the foregoing, the Funds may or may not receive, but in any event will have no rights with respect to,
opportunities sourced by Goldman Sachs businesses and affiliates. Such opportunities or any portion thereof may be offered to other Accounts, Goldman Sachs, all or certain investors in the Funds, or such other persons or entities as determined by
Goldman Sachs in its sole discretion. The Funds will have no rights and will not receive any compensation related to such opportunities.
B-54
Goldman Sachs Financial and Other Interests May Incentivize Goldman Sachs to Promote the Sale of
Fund Shares
Goldman Sachs and its personnel have interests in promoting sales of Fund shares, and the compensation from such sales may be
greater than the compensation relating to sales of interests in other Accounts. Therefore, Goldman Sachs and its personnel may have a financial interest in promoting Fund shares over interests in other Accounts.
Management of the Funds by the Investment Adviser
Potential Restrictions and Issues Relating to Information Held by Goldman Sachs
Goldman Sachs has established certain information barriers and other policies to address the sharing of information between different businesses within Goldman Sachs. As a result of information barriers,
the Investment Adviser generally will not have access, or will have limited access, to information and personnel in other areas of Goldman Sachs, and generally will not be able to manage the Funds with the benefit of information held by such other
areas. Such other areas, including without limitation, Goldman Sachs prime brokerage and administration businesses, will have broad access to detailed information that is not available to the Investment Adviser, including information in
respect of markets and investments, which, if known to the Investment Adviser, might cause the Investment Adviser to seek to dispose of, retain or increase interests in investments held by the Funds or acquire certain positions on behalf of the
Funds, or take other actions. Goldman Sachs will be under no obligation or fiduciary or other duty to make any such information available to the Investment Adviser or personnel of the Investment Adviser involved in decision-making for the Funds. In
addition, Goldman Sachs will not have any obligation to make available any information regarding its trading activities, strategies or views, or the activities, strategies or views used for other Accounts, for the benefit of the Funds.
Valuation of the Funds Investments
The Investment Adviser, while not the primary valuation agent of the Funds, performs certain valuation services related to securities and assets in the Funds. The Investment Adviser values securities and
assets in the Funds according to its valuation policies and may value an identical asset differently than another division or unit within Goldman Sachs or another Account values the asset, including because such other division or unit or Account has
information regarding valuation techniques and models or other information that it does not share with the Investment Adviser. This is particularly the case in respect of difficult-to-value assets. The Investment Adviser may face a conflict with
respect to such valuations as they affect the Investment Advisers compensation.
Goldman Sachs and the Investment
Advisers Activities on Behalf of Other Accounts
The Investment Advisers decisions and actions on behalf of the
Funds may differ from those on behalf of other Accounts. Advice given to, or investment or voting decisions made for, one or more Accounts may compete with, affect, differ from, conflict with, or involve timing different from, advice given to or
investment decisions made for the Funds.
The extent of Goldman Sachs activities in the global financial markets may have
potential adverse effects on the Funds. Goldman Sachs, the clients it advises, and its personnel have interests in and advise Accounts which have investment objectives or portfolios similar to or opposed to those of the Funds, and/or which engage in
and compete for transactions in the same types of securities and other instruments as the Funds. Transactions by such Accounts may involve the same or related securities or other instruments as those in which the Funds invest, and may negatively
affect the Funds or the prices or terms at which the Funds transactions may be effected. For example, Accounts may engage in a strategy while the Funds are undertaking the same or a differing strategy, any of which could directly or indirectly
disadvantage the Funds. The Funds and Goldman Sachs may also vote differently on or take or refrain from taking different actions with respect to the same security, which may be disadvantageous to the Funds. Accounts may also invest in or extend
credit to different classes of securities or different parts of the capital structure of the same issuer and classes of securities that are subordinate or senior to, securities in which the Funds invest. As a result, Goldman Sachs and the Accounts
may pursue or enforce rights or activities, or refrain from pursuing or enforcing rights or activities, with respect to a particular issuer in which the Funds have invested. The Funds could sustain losses during periods in which Goldman Sachs and
other Accounts achieve profits. The negative effects described above may be more pronounced in connection with transactions in, or the Funds use of, small capitalization, emerging market, distressed or less liquid strategies.
Goldman Sachs and its personnel may make investment decisions or recommendations, provide differing investment views or have views with
respect to research or valuations that are inconsistent with, or adverse to, the interests and activities of the Funds. Research, analyses or viewpoints may be available to clients or potential clients at different times. Goldman Sachs will not have
any obligation to make available to the Funds any research or analysis prior to its public dissemination. The Investment Adviser is responsible for making investment decisions on behalf of the Funds and such investment decisions can differ from
investment decisions or recommendations by Goldman Sachs on behalf of other Accounts. Goldman Sachs may, on behalf of other Accounts and in accordance with its management of such Accounts, implement an investment decision or strategy ahead of, or
contemporaneously with, or behind similar investment decisions or strategies made for the Funds. The
B-55
relative timing for the implementation of investment decisions or strategies among Accounts and the Funds may disadvantage the Funds. Certain factors, for example, market impact, liquidity
constraints, or other circumstances, could result in the Funds receiving less favorable trading results or incurring increased costs associated with implementing such investment decisions or strategies, or being otherwise disadvantaged.
Subject to applicable law, the Investment Adviser may cause the Funds to invest in securities, bank loans or other obligations of
companies affiliated with Goldman Sachs or in which Goldman Sachs or Accounts have an equity, debt or other interest, or to engage in investment transactions that may result in other Accounts being relieved of obligations or otherwise divesting of
investments, which may enhance the profitability of Goldman Sachs or other Accounts investments in and activities with respect to such companies.
When the Investment Adviser wishes to place an order for different types of Accounts (including the Funds) for which aggregation is not practicable, the Investment Adviser may use a trade sequencing and
rotation policy to determine which type of Account is to be traded first. Under this policy, each portfolio management team may determine the length of its trade rotation period and the sequencing schedule for different categories of clients within
this period provided that the trading periods and these sequencing schedules are designed to be fair and equitable over time. The portfolio management teams currently base their trading periods and rotation schedules on the relative amounts of
assets managed for different client categories (e.g., unconstrained client accounts, wrap program accounts, etc.) and, as a result, the Funds may trade behind other Accounts. Within a given trading period, the sequencing schedule
establishes when and how frequently a given client category will trade first in the order of rotation. The Investment Adviser may deviate from the predetermined sequencing schedule under certain circumstances, and the Investment Advisers trade
sequencing and rotation policy may be amended, modified or supplemented at any time without prior notice to clients.
Investments in
Goldman Sachs Funds
To the extent permitted by applicable law, the Funds may invest in money market and other funds
sponsored, managed or advised by Goldman Sachs. In connection with any such investments, a Fund, to the extent permitted by the Act, will pay all advisory, administrative or Rule 12b-1 fees applicable to the investment, and fees to the
Investment Adviser in its capacity as manager of the Funds will not be reduced thereby (i.e., there could be double fees involved in making any such investment because Goldman Sachs could receive fees with respect to both the management
of the Funds and such money market fund). In such circumstances, as well as in all other circumstances in which Goldman Sachs receives any fees or other compensation in any form relating to the provision of services, no accounting or repayment to
the Funds will be required.
Goldman Sachs May In-Source or Outsource
Subject to applicable law, Goldman Sachs, including the Investment Adviser, may from time to time and without notice to investors
in-source or outsource certain processes or functions in connection with a variety of services that it provides to the Funds in its administrative or other capacities. Such in-sourcing or outsourcing may give rise to additional conflicts of
interest.
Distributions of Assets Other Than Cash
With respect to redemptions from the Funds, the Funds may, in certain circumstances, have discretion to decide whether to permit or limit redemptions and whether to make distributions in connection with
redemptions in the form of securities or other assets, and in such case, the composition of such distributions. In making such decisions, the Investment Adviser may have a potentially conflicting division of loyalties and responsibilities with
respect to redeeming investors and remaining investors.
Goldman Sachs May Act in a Capacity Other Than Investment Adviser to the Funds
Principal and Cross Transactions
When permitted by applicable law and the Investment Advisers policies, the Investment Adviser, acting on behalf of the Funds, may enter into transactions in securities and other instruments with or
through Goldman Sachs, and may cause the Funds to engage in transactions in which the Investment Adviser acts as principal on its own behalf (principal transactions), advises both sides of a transaction (cross transactions) and acts as broker for,
and receives a commission from, the Funds on one side of a transaction and a brokerage account on the other side of the transaction (agency cross transactions). There may be potential conflicts of interest or regulatory issues relating to these
transactions which could limit the Investment Advisers decision to engage in these transactions for the Funds. Goldman Sachs may have a potentially conflicting division of loyalties and responsibilities to the parties in such transactions, and
has developed policies and procedures in relation to such transactions and conflicts. Any principal, cross or agency cross transactions will be effected in accordance with fiduciary requirements and applicable law (which may include disclosure and
consent).
B-56
Goldman Sachs May Act in Multiple Commercial Capacities
To the extent permitted by applicable law, Goldman Sachs may act as broker, dealer, agent, lender or advisor or in other commercial
capacities for the Funds or issuers of securities held by the Funds. Goldman Sachs may be entitled to compensation in connection with the provision of such services, and the Funds will not be entitled to any such compensation. Goldman Sachs will
have an interest in obtaining fees and other compensation in connection with such services that are favorable to Goldman Sachs, and may take commercial steps in its own interests in connection with providing such services that negatively affect the
Funds. For example, Goldman Sachs may require repayment of all or part of a loan at any time and from time to time or cause the Funds to default, liquidate its assets or redeem positions more rapidly (and at significantly lower prices) than might
otherwise be desirable. In addition, due to its access to and knowledge of funds, markets and securities based on its other businesses, Goldman Sachs may make decisions based on information or take (or refrain from taking) actions with respect to
interests in investments of the kind held directly or indirectly by the Funds in a manner that may be adverse to the Funds. Goldman Sachs may also derive benefits from providing services to the Funds, which may enhance Goldman Sachs
relationships with various parties, facilitate additional business development and enable Goldman Sachs to obtain additional business and generate additional revenue.
To the extent permitted by applicable law, Goldman Sachs may create, write, sell, issue, invest in or act as placement agent or distributor of derivative instruments related to the Funds, or with respect
to underlying securities or assets of the Funds, or which may be otherwise based on or seek to replicate or hedge the performance of the Funds. Such derivative transactions, and any associated hedging activity, may differ from and be adverse to the
interests of the Funds.
Goldman Sachs may make loans or enter into asset-based or other credit facilities or similar
transactions that are secured by a clients assets or interests, including Fund shares, interests in an Account or assets in which the Funds or an Account has an interest. In connection with its rights as lender, Goldman Sachs may take actions
that adversely affect the Account and which may in turn adversely affect the Funds (e.g., a Fund holding the same type of security that is providing the credit support to the borrower Account may be disadvantaged when the borrower Account liquidates
assets in response to an action taken by Goldman Sachs).
Code of Ethics and Personal Trading
Each of the Funds and Goldman Sachs, as each Funds Investment Adviser and distributor, has adopted a Code of Ethics (the Code
of Ethics) in compliance with Section 17(j) of the Act designed to provide that personnel of the Investment Adviser, and certain additional Goldman Sachs personnel who support the Investment Adviser, comply with applicable federal
securities laws and place the interests of clients first in conducting personal securities transactions. The Code of Ethics imposes certain restrictions on securities transactions in the personal accounts of covered persons to help avoid conflicts
of interest. Subject to the limitations of the Code of Ethics, covered persons may buy and sell securities or other investments for their personal accounts, including investments in the Funds, and may also take positions that are the same as,
different from, or made at different times than, positions taken by the Funds. The Codes of Ethics can be reviewed and copied at the SECs Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may
be obtained by calling the SEC at 1-202-942-8090. The Codes of Ethics are also available on the EDGAR Database on the SECs Internet site at http://www.sec.gov. Copies may also be obtained after paying a duplicating fee by writing the
SECs Public Reference Section, Washington, DC 20549-0102, or by electronic request to publicinfo@sec.gov. Additionally, Goldman Sachs personnel, including personnel of the Investment Adviser, are subject to firm-wide policies and procedures
regarding confidential and proprietary information, information barriers, private investments, outside business activities and personal trading.
Proxy Voting by the Investment Adviser
The Investment Adviser 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 its fiduciary obligations to its clients. Notwithstanding such proxy voting policies and procedures, proxy voting decisions made by the Investment Adviser with respect to
securities held by the Funds may benefit the interests of Goldman Sachs and Accounts other than the Funds. For a more detailed discussion of these policies and procedures, see the section of this SAI entitled PROXY VOTING.
Potential Limitations and Restrictions on Investment Opportunities and Activities of the Investment Adviser and the Funds
The Investment Adviser may restrict its investment decisions and activities on behalf of the Funds in various circumstances, including as
a result of applicable regulatory requirements, information held by Goldman Sachs, Goldman Sachs internal policies and/or potential reputational risk or disadvantage to Accounts, including the Funds, and Goldman Sachs. As a result, the
Investment Adviser might not engage in transactions for the Funds in consideration of Goldman Sachs activities outside the Funds (e.g., the Investment Adviser may refrain from making investments for the Funds that would cause Goldman Sachs to
exceed position limits or cause Goldman Sachs to have additional disclosure obligations and may limit purchases or sales of
B-57
securities in respect of which Goldman Sachs is engaged in an underwriting or other distribution). In
addition, the Investment Adviser is not permitted to obtain or use material non-public information in effecting purchases and sales in public securities transactions for the Funds. The Investment Adviser may also limit the activities and
transactions engaged in by the Funds, and may limit its exercise of rights on behalf of or in respect of the Funds, for reputational or other reasons, including where Goldman Sachs is providing (or may provide) advice or services to an entity
involved in such activity or transaction, where Goldman Sachs or an Account is or may be engaged in the same or a related transaction to that being considered on behalf of the Funds, where Goldman Sachs or an Account has an interest in an entity
involved in such activity or transaction, or where such activity or transaction or the exercise of such rights on behalf of or in respect of the Funds could affect Goldman Sachs, the Investment Adviser or their activities.
Brokerage Transactions
The Investment Adviser may select broker-dealers (including affiliates of the Investment Adviser) that furnish the Investment Adviser, the Funds, their affiliates and other Goldman Sachs personnel with
proprietary or third party brokerage and research services (collectively, brokerage and research services) that provide, in the Investment Advisers view, appropriate assistance to the Investment Adviser in the investment
decision-making process. As a result, the Investment Adviser may pay for such brokerage and research services with soft or commission dollars.
Brokerage and research services may be used to service the Funds and any or all other Accounts, including in connection with Accounts other than those that pay commissions to the broker-dealer relating to
the brokerage and research service arrangements. As a result, the brokerage and research services (including soft dollar benefits) may disproportionately benefit other Accounts relative to the Funds based on the amount of commissions paid by the
Funds in comparison to such other Accounts. The Investment Adviser does not attempt to allocate soft dollar benefits proportionately among clients or to track the benefits of brokerage and research services to the commissions associated with a
particular Account or group of Accounts.
Aggregation of Trades by the Investment Adviser
The Investment Adviser follows policies and procedures pursuant to which it may combine or aggregate purchase or sale orders for the same
security for multiple clients (sometimes called bunching) (including Accounts that are proprietary to Goldman Sachs), so that the orders can be executed at the same time. The Investment Adviser aggregates orders when the Investment
Adviser considers doing so appropriate and in the interests of its clients generally. In addition, under certain circumstances trades for the Funds may be aggregated with Accounts that contain Goldman Sachs assets.
When a bunched order is completely filled, the Investment Adviser generally will allocate the securities purchased or proceeds of sale pro
rata among the participating Accounts, based on the purchase or sale order. If an order is filled at several different prices, through multiple trades (whether at a particular broker-dealer or among multiple broker-dealers), generally all
participating Accounts will receive the average price and pay the average commission, however, this may not always be the case (due to, e.g., odd lots, rounding, market practice or constraints applicable to particular Accounts).
The Investment Adviser does not bunch or aggregate orders for different Funds, or net buy and sell orders for the same Fund, if portfolio
management decisions relating to the orders are made separately, or if bunching, aggregating or netting is not appropriate or practicable from the Investment Advisers operational or other perspective. The Investment Adviser may be able to
negotiate a better price and lower commission rate on aggregated trades than on trades for Funds that are not aggregated, and incur lower transaction costs on netted trades than trades that are not netted. Where transactions for a Fund are not
aggregated with other orders, or not netted against orders for the Fund, the Fund may not benefit from a better price and lower commission rate or lower transaction cost.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The
Investment Adviser is responsible for decisions to buy and sell securities for the Fund, the selection of brokers and dealers to effect the transactions and the negotiation of brokerage commissions, if any. Purchases and sales of securities on a
securities exchange are effected through brokers who charge a negotiated commission for their services. Increasingly, securities traded over-the-counter also involve the payment of negotiated brokerage commissions. Orders may be directed to any
broker including, to the extent and in the manner permitted by applicable law, Goldman Sachs.
In the over-the-counter market,
most securities have historically traded on a net basis with dealers acting as principal for their own accounts without a stated commission, although the price of a security usually includes a profit to the dealer. In underwritten
offerings, securities are purchased at a fixed price which includes an amount of compensation to the underwriter, generally referred to as the underwriters concession or discount. On occasion, certain money market instruments may be purchased
directly from an issuer, in which case no commissions or discounts are paid.
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In placing orders for portfolio securities of the Fund, the Investment Adviser is generally
required to give primary consideration to obtaining the most favorable execution and net price available. This means that the Investment Adviser will seek to execute each transaction at a price and commission, if any, which provides the most
favorable total cost or proceeds reasonably attainable in the circumstances. As permitted by Section 28(e) of the Securities Exchange Act of 1934 (Section 28(e)), the Fund may pay a broker which provides brokerage and research
services to the Fund an amount of disclosed commission in excess of the commission which another broker would have charged for effecting that transaction. Such practice is subject to a good faith determination that such commission is reasonable in
light of the services provided and to such policies as the Trustees may adopt from time to time. While the Investment Adviser generally seeks reasonably competitive spreads or commissions, the Fund will not necessarily be paying the lowest spread or
commission available. Within the framework of this policy, the Investment Adviser will consider research and investment services provided by brokers or dealers who effect or are parties to portfolio transactions of the Fund, the Investment Adviser
and its affiliates, or their other clients. Such research and investment services are those which brokerage houses customarily provide to institutional investors and include research reports on particular industries and companies; economic surveys
and analyses; recommendations as to specific securities; research products including quotation equipment and computer related programs; advice concerning the value of securities, the advisability of investing in, purchasing or selling securities and
the availability of securities or the purchasers or sellers of securities; analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy and performance of accounts; services relating to effecting
securities transactions and functions incidental thereto (such as clearance and settlement); and other lawful and appropriate assistance to the Investment Adviser in the performance of its decision-making responsibilities.
Such services are used by the Investment Adviser in connection with all of its investment activities, and some of such services obtained
in connection with the execution of transactions for the Fund may be used in managing other investment accounts. Conversely, brokers furnishing such services may be selected for the execution of transactions of such other accounts, whose aggregate
assets may be larger than those of the Funds, and the services furnished by such brokers may be used by the Investment Adviser in providing management services for the Trust. The Investment Adviser may also participate in so-called
commission sharing arrangements and client commission arrangements under which the Investment Adviser 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 the Investment Adviser. The Investment Adviser excludes from use under these arrangements those products and services that are not fully eligible under applicable law and regulatory
interpretationseven as to the portion that would be eligible if accounted for separately.
The research services received
as part of commission sharing and client commission arrangements will comply with Section 28(e) and may be subject to different legal requirements in the jurisdictions in which the Investment Adviser does business. Participating in commission
sharing and client commission arrangements may enable the Investment Adviser to consolidate payments for research through one or more channels using accumulated client commissions or credits from transactions executed through a particular
broker-dealer to obtain research provided by other firms. Such arrangements also help to ensure the continued receipt of research services while facilitating best execution in the trading process. The Investment Adviser believes such research
services are useful in its investment decision-making process by, among other things, ensuring access to a variety of high quality research, access to individual analysts and availability of resources that the Investment Adviser might not be
provided access to absent such arrangements.
On occasions when the Investment Adviser deems the purchase or sale of a security
to be in the best interest of the Fund as well as its other customers (including any other fund or other investment company or advisory account for which the Investment Adviser acts as investment adviser or sub-investment adviser), the Investment
Adviser, to the extent permitted by applicable laws and regulations, may aggregate the securities to be sold or purchased for the Fund with those to be sold or purchased for such other customers in order to obtain the best net price and most
favorable execution under the circumstances. In such event, allocation of the securities so purchased or sold, as well as the expenses incurred in the transaction, will be made by the Investment Adviser in the manner it considers to be equitable and
consistent with its fiduciary obligations to the Fund and such other customers. In some instances, this procedure may adversely affect the price and size of the position obtainable for the Fund.
Commission rates in the U.S. are established pursuant to negotiations with the broker based on the quality and quantity of execution
services provided by the broker in the light of generally prevailing rates. The allocation of orders among brokers and the commission rates paid are reviewed periodically by the Trustees. The amount of brokerage commissions paid by the Fund may vary
substantially from year to year because of differences in shareholder purchase and redemption activity, portfolio turnover rates and other factors.
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The Fund may participate in a commission recapture program. Under the program, participating
broker-dealers rebate a percentage of commissions earned on Fund portfolio transactions to the Fund from which the commissions were generated. The rebated commissions are expected to be treated as realized capital gains of the Fund.
Subject to the above considerations, the Investment Adviser may use Goldman Sachs or an affiliate as a broker for the Fund. In order for
Goldman Sachs or an affiliate acting as agent to effect any portfolio transactions for the Fund, the commissions, fees or other remuneration received by Goldman Sachs or an affiliate must be reasonable and fair compared to the commissions, fees or
other remuneration received by other brokers in connection with comparable transactions involving similar securities or futures contracts. Furthermore, the Trustees, including a majority of the Trustees who are not interested Trustees,
have adopted procedures which are reasonably designed to provide that any commissions, fees or other remuneration paid to Goldman Sachs are consistent with the foregoing standard. Brokerage transactions with Goldman Sachs are also subject to such
fiduciary standards as may be imposed upon Goldman Sachs by applicable law.
NET ASSET VALUE
In accordance with procedures adopted by the Trustees, the net asset value per share of each class of the Fund is
calculated by determining the value of the net assets attributed to each class of the Fund and dividing by the number of outstanding shares of that class. All securities are valued on each Business Day as of the close of regular trading on the New
York Stock Exchange (normally, but not always, 4:00 p.m. New York time), or such other time as the New York Stock Exchange or National Association of Securities Dealers Automated Quotations (NASDAQ) market may officially close. The term
Business Day means any day the New York Stock Exchange is open for trading, which is Monday through Friday except for holidays. The New York Stock Exchange is closed on the following holidays: New Years Day, Martin Luther King, Jr.
Day, Washingtons Birthday (observed), Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas.
The time at which transactions and shares are priced and the time by which orders must be received may be changed in case of an emergency or if regular trading on the New York Stock Exchange is stopped at
a time other than 4:00 p.m. New York Time. The Trust reserves the right to reprocess purchase, redemption and exchange transactions that were initially processed at a net asset value other than the Funds official closing net asset value that
is subsequently adjusted, and to recover amounts from (or distribute amounts to) shareholders based on the official closing net asset value. The Trust reserves the right to advance the time by which purchase and redemption orders must be received
for same business day credit as otherwise permitted by the SEC. In addition, the Fund may compute its net asset value as of any time permitted pursuant to any exemption, order or statement of the SEC or its staff.
Portfolio securities of the Fund for which accurate market quotations are readily available are valued as follows: (i) securities
listed on any U.S. or foreign stock exchange or on the NASDAQ will be valued at the last sale price, or the official closing price, on the exchange or system in which they are principally traded on the valuation date. If there is no sale on the
valuation day, securities traded will be valued at the closing bid price, or if a closing bid price is not available, at either the exchange or system-defined close price on the exchange or system in which such securities are principally traded. If
the relevant exchange or system has not closed by the above-mentioned time for determining the Funds net asset value, the securities will be valued at the last sale price or official closing price, or if not available at the bid price at the
time the net asset value is determined; (ii) over-the-counter securities not quoted on NASDAQ will be valued at the last sale price on the valuation day or, if no sale occurs, at the last bid price at the time net asset value is determined;
(iii) equity securities for which no prices are obtained under sections (i) or (ii) including those for which a pricing service supplies no exchange quotation or a quotation that is believed by the portfolio manager/trader to be
inaccurate, will be valued at their fair value in accordance with procedures approved by the Board of Trustees; (iv) fixed income securities, with the exception of short term securities with remaining maturities of 60 days or less, will be
valued using evaluated prices provided by a recognized pricing service (e.g., Interactive Data Corp., Reuters, etc.) or dealer-supplied bid quotations; (v) fixed income securities for which accurate market quotations are not readily available
are valued by the Investment Adviser based on valuation models that take into account various factors such as spread and daily yield changes on government or other securities in the appropriate market (i.e. matrix pricing); (vi) short term
fixed income securities with a remaining maturity of 60 days or less are valued at amortized cost, which the Trustees have determined to approximate fair value; and (vii) all other instruments, including those for which a pricing service
supplies no exchange quotation or a quotation that is believed by the portfolio manager/trader to be inaccurate, will be valued in accordance with the valuation procedures approved by the Board of Trustees.
The value of all assets and liabilities expressed in foreign currencies will be converted into U.S. dollar values at current exchange
rates of such currencies against U.S. dollars last quoted by any major bank or pricing service. If such quotations are not available, the rate of exchange will be determined in good faith by or under procedures established by the Board of Trustees.
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Generally, trading in securities on European, Asian and Far Eastern securities exchanges and
on over-the-counter markets in these regions is substantially completed at various times prior to the close of business on each Business Day in New York (
i.e.
, a day on which the New York Stock Exchange is open for trading). In addition,
European, Asian or Far Eastern securities trading generally or in a particular country or countries may not take place on all Business Days in New York. Furthermore, trading takes place in various foreign markets on days which are not Business Days
in New York and days on which the Funds net asset values are not calculated. Such calculation does not take place contemporaneously with the determination of the prices of the majority of the portfolio securities used in such calculation. For
investments in foreign equity securities, fair value prices are provided by an independent fair value service (if available), in accordance with the fair value procedures approved by the Trustees, and are intended to reflect more
accurately the value of those securities at the time the Funds NAV is calculated. Fair value prices are used because many foreign markets operate at times that do not coincide with those of the major U.S. markets. Events that could affect the
values of foreign portfolio holdings may occur between the close of the foreign market and the time of determining the NAV, and would not otherwise be reflected in the NAV. If the independent fair value service does not provide a fair value for a
particular security or if the value does not meet the established criteria for the Fund, the most recent closing price for such a security on its principal exchange will generally be its fair value on such date.
The Investment Adviser, consistent with its procedures and applicable regulatory guidance, may determine to make an adjustment to the
previous closing prices of either domestic or foreign securities in light of significant events, to reflect what it believes to be the fair value of the securities at the time of determining the Funds NAV. Significant events that could affect
a large number of securities in a particular market may include, but are not limited to: situations relating to one or more single issuers in a market sector; significant fluctuations in U.S. or foreign markets; market dislocations; market
disruptions or market closings; equipment failures; natural or man-made disasters or acts of God; armed conflicts; governmental actions or other developments; as well as the same or similar events which may affect specific issuers or the securities
markets even though not tied directly to the securities markets. Other significant events that could relate to a single issuer may include, but are not limited to: corporate actions such as reorganizations, mergers and buy-outs; corporate
announcements, including those relating to earnings, products and regulatory news; significant litigation; low trading volume; trading limits; or suspensions.
The proceeds received by the Fund and each other series of the Trust from the issue or sale of its shares, and all net investment income, realized and unrealized gain and proceeds thereof, subject only to
the rights of creditors, will be specifically allocated to the Fund or particular series and constitute the underlying assets of the Fund or series. The underlying assets of the Fund will be segregated on the books of account, and will be charged
with the liabilities in respect of the Fund and with a share of the general liabilities of the Trust. Expenses of the Trust with respect to the Fund and the other series of the Trust are generally allocated in proportion to the net asset values of
the Fund or series except where allocations of expenses can otherwise be fairly made.
Errors and Corrective Actions
The Investment Adviser will report to the Board of Trustees any material breaches of investment objective, policies or restrictions and
any material errors in the calculation of the NAV of the Fund or the processing of purchases and redemptions. Depending on the nature and size of an error, corrective action may or may not be required. Corrective action may involve a prospective
correction of the NAV only, correction of any erroneous NAV and compensation to the Fund, or correction of any erroneous NAV, compensation to the Fund and reprocessing of individual shareholder transactions. The Trusts policies on errors and
corrective action limit or restrict when corrective action will be taken or when compensation to the Fund or its shareholders will be paid, and not all mistakes will result in compensable errors. As a result, neither the Fund nor its shareholders
who purchase or redeem shares during periods in which errors accrue or occur may be compensated in connection with the resolution of an error. Shareholders will generally not be notified of the occurrence of a compensable error or the resolution
thereof absent unusual circumstances.
As discussed in more detail under NET ASSET VALUE, the Funds portfolio
securities may be priced based on quotations for those securities provided by pricing services. There can be no guarantee that a quotation provided by a pricing service will be accurate.
SHARES OF THE TRUST
The Fund is a series of Goldman Sachs Trust, a Delaware statutory trust established by an Agreement and Declaration of Trust dated January 28, 1997. The fiscal year of the Fund is December 31.
B-61
The Trustees have authority under the Trusts Declaration of Trust to create and
classify shares of beneficial interest in separate series, without further action by shareholders. The Trustees also have authority to classify and reclassify any series of shares into one or more classes of shares. As of February 29, 2012, the
Trustees have classified the shares of the Fund into five classes: Institutional Shares, Class A Shares, Class C Shares, Class R Shares and Class IR Shares. Additional series and classes may be added in the future.
Each Class A Share, Class C Share, Institutional Share, Class R Share and Class IR Share of the Fund represents a
proportionate interest in the assets belonging to the applicable class of the Fund. All expenses of the Fund are borne at the same rate by each class of shares, except that fees under the Distribution and Service Plan (the Plan) are
borne exclusively by Class A, Class C or Class R Shares and transfer agency fees and expenses are borne at different rates by different share classes. The Trustees may determine in the future that it is appropriate to allocate other
expenses differently among classes of shares and may do so to the extent consistent with the rules of the SEC and positions of the IRS. Each class of shares may have different minimum investment requirements and be entitled to different shareholder
services. With limited exceptions, shares of a class may only be exchanged for shares of the same or an equivalent class of another fund. See Shareholder Guide in the Prospectus and OTHER INFORMATION REGARDING MAXIMUM SALES CHARGE,
PURCHASES, REDEMPTIONS, EXCHANGES AND DIVIDENDS below. In addition, the fees and expenses set forth below for each class may be subject to voluntary fee waivers or reimbursements, as discussed more fully in the Funds Prospectus.
Class A Shares are sold with an initial sales charge of up to 5.5% through brokers and dealers who are members of the
Financial Industry Regulatory Authority (the FINRA) and certain other financial service firms that have sales agreements with Goldman Sachs. Class A Shares bear the cost of distribution fees at the aggregate rate of up to 0.25% of
the average daily net assets of such Class A Shares of the Fund, although the distributor at its discretion may use compensation for distribution services paid under the Distribution and Service Plan for personal and account maintenance
services and expenses so long as such total compensation under the Plan does not exceed the maximum cap on service fees imposed by FINRA.
Class C Shares of the Fund are sold subject to a CDSC of up to 1.0% through brokers and dealers who are members of FINRA and certain other financial services firms that have sales arrangements with
Goldman Sachs. Class C Shares bear the cost of distribution (Rule 12b-1) fees at the aggregate rate of up to 0.75% of the average daily net assets attributable to Class C Shares. Class C Shares also bear the cost of service fees
at an annual rate of up to 0.25% of the average daily net assets attributable to Class C Shares.
Class IR and Class R
Shares are sold at net asset value without a sales charge. As noted in the Prospectus, Class IR and Class R Shares are not sold directly to the public. Instead, Class IR and Class R Shares generally are available only to Section 401(k) plans,
403(b), 457, profit sharing, money purchase pension, tax-sheltered annuity, defined benefit pension, non-qualified deferred compensation plans and non-qualified pension plans or other employee benefit plans (including health savings accounts) or
SIMPLE plans that are sponsored by one or more employers (including governmental or church employers) or employee organizations (Employee Benefit Plans). Such an Employee Benefit Plan must purchase Class IR or Class R Shares through a
plan level or omnibus account. Class IR Shares may also be sold to accounts established under a fee-based program that is sponsored and maintained by a registered broker-dealer or other financial intermediary that is approved by Goldman Sachs
(Eligible Fee-Based Program). Class IR and R Shares are not available to traditional and Roth Individual Retirement Accounts (IRAs), SEPs and SARSEPs; except that Class IR Shares are available to such accounts or plans to the extent they
are purchased through an Eligible Fee-Based Program. Participants in an Employee Benefit Plan should contact their Employee Benefit Plan service provider for information regarding purchases, sales and exchanges of Class IR and Class R Shares. Class
R Shares bear the cost of distribution (Rule 12b-1) fees at the aggregate rate of up to 0.50% of the average daily net assets attributable to Class R Shares. With respect to Class R Shares the distributor at its discretion may use compensation for
distribution services paid under the Distribution and Service Plan for personal and account maintenance services and expenses so long as such total compensation under the Plan does not exceed the maximum cap on service fees imposed by
the Financial Industry Regulatory Authority (FINRA).
Institutional Shares may be purchased at net asset value
without a sales charge for accounts in the name of an investor or institution that is not compensated by the Fund under a Plan for services provided to the institutions customers.
It is possible that an institution or its affiliate may offer different classes of shares (
i.e.
, Class A, Class C,
Class R, Class IR, or Institutional Shares) to its customers and thus receive different compensation with respect to different classes of shares of the Fund. Dividends paid by the Fund, if any, with respect to each class of shares will be
calculated in the same manner, at the same time on the same day and will be the same amount, except for differences caused by the fact that the respective transfer agency and Plan fees relating to a particular class will be borne exclusively by that
class. Similarly, the net asset value per share may differ depending upon the class of shares purchased.
Certain aspects of
the shares may be altered after advance notice to shareholders if it is deemed necessary in order to satisfy certain tax regulatory requirements.
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When issued for the consideration described in the Funds Prospectus, shares are fully
paid and non-assessable. The Trustees may, however, cause shareholders, or shareholders of a particular series or class, to pay certain custodian, transfer agency, servicing or similar charges by setting off the same against declared but unpaid
dividends or by reducing share ownership (or by both means). In the event of liquidation, shareholders are entitled to share pro rata in the net assets of the applicable class of the Fund available for distribution to such shareholders. All shares
are freely transferable and have no preemptive, subscription or conversion rights. The Trustees may require Shareholders to redeem Shares for any reason under terms set by the Trustees.
The Act requires that where more than one series of shares exists, each series must be preferred over all other series in respect of
assets specifically allocated to such series. In addition, Rule 18f-2 under the Act provides that any matter required to be submitted by the provisions of the Act or applicable state law, or otherwise, to the holders of the outstanding voting
securities of an investment company such as the Trust shall not be deemed to have been effectively acted upon unless approved by the holders of a majority of the outstanding shares of each series affected by such matter. Rule 18f-2 further
provides that a series shall be deemed to be affected by a matter unless the interests of each series in the matter are substantially identical or the matter does not affect any interest of such series. However, Rule 18f-2 exempts the selection
of independent public accountants, the approval of principal distribution contracts and the election of trustees from the separate voting requirements of Rule 18f-2.
The Trust is not required to hold annual meetings of shareholders and does not intend to hold such meetings. In the event that a meeting of shareholders is held, each share of the Trust will be entitled,
as determined by the Trustees without the vote or consent of the shareholders, either to one vote for each share or to one vote for each dollar of net asset value represented by such share on all matters presented to shareholders including the
election of Trustees (this method of voting being referred to as dollar based voting). However, to the extent required by the Act or otherwise determined by the Trustees, series and classes of the Trust will vote separately from each
other. Shareholders of the Trust do not have cumulative voting rights in the election of Trustees. Meetings of shareholders of the Trust, or any series or class thereof, may be called by the Trustees, certain officers or upon the written request of
holders of 10% or more of the shares entitled to vote at such meetings. The Trustees will call a special meeting of shareholders for the purpose of electing Trustees, if, at any time, less than a majority of Trustees holding office at the time were
elected by shareholders. The shareholders of the Trust will have voting rights only with respect to the limited number of matters specified in the Declaration of Trust and such other matters as the Trustees may determine or may be required by law.
The Declaration of Trust provides for indemnification of Trustees, officers, employees and agents of the Trust unless the
recipient is adjudicated (i) to be liable by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such persons office or (ii) not to have acted in good faith in the
reasonable belief that such persons actions were in the best interest of the Trust. The Declaration of Trust provides that, if any shareholder or former shareholder of any series is held personally liable solely by reason of being or having
been a shareholder and not because of the shareholders acts or omissions or for some other reason, the shareholder or former shareholder (or the shareholders heirs, executors, administrators, legal representatives or general successors)
shall be held harmless from and indemnified against all loss and expense arising from such liability. The Trust, acting on behalf of any affected series, must, upon request by such shareholder, assume the defense of any claim made against such
shareholder for any act or obligation of the series and satisfy any judgment thereon from the assets of the series.
The
Declaration of Trust permits the termination of the Trust or of any series or class of the Trust (i) by a majority of the affected shareholders at a meeting of shareholders of the Trust, series or class; or (ii) by a majority of the
Trustees without shareholder approval if the Trustees determine, in their sole discretion, that such action is in the best interest of the Trust, such series, such class or their respective shareholders. The Trustees may consider such factors as
they, in their sole discretion, deem appropriate in making such determination, including (i) the inability of the Trust or any series or class to maintain its assets at an appropriate size; (ii) changes in laws or regulations governing the
Trust, series or class or affecting assets of the type in which it invests; or (iii) economic developments or trends having a significant adverse impact on the business or operations of the Trust or series.
The Declaration of Trust authorizes the Trustees, without shareholder approval, to cause the Trust, or any series thereof, to merge or
consolidate with any corporation, association, trust or other organization or sell or exchange all or substantially all of the property belonging to the Trust or any series thereof. In addition, the Trustees, without shareholder approval, may adopt
a master-feeder structure by investing all or a portion of the assets of a series of the Trust in the securities of another open-end investment company with substantially the same investment objective, restrictions and policies.
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The Declaration of Trust permits the Trustees to amend the Declaration of Trust without a
shareholder vote. However, shareholders of the Trust have the right to vote on any amendment (i) that would adversely affect the voting rights of shareholders; (ii) that is required by law to be approved by shareholders; (iii) that
would amend the provisions of the Declaration of Trust regarding amendments and supplements thereto; or (iv) that the Trustees determine to submit to shareholders.
The Trustees may appoint separate Trustees with respect to one or more series or classes of the Trusts shares (the Series Trustees). Series Trustees may, but are not required
to, serve as Trustees of the Trust or any other series or class of the Trust. To the extent provided by the Trustees in the appointment of Series Trustees, the Series Trustees may have, to the exclusion of any other Trustees of the Trust,
all the powers and authorities of Trustees under the Declaration of Trust with respect to such Series or Class, but may have no power or authority with respect to any other series or class.
Principal Holders of Securities
The Fund had not commenced operations as
of the date of this SAI, and the Trust does not know of any persons who own of record or beneficially 5% or more of any class of the Funds shares as of that date.
Shareholder and Trustee Liability
Under Delaware Law, the shareholders of
the Fund are not generally subject to liability for the debts or obligations of the Trust. Similarly, Delaware law provides that a series of the Trust will not be liable for the debts or obligations of any other series of the Trust. However, no
similar statutory or other authority limiting statutory trust shareholder liability exists in other states. As a result, to the extent that a Delaware statutory trust or a shareholder is subject to the jurisdiction of courts of such other states,
the courts may not apply Delaware law and may thereby subject the Delaware statutory trust shareholders to liability. To guard against this risk, the Declaration of Trust contains an express disclaimer of shareholder liability for acts or
obligations of a series. Notice of such disclaimer will normally be given in each agreement, obligation or instrument entered into or executed by a series of the Trust. The Declaration of Trust provides for indemnification by the relevant series for
all loss suffered by a shareholder as a result of an obligation of the series. The Declaration of Trust also provides that a series shall, upon request, assume the defense of any claim made against any shareholder for any act or obligation of the
series and satisfy any judgment thereon. In view of the above, the risk of personal liability of shareholders of a Delaware statutory trust is remote.
In addition to the requirements under Delaware law, the Declaration of Trust provides that shareholders of a series may bring a derivative action on behalf of the series only if the following conditions
are met: (a) shareholders eligible to bring such derivative action under Delaware law who hold at least 10% of the outstanding shares of the series, or 10% of the outstanding shares of the class to which such action relates, shall join in the
request for the Trustees to commence such action; and (b) the Trustees must be afforded a reasonable amount of time to consider such shareholder request and to investigate the basis of such claim. The Trustees will be entitled to retain counsel
or other advisers in considering the merits of the request and may require an undertaking by the shareholders making such request to reimburse the series for the expense of any such advisers in the event that the Trustees determine not to bring such
action.
The Declaration of Trust further provides that the Trustees will not be liable for errors of judgment or mistakes of
fact or law, but nothing in the Declaration of Trust protects a Trustee against liability to which he or she would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in
the conduct of his or her office.
TAXATION
The following is a summary of the principal U.S. federal income tax considerations generally affecting the Fund and the purchase,
ownership and disposition of shares of the Fund that are not described in the Prospectus. The discussions below and in the Prospectus are only summaries and are not intended as substitutes for careful tax planning. They do not address special tax
rules applicable to certain classes of investors, such as tax-exempt entities, insurance companies and financial institutions. Each prospective shareholder is urged to consult his or her own tax adviser with respect to the specific federal, state,
local and foreign tax consequences of investing in the Fund. The summary is based on the laws in effect on February 29, 2012, which are subject to change.
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Fund Taxation
The Fund is treated as a separate taxable entity and has elected to be treated and intend to qualify for each taxable year as regulated investment companies under Subchapter M of Subtitle A,
Chapter 1, of the Code. To qualify as such, the Fund must satisfy certain requirements relating to the sources of its income, diversification of its assets and distribution of its income to shareholders. As a regulated investment company, the
Fund will not be subject to federal income or excise tax on any net investment income and net realized capital gains that are distributed to its shareholders in accordance with certain timing requirements of the Code.
In the future, the Fund may gain commodity exposure through investment in commodity index-linked structured notes and/or in a subsidiary
that invests in commodity-linked instruments. Although the IRS has issued numerous favorable private letter rulings concluding that income from certain commodity index-linked structured notes and investments through a subsidiary is qualifying income
for purposes of the annual 90% qualifying gross income test applicable to registered investment companies, such rulings can be relied on only by the taxpayers to whom they are issued. The IRS currently is reconsidering whether and how a registered
investment company should be permitted to gain commodity exposure. Future IRS guidance (or possibly legislation or other regulatory guidance) could limit the ability of the Fund to gain commodity exposure. Such investments would be made only to the
extent permissible under applicable law then in effect, or in reliance upon a private letter ruling from the IRS, or other applicable guidance or relief provided by the IRS or other agencies. The tax treatment of commodity-linked notes, other
commodity-linked derivatives and/or investments through a subsidiary may also be adversely affected by future legislation, Treasury regulations and/or guidance issued by the IRS that could affect the character, timing and/or amount of the
Funds taxable income or any gains and distributions made by the Fund.
There are certain tax requirements that the Fund
must follow if it is to avoid federal taxation. In its efforts to adhere to these requirements, the Fund may have to limit its investment activities in some types of instruments. Qualification as a regulated investment company under the Code
requires, among other things, that (i) the Fund derive at least 90% of its gross income for each taxable year from dividends, interest, payments with respect to securities loans, gains from the sale or other disposition of stocks or securities
or foreign currencies, net income from qualified publicly traded partnerships or other income (including but not limited to gains from options, futures, and forward contracts) derived with respect to the Funds business of investing in stocks,
securities or currencies (the 90% gross income test); and (ii) the Fund diversify its holdings so that, in general, at the close of each quarter of its taxable year, (a) at least 50% of the fair market value of the Funds
total (gross) assets is comprised of cash, cash items, U.S. Government securities, securities of other regulated investment companies and other securities limited in respect of any one issuer to an amount not greater in value than 5% of the
value of the Funds total assets and to not more than 10% of the outstanding voting securities of such issuer, and (b) not more than 25% of the value of its total (gross) assets is invested in the securities of any one issuer (other
than U.S. Government Securities and securities of other regulated investment companies), two or more issuers controlled by the Fund and engaged in the same, similar or related trades or businesses, or certain publicly traded partnerships.
For purposes of the 90% gross income test, income that the Fund earns from equity interests in certain entities that are not
treated as corporations or as qualified publicly traded partnerships for U.S. federal income tax purposes (
e.g.
, partnerships or trusts) will generally have the same character for the Fund as in the hands of such an entity; consequently, the
Fund may be required to limit its equity investments in any such entities that earn fee income, rental income, or other nonqualifying income. In addition, future Treasury regulations could provide that qualifying income under the 90% gross income
test will not include gains from foreign currency transactions that are not directly related to the Funds principal business of investing in stock or securities or options and futures with respect to stock or securities. Using foreign currency
positions or entering into foreign currency options, futures and forward or swap contracts for purposes other than hedging currency risk with respect to securities in the Funds portfolio or anticipated to be acquired may not qualify as
directly-related under these tests.
The Fund generally intends to distribute for each taxable year to its
shareholders all or substantially all of its investment company taxable income, net capital gain and any tax-exempt interest. Exchange control or other foreign laws, regulations or practices may restrict repatriation of investment income, capital or
the proceeds of securities sales by foreign investors such as the Fund and may therefore make it more difficult for the Fund to satisfy the distribution requirements described above, as well as the excise tax distribution requirements described
below. The Fund generally expects, however, to be able to obtain sufficient cash to satisfy those requirements from new investors, the sale of securities or other sources. If for any taxable year the Fund does not qualify as a regulated investment
company, it will be taxed on all of its taxable income and net capital gain at corporate rates, and its distributions to shareholders will generally be taxable as ordinary dividends to the extent of its current and accumulated earnings and profits.
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If the Fund retains any net capital gain, the Fund may designate the retained amount as
undistributed capital gains in a notice to its shareholders who (1) if subject to U.S. federal income tax on long-term capital gains, will be required to include in income for federal income tax purposes, as long-term capital gain, their shares
of that undistributed amount, and (2) will be entitled to credit their proportionate shares of the tax paid by the Fund against their U.S. federal income tax liabilities, if any, and to claim refunds to the extent the credit exceeds those
liabilities. For U.S. federal income tax purposes, the tax basis of shares owned by a shareholder of the Fund will be increased by the amount of any such undistributed net capital gain included in the shareholders gross income and decreased by
the federal income tax paid by the Fund on that amount of net capital gain.
To avoid a 4% federal excise tax, the Fund must
distribute (or be deemed to have distributed) by December 31 of each calendar year at least 98% of its taxable ordinary income for the calendar year, at least 98.2% of the excess of its capital gains over its capital losses (generally computed
on the basis of the one-year period ending on October 31 of such year), and all taxable ordinary income and the excess of capital gains over capital losses for all previous years that were not distributed for those years and on which the Fund
paid no federal income tax. For federal income tax purposes, dividends declared by the Fund in October, November or December to shareholders of record on a specified date in such a month and paid during January of the following year are taxable to
such shareholders, and deductible by the Fund, as if paid on December 31 of the year declared. The Fund anticipates that it will generally make timely distributions of income and capital gains in compliance with these requirements so that it
will generally not be required to pay the excise tax.
For federal income tax purposes, the Fund is generally permitted to
carry forward, indefinitely, a net capital loss in any taxable year to offset its own capital gains, if any, during the years following the year of the loss. Capital loss carryforwards arising on taxable years of a Fund beginning after
December 22, 2010 will generally be able to be carried forward indefinitely. These amounts are available to be carried forward to offset future capital gains to the extent permitted by the Code and applicable tax regulations.
Gains and losses on the sale, lapse, or other termination of options and futures contracts, options thereon and certain forward contracts
(except certain foreign currency options, forward contracts and futures contracts) will generally be treated as capital gains and losses. Certain of the futures contracts, forward contracts and options held by the Fund will be required to be
marked-to-market for federal tax purposes that is, treated as having been sold at their fair market value on the last day of the Funds taxable year (or, for excise tax purposes, on the last day of the relevant period). These
provisions may require the Fund to recognize income or gains without a concurrent receipt of cash. Any gain or loss recognized on actual or deemed sales of these futures contracts, forward contracts, or options will (except for certain foreign
currency options, forward contracts, and futures contracts) be treated as 60% long-term capital gain or loss and 40% short-term capital gain or loss. As a result of certain hedging transactions entered into by the Fund, it may be required to defer
the recognition of losses on futures contracts, forward contracts, and options or underlying securities or foreign currencies to the extent of any unrecognized gains on related positions held by the Fund, and the characterization of gains or losses
as long-term or short-term may be changed. The tax provisions described in this paragraph may affect the amount, timing and character of the Funds distributions to shareholders. The application of certain requirements for qualification as a
regulated investment company and the application of certain other tax rules may be unclear in some respects in connection with certain investment practices such as dollar rolls, or investments in certain derivatives, including interest rate swaps,
floors, caps and collars, currency swaps, total return swaps, mortgage swaps, index swaps, forward contracts and structured notes. As a result, the Fund may therefore be required to limit its investments in such transactions and it is also possible
that the IRS may not agree with the Funds tax treatment of such transactions. In addition, the tax treatment of derivatives, and certain other investments, may be affected by future legislation, Treasury Regulations and guidance issued by the
IRS that could affect the timing, character and amount of the Funds income and gains and distributions to shareholders. Certain tax elections may be available to the Fund to mitigate some of the unfavorable consequences described in this
paragraph.
Section 988 of the Code contains special tax rules applicable to certain foreign currency transactions and
instruments, which may affect the amount, timing and character of income, gain or loss recognized by the Fund. Under these rules, foreign exchange gain or loss realized with respect to foreign currencies and certain futures and options thereon,
foreign currency-denominated debt instruments, foreign currency forward contracts, and foreign currency-denominated payables and receivables will generally be treated as ordinary income or loss, although in some cases elections may be available that
would alter this treatment. If a net foreign exchange loss treated as ordinary loss under Section 988 of the Code were to exceed the Funds investment company taxable income (computed without regard to that loss) for a taxable year, the
resulting loss would not be deductible by the Fund or its shareholders in future years. Net loss, if any, from certain foreign currency transactions or instruments could exceed net investment income otherwise calculated for accounting purposes, with
the result being either no dividends being paid or a portion of the Funds dividends being treated as a return of capital for tax purposes, nontaxable to the extent of a shareholders tax basis in his shares and, once such basis is
exhausted, generally giving rise to capital gains.
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The Funds investments in certain structured securities or other securities bearing
original issue discount or, if the Fund elects to include market discount in income currently, market discount, as well as any marked-to-market gain from certain options, futures or forward contracts, as described above, will in many
cases cause the Fund to realize income or gain before the receipt of cash payments with respect to these securities or contracts. For the Fund to obtain cash to enable the Fund to distribute any such income or gain, to maintain its qualification as
a regulated investment company and to avoid federal income and excise taxes, the Fund may be required to liquidate portfolio investments sooner than it might otherwise have done.
Investments in lower-rated securities may present special tax issues for the Fund to the extent actual or anticipated defaults may be more
likely with respect to those kinds of securities. Tax rules are not entirely clear about issues such as when an investor in such securities may cease to accrue interest, original issue discount, or market discount; when and to what extent deductions
may be taken for bad debts or worthless securities; how payments received on obligations in default should be allocated between principal and income; and whether exchanges of debt obligations in a workout context are taxable. These and other issues
will generally need to be addressed by the Fund, in the event it invests in such securities, so as to seek to eliminate or to minimize any adverse tax consequences.
The Fund anticipates that it may be subject to foreign taxes on its income (possibly including, in some cases, capital gains) from foreign securities. Tax conventions between certain countries and the
United States may reduce or eliminate such taxes in some cases. The Fund will not be eligible to elect to pass through foreign taxes to the shareholders but will be entitled to deduct such taxes in computing the amounts they are required to
distribute.
If the Fund acquires stock (including, under proposed regulations, an option to acquire stock such as is inherent
in a convertible bond) in certain foreign corporations that receive at least 75% of their annual gross income from passive sources (such as interest, dividends, rents, royalties or capital gain) or hold at least 50% of their assets in investments
producing such passive income (passive foreign investment companies), the Fund could be subject to federal income tax and additional interest charges on excess distributions received from such companies or gain from the sale
of stock in such companies, even if all income or gain actually received by the Fund is timely distributed to its shareholders. The Fund will not be able to pass through to its shareholders any credit or deduction for such a tax. In some cases,
elections may be available that will ameliorate these adverse tax consequences, but those elections will require the Fund to include each year certain amounts as income or gain (subject to the distribution requirements described above) without a
concurrent receipt of cash. The Fund may attempt to limit and/or to manage its holdings in passive foreign investment companies to minimize its tax liability or maximize its return from these investments.
If the Fund invests in certain REITs or in REMIC residual interests, a portion of the Funds income may be classified as excess
inclusion income. A shareholder that is otherwise not subject to tax may be taxable on their share of any such excess inclusion income as unrelated business taxable income. In addition, tax may be imposed on the Fund on the portion
of any excess inclusion income allocable to any shareholders that are classified as disqualified organizations.
Medicare Tax
For taxable years beginning after December 31, 2012, an additional 3.8% Medicare tax will be imposed on certain net
investment income (including ordinary dividends and capital gain distributions received from the Fund and net gains from redemptions or other taxable dispositions of Fund shares) of US individuals, estates and trusts to the extent that such
persons modified adjusted gross income (in the case of an individual) or adjusted gross income (in the case of an estate or trust) exceeds a threshold amount.
Non-U.S. Shareholders
The discussion above relates solely to U.S. federal
income tax law as it applies to U.S. persons subject to tax under such law.
Distributions to shareholders who, as
to the United States, are not U.S. persons, (
i.e.
, are nonresident aliens, foreign corporations, fiduciaries of foreign trusts or estates, foreign partnerships or other non-U.S. investors) generally will be subject to U.S. federal
withholding tax at the rate of 30% on distributions treated as ordinary income unless the tax is reduced or eliminated pursuant to a tax treaty or the distributions are effectively connected with a U.S. trade or business of the shareholder; but
distributions of net capital gain (the excess of any net long-term capital gains over any net short-term capital losses) including amounts retained by the Fund which are designated as undistributed capital gains, to such a non-U.S. shareholder will
not be subject to U.S. federal income or withholding tax unless the distributions are effectively connected with the shareholders trade or business in the United States or, in the case of a shareholder who is a nonresident alien individual,
the shareholder is present in the United States for 183 days or more during the taxable year and certain other conditions are met.
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Any capital gain realized by a non-U.S. shareholder upon a sale or redemption of shares of
the Fund will not be subject to U.S. federal income or withholding tax unless the gain is effectively connected with the shareholders trade or business in the U.S., or in the case of a shareholder who is a nonresident alien individual, the
shareholder is present in the U.S. for 183 days or more during the taxable year and certain other conditions are met.
Non-U.S. persons who fail to furnish the Fund with the proper IRS Form W-8 (
i.e.
, W-8BEN, W-8ECI, W-8IMY or W-8EXP), or an
acceptable substitute, may be subject to backup withholding at a 28% (currently scheduled to increase to 31% after 2012) rate on dividends (including capital gain dividends) and on the proceeds of redemptions and exchanges. Also, non-U.S.
shareholders of the Fund may be subject to U.S. estate tax with respect to their Fund shares.
Effective January 1, 2013,
the Fund will be required to withhold U.S. tax (at a 30% rate) on payments of dividends and redemption proceeds made to certain non-U.S. entities that fail to comply with extensive new reporting and withholding requirements designed to inform the
U.S. Department of the Treasury of U.S.-owned foreign investment accounts. Shareholders may be requested to provide additional information to the Fund to enable the Fund to determine whether withholding is required.
Each shareholder who is not a U.S. person should consult his or her tax adviser regarding the U.S. and non-U.S. tax consequences of
ownership of shares of, and receipt of distributions from, the Fund.
State and Local
The Fund may be subject to state or local taxes in jurisdictions in which the Fund is deemed to be doing business. In addition, in those
states or localities that impose income taxes, the treatment of the Fund and its shareholders under those jurisdictions tax laws may differ from the treatment under federal income tax laws, and investment in the Fund may have tax consequences
for shareholders that are different from those of a direct investment in the Funds portfolio securities. Shareholders should consult their own tax advisers concerning state and local tax matters.
FINANCIAL STATEMENTS
A copy of the Funds Annual Report (when available) may be obtained upon request and without charge by writing Goldman, Sachs & Co., P.O. Box 06050, Chicago, Illinois 60606 or by calling
Goldman, Sachs & Co., at the telephone number on the back cover of the Funds Prospectus. The Annual Report for the fiscal period ending December 31, 2012 will become available to investors in February 2013.
PROXY VOTING
The Trust, on behalf of the Fund, has delegated the voting of portfolio securities to the Investment Adviser. For client accounts for which the Investment Adviser has voting discretion, the Investment
Adviser has adopted policies and procedures (the Proxy Voting Policy) for the voting of proxies. Under the Proxy Voting Policy, the Investment Advisers guiding principles in performing proxy voting are to make decisions that favor
proposals that tend to maximize a companys shareholder value and are not influenced by conflicts of interest. To implement these guiding principles for investments in publicly-traded equities, the Investment Adviser has developed customized
proxy voting guidelines (the Guidelines) that it generally applies when voting on behalf of client accounts. Attached as Appendix B is a summary of the Guidelines. These Guidelines address a wide variety of individual topics, including,
among other matters, shareholder voting rights, anti-takeover defenses, board structures, the election of directors, executive and director compensation, reorganizations, mergers, issues of corporate social responsibility and various shareholder
proposals.
The Proxy Voting Policy, including the Guidelines, is reviewed periodically to ensure that it continues to be
consistent with the Investment Advisers guiding principles. The Guidelines embody the positions and factors the Investment Adviser generally considers important in casting proxy votes.
The Investment Adviser has retained a third-party proxy voting service (Proxy Service), currently Institutional Shareholder
Services, to assist in the implementation and administration of certain proxy voting-related functions including, without limitation, operational, recordkeeping and reporting services. The Proxy Service also prepares a written analysis and
recommendation (a Recommendation) of each proxy vote that reflects the Proxy Services application of the Guidelines to particular proxy issues. While it is the Investment Advisers policy generally to follow the Guidelines and
Recommendations from the Proxy Service, the Investment Advisers portfolio management teams (Portfolio Management Teams) may on certain proxy votes seek approval to diverge from the Guidelines or a Recommendation by following an
override process. Such decisions are subject to a review and approval process, including a determination that the decision is not influenced by any conflict of interest. A Portfolio Management Team that receives approval through the
override process to cast a proxy vote that diverges from the Guidelines and/or a Recommendation may vote differently than other Portfolio Management Teams that did not seek to override that vote. In forming their views on particular matters, the
Portfolio Management Teams are also permitted to consider applicable regional rules and practices, including codes of conduct and other guides, regarding proxy voting, in addition to the Guidelines and Recommendations. The Investment Adviser may
hire other service providers to replace or supplement the Proxy Service with respect to any of the services the Investment Adviser currently receives from the Proxy Service.
From time to time, the Investment Adviser may face regulatory, compliance, legal or logistical limits with respect to voting securities that it may purchase or hold for client accounts, which can affect
the Investment Advisers ability to vote such proxies, as well as the desirability of voting such proxies. Among other limits, federal, state and foreign regulatory restrictions or company specific ownership limits, as well as legal matters
related to consolidated groups, may restrict the total percentage of an issuers voting securities that the Investment Adviser can hold for clients and the nature of the Investment Advisers voting in such securities. The Investment
Advisers ability to vote proxies may also be affected by, among other things: (i) late receipt of meeting notices; (ii) requirements to vote proxies in person: (iii) restrictions on a foreigners ability to exercise votes;
(iv) potential difficulties in translating the proxy; (v) requirements to provide local agents with unrestricted powers of attorney to facilitate voting instructions; and (vi) requirements that investors who exercise their voting
rights surrender the right to dispose of their holdings for some specified period in proximity to the shareholder meeting.
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GSAM conducts periodic due diligence meetings with the Proxy Service which include, but are
not limited to, a review of the Proxy Services general organizational structure, new developments with respect to research and technology, work flow improvements and internal due diligence with respect to conflicts of interest.
The Investment Adviser has adopted policies and procedures designed to prevent conflicts of interest from influencing its proxy voting
decisions that the Investment Adviser makes on behalf of a client account and to help ensure that such decisions are made in accordance with the Investment Advisers fiduciary obligations to its clients. These policies and procedures include
the Investment Advisers use of the Guidelines and Recommendations from the Proxy Service, the override approval process previously discussed, and the establishment of information barriers between the Investment Adviser and other businesses
within The Goldman Sachs Group, Inc. Notwithstanding such proxy voting policies and procedures, actual proxy voting decisions of the Investment Adviser may have the effect of benefitting the interests of other clients or businesses of other
divisions or units of Goldman Sachs and/or its affiliates, provided that the Investment Adviser believes such voting decisions to be in accordance with its fiduciary obligations.
Voting decisions with respect to fixed income securities and the securities of privately held issuers generally will be made by a
Funds managers based on their assessment of the particular transactions or other matters at issue.
Information regarding
how the Funds voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on or through the Funds website at www.goldmansachsfunds.com and on the SECs website at
www.sec.gov
.
PAYMENTS TO INTERMEDIARIES
The Investment Adviser, Distributor and/or their affiliates may make payments to Intermediaries from time to time to promote the sale,
distribution and/or servicing of shares of the Fund. These payments (Additional Payments) are made out of the Investment Advisers, Distributors and/or their affiliates own assets (which may come directly or indirectly
from fees paid by the Fund), are not an additional charge to the Fund or its shareholders, and do not change the price paid by investors for the purchase of the Funds shares or the amount the Fund receives as proceeds from such purchases.
Although paid by the Investment Advisor, Distributor, and/or their affiliates, the Additional Payments are in addition to the distribution and service fees paid by the Fund to the Intermediaries as described in the Funds Prospectus and this
SAI, and are also in addition to the sales commissions payable to Intermediaries as set forth in the Prospectus. For purposes of this Payments to Intermediaries section, Funds shall mean, collectively, the Fund and any of the
other Goldman Sachs Funds.
The Additional Payments are intended to compensate Intermediaries for, among other things:
marketing shares of the Funds, which may consist of payments relating to funds included on preferred or recommended fund lists or in certain sales programs from time to time sponsored by the Intermediaries; access to the Intermediaries
registered representatives or salespersons, including at conferences and other meetings; assistance in training and education of personnel; finders or referral fees for directing investors to the Funds; marketing support fees
for providing assistance in promoting the sale of Fund shares (which may include promotions in communications with the Intermediaries customers, registered representatives and salespersons); and/or other specified services intended to assist
in the distribution and marketing of the Funds. In addition, the Investment Adviser, Distributor and/or their affiliates may make Additional Payments (including through sub-transfer agency and networking agreements) for subaccounting, administrative
and/or shareholder processing services that are in addition to the transfer agent, shareholder administration, servicing and processing fees paid by the Funds. These Additional Payments may exceed amounts earned on these assets by the Investment
Adviser, Distributor and/or their affiliates for the performance of these or similar services. The Additional Payments may be a fixed dollar amount; may be based on the number of customer accounts maintained by an Intermediary; may be based on a
percentage of the value of shares sold to, or held by, customers of the Intermediary involved; or may be calculated on another basis. The Additional Payments are negotiated with each Intermediary based on a range of factors, including but not
limited to the Intermediarys ability to attract and retain assets (including particular classes of Fund shares), target markets, customer relationships, quality of service and industry reputation. Although the individual components may be
higher or lower and the total amount of Additional Payments made to any Intermediary in any given year will vary, the amount of these Additional Payments (excluding payments made through sub- transfer agency and networking agreements), on average,
is normally not expected to exceed 0.50% (annualized) of the amount sold or invested through an Intermediary.
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These Additional Payments may be significant to certain Intermediaries, and may be an
important factor in an Intermediarys willingness to support the sale of the Funds through its distribution system.
The
Investment Adviser, Distributor and/or their affiliates may be motivated to make Additional Payments since they promote the sale of Fund shares to clients of Intermediaries and the retention of those investments by those clients. To the extent
Intermediaries sell more shares of the Funds or retain shares of the Funds in their clients accounts, the Investment Adviser and Distributor benefit from the incremental management and other fees paid by the Funds with respect to those assets.
In addition, certain Intermediaries may have access to certain research and investment services from the Investment Adviser,
Distributor and/or their affiliates. Such research and investment services (Additional Services) may include research reports, economic analysis, portfolio analysis tools, business planning services, certain marketing and investor
education materials and strategic asset allocation modeling. The Intermediary may not pay for these products or services. The cost of the Additional Services and the particular services provided may vary from Intermediary to Intermediary.
The Additional Payments made by the Investment Adviser, Distributor and/or their affiliates or the Additional Services
received by an Intermediary may vary with respect to the type of fund (e.g., equity, fund, fixed income fund, specialty fund, asset allocation portfolio or money market fund) sold by the Intermediary. In addition, the Additional Payment arrangements
may include breakpoints in compensation which provide that the percentage rate of compensation varies as the dollar value of the amount sold or invested through an Intermediary increases.
The presence of these Additional Payments or Additional Services, the varying fee structure and the basis on which an Intermediary
compensates its registered representatives or salespersons may create an incentive for a particular Intermediary, registered representative or salesperson to highlight, feature or recommend funds, including the Funds, or other investments based, at
least in part, on the level of compensation paid. Additionally, if one mutual fund sponsor makes greater distribution payments than another, an Intermediary may have an incentive to recommend one fund complex over another. Similarly, if an
Intermediary receives more distribution assistance for one share class versus another, that Intermediary may have an incentive to recommend that share class. Because Intermediaries may be paid varying amounts per class for sub-transfer agency and
related recordkeeping services, the service requirements of which also may vary by class, this may create an additional incentive for financial firms and their financial advisors to favor one fund complex over another, or one fund class over
another. You should consider whether such incentives exist when evaluating any recommendations from an Intermediary to purchase or sell Shares of the Fund and when considering which share class is most appropriate for you.
For the year ended December 31, 2011, the Investment Adviser, Distributor and their affiliates made Additional Payments out of their
own assets to approximately 157 Intermediaries, totaling approximately $97.4 million (excluding payments made through sub-transfer agency and networking agreements and certain other types of payments described below), with respect to the Fund,
Goldman Sachs Trust, all of the funds in an affiliated investment company and Goldman Sachs Variable Insurance Trust. During the year ended December 31, 2011, the Investment Adviser, Distributor and/or their affiliates had contractual
arrangements to make Additional Payments to the Intermediaries listed below (or their affiliates or successors), among others. This list will change over time, and any additions, modifications or deletions thereto that have occurred since
December 31, 2011 are not reflected. Additional Intermediaries may receive payments in 2012 and in future years. Certain arrangements are still being negotiated, and there is a possibility that payments will be made retroactively to
Intermediaries not listed below.
ADP Broker Dealer, Inc
American Enterprise Investment Services Inc
Allstate Life Insurance Co
Amalga Trust Company
Amalgamated Bank of Chicago
American National Trust and Investment Management Company (dba Old National Trust Company)
American United Life Insurance Co
Ameriprise Financial Services, Inc.
Ascensus, Inc
Associated Trust NA & Associated Investment Services Inc.
AXA Equitable Life Insurance Company
Banc of America Securities, LLC
BancorpSouth
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Bank Hapoalim B.M.
Bank of New York
Bank of Oklahoma
Bankers Trust
Barclays Capital Inc.
BB&T Capital Markets
BMO Nesbitt Burns (Harris)
BOSC, Inc.
Branch Banking & Trust Company
Brown Brothers Harriman & Co
C.M. Life Insurance Company
Financial Network Investment Corporation
Multi Financial Securities Corporation
PrimeVest Financial Services
Charles Schwab & Co., Inc.
Chicago Mercantile Exchange, Inc. and CME Shareholder Servicing, LLC.
Citibank
N.A.
Citibank N.A. Agency and Trust Department
Citigroup Global Markets, Inc.
Citigroup Private Bank at Citibank N.A.
Citizens Bank Wealth Management N.A.
Comerica Bank
Comerica Securities
Commerce Bank N.A.
Companion Life Insurance Company
Compass Bank
Computershare Trust Company, N.A.
Connecticut General Life Insurance Company
Daily Access Corporation
Dain Rauscher Inc.
Deutsche Bank Trust Company Americas
DeWaay Financial Network LLC
Diversified Investment Advisors
Dubuque Bank & Trust
Edward D. Jones & Co., L.P.
Farmers New World Life Insurance Co.
Federal Deposit Insurance Corporation
Fidelity Brokerage Services LLC and
National Financial Services LLC
Fidelity Investments Institutional Operations Company, Inc
Fifth Third Bank
First National Bank of Omaha
First Trust Corporation
Fulton Bank N.A.
Fulton Financial Advisors, National Association
GE Life and Annuity Assurance Company
Genworth Financial Trust Company
Great West Life & Annuity Insurance Company
Greatbanc Trustco
Guardian Insurance and Annuity Company, Inc
GWFS Equities, Inc.
Harris Trust & Savings Bank
Hartford Life Insurance Co.
Hartford Securities Distribution Company Inc.
Hewitt Associates LLC
Horace Mann Life Insurance Company
HSBC Bank USA
Hunt Dupree & Rhine
ING Institutional Plan Services, LLC / ING Investment Advisors, LLC
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ING Life Insurance & Annuity Company / ING Financial Advisers, LLC / ING
Institutional Plan
Services, LLC
Invesmart, Inc.
J.P. Morgan Securities Inc.
Jefferson Pilot Financial Insurance Company
JP Morgan Retirement Plan Services, LLC
JPMorgan Securities, Inc.
Kemper Investors Life Insurance Company
Key Bank Capital Markets
LaSalle Bank N.A.
Law Debenture Trust Company of New York
Lincoln Benefit Life Company
Lincoln Financial Advisors
Lincoln National Life Insurance Company and Lincoln Life & Annuity Company of New York
Lincoln Retirement Services Company, LLC
M&I Brokerage Services, Inc.
M&T Securities, Inc.
Marshall & Ilsley Trust Company N.A.
Massachusetts Mutual Life Insurance Company
Mellon Bank N.A.
Mellon HR Solutions
Mercer HR Services, LLC
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Mid-Atlantic Capital Corporation
Midland National Life Insurance Company
Minnesota Life Insurance Company
Morgan Keegan and Company, Inc.
Morgan Stanley Smith Barney LLC
MSCS Financial Services
National Security Life and Annuity Company
Nationwide Financial Services, Inc.
Newport Retirement Services, Inc
Northern Trust Securities Inc.
NYLife Distributors, Inc.
Ohio National Life Insurance Company
Pershing, LLC
PNC Bank, N.A.
PNC Bank, National Organization
PNC Capital Markets
Principal Life Insurance Company
Princor Financial Services
Protective Life Insurance Company
PruCo Life Insurance Company & PruCo
Life Insurance Company of New Jersey
Prudential Financial, Inc
Prudential Life Insurance Company
Raymond James & Associates, Inc. and Raymond James Financial Services
Regions Bank
Reliance Trust Company
Robert W. Baird & Co., Inc.
Scott & Stringfellow Inc.
Security Benefit Life Insurance Company
Signature Bank
Standard Insurance Company
State Street Global Markets, LLC and State Street Bank and Trust Company
Sun Life Assurance Company of Canada (US)
Sungard Institutional Brokerage, Inc
SunTrust Bank
SunTrust Robinson Humphrey, Inc.
SVB Securities
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Synovus Securities
T. Rowe Price Retirement Plan Services, Inc
The Princeton Retirement Group,
Inc & GPC Securities, Inc
The Prudential Insurance Company of America
The Travelers Insurance Company
Transamerica Life Insurance Company and Transamerica Financial Life Insurance Company
Treasury Curve
Trustmark National Bank
UBATCO & Co.
UBS Financial Services, Inc.
UMB Bank
Union Bank
United of Omaha Life Insurance Company
US Bank
US Bank National Association
Valic Retirement Services
Vanguard Group
Wachovia Capital Markets, LLC.
Wachovia Securities, LLC.
Wells Fargo Advisors LLC
Wells Fargo Bank and Its Affiliates
Wells Fargo Bank National Association
Wells Fargo Bank, N.A.
Wells Fargo Corporate Trust Services
Wells Fargo Investment, LLC.
Wilmington Trust Company
Zions First National Bank
Your Authorized Dealer or other Intermediary may charge you additional fees or commissions other than those disclosed in the Prospectus.
Shareholders should contact their Authorized Dealer or other Intermediary for more information about the Additional Payments or Additional Services they receive and any potential conflicts of interest, as well as for information regarding any fees
and/or commissions it charges. For additional questions, please contact Goldman Sachs Funds at 1-800-621-2550.
Not included on
the list above are other subsidiaries of Goldman Sachs who may receive revenue from the Investment Adviser, Distributor and/or their affiliates through intra-company compensation arrangements and for financial, distribution, administrative and
operational services.
Furthermore, the Investment Adviser, Distributor and/or their affiliates may, to the extent permitted by
applicable regulations, contribute to various non-cash and cash incentive arrangements to promote the sale of Fund shares, as well as sponsor various educational programs, sales contests and/or promotions. The Investment Adviser, Distributor and
their affiliates may also pay for the travel expenses, meals, lodging and entertainment of Intermediaries and their salespersons and guests in connection with educational, sales and promotional programs subject to applicable FINRA regulations. Other
compensation may also be offered from time to time to the extent not prohibited by applicable federal or state laws or FINRA regulations. This compensation is not included in, and is made in addition to, the Additional Payments described above.
OTHER INFORMATION
Selective Disclosure of Portfolio Holdings
The Board of Trustees of the
Trust and the Investment Adviser have adopted a policy on selective disclosure of portfolio holdings in accordance with regulations that seek to ensure that disclosure of information about portfolio securities is in the best interest of Fund
shareholders and to address the conflicts between the interests of Fund shareholders and its service providers. The policy provides that neither the Fund nor its Investment Adviser, Distributor or any agent, or any employee thereof (Fund
Representative) will disclose the Funds portfolio holdings information to any person other than in accordance with the policy. For purposes of the policy, portfolio holdings information means the Funds actual portfolio
holdings, as well as nonpublic information about its trading strategies or pending transactions. Under the policy, neither the Fund nor any
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Fund Representative may solicit or accept any compensation or other consideration in connection with the disclosure of portfolio holdings information. A Fund Representative may provide portfolio
holdings information to third parties if such information has been included in the Funds public filings with the SEC or is disclosed on the Funds publicly accessible website. Information posted on the Funds website may be
separately provided to any person commencing the day after it is first published on the Funds website.
Portfolio
holdings information that is not filed with the SEC or posted on the publicly available website may be provided to third parties only if the third party recipients are required to keep all portfolio holdings information confidential and are
prohibited from trading on the information they receive. Disclosure to such third parties must be approved in advance by the Investment Advisers legal or compliance department. Disclosure to providers of auditing, custody, proxy voting and
other similar services for the Fund, as well as rating and ranking organizations, will generally be permitted; however, information may be disclosed to other third parties (including, without limitation, individuals, institutional investors, and
intermediaries that sell shares of the Fund,) only upon approval by the Funds Chief Compliance Officer, who must first determine that the Fund has a legitimate business purpose for doing so. In general, each recipient of non-public portfolio
holdings information must sign a confidentiality and non-trading agreement, although this requirement will not apply when the recipient is otherwise subject to a duty of confidentiality. In accordance with the policy, the identity of those
recipients who receive non-public portfolio holdings information on an ongoing basis is as follows: the Investment Adviser and its affiliates, the Funds independent registered public accounting firm, the Funds custodian, the Funds
legal counselDechert LLP, the Funds financial printerRR Donnelley, and the Funds proxy voting serviceISS. In addition, certain fixed income funds of the Trust provide non-public portfolio holdings information to
Standard & Poors Rating Services to allow such funds to be rated by it and certain equity funds provide non-public portfolio holdings information to FactSet, a provider of global financial and economic information. These entities are
obligated to keep such information confidential. Third party providers of custodial or accounting services to the Fund may release non-public portfolio holdings information of the Fund only with the permission of Fund Representatives. From time to
time portfolio holdings information may be provided to broker-dealers solely in connection with the Fund seeking portfolio securities trading suggestions. In providing this information reasonable precautions, including limitations on the scope of
the portfolio holdings information disclosed, are taken to avoid any potential misuse of the disclosed information. All marketing materials prepared by the Trusts principal underwriter are reviewed by Goldman Sachs Compliance department
for consistency with the Trusts portfolio holdings disclosure policy.
The Fund currently intends to publish on the
Trusts website complete portfolio holdings as of the end of each month subject to a thirty calendar day lag between the date of the information and the date on which the information is disclosed. The Fund may publish on the website complete
portfolio holdings information more frequently if it has a legitimate business purpose for doing so. Reports that contain other information about the Fund may be obtained upon request and without charge by calling Goldman, Sachs & Co. toll-free
at 1-800-526-7384 (for Class A, Class C, Class R and Class IR Shareholders) or 1-800-621-2550 (for Institutional Shareholders).
Under the policy, Fund Representatives will initially supply the Board of the Trustees with a list of third parties who receive portfolio
holdings information pursuant to any ongoing arrangement. In addition, the Board is to receive information, on a quarterly basis, regarding any other disclosures of non-public portfolio holdings information that were permitted during the preceding
quarter. In addition, the Board of Trustees is to approve at its meetings a list of Fund Representatives who are authorized to disclose portfolio holdings information under the policy. As of February 29, 2012, only certain officers of the Trust
as well as certain senior members of the compliance and legal groups of the Investment Adviser have been approved by the Board of Trustees to authorize disclosure of portfolio holdings information.
Miscellaneous
The Fund
will redeem shares solely in cash up to the lesser of $250,000 or 1% of the net asset value of the Fund during any 90-day period for any one shareholder. The Fund, however, reserves the right, in its sole discretion, to pay redemptions by a
distribution in kind of securities (instead of cash) if (i) the redemption exceeds the lesser of $250,000 or 1% of the net asset value of the Fund at the time of redemption; or (ii) with respect to lesser redemption amounts, the redeeming
shareholder requests in writing a distribution in-kind of securities instead of cash. The securities distributed in kind would be valued for this purpose using the same method employed in calculating the Funds net asset value per share. See
NET ASSET VALUE. If a shareholder receives redemption proceeds in kind, the shareholder should expect to incur transaction costs upon the disposition of the securities received in the redemption.
The right of a shareholder to redeem shares and the date of payment by the Fund may be suspended for more than seven days for any period
during which the New York Stock Exchange is closed, other than the customary weekends or holidays, or when trading on such Exchange is restricted as determined by the SEC; or during any emergency, as determined by the SEC, as a result of which it is
not reasonably practicable for the Fund to dispose of securities owned by it or fairly to determine the value of its net assets; or for such other period as the SEC may by order permit for the protection of shareholders of the Fund.
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(The Trust may also suspend or postpone the recordation of the transfer of shares upon the occurrence of any
of the foregoing conditions.)
As stated in the Prospectus, the Trust may authorize Authorized Institutions, Authorized Dealers
and other institutions that provide recordkeeping, reporting and processing services to their customers to accept on the Trusts behalf purchase, redemption and exchange orders placed by or on behalf of their customers and, if approved by the
Trust, to designate other intermediaries to accept such orders. These institutions may receive payments from the Trust or Goldman Sachs for their services. Certain Authorized Institutions, Authorized Dealers or other institutions may enter into
sub-transfer agency agreements with the Trust or Goldman Sachs with respect to their services.
In the interest of economy and
convenience, the Trust does not issue certificates representing the Funds shares. Instead, the transfer agent maintains a record of each shareholders ownership. Each shareholder receives confirmation of purchase and redemption orders
from the transfer agent. Fund shares and any dividends and distributions paid by the Fund are reflected in account statements from the transfer agent.
The Prospectus and this SAI do not contain all the information included in the Registration Statement filed with the SEC under the 1933 Act with respect to the securities offered by the Prospectus.
Certain portions of the Registration Statement have been omitted from the Prospectus and this SAI pursuant to the rules and regulations of the SEC. The Registration Statement including the exhibits filed therewith may be examined at the office of
the SEC in Washington, D.C.
Statements contained in the Prospectus or in this SAI as to the contents of any contract or other
document referred to are not necessarily complete, and, in each instance, reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement of which the Prospectus and this SAI form a part, each such
statement being qualified in all respects by such reference.
Line of Credit
The Fund will participate in a $580,000,000 committed, unsecured revolving line of credit facility together with other funds of the Trust
and registered investment companies having management or investment advisory agreements with GSAM or its affiliates. Pursuant to the terms of this facility, the Fund and other borrowers may increase the credit amount by an additional $340,000,000,
for a total of up to $920,000,000. This facility is to be used for temporary emergency purposes or to allow for an orderly liquidation of securities to meet redemption requests. The interest rate on borrowings is based on the federal funds rate. The
facility also requires a fee to be paid by the Fund based on the amount of the commitment that has not been utilized.
Large Trade
Notifications
The Transfer Agent may from time to time receive notice that an Authorized Dealer or other financial
intermediary has received an order for a large trade in the Funds shares. The Fund may determine to enter into portfolio transactions in anticipation of that order, even though the order will not be processed until the following business day.
This practice provides for a closer correlation between the time shareholders place trade orders and the time the Fund enters into portfolio transactions based on those orders, and permits the Fund to be more fully invested in investment securities,
in the case of purchase orders, and to more orderly liquidate its investment positions, in the case of redemption orders. On the other hand, the Authorized Dealer or other financial intermediary may not ultimately process the order. In this case,
the Fund may be required to borrow assets to settle the portfolio transactions entered into in anticipation of that order, and would therefore incur borrowing costs. The Fund may also suffer investment losses on those portfolio transactions.
Conversely, the Fund would benefit from any earnings and investment gains resulting from such portfolio transactions.
Corporate Actions
From time to time, the issuer of a security held in the Funds portfolio may initiate a corporate action relating to
that security. Corporate actions relating to equity securities may include, among others, an offer to purchase new shares, or to tender existing shares, of that security at a certain price. Corporate actions relating to debt securities may include,
among others, an offer for early redemption of the debt security, or an offer to convert the debt security into stock. Certain corporate actions are voluntary, meaning that the Fund may only participate in the corporate action if it elects to do so
in a timely fashion. Participation in certain corporate actions may enhance the value of the Funds investment portfolio.
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In cases where the Fund or its Investment Adviser receives sufficient advance notice of a
voluntary corporate action, the Investment Adviser will exercise its discretion, in good faith, to determine whether the Fund will participate in that corporate action. If the Fund or its Investment Adviser does not receive sufficient advance notice
of a voluntary corporate action, the Fund may not be able to timely elect to participate in that corporate action. Participation or lack of participation in a voluntary corporate action may result in a negative impact on the value of the Funds
investment portfolio.
DISTRIBUTION AND SERVICE PLANS
(Class A Shares, Class C Shares and Class R Shares Only)
Distribution and Service Plans
.
As described in the Prospectus, the Trust has adopted, on behalf of Class A,
Class C and Class R Shares of the Fund, Distribution and Service Plans (each a Plan). See Shareholder GuideDistribution and Service Fees in the Prospectus. The distribution fees payable under the Plans are
subject to Rule 12b-1 under the Act and finance distribution and other services that are provided to investors in the Fund and enable the Fund to offer investors the choice of investing in either Class A, Class C or Class R
Shares when investing in the Fund. In addition, distribution fees payable under the Plans may be used to assist the Fund in reaching and maintaining asset levels that are efficient for the Funds operations and investments.
The Plans for the Funds Class A, Class C and Class R Shares were most recently approved on October 20, 2011 by a
majority vote of the Trustees of the Trust, including a majority of the non-interested Trustees of the Trust who have no direct or indirect financial interest in the Plans, cast in person at a meeting called for the purpose of approving the Plans.
The compensation for distribution services payable under a Plan to Goldman Sachs may not exceed 0.25%, 0.75% and
0.50% per annum of the Funds average daily net assets attributable to Class A, Class C and Class R Shares, respectively, of the Fund.
Under the Plan for Class C Shares, Goldman Sachs is also entitled to receive a separate fee for personal and account maintenance services equal on an annual basis to 0.25% of the Funds average
daily net assets attributable to Class C Shares. With respect to Class A and Class R Shares, the Distributor at its discretion may use compensation for distribution services paid under the Plan for personal and account maintenance
services and expenses so long as such total compensation under the Plan does not exceed the maximum cap on service fees imposed by FINRA.
Each Plan is a compensation plan which provides for the payment of a specified fee without regard to the expenses actually incurred by Goldman Sachs. If such fee exceeds Goldman Sachs expenses,
Goldman Sachs may realize a profit from these arrangements. The distribution fees received by Goldman Sachs under the Plans (and, as applicable, CDSC) on Class A, Class C and Class R Shares may be sold by Goldman Sachs as distributor to
entities which provide financing for payments to Authorized Dealers in respect of sales of Class A, Class C and Class R Shares. To the extent such fees are not paid to such dealers, Goldman Sachs may retain such fees as compensation
for its services and expenses of distributing the Funds Class A, Class C and Class R Shares.
Under each
Plan, Goldman Sachs, as distributor of the Funds Class A, Class C and Class R Shares, will provide to the Trustees of the Trust for their review, and the Trustees of the Trust will review at least quarterly a written report of
the services provided and amounts expended by Goldman Sachs under the Plans and the purposes for which such services were performed and expenditures were made.
The Plans will remain in effect until [June 30], 2012 and from year to year thereafter, provided that such continuance is approved annually by a majority vote of the Trustees of the Trust, including
a majority of the non-interested Trustees of the Trust who have no direct or indirect financial interest in the Plans. The Plans may not be amended to increase materially the amount of distribution compensation described therein without approval of
a majority of the outstanding Class A, Class C or Class R Shares of the affected Fund and affected share class but may be amended without shareholder approval to increase materially the amount of non-distribution compensation. All
material amendments of a Plan must also be approved by the Trustees of the Trust in the manner described above. A Plan may be terminated at any time as to the Fund without payment of any penalty by a vote of a majority of the non-interested Trustees
of the Trust or by vote of a majority of the Class A, Class C or Class R Shares. If a Plan was terminated by the Trustees of the Trust and no successor plan was adopted, the Fund would cease to make payments to Goldman Sachs under the
Plan and Goldman Sachs would be unable to recover the amount of any of its unreimbursed expenditures. So long as a Plan is in effect, the selection and nomination of non-interested Trustees of the Trust will be committed to the discretion of the
non-interested Trustees of the Trust. The Trustees of the Trust have determined that in their judgment there is a reasonable likelihood that the Plans will benefit the Fund and its Class A, Class C and Class R shareholders.
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OTHER INFORMATION REGARDING MAXIMUM SALES CHARGE, PURCHASES,
REDEMPTIONS,
EXCHANGES AND DIVIDENDS
(Class A Shares, Class C Shares and Class R Shares Only)
The following information supplements the information in the Prospectus under the captions Shareholder Guide and
Dividends. Please see the Prospectus for more complete information.
Maximum Sales Charges
Class A Shares of the Fund are sold with a maximum sales charge of 5.5%. Using the initial net asset value per share, the maximum
offering price of the Funds Class A shares would be as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Asset
Value
|
|
|
Maximum
Sales Charge
|
|
|
Offering Price
to Public
|
|
Managed Futures Strategy Fund
|
|
$
|
10.00
|
|
|
|
5.5
|
%
|
|
$
|
10.58
|
|
The actual sales charge that is paid by an investor on the purchase of Class A Shares may differ
slightly from the sales charge listed above or in the Funds Prospectus due to rounding in the calculations. For example, the sales load disclosed above and in the Funds Prospectus is only shown to one decimal place (
i.e.
, 5.5%).
The actual sales charge that is paid by an investor will be rounded to two decimal places. As a result of such rounding in the calculations, the actual sales load paid by an investor may be somewhat greater (
e.g.
, 5.53%) or somewhat lesser
(
e.g.
, 5.48%) than that listed above or in the Prospectus. Contact your financial adviser for further information.
Other Purchase
Information/Sales Charge Waivers
At the discretion of the Trusts officers and in addition to the NAV purchases
permitted in the Funds Prospect, Class A Shares of the Fund may also be sold at NAV without payment of any sales charge for shares purchased through certain Section 401(k), profit sharing, money purchase pension, tax-sheltered
annuity, defined benefit pension, or other employee benefit (including health savings accounts) or SIMPLE plans that are sponsored by one or more employers (including governmental or church employers) or employee organizations investing in the Fund.
Certain Goldman Sachs sponsored or partnered retirement platforms (specifically, GS Retirement Plan Plus and Goldman Sachs
401(k) Program) will be eligible to purchase Class A Shares of the Funds of the Trust without a front-end sales charge.
In
addition, certain former shareholders of certain funds (e.g., funds of AXA Enterprise Funds Trust, AXA Enterprise Multimanager Funds Trust, and The Enterprise Group of Funds, Inc., and the Signal Funds of The Coventry Group) (the Acquired
Funds) who (i) received shares of a Goldman Sachs Fund in connection with a reorganization of an Acquired Fund into a Goldman Sachs Fund, (ii) had previously qualified for purchases of Class A shares of the Acquired Funds without the
imposition of a sales load under the guidelines of the applicable Acquired Fund family, and (iii) as of August 24, 2012 held their Goldman Sachs Fund shares directly with the Goldman Sachs Funds Transfer Agent, are permitted to purchase Class
A Shares of a Goldman Sachs Fund without the imposition of a front-end sales load as long as they continue to hold the shares directly at the Transfer Agent.
If shares of the Fund are held in an account with an Authorized Dealer, all recordkeeping, transaction processing and payments of distributions relating to the beneficial owners account will be
performed by the Authorized Dealer, and not by the Fund and its transfer agent. Because the Fund will have no record of the beneficial owners transactions, a beneficial owner should contact the Authorized Dealer to purchase, redeem or exchange
shares, to make changes in or give instructions concerning the account or to obtain information about the account. The transfer of shares in a street name account to an account with another dealer or to an account directly with the Fund
involves special procedures and will require the beneficial owner to obtain historical purchase information about the shares in the account from the Authorized Dealer.
Right of Accumulation (Class A)
A Class A shareholder qualifies
for cumulative quantity discounts if the current purchase price of the new investment plus the shareholders current holdings of existing Class A and/or Class C Shares (acquired by purchase or exchange) of the Fund and Class A,
Class B and/or Class C Shares of any other Goldman Sachs Fund total the requisite amount for receiving a discount. For example, if a shareholder owns shares with a current market value of $65,000 and purchases additional Class A
Shares of any Goldman Sachs Fund with a purchase price of $45,000, the sales charge for the $45,000 purchase would be 3.75% (the rate applicable to a single purchase of $100,000 but less than $250,000). Class A and/or Class C Shares of the
Fund and Class A, Class B and/or Class C Shares of any other Goldman Sachs Fund purchased (i) by an individual, his spouse, his parents and his children, and (ii) by a trustee, guardian or other fiduciary of a single trust
estate or a single fiduciary account, will be combined for the purpose of determining whether a purchase will qualify for such right of accumulation and, if qualifying, the applicable sales charge level. For purposes of applying the right of
accumulation, shares of the Fund and any other Goldman Sachs Fund purchased by an existing client of Goldman Sachs Wealth Management or GS Ayco Holding LLC will be combined with Class A, Class B and/or Class C Shares and other assets
held by all other Goldman Sachs Wealth Management accounts or accounts of GS Ayco Holding LLC, respectively. In addition, Class A and/or Class C Shares of the Fund and Class A, Class B and/or Class C Shares of any other
Goldman Sachs Fund purchased by partners, directors, officers or employees of the same business organization, groups of individuals represented by and investing on the recommendation of the same accounting firm, certain affinity groups or other
similar organizations (collectively, eligible persons) may be combined for the purpose of determining whether a purchase will qualify for the right of accumulation and, if qualifying, the
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applicable sales charge level. This right of accumulation is subject to the following conditions: (i) the business organizations, groups or firms agreement to cooperate in
the offering of the Funds shares to eligible persons; and (ii) notification to the Fund at the time of purchase that the investor is eligible for this right of accumulation. In addition, in connection with SIMPLE IRA accounts, cumulative
quantity discounts are available on a per plan basis if (i) your employee has been assigned a cumulative discount number by Goldman Sachs; and (ii) your account, alone or in combination with the accounts of other plan participants also
invested in Class A, Class B and/or Class C Shares of the Goldman Sachs Funds, totals the requisite aggregate amount as described in the Prospectus.
Statement of Intention (Class A)
If a shareholder anticipates
purchasing at least $100,000 of Class A Shares of the Fund alone or in combination with Class A Shares of any other Goldman Sachs Fund within a 13-month period, the shareholder may purchase shares of the Fund at a reduced sales charge by
submitting a Statement of Intention (the Statement). Shares purchased pursuant to a Statement will be eligible for the same sales charge discount that would have been available if all of the purchases had been made at the same time. The
shareholder or his Authorized Dealer must inform Goldman Sachs that the Statement is in effect each time shares are purchased. There is no obligation to purchase the full amount of shares indicated in the Statement. A shareholder may include the
value of all Class A Shares on which a sales charge has previously been paid as an accumulation credit toward the completion of the Statement, but a price readjustment will be made only on Class A Shares purchased within ninety
(90) days before submitting the Statement. The Statement authorizes the transfer agent to hold in escrow a sufficient number of shares which can be redeemed to make up any difference in the sales charge on the amount actually invested. For
purposes of satisfying the amount specified on the Statement, the gross amount of each investment, exclusive of any appreciation on shares previously purchased, will be taken into account.
The provisions applicable to the Statement, and the terms of the related escrow agreement, are set forth in Appendix C to this SAI.
Cross-Reinvestment of Dividends and Distributions
Shareholders may receive dividends and distributions in additional shares of the same class of the Fund or they may elect to receive them in cash or shares of the same class of other Goldman Sachs Funds
or Service Shares of the Goldman Sachs Financial Square Prime Obligations Fund (the Prime Obligations Fund), if they hold Class C Shares of the Fund.
A Fund shareholder should obtain and read the prospectus relating to the other Goldman Sachs Fund or the Prime Obligations Fund and its shares and consider its investment objective, policies and
applicable fees before electing cross-reinvestment into that Fund. The election to cross-reinvest dividends and capital gain distributions will not affect the tax treatment of such dividends and distributions, which will be treated as received by
the shareholder and then used to purchase shares of the acquired fund. Such reinvestment of dividends and distributions in shares of other Goldman Sachs Funds or the Prime Obligations Fund is available only in states where such reinvestment may
legally be made.
Automatic Exchange Program
A Fund shareholder may elect to exchange automatically a specified dollar amount of shares of the Fund for shares of the same class or an equivalent class of another Goldman Sachs Fund provided the
minimum initial investment requirement has been satisfied. A Fund shareholder should obtain and read the prospectus relating to any other Goldman Sachs Fund and its shares and consider its investment objective, policies and applicable fees and
expenses before electing an automatic exchange into that Goldman Sachs Fund.
Class C Exchanges
As stated in the Prospectus, Goldman Sachs normally begins paying the annual 0.75% distribution fee on Class C Shares to Authorized
Dealers after the shares have been held for one year. When an Authorized Dealer enters into an appropriate agreement with Goldman Sachs and stops receiving this payment on Class C Shares that have been beneficially owned by the Authorized
Dealers customers for at least ten years, those Class C Shares may be exchanged for Class A Shares (which bear a lower distribution fee) of the same Fund at their relative net asset value without a sales charge in recognition of the
reduced payment to the Authorized Dealer.
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Exchanges from Collective Investment Trusts to Goldman Sachs Funds
The Investment Adviser manages a number of collective investment trusts that hold assets of 401(k) plans and other retirement plans (each,
a Collective Investment Trust). An investor in a Collective Investment Trust (or an Intermediary acting on behalf of the investor) may elect to exchange some or all of the interests it holds in a Collective Investment Trust for shares of
one or more of the Goldman Sachs Funds. Generally speaking, Rule 22c-1 under the Act requires a purchase order for shares of a Goldman Sachs Fund to be priced based on the current NAV of the Goldman Sachs Fund that is next calculated after
receipt of the purchase order. A Goldman Sachs Fund will treat a purchase order component of an exchange from an investor in a Collective Investment Trust as being received in good order at the time it is communicated to an Intermediary or the
Transfer Agent, if the amount of shares to be purchased is expressed as a percentage of the value of the investors interest in a designated Collective Investment Trust that it is contemporaneously redeeming (
e.g.
, if the investor
communicates a desire to exchange 100% of its interest in a Collective Investment Trust for shares of a Goldman Sachs Fund). The investors purchase price and the number of Goldman Sachs Fund shares it will acquire will therefore be calculated
as of the pricing of the Collective Investment Trust on the day of the purchase order. Such an order will be deemed to be irrevocable as of the time the Goldman Sachs Funds NAV is next calculated after receipt of the purchase order. An
investor should obtain and read the prospectus relating to any Goldman Sachs Fund and its shares and consider its investment objective, policies and applicable fees and expenses before electing an exchange into that Goldman Sachs Fund. For federal
income tax purposes, an exchange of interests in a Collective Investment Trust for shares of a Goldman Sachs Fund may be subject to tax, and you should consult your tax adviser concerning the tax consequences of an exchange.
Systematic Withdrawal Plan
A systematic withdrawal plan (the Systematic Withdrawal Plan) is available to shareholders of the Fund whose shares are worth at least $5,000. The Systematic Withdrawal Plan provides for
monthly payments to the participating shareholder of any amount not less than $50.
Dividends and capital gain distributions on
shares held under the Systematic Withdrawal Plan are reinvested in additional full and fractional shares of the Fund at net asset value. The transfer agent acts as agent for the shareholder in redeeming sufficient full and fractional shares to
provide the amount of the systematic withdrawal payment. The Systematic Withdrawal Plan may be terminated at any time. Goldman Sachs reserves the right to initiate a fee of up to $5 per withdrawal, upon thirty (30) days written notice to the
shareholder. Withdrawal payments should not be considered to be dividends, yield or income. If periodic withdrawals continuously exceed new purchases and reinvested dividends and capital gains distributions, the shareholders original
investment will be correspondingly reduced and ultimately exhausted. The maintenance of a withdrawal plan concurrently with purchases of additional Class A or Class C Shares would be disadvantageous because of the sales charge imposed on
purchases of Class A Shares or the imposition of a CDSC on redemptions of Class A or Class C Shares. The CDSC applicable to Class A or Class C Shares redeemed under a systematic withdrawal plan may be waived. See
Shareholder Guide in the Prospectus. In addition, each withdrawal constitutes a redemption of shares, and any gain or loss realized must be reported for federal and state income tax purposes. A shareholder should consult his or her own
tax adviser with regard to the tax consequences of participating in the Systematic Withdrawal Plan. For further information or to request a Systematic Withdrawal Plan, please write or call the Transfer Agent.
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APPENDIX A
DESCRIPTION OF SECURITIES RATINGS
Short-Term Credit Ratings
A Standard & Poors
short-term issue credit rating is a current opinion of the creditworthiness of an obligor with respect to a specific financial obligation having an original maturity of no more than 365 days. The following summarizes the rating categories used
by Standard & Poors for short-term issues:
A-1 A short-term obligation rated A-1
is rated in the highest category by Standard & Poors. The obligors 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 obligors 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 obligors capacity to meet its financial commitment on the obligation is satisfactory.
A-3 A short-term obligation rated A-3 exhibits adequate protection parameters. However, adverse economic
conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
B A short-term obligation rated B is regarded as having significant speculative characteristics. Ratings of B-1, B-2, and B-3 may be
assigned to indicate finer distinctions within the B category. The obligor currently has the capacity to meet its financial commitment on the obligation; however, it faces major ongoing uncertainties which could lead to the
obligors inadequate capacity to meet its financial commitment on the obligation.
B-1 A short-term
obligation rated B-1 is regarded as having significant speculative characteristics, but the obligor has a relatively stronger capacity to meet its financial commitments over the short-term compared to other speculative-grade obligors.
B-2 A short-term obligation rated B-2 is regarded as having significant speculative
characteristics, and the obligor has an average speculative-grade capacity to meet its financial commitments over the short-term compared to other speculative-grade obligors.
B-3 A short-term obligation rated B-3 is regarded as having significant speculative characteristics, and the obligor has a relatively weaker capacity to meet its financial
commitments over the short-term compared to other speculative-grade obligors.
C A short-term obligation
rated C is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation.
D A short-term obligation rated D is in payment default. The D rating category is used when
payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poors believes that such payments will be made during such grace period. The D rating also will
be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized.
Local Currency and Foreign Currency Risks Country risk considerations are a standard part of Standard & Poors
analysis for credit ratings on any issuer or issue. Currency of repayment is a key factor in this analysis. An obligors capacity to repay foreign currency obligations may be lower than its capacity to repay obligations in its local currency
due to the sovereign governments own relatively lower capacity to repay external versus domestic debt. These sovereign risk considerations are incorporated in the debt ratings assigned to specific issues. Foreign Currency issuer ratings are
also distinguished from local currency issuer ratings to identify those instances where sovereign risks make them different for the same issuer.
Moodys Investors Service (Moodys) short-term ratings are opinions of the ability of issuers to honor short-term financial obligations. Ratings may be assigned to issuers,
short-term programs or to individual short-term debt instruments. Such obligations generally have an original maturity not exceeding thirteen months, unless explicitly noted.
Moodys 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.
1-A
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.
Fitch, Inc. / Fitch Ratings Ltd. (Fitch) short-term ratings scale
applies to foreign currency and local currency ratings. A short-term rating has a time horizon of less than 13 months for most obligations, or up to three years for U.S. public finance, in line with industry standards, to reflect unique risk
characteristics of bond, tax, and revenue anticipation notes that are commonly issued with terms up to three years. Short-term ratings thus place greater emphasis on the liquidity necessary to meet financial commitments in a timely manner. The
following summarizes the rating categories used by Fitch for short-term obligations:
F1 Securities possess
the highest credit quality. This designation indicates the strongest capacity for timely payment of financial commitments; may have an added + to denote any exceptionally strong credit feature.
F2 Securities possess good credit quality. This designation indicates a satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in the case of the higher ratings.
F3
Securities possess fair credit quality. This designation indicates that the capacity for timely payment of financial commitments is adequate; however, near term adverse changes could result in a reduction to non investment grade.
B Securities possess speculative credit quality. This designation indicates minimal capacity for timely payment of
financial commitments, plus vulnerability to near term adverse changes in financial and economic conditions.
C
Securities possess high default risk. Default is a real possibility. This designation indicates a capacity for meeting financial commitments which is solely reliant upon a sustained, favorable business and economic environment.
D Indicates an entity or sovereign that has defaulted on all of its financial obligations.
NR This designation indicates that Fitch does not publicly rate the associated issuer or issue.
WD This designation indicates that the rating has been withdrawn and is no longer maintained by Fitch.
The following summarizes the ratings used by Dominion Bond Rating Service Limited (DBRS) for commercial paper and short-term
debt:
R-1 (high) Short-term debt rated R-1 (high) is of the highest credit quality, and
indicates an entity possessing unquestioned ability to repay current liabilities as they fall due. Entities rated in this category normally maintain strong liquidity positions, conservative debt levels, and profitability that is both stable and
above average. Companies achieving an R-1 (high) rating are normally leaders in structurally sound industry segments with proven track records, sustainable positive future results, and no substantial qualifying negative factors. Given
the extremely tough definition DBRS has established for an R-1 (high), few entities are strong enough to achieve this rating.
R-1 (middle) Short-term debt rated R-1 (middle) is of superior credit quality and, in most cases, ratings in this category differ from R-1 (high) credits by only
a small degree. Given the extremely tough definition DBRS has established for the R-1 (high) category, entities rated R-1 (middle) are also considered strong credits, and typically exemplify above average strength in key
areas of consideration for the timely repayment of short-term liabilities.
R-1 (low) Short-term debt rated
R-1 (low) is of satisfactory credit quality. The overall strength and outlook for key liquidity, debt and profitability ratios are not normally as favorable as with higher rating categories, but these considerations are still
respectable. Any qualifying negative factors that exist are considered manageable, and the entity is normally of sufficient size to have some influence in its industry.
R-2 (high) Short-term debt rated R-2 (high) is considered to be at the upper end of adequate credit quality. The ability to repay obligations as they mature remains
acceptable, although the overall strength and outlook for key liquidity, debt, and profitability ratios is not as strong as credits rated in the R-1 (low) category. Relative to the latter category, other shortcomings often include areas
such as stability, financial flexibility, and the relative size and market position of the entity within its industry.
R-2 (middle) Short-term debt rated R-2 (middle) is considered to be of adequate credit quality. Relative to
the R-2 (high) category, entities rated R-2 (middle) typically have some combination of higher volatility, weaker debt or liquidity positions, lower future cash flow capabilities, or are negatively impacted by a weaker
industry. Ratings in this category would be more vulnerable to adverse changes in financial and economic conditions.
R-2
(low) Short-term debt rated R-2 (low) is considered to be at the lower end of adequate credit quality, typically having some combination of challenges that are not acceptable for an R-2 (middle) credit. However,
R-2 (low) ratings still display a level of credit strength that allows for a higher rating than the R-3 category, with this distinction often reflecting the issuers liquidity profile.
2-A
R-3 Short-term debt rated R-3 is considered to be at the
lowest end of adequate credit quality, one step up from being speculative. While not yet defined as speculative, the R-3 category signifies that although repayment is still expected, the certainty of repayment could be impacted by a
variety of possible adverse developments, many of which would be outside the issuers control. Entities in this area often have limited access to capital markets and may also have limitations in securing alternative sources of liquidity,
particularly during periods of weak economic conditions.
R-4 Short-term debt rated R-4 is
speculative. R-4 credits tend to have weak liquidity and debt ratios, and the future trend of these ratios is also unclear. Due to its speculative nature, companies with R-4 ratings would normally have very limited access to
alternative sources of liquidity. Earnings and cash flow would typically be very unstable, and the level of overall profitability of the entity is also likely to be low. The industry environment may be weak, and strong negative qualifying factors
are also likely to be present.
R-5 Short-term debt rated R-5 is highly speculative. There is a
reasonably high level of uncertainty as to the ability of the entity to repay the obligations on a continuing basis in the future, especially in periods of economic recession or industry adversity. In some cases, short term debt rated
R-5 may have challenges that if not corrected, could lead to default.
D A security rated
D implies the issuer has either not met a scheduled payment or the issuer has made it clear that it will be missing such a payment in the near future. In some cases, DBRS may not assign a D rating under a bankruptcy
announcement scenario, as allowances for grace periods may exist in the underlying legal documentation. Once assigned, the D rating will continue as long as the missed payment continues to be in arrears, and until such time as the rating
is discontinued or reinstated by DBRS.
Long-Term Credit Ratings
The following summarizes the ratings used by Standard & Poors for long-term issues:
AAA An obligation rated AAA has the highest rating assigned by Standard & Poors. The
obligors 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 obligors 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 obligors 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.
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 obligors 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 obligors 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 instruments terms.
D An obligation rated D is in payment default. The D rating category is used when payments on
an obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poors believes that such payments will be made during such grace period. The D rating also will be used upon
the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized.
3-A
Plus (+) or minus (-) The ratings from AA to CCC may be
modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories.
NR This indicates that no rating has been requested, that there is insufficient information on which to base a rating,
or that Standard & Poors does not rate a particular obligation as a matter of policy.
Local Currency and
Foreign Currency Risks Country risk considerations are a standard part of Standard & Poors analysis for credit ratings on any issuer or issue. Currency of repayment is a key factor in this analysis. An obligors capacity
to repay foreign currency obligations may be lower than its capacity to repay obligations in its local currency due to the sovereign governments own relatively lower capacity to repay external versus domestic debt. These sovereign risk
considerations are incorporated in the debt ratings assigned to specific issues. Foreign currency issuer ratings are also distinguished from local currency issuer ratings to identify those instances where sovereign risks make them different for the
same issuer.
The following summarizes the ratings used by Moodys for long-term debt:
Aaa Obligations rated Aaa are judged to be of the highest quality, with minimal 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 subject to moderate credit risk. They are considered medium-grade
and as such may possess certain speculative characteristics.
Ba Obligations rated Ba are judged
to have speculative elements 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 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 of bonds and are typically in default, with little
prospect for recovery of principal or interest.
Note: Moodys appends numerical modifiers 1, 2, and 3 to each generic
rating classification from Aa 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.
The following summarizes long-term ratings used by Fitch:
AAA Securities considered to be of the highest credit quality. AAA ratings denote the lowest
expectation of credit risk. They are assigned only in case of exceptionally strong capacity for payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.
AA Securities considered to be of 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 Securities considered to be of 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 changes in circumstances or in economic conditions than is the case for higher ratings.
BBB Securities considered to be of good credit quality. BBB ratings indicate that there is currently expectations of low credit risk. The capacity for payment of financial
commitments is considered adequate but adverse changes in circumstances and economic conditions are more likely to impair this capacity. This is the lowest investment grade category.
BB Securities considered to be speculative. BB ratings indicate that there is a possibility of credit risk
developing, particularly as the result of adverse economic change over time; however, business or financial alternatives may be available to allow financial commitments to be met. Securities rated in this category are not investment grade.
B Securities considered to be highly speculative. For issuers and performing obligations, B
ratings indicate that significant credit risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is contingent upon a sustained, favorable business and economic
environment. For individual obligations, may indicate distressed or defaulted obligations with potential for extremely high recoveries. Such obligations would possess a Recovery Rating of RR1 (outstanding).
4-A
CCC For issuers and performing obligations, default is a real
possibility. Capacity for meeting financial commitments is solely reliant upon sustained, favorable business or economic conditions. For individual obligations, may indicate distressed or defaulted obligations with potential for average to superior
levels of recovery. Differences in credit quality may be denoted by plus/minus distinctions. Such obligations typically would possess a Recovery Rating of RR2 (superior), or RR3 (good) or RR4 (average).
CC For issuers and performing obligations, default of some kind appears probable. For individual
obligations, may indicate distressed or defaulted obligations with a Recovery Rating of RR4 (average) or RR5 (below average).
C For issuers and performing obligations, default is imminent. For individual obligations, may indicate distressed or defaulted obligations with potential for below-average to poor
recoveries. Such obligations would possess a Recovery Rating of RR6 (poor).
RD Indicates an
entity that has failed to make due payments (within the applicable grace period) on some but not all material financial obligations, but continues to honor other classes of obligations.
D Indicates an entity or sovereign that has defaulted on all of its financial obligations.
Plus (+) or minus (-) may be appended to a rating to denote relative status within major rating categories. Such suffixes are not
added to the AAA category or to categories below CCC.
NR Denotes that Fitch does
not publicly rate the associated issue or issuer.
WD Indicates that the rating has been withdrawn and is no
longer maintained by Fitch.
The following summarizes the ratings used by DBRS for long-term debt:
AAA Long-term debt rated AAA is of the highest credit quality, with exceptionally strong protection for the
timely repayment of principal and interest. Earnings are considered stable, the structure of the industry in which the entity operates is strong, and the outlook for future profitability is favorable. There are few qualifying factors present that
would detract from the performance of the entity. The strength of liquidity and coverage ratios is unquestioned and the entity has established a credible track record of superior performance. Given the extremely high standard that DBRS has set for
this category, few entities are able to achieve a AAA rating.
AA Long-term debt rated
AA is of superior credit quality, and protection of interest and principal is considered high. In many cases they differ from long-term debt rated AAA only to a small degree. Given the extremely restrictive definition DBRS
has for the AAA category, entities rated AA are also considered to be strong credits, typically exemplifying above-average strength in key areas of consideration and unlikely to be significantly affected by reasonably
foreseeable events.
A Long-term debt rated A is of satisfactory credit quality. Protection of
interest and principal is still substantial, but the degree of strength is less than that of AA rated entities. While A is a respectable rating, entities in this category are considered to be more susceptible to adverse
economic conditions and have greater cyclical tendencies than higher-rated securities.
BBB Long-term debt
rated BBB is of adequate credit quality
.
Protection of interest and principal is considered acceptable, but the entity is fairly susceptible to adverse changes in financial and economic conditions, or there may be other adverse
conditions present which reduce the strength of the entity and its rated securities.
BB
Long-term
debt rated BB is defined to be speculative and non-investment grade, where the degree of protection afforded interest and principal is uncertain, particularly during periods of economic recession. Entities in the BB range
typically have limited access to capital markets and additional liquidity support. In many cases, deficiencies in critical mass, diversification, and competitive strength are additional negative considerations.
B Long-term debt rated B is considered highly speculative and there is a reasonably high level of
uncertainty as to the ability of the entity to pay interest and principal on a continuing basis in the future, especially in periods of economic recession or industry adversity.
CCC, CC and C Long-term debt rated in any of these categories is very highly speculative and is in
danger of default of interest and principal. The degree of adverse elements present is more severe than long-term debt rated B. Long-term debt rated below B often have features which, if not remedied, may lead to default. In
practice, there is little difference between these three categories, with CC and C normally used for lower ranking debt of companies for which the senior debt is rated in the CCC to B range.
D
A security rated D implies the issuer has either not met a scheduled payment of
interest or principal or that the issuer has made it clear that it will miss such a payment in the near future. In some cases, DBRS may not assign a D rating under a bankruptcy announcement scenario, as allowances for grace periods may
exist in the underlying legal documentation. Once assigned, the D rating will continue as long as the missed payment continues to be in arrears, and until such time as the rating is discontinued or reinstated by DBRS.
5-A
(high, low) Each rating category is denoted by the
subcategories high and low. The absence of either a high or low designation indicates the rating is in the middle of the category. The AAA and D categories do not
utilize high, middle, and low as differential grades.
Municipal Note Ratings
A Standard & Poors U.S. municipal note rating reflects the liquidity factors and market access risks unique to notes. Notes
due in three years or less will likely receive a note rating. Notes maturing beyond three years will most likely receive a long-term debt rating. The following criteria will be used in making that assessment:
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Amortization schedule-the larger the final maturity relative to other maturities, the more likely it will be treated as a note; and
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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.
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Note rating symbols are as follows:
SP-1 The issuers of these municipal notes exhibit a strong capacity to pay principal and interest. Those issues determined to possess a very strong capacity to pay debt service are
given a plus (+) designation.
SP-2 The issuers of these municipal notes exhibit a satisfactory
capacity to pay principal and interest, with some vulnerability to adverse financial and economic changes over the term of the notes.
SP-3 The issuers of these municipal notes exhibit speculative capacity to pay principal and interest.
Moodys uses three rating categories for short-term municipal obligations that are considered investment grade. These ratings are designated as Municipal Investment Grade (MIG) and are
divided into three levels MIG-1 through MIG-3. In addition, those short-term obligations that are of speculative quality are designated SG, or speculative grade. MIG ratings expire at the maturity of the
obligation. The following summarizes the ratings used by Moodys for these short-term obligations:
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.
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
Moodys evaluation of the degree of risk associated with scheduled principal and interest payments. The second element represents Moodys evaluation of the degree of risk associated with the ability to receive purchase price upon demand
(demand feature), using a variation of the MIG rating scale, the Variable Municipal Investment Grade or VMIG rating.
When either the long- or short-term aspect of a VRDO is not rated, that piece is designated NR,
e.g.
, Aaa/NR or NR/VMIG-1.
VMIG rating expirations are a function of each issues specific structural or credit features.
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.
6-A
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.
Fitch uses the same ratings for municipal securities as described above for other short-term credit ratings.
About Credit Ratings
A Standard & Poors issue credit rating is a current opinion of the creditworthiness of an obligor with respect to a specific financial obligation, a specific class of financial obligations,
or a specific financial program (including ratings on medium-term note programs and commercial paper programs). It takes into consideration the creditworthiness of guarantors, insurers, or other forms of credit enhancement on the obligation and
takes into account the currency in which the obligation is denominated. The issue credit rating is not a recommendation to purchase, sell, or hold a financial obligation, inasmuch as it does not comment as to market price or suitability for a
particular investor.
Moodys credit ratings must be construed solely as statements of opinion and not as statements of
fact or recommendations to purchase, sell or hold any securities.
Fitchs 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. Fitch credit ratings are used by investors as indications of the likelihood of
receiving their money back in accordance with the terms on which they invested. Fitchs credit ratings cover the global spectrum of corporate, sovereign (including supranational and sub-national), financial, bank, insurance, municipal and other
public finance entities and the securities or other obligations they issue, as well as structured finance securities backed by receivables or other financial assets.
DBRS credit ratings are not buy, hold or sell recommendations, but rather the result of qualitative and quantitative analysis focusing solely on the credit quality of the issuer and its underlying
obligations.
7-A
Effective: February 2012