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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 26, 2009 File No. 811-21638 UNITED STATES WASHINGTON, D.C. 20549
SECURITIES AND EXCHANGE COMMISSION
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940 | x |
AMENDMENT No. 12
JPMORGAN INSTITUTIONAL TRUST
(Exact Name of Registrant as Specified in Charter)
245 Park Avenue
New York, New York 10167
(Address of Principal Executive Offices)
Registrants Telephone Number, including Area Code (212) 837-2524
Frank J. Nasta, Esq.
JPMorgan Chase & Co.
245 Park Avenue
New York, New York 10167
(Name and Address of Agent for Service)
Copies to:
Jessica K. Ditullio, Esq. JPMorgan Chase & Co. 1111 Polaris Parkway, Mail Code OH1-0152 Columbus, Ohio 43240 |
EXPLANATORY NOTE
This Amendment is filed by JPMorgan Institutional Trust (the Registrant). This Registration Statement has been filed by the Registrant pursuant to Section 8(b) of the Investment Company Act of 1940, as amended. However, shares of beneficial interest in the Registrant are not being registered under the Securities Act of 1933, as amended (the Securities Act), because such shares are issued solely in private placement transactions that do not involve a public offering within the meaning of Section 4(2) of the Securities Act. The shares have not been registered under any state securities laws in reliance upon various exemptions provided by those laws. Investments in the shares of the Registrant may be made only by accredited investors within the meaning of Regulation D under the Securities Act. This Registration Statement does not constitute an offer to sell, or the solicitation of an offer to buy, any shares of the Registrant.
Prospective Investor
|
Copy # ______________ |
DO NOT COPY OR CIRCULATE |
JPMorgan
Intermediate Bond Trust |
1 | |||||
JPMorgan Core
Bond Trust |
7 | |||||
JPMorgan
Equity Index Trust |
13 | |||||
The
Funds Management and Administration |
18 | |||||
Subscribing
for and Purchasing and Redeeming Fund Shares |
19 | |||||
Purchasing
Fund Shares |
19 | |||||
Redeeming
Fund Shares |
20 | |||||
Shareholder
Information |
22 | |||||
Dividend
Policies |
22 | |||||
Tax Treatment
of Shareholders |
22 | |||||
Shareholder
Statements and Reports |
23 | |||||
Availability
of Proxy Voting Record |
23 | |||||
Portfolio
Holdings Disclosure |
23 | |||||
Investment
Practices |
25 | |||||
Risk and
Reward Elements of the Funds |
32 | |||||
How to Reach Us |
Back cover |
|
There is no assurance that the Fund will meet its investment objective. |
|
The Fund does not represent a complete investment program. |
Best Quarter |
4th quarter, 200 8 |
3.42 | % | Worst Quarter |
3rd quarter, 200 8 |
1.39 | % |
1 |
The Funds fiscal year end is the last day of February. |
Past 1 Year |
Life of Fund1 |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
INTERMEDIATE
BOND TRUST |
|||||||||||
Return Before
Taxes |
3.97 | 4.38 | |||||||||
Return After
Taxes |
2.16 | 2.62 | |||||||||
Return After
Taxes on Distributions |
2.56 | 2.70 | |||||||||
BARCLAYS
CAPITAL INTERMEDIATE U.S. GOVERNMENT/CREDIT INDEX2,ˆ |
|||||||||||
(Reflects No
Deduction for Fees, Expenses or Taxes) |
5.08 | 4.56 | |||||||||
LIPPER
SHORT-INTERMEDIATE U.S. GOVERNMENT FUNDS INDEX3,ˆ |
|||||||||||
(Reflects No
Deduction for Taxes) |
5.35 | 4.63 |
1 |
The Fund commenced operations on 2/7/05. Performance for the benchmark s is from 2/28/05. |
2 |
The Barclays Capital Intermediate U.S. Government/Credit Index (formerly the Lehman Brothers Intermediate U.S. Government/Credit Index) is an unmanaged index comprised of intermediate maturity U.S. treasury and agency securities and investment grade corporate securities. The performance of the index does not reflect the deduction of expenses associated with a mutual fund, such as investment management fees. By contrast, the performance of the Fund reflects the deduction of mutual fund expenses . |
3 |
The performance of the Lipper Short-Intermediate U.S. Government Funds Index includes expenses associated with a mutual fund, such as investment management fees. These expenses are not identical to the expenses charged by the Fund. |
ˆ |
Investors cannot invest directly in an index. |
Management
Fees |
0.30 | % | ||||
Other
Expenses1 |
0. 19 | |||||
Total Annual
Fund Operating Expenses |
0. 49 | |||||
Fee Waiver
and/or Expense Reimbursement 2 |
(0.34 | ) | ||||
Net
Expenses 2 |
0.1 5 |
1 |
Other Expenses have been calculated based on the actual amounts incurred in the most recent fiscal year. |
2 |
JPMIM and the Trusts Administrator have contractually agreed to waive fees and/or reimburse expenses to the extent that T otal A nnual O perating E xpenses of the Fund (excluding a cquired f und f ees and e xpenses, dividend expenses relating to short sales, interest, taxes and extraordinary expenses) exceed 0.15% of its average daily net assets through 6/30/ 10 . In addition, the Funds service providers may voluntarily waive or reimburse certain of their fees, as they may determine, from time to time. |
1 Year |
3 Years |
5 Years |
10 Years |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
15 |
123 |
240 |
583 |
|
There is no assurance that the Fund will meet its investment objective. |
|
The Fund does not represent a complete investment program. |
Best
Quarter |
3rd quarter,
2006 |
3.66 | % | Worst
Quarter |
3rd
quarter, 200 8 |
1.60 | % |
1 |
The Funds fiscal year end is the last day of February. |
Past 1 Year |
Life of Fund1 |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
CORE BOND
TRUST |
|||||||||||
Return Before
Taxes |
3.06 | 4.23 | |||||||||
Return After
Taxes |
1.11 | 2.40 | |||||||||
Return After
Taxes on Distributions |
1.97 | 2.53 | |||||||||
BARCLAYS
CAPITAL U.S. AGGREGATE INDEX2,ˆ |
|||||||||||
(Reflects No
Deduction for Fees, Expenses or Taxes) |
5.24 | 4.66 | |||||||||
LIPPER
INTERMEDIATE U.S. GOVERNMENT FUNDS INDEX3,ˆ |
|||||||||||
(Reflects No
Deduction for Taxes) |
8.14 | 5.52 |
1 |
The Fund commenced operations on 2/7/05. Performance for the benchmark s is from 2/28/05. |
2 |
The Barclays Capital U.S. Aggregate Index (formerly the Lehman Brothers U.S. Aggregate Index) is an unmanaged index that represents securities that are SEC-registered, taxable and dollar denominated. The performance of the index does not reflect the deduction of expenses associated with a mutual fund, such as investment management fees. By contrast, the performance of the Fund reflects the deduction of mutual fund expenses . |
3 |
The performance of the Lipper Intermediate U.S. Government Funds Index includes expenses associated with a mutual fund, such as investment management fees. These expenses are not identical to the expenses charged by the Fund. |
ˆ |
Investors cannot invest directly in an index. |
Management
Fees |
0.30 | % | ||||
Other
Expenses1 |
0.1 4 | |||||
Total Annual
Fund Operating Expenses |
0.4 4 | |||||
Fee Waiver
and/or Expense Reimbursement 2 |
(0.2 9 ) | |||||
Net
Expenses 2 |
0.1 5 |
1 |
Other Expenses have been calculated based on the actual amounts incurred in the most recent fiscal year. |
2 |
JPMIM and the Trusts Administrator have contractually agreed to waive fees and/or reimburse expenses to the extent that T otal A nnual O perating E xpenses of the Fund (excluding a cquired f und f ees and e xpenses, dividend expenses relating to short sales, interest, taxes and extraordinary expenses) exceed 0.15% of its average daily net assets through 6/30/ 1 0. In addition, the Funds service providers may voluntarily waive or reimburse certain of their fees, as they may determine, from time to time. |
1 Year |
3 Years |
5 Years |
10 Years |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
15 |
112 |
217 |
526 |
1 |
S&P 500 is a registered service mark of Standard & Poors Corporation, which does not sponsor and is in no way affiliated with the Fund. |
|
There is no assurance that the Fund will meet its investment objective. |
|
The Fund does not represent a complete investment program. |
Best
Quarter |
4th quarter,
2006 |
6.63 | % | Worst
Quarter |
4th quarter,
200 8 |
22.13 | % |
1 |
The Funds fiscal year end is the last day of February. |
Past 1 Year |
Life of Fund1 |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
EQUITY INDEX
TRUST |
|||||||||||
Return Before
Taxes |
(37.14 | ) | (5.31 | ) | |||||||
Return After
Taxes |
(37.40 | ) | (5.71 | ) | |||||||
Return After
Taxes on Distributions |
(23.75 | ) | (4.35 ) | ||||||||
S&P 500
INDEX2,ˆ |
|||||||||||
(Reflects No
Deduction for Fees, Expenses or Taxes) |
(37.00 | ) | (4.72 | ) | |||||||
LIPPER
S&P 500 OBJECTIVE FUNDS INDEX3,ˆ |
|||||||||||
(Reflects No
Deduction for Taxes) |
(37.08 ) | (5.53 | ) |
1 |
The Fund commenced operations on 2/7/05. Performance for the benchmark s is from 2/28/05. |
2 |
The S&P 500 Index is an unmanaged index generally representa tive of the performance of large companies in the U.S. stock market . The performance of the index does not reflect the deduction of expenses associated with a mutual fund, such as investment management fees. By contrast, the performance of the Fund reflects the deduction of mutual fund expenses . |
3 |
The performance of the Lipper S&P 500 Objective Funds Index includes expenses associated with a mutual fund, such as investment management fees. These expenses are not identical to the expenses charged by the Fund. |
ˆ |
Investors cannot invest directly in an index. |
Management
Fees |
0.25 | % | ||||
Other
Expenses1 |
0.1 6 | |||||
Total Annual
Fund Operating Expenses |
0.4 1 | |||||
Fee Waiver
and/or Expense Reimbursement2 |
(0. 31 ) | |||||
Net
Expenses2 |
0.10 |
1 |
Other Expenses have been calculated based on actual amounts incurred in the most recent fiscal year. |
2 |
JPMIM and the Trusts Administrator have contractually agreed to waive fees and/or reimburse expenses to the extent that T otal A nnual O perating E xpenses of the Fund (excluding acquired fund fees and expenses, dividend expenses relating to short sales, interest, taxes and extraordinary expenses) exceed 0.10% of the average daily net assets through 6/ 30 /1 0. In addition, the Funds service providers may voluntarily waive or reimburse certain of their fees, as they may determine, from time to time. |
1 Year |
3 Years |
5 Years |
10 Years |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
10 |
100 |
199 |
487 |
JPMorgan
Intermediate Bond Trust |
0. 06 | % | ||||
JPMorgan Core
Bond Trust |
0.1 1 | |||||
JPMorgan
Equity Index Trust |
0.0 4 |
|
The minimum initial investment for shares of the JPMorgan Intermediate Bond Trust is $5,000,000 and for shares of the JPMorgan Core Bond Trust and the JPMorgan Equity Index Trust is $10,000,000. |
|
You are required to maintain a minimum account balance equal to the minimum initial investment in each Fund. |
|
The Funds reserve the right to waive any investment minimum. For further information on investment minimum waivers, contact your client relationship or client service manager. |
|
Purchases may be made on any business day. This includes any day that the Funds are open for business, other than weekends and days on which the New York Stock Exchange (NYSE) is closed, including the following holidays: New Years Day, Martin Luther King, Jr. Day, Presidents Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Investors should contact their client relationship or client service manager to make initial investment requests and in order to request to purchase additional shares. |
|
Purchase requests received by the Fund or an authorized agent of the Fund in proper form before 4:00 p.m. Eastern Time (ET) will be effective that day. On occasion, the NYSE will close before 4:00 p.m. ET. When that happens, purchase requests received by the Fund or an authorized agent of the Fund after the NYSE closes will be effective the following business day. |
|
Share ownership is electronically recorded; therefore, no certificates will be issued. |
|
The J.P. Morgan Funds do not authorize market timing and use reasonable methods to identify market timers and to prevent such activity. However, there can be no assurance that these methods will prevent market timing or other trading that may be deemed abusive. Market timing is an investment strategy using frequent purchases, redemptions and/or exchanges in an attempt to profit from short-term market movements. Market timing may result in dilution of the value of Fund shares held by long-term shareholders, disrupt portfolio management and increase Fund expenses for all shareholders. Although market timing may affect any Fund, these |
risks may be higher for Funds that invest significantly in non-U.S. securities or thinly traded securities (e.g., certain small cap securities), such as international, global or emerging market funds or small cap funds. For example, when a Fund invests in securities trading principally in non-U.S. markets that close prior to the close of the NYSE, market timers may seek to take advantage of the difference between the prices of these securities at the close of their non-U.S. markets and the value of such securities when the Fund calculates its net asset value. The J.P. Morgan Funds will prohibit any purchase order (including exchanges) with respect to one investor, a related group of investors or their agent(s), where they detect a pattern of either purchases and sales of one of the J.P. Morgan Funds, that indicates market timing or trading that they determine is abusive. |
|
The J.P. Morgan Funds Board of Trustees has adopted policies and procedures that use a variety of methods to identify market timers, including reviewing round trips in and out of the J.P. Morgan Funds by investors. A round trip includes a purchase into a Fund followed or preceded by a redemption out of the same Fund. The Fund will reject your purchase orders for a period of at least 90 days if it detects that you have completed two round trips within 60 days within the same Fund. In identifying market timers, the Fund may also consider activity of accounts that it believes to be under common ownership or control. |
|
Market timers may disrupt portfolio management and harm Fund performance. To the extent that the J.P. Morgan Funds are unable to identify market timers effectively, long-term investors may be adversely affected. Although the Funds use a variety of methods to detect and deter market timing, there is no assurance that the J.P. Morgan Funds will be able to identify and eliminate all market timing strategies . For example, certain accounts, which are known as omnibus accounts, include multiple investors and such accounts typically provide the Funds with a net purchase or redemption order on any given day where purchasers of Fund shares and redeemers of Fund shares are netted against one another and the identity of individual purchasers and redeemers whose orders are aggregated are not known by the Funds. While the Funds seek to monitor for market timing activities in omnibus accounts, the netting effect limits the Fund s ability to locate and eliminate individual market timers from the Funds and there can be no assurances that the Funds will be able to do so. |
|
Subject to the foregoing, the Funds will seek to apply these policies and restrictions as uniformly as practicable, except in cases of purchases, redemptions and exchanges made on a systematic basis, automatic reinvestments of dividends and distributions or purchases, redemptions or exchanges that are part of a rebalancing program, such as a wrap program, or as part of a bona fide asset allocation program. Please see the Supplement for a further description of these arrangements. |
|
In addition to rejecting purchase orders in connection with suspected market timing activities, the Funds can reject a purchase order (including purchase orders for the Funds listed above) for any reason, including purchase orders that it does not think are in the best interests of a Fund and/or its shareholders or if they determine the trading to be abusive. |
|
Shares are sold at net asset value (NAV). |
|
NAV per share is calculated by dividing the total market value of a Funds investments and other assets (minus liabilities) by the number of outstanding shares in that class. |
|
The market value of a Funds investments is determined primarily on the basis of readily available market quotations. Certain short-term securities are valued at amortized cost, which approximates market value. If market quotations are not readily available or if available market quotations are determined not to be reliable or if a securitys value has been materially affected by events occurring after the close of trading on the exchange or market on which the security is principally traded (for example, a natural disaster affecting an entire country or region, or an event that affects an individual company), but before a Funds NAV is calculated, that security may be valued at its fair value in accordance with policies and procedures adopted by the J.P. Morgan Funds Board of Trustees. A securitys valuation may differ depending on the method used for determining value. Shareholders who purchase or redeem shares when NAV has been determined using fair valuation procedures may receive a number of shares or redemption proceeds that is greater or lower than they would have received if securities were not valued using the Trusts fair valuation procedures. The Board of Trustees receives regular reports concerning the operations of the fair valuation procedures. |
|
A Funds NAV changes every day. NAV is calculated each business day following the close of the NYSE at 4:00 p.m. ET. On occasion, the NYSE will close before 4:00 p.m. ET. When that happens, NAV will be calculated as of the time the NYSE closes. |
1. |
Trading on the NYSE is restricted; |
2. |
The NYSE is closed (other than weekend or holiday closings); |
3. |
Federal securities laws permit; |
4. |
The SEC has permitted a suspension; or |
5. |
An emergency exists, as determined by the SEC. |
FUND NAME |
FUND CODE | |||||
---|---|---|---|---|---|---|
JPMorgan Core
Bond Trust |
1 | |||||
JPMorgan
Intermediate Bond Trust |
2 | |||||
JPMorgan
Equity Index Trust |
3 |
INSTRUMENT | FUND CODE | RISK TYPE | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
Adjustable Rate Mortgage Loans (ARMs): Loans in a mortgage pool which provide for a fixed initial mortgage
interest rate for a specified period of time, after which the rate may be subject to periodic adjustments. |
1 , 2 |
Credit Interest Rate Market Political Prepayment |
||||||||
Asset-Backed Securities: Securities secured by company receivables, home equity loans, truck and auto loans,
leases and credit card receivables or other securities backed by other types of receivables or other assets. |
1 , 2 |
Credit Interest Rate Market Political Prepayment |
||||||||
Bank Obligations: Bankers acceptances, certificates of deposit and time deposits. Bankers acceptances
are bills of exchange or time drafts drawn on and accepted by a commercial bank. Maturities are generally six months or less. Certificates of deposit
and time deposits are non-negotiable receipts issued by a bank in exchange for the deposit of funds. |
1 3 |
Credit Currency Interest Rate Liquidity Market Political |
||||||||
Borrowings: A Fund may borrow for temporary purposes and/or for investment purposes. Such a practice will result
in leveraging of a Funds assets and may cause a Fund to liquidate portfolio positions when it would not be advantageous to do so. A Fund must
maintain continuous asset coverage of 300% of the amount borrowed, with the exception for borrowings not in excess of 5% of a Funds total assets
made for temporary administrative purposes. |
1 3 |
Credit Interest Rate Market |
||||||||
Call and Put Options: A call option gives the buyer the right to buy, and obligates the seller of the option to
sell a security at a specified price at a future date. A put option gives the buyer the right to sell, and obligates the seller of the option to buy a
security at a specified price at a future date. A Fund will sell only covered call and secured put options. |
1 3 |
Credit Leverage Liquidity Management Market |
INSTRUMENT | FUND CODE | RISK TYPE | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
Commercial Paper: Secured and unsecured short-term promissory notes issued by corporations and other entities.
Maturities generally vary from a few days to nine months. |
1 3 |
Credit Currency Interest Rate Liquidity Market Political |
||||||||
Common Stock: Shares of ownership of a company. |
3 |
Market |
||||||||
Common Stock Warrants and Rights: Securities, typically issued with preferred stock or bonds, that give the holder
the right to buy a proportionate amount of common stock at a specified price. |
3 |
Credit Market |
||||||||
Convertible Securities: Bonds or preferred stock that can convert to common stock. |
13 |
Credit Currency Interest Rate Liquidity Market Political Valuation |
||||||||
Corporate Debt Securities: May include bonds and other debt securities of domestic and foreign issuers, including
obligations of industrial, utility, banking and other corporate issuers. |
13 |
Credit Currency Interest Rate Liquidity Market Political Valuation |
||||||||
Credit Default Swaps (CDS s ): A swap agreement between two parties pursuant to which one party pays the
other a fixed periodic coupon for the specified life of the agreement. The other party makes no payment unless a credit event, relating to a
predetermined reference asset, occurs. If such an event occurs, the party will then make a payment to the first party, and the swap will
terminate. |
1 , 2 |
Credit Currency Interest Rate Leverage Liquidity Management Market Political Valuation |
||||||||
Custodial Receipts: Certain Funds may acquire securities in the form of custodial receipts that evidence ownership
of future interest payments, principal payments or both on certain U.S. Treasury notes or bonds in connection with programs sponsored by banks and
brokerage firms. These are not considered to be U.S. government securities. These notes and bonds are held in custody by a bank on behalf of the owners
of the receipts. |
1 , 2 |
Credit Liquidity Market |
||||||||
Demand Features: Securities that are subject to puts and standby commitments to purchase the securities at a fixed
price (usually with accrued interest) within a fixed period of time following demand by a Fund. |
1 , 2 |
Liquidity Management Market |
||||||||
Emerging Market Securities: Securities issued by issuers or governments in countries with emerging economies or
securities markets. |
1, 2 |
Foreign Investment |
INSTRUMENT | FUND CODE | RISK TYPE | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
Exchange Traded Funds (ETFs): Ownership interest in unit investment trusts, depositary receipts, and other pooled
investment vehicles that hold a portfolio of securities or stocks designed to track the price performance and dividend yield of a particular broad
based, sector or international index. ETFs include a wide range of investments such as iShares, Standard & Poors Depositary Receipts (SPDRs)
and NASDAQ 100s. |
1 3 |
Market Investment Company |
||||||||
Foreign Investments: Equity and debt securities (e.g., bonds and commercial paper) of foreign entities and
obligations of foreign branches of U.S. banks and foreign banks. Foreign securities may also include American Depositary Receipts (ADRs), Global
Depositary Receipts (GDRs), European Depositary Receipts (EDRs) and American Depositary Securities. |
13 |
Foreign Investment Liquidity Market Political Prepayment |
||||||||
Inflation-Linked Debt Securities: Includes fixed and floating rate debt securities of varying maturities issued by
the U.S. government as well as securities issued by other entities such as corporations, foreign governments and foreign issuers. |
1 , 2 |
Credit Currency Interest Rate Political |
||||||||
Inverse Floating Rate Instruments: Leveraged variable debt instruments with interest rates that reset in the
opposite direction from the market rate of interest to which the inverse floater is indexed. |
1 , 2 |
Credit Leverage Market |
||||||||
Investment Company Securities: Shares of other investment companies, including money market funds for which the
a dviser and/or its affiliates serve as investment adviser or administrator. The a dviser will waive certain fees when investing in funds
for which it serves as investment adviser, to the extent required by law. |
1 3 |
Market Investment Company |
||||||||
Loan Assignments and Participations: Assignments of, or participations in, all or a portion of loans to
corporations or to governments, including governments of less developed countries. |
1 , 2 |
Credit Currency Extension Foreign Investment Interest Rate Liquidity Market Political Prepayment |
||||||||
Master Limited Partnerships: Limited partnerships that are publicly traded on a securities
exchange. |
3 |
Market |
||||||||
Mortgages (Directly Held): Debt instruments secured by real property. |
1 , 2 |
Credit Environmental Extension Interest Rate Liquidity Market Natural Event Political Prepayment Valuation |
INSTRUMENT | FUND CODE | RISK TYPE | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
Mortgage-Backed Securities: Debt obligations secured by real estate loans and pools of loans including
collateralized mortgage obligations (CMOs), commercial mortgage-backed securities (CMBSs), and other asset-backed structures. |
1 , 2 |
Credit Currency Extension Interest Rate Leverage Liquidity Market Political Prepayment Tax Valuation |
||||||||
Mortgage Dollar Rolls: A transaction in which a Fund sells securities for delivery in a current month and
simultaneously contracts with the same party to repurchase similar but not identical securities on a specified future date. |
1 , 2 |
Currency Extension Interest Rate Leverage Liquidity Market Political Prepayment |
||||||||
Municipal Securities: Securities issued by a state or political subdivision to obtain funds for various public
purposes. Municipal securities include private activity bonds and industrial development bonds, as well as general obligation notes, tax anticipation
notes, bond anticipation notes, revenue anticipation notes, other short-term tax-exempt obligations, municipal leases, obligations of municipal housing
authorities and single-family revenue bonds. |
1 , 2 |
Credit Interest Rate Market Natural Event Political Prepayment Tax |
||||||||
New Financial Products: New options and futures contracts and other financial products continue to be developed
and a Fund may invest in such options, contracts and products. |
1 3 |
Credit Liquidity Management Market |
||||||||
Obligations of Supranational Agencies: Obligations which are chartered to promote economic development and are
supported by various governments and governmental agencies. |
1 , 2 |
Credit Foreign Investment Political |
||||||||
Options and Futures Transactions: A Fund may purchase and sell (a) exchange traded and over-the-counter put and
call options on securities, indexes of securities and futures contracts on securities and indexes of securities and (b) futures contracts on securities
and indexes of securities. |
1 3 |
Credit Leverage Liquidity Management Market |
||||||||
Preferred Stock: A class of stock that generally pays a dividend at a specified rate and has preference over
common stock in the payment of dividends and in liquidation. |
1 3 |
Market |
||||||||
Private Placements, Restricted Securities and Other Unregistered Securities: Securities not registered under the
Securities Act of 1933, such as privately placed commercial paper and Rule 144A securities. |
1 3 |
Liquidity Market |
INSTRUMENT | FUND CODE | RISK TYPE | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
Real Estate Investment Trusts (REITs): Pooled investment vehicles which invest primarily in income producing real
estate or real estate related loans or interest. |
1 3 |
Credit Interest Rate Liquidity Management Market Political Prepayment Tax Valuation |
||||||||
Repurchase Agreements: The purchase of a security and the simultaneous commitment to return the security to the
seller at an agreed upon price on an agreed upon date. This is treated as a loan. |
1 3 |
Credit Liquidity Market |
||||||||
Reverse Repurchase Agreements: The sale of a security and the simultaneous commitment to buy the security back at
an agreed upon price on an agreed upon date. This is treated as a borrowing by a Fund. |
1 3 |
Credit Leverage Market |
||||||||
Securities Issued in Connection with Reorganizations and Corporate Restructurings: In connection with reorganizing
or restructuring of an issuer, an issuer may issue common stock or other securities to holders of its debt securities. |
1 3 |
Market |
||||||||
Securities Lending: The lending of up to 33-1/3% of a Funds total assets. In return, the Fund will receive
cash, other securities, and/or letters of credit as collateral. |
1 3 |
Credit Leverage Market |
||||||||
Short-Term Funding Agreements: Agreements issued by banks and highly rated U.S. insurance companies such as
Guaranteed Investment Contracts (GICs) and Bank Investment Contracts (BICs). |
13 |
Credit Liquidity Market |
||||||||
Sovereign Obligations: Investments in debt obligations issued or guaranteed by a foreign sovereign government, or
its agencies, authorities or political subdivisions. |
1 , 2 |
Foreign Investment Political |
||||||||
Stripped Mortgage-Backed Securities: Derivative multi-class mortgage securities which are usually structured with
two classes of shares that receive different proportions of the interest and principal from a pool of mortgage assets. These include Interest-Only (IO)
and Principal-Only (PO) securities issued outside a Real Estate Mortgage Investment Conduit (REMIC) or CMO structure. |
1 , 2 |
Credit Market Political Prepayment |
||||||||
Structured Investments: A security having a return tied to an underlying index or other security or asset class.
Structured investments generally are individually negotiated agreements and may be traded over-the-counter. Structured investments are organized and
operated to restructure the investment characteristics of the underlying security. |
1 , 2 |
Credit Foreign Investment Liquidity Management Market Valuation |
||||||||
Swaps and Related Swap Products: Swaps involve an exchange of obligations by two parties. Caps and floors entitle
a purchaser to a principal amount from the seller of the cap or floor to the extent that a specified index exceeds or falls below a predetermined
interest rate or amount. A Fund may enter into these transactions to manage its exposure to changing interest rates and other
factors. |
1 3 |
Credit Currency Interest Rate Leverage Liquidity Management Market Political Valuation |
INSTRUMENT | FUND CODE | RISK TYPE | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
Temporary Defensive Positions: To respond to unusual circumstances a Fund may invest up to 100% of its total
assets in cash and cash equivalents for temporary defensive purposes. |
1 , 2 |
Credit Interest Rate Liquidity Market |
||||||||
Treasury Receipts: A Fund may purchase interests in separately traded interest and principal component parts of
U.S. Treasury obligations that are issued by banks or brokerage firms and that are created by depositing U.S. Treasury notes and U.S. Treasury bonds
into a special account at a custodian bank. Receipts include Treasury Receipts (TRs), Treasury Investment Growth Receipts (TIGRs), and Certificates of
Accrual on Treasury Securities (CATS). |
1 3 |
Market |
||||||||
Trust Preferreds: Securities with characteristics of both subordinated debt and preferred stock. Trust preferreds
are generally long term securities that make periodic fixed or variable interest payments. |
13 |
Credit Currency Interest Rate Liquidity Market Political Valuation |
||||||||
U.S. Government Agency Securities: Securities issued by agencies and instrumentalities of the U.S. government.
These include all types of securities issued by Ginnie Mae, Fannie Mae and Freddie Mac, including funding notes, subordinated benchmark notes, CMOs and
REMICs. |
1 3 |
Credit Govt Securities Interest Rate Market |
||||||||
U.S. Government Obligations: May include direct obligations of the U.S. Treasury, including Treasury bills, notes
and bonds, all of which are backed as to principal and interest payments by the full faith and credit of the United States, and separately traded
principal and interest component parts of such obligations that are transferable through the Federal book-entry system known as Separate Trading of
Registered Interest and Principal of Securities (STRIPS) and Coupons Under Book Entry Safekeeping (CUBES). |
1 3 |
Interest Rate Market |
||||||||
Variable and Floating Rate Instruments: Obligations with interest rates which are reset daily, weekly, quarterly
or some other period and which may be payable to a Fund on demand or at the expiration of a specified term. |
1 , 2 |
Credit Liquidity Market |
||||||||
When-Issued Securities, Delayed Delivery Securities and Forward Commitments: Purchase or contract to purchase
securities at a fixed price for delivery at a future date. |
1 , 2 |
Credit Leverage Liquidity Market |
||||||||
Zero-Coupon, Pay-in-Kind and Deferred Payment Securities: Zero-coupon securities are securities that are sold at a
discount to par value and on which interest payments are not made during the life of the security. Pay-in-kind securities are securities that have
interest payable by delivery of additional securities. Deferred payment securities are zero-coupon debt securities which convert on a specified date to
interest bearing debt securities. |
1 , 2 |
Credit Currency Interest Rate Liquidity Market Political Valuation |
POTENTIAL RISKS | POTENTIAL REWARDS | POLICIES TO BALANCE RISK AND REWARD | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
Credit
Quality |
||||||||||
The default of an issuer would leave a Fund with unpaid interest or principal |
Investment-grade bonds have a lower risk of default |
Each Fund maintains its own policies for balancing credit quality against potential yields and gains in
light of its investment goals The adviser develops its own ratings of unrated securities and makes a credit quality determination for unrated securities |
||||||||
Derivatives* |
||||||||||
Derivatives such as futures, options, and swaps1 that are used
for hedging the portfolio or specific securities may not fully offset the underlying positions and this could result in losses to a Fund that would not
have otherwise occurred A Fund may have difficulty exiting a derivatives position Derivatives used for risk management or, to increase a Funds gain may not have the intended effects and may result in losses or missed opportunities The counterparty to a derivatives contract could default Certain types of derivatives involve costs to the Funds which can reduce return Derivatives that involve leverage could magnify losses Segregated or earmarked assets and collateral accounts established in connection with derivatives may limit a Funds investment flexibility Derivatives used for non-hedging purposes could cause losses that exceed the original investment Derivatives may, for tax purposes, affect the character of gain and loss realized by a Fund, accelerate recognition of income to a Fund, affect the holding period of a Funds assets and defer recognition of certain of a Funds losses |
Hedges that correlate well with underlying positions can reduce or eliminate losses at low cost A Fund could make money and protect against losses if the investment analysis (managements analysis) proves correct Derivatives that involve leverage could generate substantial gains at low cost |
A Fund uses derivatives for hedging and for risk management and/or to increase income or gains (i.e., to adjust
duration or yield curve exposure or to establish or adjust exposure to particular securities, or markets); risk management may include management
of such Funds exposure relative to its benchmark A Fund only establishes hedges that it expects will be highly correlated with underlying positions A Fund segregates or earmarks liquid assets to cover its derivatives and offset a portion of the leverage risk |
* |
The Funds are not subject to registration or regulation as a commodity pool operator as defined in the Commodity Exchange Act because the Funds have claimed an exclusion from that definition. |
1 |
A futures contract is an agreement to buy or sell a set quantity of an underlying instrument at a future date, or to make or receive a cash payment based on changes in the value of a securities index. An option is the right to buy or sell a set quantity of an underlying instrument at a predetermined price. A swap is a privately negotiated agreement to exchange one stream of payments for another. |
POTENTIAL RISKS | POTENTIAL REWARDS | POLICIES TO BALANCE RISK AND REWARD | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
Market
Conditions |
||||||||||
Adverse market, economic, political and other conditions may from time to time cause a Fund to take
temporary defensive positions that are inconsistent with its principal investment strategies and may hinder a Fund from achieving its investment
objective The value of most bonds will fall when interest rates rise; the longer a bonds maturity and the lower its credit quality, the more its value typically falls Each Funds share price, yield and total return will fluctuate in response to bond market movements Mortgage-backed and asset-backed securities (securities representing an interest in, or secured by, a pool of mortgages or other assets such as receivables) and direct mortgages could generate capital losses or periods of low yields if they are paid off substantially earlier or later than anticipated Each Funds share price and performance will fluctuate in response to stock and/or bond market movements The market value of convertible securities and other debt securities tends to fall when prevailing interest rates rise. The value of convertible securities also tends to change whenever the market value of the underlying common or preferred stock fluctuates |
Stocks have generally outperformed more stable investments (such as bonds and cash equivalents) over
the long-term Bonds have generally outperformed money market investments over the long - term, with less risk than stocks Most bonds will rise in value when interest rates fall Mortgage-backed and asset-backed securities and direct mortgages can offer attractive returns |
Each Fund seeks to limit risk and enhance performance through active management and/or
diversification Each Fund seeks to limit risk and enhance total return or yields through careful management, sector allocations, individual securities selection and duration management During severe market downturns, the Intermediate Bond Fund and the Core Bond Fund have the option of investing up to 100% of its assets in high-quality short-term instruments Under normal circumstances the Intermediate Bond Fund and the Core Bond Fund plan to remain fully invested in bonds and other fixed-income securities and may invest uninvested cash in affiliated money market funds The adviser monitors interest rate trends, as well as geographic and demographic information related to mortgage-backed securities and mortgage prepayments Under normal circumstances each Fund plans to remain fully invested in accordance with its policies and each Fund may invest uninvested cash in affiliated money market funds; in addition to the securities described in the Fund Summary |
||||||||
Loan
Assignments and Participations |
||||||||||
Loan assignments and participations have a higher risk of default and may be less liquid and/or become
illiquid |
Loan assignments and participations offer higher yields and higher potential gain |
The adviser performs ongoing credit review of the obligor and invests only in loan assignments and participations if it
determines the instrument contains favorable risk/reward characteristics A Fund limits its investments in illiquid securities to no more than 15% of the Funds net assets at the time of purchase |
POTENTIAL RISKS | POTENTIAL REWARDS | POLICIES TO BALANCE RISK AND REWARD | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
When-Issued
and Delayed Delivery Securities |
||||||||||
When a Fund buys securities before issue or for delayed delivery, it could be exposed to leverage risk
if it does not segregate liquid assets |
A Fund can take advantage of attractive transaction opportunities |
Each Fund segregates liquid assets to offset leverage risk |
||||||||
Management
Choices |
||||||||||
A Fund could underperform its benchmark due to its sector, securities or duration
choices |
Each Fund could outperform its benchmark due to these same choices |
The adviser focuses its management on those areas where it believes its commitment to research can most
enhance returns and manage risks in a consistent way |
||||||||
Securities
Lending |
||||||||||
When a Fund lends a security, there is a risk that the loaned securities may not be returned if the
borrower or the lending agent defaults The collateral will be subject to the risks of the securities in which it is invested |
A Fund may enhance income through the investment of the collateral received from the
borrower |
The adviser maintains a list of approved borrowers Each Fund receives collateral equal to at least 100% of the current value of securities loaned The lending agent indemnifies a Fund against borrower default The advisers collateral investment guidelines limit the quality and duration of collateral investment to minimize losses Upon recall, the borrower must return the securities loaned within the normal settlement period |
||||||||
Illiquid
Holdings |
||||||||||
A Fund could have difficulty valuing these holdings precisely A Fund could be unable to sell these holdings at the time or price desired |
These holdings may offer more attractive yields or potential growth /appreciation than comparable widely traded
securities |
No Fund may invest more than 15% of its net assets in illiquid holdings To maintain adequate liquidity to meet redemptions, a Fund may hold high quality short-term instruments (including repurchase agreements) and may borrow from banks as permitted by law |
POTENTIAL RISKS | POTENTIAL REWARDS | POLICIES TO BALANCE RISK AND REWARD | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
Short-Term
Trading |
||||||||||
Increased trading would raise a Funds transaction costs Increased short-term capital gains distributions w ould raise shareholders income tax liability Increased short-term capital gain distributions w ould raise shareholders income tax liability; such an increase in transaction costs and/or tax liability, if not offset by gains from short-term trading, would reduce a Funds returns |
A Fund could realize gain in a short period of time A Fund could protect against losses if a security is overvalued and its value later falls |
Each Fund generally avoids short-term trading, except to take advantage of attractive or unexpected
opportunities or to meet demands generated by shareholder activity |
||||||||
Exchange
Traded Funds (ETFs) and o ther i nvestment c ompanies |
||||||||||
If a Fund invests in shares of another investment company, shareholders would bear not only their proportionate share of the
Funds expenses, but also similar expenses of the investment company The price movement of an ETF may not track the underlying index, market, sector, regions or industries and may result in a loss |
Invest ments in other investment companies help to manage smaller cash flows Investing in ETFs offers instant exposure to an index or a broad range of markets, sectors, geographic regions and industries |
Generally, a Funds investments in other investment companies, including ETFs, are subject to the percentage
limitations of the Investment Company Act of 1940 (1940 Act) Exemptive orders granted to various ETFs and their investment advisers by the Securities and Exchange Commission (SEC) permit a Fund to invest beyond the 1940 Act limits, subject to certain terms and conditions, including a finding of the Board of Trustees that the advisory fees charged by the adviser are for services that are in addition to, and not duplicative of, the advisory services provided to those ETFs Under SEC Rule 12d1-1, a Fund may invest in both affiliated and unaffiliated money market funds without limit subject to a Funds investment policies and restrictions and the conditions of the rule |
JPMorgan Institutional Trust 245 Park Avenue New York, NY 10167 |
CONFIDENTIAL OFFERING MEMORANDUM SUPPLEMENT
JPMORGAN INSTITUTIONAL TRUST
JPMORGAN INTERMEDIATE BOND TRUST (THE
INTERMEDIATE BOND TRUST)
JPMORGAN CORE BOND TRUST (THE CORE BOND TRUST)
JPMORGAN EQUITY INDEX TRUST (THE EQUITY INDEX TRUST)
(EACH A FUND, AND COLLECTIVELY THE FUNDS)
June 26 , 2009
This Confidential Offering Memorandum Supplement (the Supplement) should be read in conjunction with the Confidential Offering Memorandum of JPMorgan Institutional Trust, dated June 26 , 2009 , as amended or supplemented from time to time. Each Fund issues its shares only in private placement transactions in accordance with Regulation D or other applicable exemptions under the Securities Act of 1933, as amended (the Securities Act). This Supplement is not an offer to sell, or a solicitation of any offer to buy, any security to the public within the meaning of the Securities Act.
Shares of the Funds may be purchased only by certain clients of J.P. Morgan Investment Management Inc. (JPMIM) and its affiliates who maintain one or more separately managed private accounts, and who are also accredited investors, as defined in Regulation D under the Securities Act. Eligible investors are institutional investors such as corporations, pension and profit sharing plans, financial institutions, endowments, and foundations. The Funds are not intended for individuals or accounts established for the benefit of individuals (other than certain pension and profit-sharing plans sponsored by employers or unions for the benefit of individual plan participants). Subscriptions may be accepted or rejected, in whole or in part, in the sole discretion of JPMIM. Shares of the Funds may also be purchased by certain investors outside of the United States consistent with applicable regulatory requirements.
Shares of the Funds are subject to restrictions on transferability and resale and may not be transferred or resold except as permitted under the Securities Act. Shares may be redeemed in accordance with the procedures set forth in the Confidential Offering Memorandum.
This Supplement is intended for use only by the person to whom it has been issued. Reproduction of this Supplement is prohibited.
There shall be no sale of the shares referred to herein in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction.
SAI-INSTT- 609
TABLE OF CONTENTS
|
|
THE TRUST |
1 |
INVESTMENT OBJECTIVES AND POLICIES |
1 |
Asset-Backed Securities |
1 |
Bank Obligations |
2 |
Commercial Paper |
3 |
Convertible Securities |
3 |
Custodial Receipts |
4 |
Debt Instruments |
4 |
Corporate Debt Securities |
4 |
Inflation-Linked Debt Securities |
4 |
Variable and Floating Rate Instruments |
5 |
Zero-Coupon, Pay-in-Kind and Deferred Payment Securities |
6 |
Demand Features |
7 |
Equity Securities, Warrants and Rights |
7 |
Common Stock |
7 |
Common Stock Warrants and Rights |
7 |
Preferred Stock |
7 |
Intitial Public Offerings |
8 |
Foreign Investments |
8 |
Obligations of Supranational Entities |
9 |
Sovereign Obligations |
9 |
Inverse Floaters and Interest Rate Caps |
10 |
Investment Company Securities and Exchange Traded Funds |
10 |
Investment Company Securities |
10 |
Exchange Traded Funds (ETFs) |
10 |
Index Investing by the Equity Index Trust |
11 |
Loan Assignments and Participations |
12 |
Miscellaneous Investment Strategies and Risks |
15 |
Borrowings |
15 |
New Financial Products |
16 |
Private Placements, Restricted Securities and Other Unregistered Securities |
16 |
Securities Issued in Connection with Reorganizations and Corporate Restructuring |
17 |
Temporary Defensive Positions |
17 |
Mortgage-Related Securities |
18 |
Mortgages (Directly Held) |
18 |
Mortgage-Backed Securities (CMOs and REMICs) |
18 |
Mortgage Dollar Rolls |
21 |
Stripped Mortgage-Backed Securities |
21 |
Adjustable Rate Mortgage Loans |
22 |
Risk Factors of Mortgage-Related Securities |
23 |
Municipal Securities |
24 |
Risk Factors in Municipal Securities |
27 |
Limitations on the use of Municipal Securities |
28 |
Options and Futures Transactions |
29 |
Purchasing Put and Call Options |
29 |
Selling (Writing) Put and Call Options |
30 |
Engaging in Straddles and Spreads |
31 |
Options on Indexes |
31 |
Exchange-Traded and OTC Options |
31 |
Futures Contracts |
31 |
Cash Equitization |
32 |
Options on Futures Contracts |
32 |
i
|
|
Combined Positions |
33 |
Correlation of Price Changes |
33 |
Liquidity of Options and Futures Contracts |
33 |
Position Limits |
34 |
Asset Coverage for Futures Contracts and Options Positions |
34 |
Real Estate Investment Trusts (REITs) |
34 |
Repurchase Agreements |
35 |
Reverse Repurchase Agreements |
35 |
Securities Lending |
36 |
Short-Term Funding Agreements |
36 |
Structured Investments |
37 |
Swaps and Related Swap Products |
37 |
Credit Default Swaps |
39 |
Temporary Liquidity Guarantee Program (TLGP) Securities |
40 |
Treasury Receipts |
40 |
U.S. Government Obligations |
40 |
When-Issued Securities, Delayed Delivery Securities and Forward Commitments |
41 |
INVESTMENT RESTRICTIONS |
42 |
FUNDAMENTAL POLICIES |
42 |
NON-FUNDAMENTAL POLICIES |
43 |
Portfolio Turnover |
43 |
DISTRIBUTIONS AND TAX MATTERS |
44 |
Capital Loss Carryforwards |
52 |
VALUATION |
53 |
ADDITIONAL INFORMATION REGARDING THE CALCULATION OF PER SHARE NET ASSET VALUE |
54 |
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION |
54 |
Purchases-in-Kind |
54 |
Redemptions-in-Kind |
55 |
Redemptions |
55 |
Cut-Off Times for Purchase and Redemption Orders |
55 |
MANAGEMENT OF THE TRUST |
55 |
TRUSTEES |
55 |
OFFICERS |
62 |
THE ADVISER |
64 |
CODES OF ETHICS |
69 |
Portfolio Transactions |
69 |
Administrator |
74 |
Placement Agent |
75 |
Custodian, Transfer Agent, Accounting Agent and Dividend Disbursing Agent |
75 |
Securities Lending Agent |
76 |
ADDITIONAL INFORMATION |
77 |
Proxy Voting Policies and Procedures |
77 |
Description of Shares |
78 |
Shareholder and Trustee Liability |
80 |
Portfolio Holdings Disclosure |
80 |
Miscellaneous |
82 |
Financial Statements |
84 |
APPENDIX A DESCRIPTION OF RATINGS |
A-1 |
ii
THE TRUST
JPMorgan Institutional Trust is an open-end management investment company. The Trust was formed as a Delaware statutory trust on September 14, 2004. The Trust consists of three series of units of beneficial interest (Shares) each representing interests in one of the following separate investment portfolios (each a Fund and collectively, the Funds):
Equity Fund: The JPMorgan Equity Index Trust (this Fund is referred to as the Equity Fund).
Bond Funds: The JPMorgan Intermediate Bond Trust and the JPMorgan Core Bond Trust (these two Funds are collectively referred to as the Bond Funds).
INVESTMENT OBJECTIVES AND POLICIES
The following policies supplement each Funds investment objective and policies as set forth in the Confidential Offering Memorandum. The Funds are advised by J.P. Morgan Investment Management Inc. (JPMIM or the Adviser).
Asset-Backed Securities
Asset-backed securities consist of securities secured by company receivables, home equity loans, truck and auto loans, leases, or credit card receivables. Asset-backed securities also include other securities backed by other types of receivables or other assets, including collateralized debt obligations (CDOs), which include collateralized bond obligations (CBOs), collateralized loan obligations (CLOs) and other similarly structured securities. Such assets are generally securitized through the use of trusts or special purpose corporations. Asset-backed securities are backed by a pool of assets often representing the obligations of a number of different parties. Certain of these securities may be illiquid.
Asset-backed securities are generally subject to the risks of the underlying assets. In addition, asset-backed securities, in general, are subject to certain additional risks including depreciation, damage or loss of the collateral backing the security, failure of the collateral to generate the anticipated cash flow or in certain cases more rapid prepayment because of events affecting the collateral, such as accelerated prepayment of loans backing these securities or destruction of equipment subject to equipment trust certificates. In addition, the underlying assets (for example, the underlying credit card debt) may be refinanced or paid off prior to maturity during periods of declining interest rates. Changes in prepayment rates can result in greater price and yield volatility. If asset-backed securities are pre-paid, a Fund may have to reinvest the proceeds from the securities at a lower rate. Potential market gains on a security subject to prepayment risk may be more limited than potential market gains on a comparable security that is not subject to prepayment risk. Under certain prepayment rate scenarios, a Fund may fail to recover additional amounts paid (i.e., premiums) for securities with higher interest rates, resulting in an unexpected loss.
A CBO is a trust or other special purpose entity (SPE) which is typically backed by a diversified pool of fixed income securities (which may include high risk, below investment grade securities). A CLO is a trust or other SPE that is typically collateralized by a pool of loans, which may include, among others, domestic and non-U.S. senior secured loans, senior unsecured loans, and subordinate corporate loans, including loans that may be rated below investment grade or equivalent unrated loans. Although certain CDOs may receive credit enhancement in the form of a senior-subordinate structure, over-collateralization or bond insurance, such enhancement may not always be present and may fail to protect a Fund against the risk of loss on default of the collateral. Certain CDOs may use derivatives contracts to create synthetic exposure to assets rather than holding such assets directly, which entails the risks of derivative instruments described elsewhere in this Supplement. CDOs may charge management fees and administrative expenses, which are in addition to those of a Fund.
1
For both CBOs and CLOs, the cashflows from the SPE are split into two or more portions, called tranches, varying in risk and yield. The riskiest portion is the equity tranche, which bears the first loss from defaults from the bonds or loans in the SPE and serves to protect the other, more senior tranches from default (though such protection is not complete). Since it is partially protected from defaults, a senior tranche from a CBO or CLO typically has higher ratings and lower yields than its underlying securities, and may be rated investment grade. Despite the protection from the equity tranche, CBO or CLO tranches can experience substantial losses due to actual defaults, downgrades of the underlying collateral by rating agencies, forced liquidation of the collateral pool due to a failure of coverage tests, increased sensitivity to defaults due to collateral default and disappearance of protecting tranches, market anticipation of defaults, as well as investor aversion to CBO or CLO securities as a class. Interest on certain tranches of a CDO may be paid in kind or deferred and capitalized (paid in the form of obligations of the same type rather than cash), which involves continued exposure to default risk with respect to such payments.
The risks of an investment in a CDO depend largely on the type of the collateral securities and the class of the CDO in which a Fund invests. Normally, CBOs, CLOs and other CDOs are privately offered and sold, and thus are not registered under the securities laws. As a result, investments in CDOs may be characterized by a Fund as illiquid securities. However, an active dealer market may exist for CDOs, allowing a CDO to qualify for Rule 144A transactions. In addition to the normal risks associated with fixed income securities and asset-backed securities generally discussed elsewhere in this Supplement, CDOs carry additional risks including, but not limited to: (i) the possibility that distributions from collateral securities will not be adequate to make interest or other payments; (ii) the risk that the collateral may decline in value or default or be downgraded, if rated, by a Nationally Recognized Statistical Rating Organization (NRSRO); (iii) a Fund may invest in tranches of CDOs that are subordinate to other tranches; (iv) the complex structure of the security may not be fully understood at the time of investment and may produce disputes with the issuer or unexpected investment results; (v) the CDOs manager may perform poorly; (vi) the lack of a readily available secondary market for CDOs ; and (vii) risk of forced fire sale liquidation due to technical defaults such as coverage test failures.
Total Annual Operating Expenses set forth in the fee table section of the Confidential Offering Memorandum do not include any expenses associated with investments in certain structured or synthetic products that may rely on exceptions to the definition of investment company provided by section 3(c)(1) and 3(c)(7) of the Investment Company Act of 1940 (the 1940 Act).
Bank Obligations
Bank obligations consist of bankers acceptances, certificates of deposit, and time deposits.
Bankers acceptances are negotiable drafts or bills of exchange typically drawn by an importer or exporter to pay for specific merchandise, which are accepted by a bank, meaning, in effect, that the bank unconditionally agrees to pay the face value of the instrument on maturity. To be eligible for purchase by a Fund, a bankers acceptance must be guaranteed by a domestic or foreign bank or savings and loan association having, at the time of investment, total assets in excess of $1 billion (as of the date of its most recently published financial statements).
Certificates of deposit are negotiable certificates issued against funds deposited in a commercial bank or a savings and loan association for a definite period of time and earning a specified return. Certificates of deposit may also include those issued by foreign banks outside the United States of America (United States or U.S.) with total assets at the time of purchase in excess of the equivalent of $1 billion. Such certificates of deposit include Eurodollar and Yankee certificates of deposits. Eurodollar certificates of deposit are U.S. dollar-denominated certificates of deposit issued by branches of foreign and domestic banks located outside the U.S. Yankee certificates of deposit are certificates of deposit issued by a U.S. branch of a foreign bank denominated in U.S. dollars and held in the U.S. Certain Funds may also invest in obligations (including bankers acceptances and certificates of deposit) denominated in foreign currencies (see Foreign Investments herein). To be eligible for purchase by a Fund, a certificate of deposit must be issued by (i) a
2
domestic or foreign branch of a U.S. commercial bank which is a member of the Federal Reserve System or the deposits of which are insured by the Federal Deposit Insurance Corporation, or (ii) a domestic savings and loan association, the deposits of which are insured by the Federal Deposit Insurance Corporation provided that, in each case, at the time of purchase, such institution has total assets in excess of $1 billion (as of the date of their most recently published financial statements).
Time deposits are interest-bearing non-negotiable deposits at a bank or a savings and loan association that have a specific maturity date. A time deposit earns a specific rate of interest over a definite period of time. Time deposits cannot be traded on the secondary market and those exceeding seven days and with a withdrawal penalty are considered to be illiquid. Time deposits will be maintained only at banks or savings and loan associations from which a Fund could purchase certificates of deposit. All of the Funds may utilize demand deposits in connection with their day-to-day operations.
Commercial Paper
Commercial paper is defined as short-term obligations with maturities from 1 to 270 days issued by banks or bank holding companies, corporations and finance companies. Although commercial paper is generally unsecured, the Funds may also purchase secured commercial paper. In the event of a default of an issuer of secured commercial paper, a Fund may hold the securities and other investments that were pledged as collateral even if it does not invest in such securities or investments. In such a case, the Fund would take steps to dispose of such securities or investments in a commercially reasonable manner. Commercial paper includes master demand obligations. See Variable and Floating Rate Instruments below. The Funds only purchase commercial paper that meets the following criteria:
Bond Funds.The Bond Funds may purchase commercial paper consisting of issues rated at the time of purchase in the highest or second highest rating category by at least one NRSRO (such as A-2 or better by Standard & Poors Rating Service (S&P), Prime-2 or better by Moodys Investors Service, Inc. (Moodys), F2 or better by Fitch Ratings (Fitch), or R-2 or better by Dominion Bond Rating Service (DBRS)) or if unrated, determined by JPMIM to be of comparable quality.
Equity Fund. The Equity Fund may purchase commercial paper consisting of issues rated at the time of purchase in the highest or second highest rating category by at least one NRSRO (such as A-2 or better by S&P, Prime-2 or better by Moodys, F-2 or better by Fitch or R-2 or better by DBRS) or if unrated, determined by JPMIM to be of comparable quality.
Certain Funds may also invest in Canadian commercial paper, which is commercial paper issued by a Canadian corporation or a Canadian counterpart of a U.S. corporation, and in Europaper which is U.S. dollar denominated commercial paper of a foreign issuer. See Risk Factors of Foreign Investments below.
Convertible Securities
The Funds may invest in convertible securities. Convertible securities include any debt securities or preferred stock which may be converted into common stock or which carry the right to purchase common stock. Generally, convertible securities entitle the holder to exchange the securities for a specified number of shares of common stock, usually of the same company, at specified prices within a certain period of time.
The terms of any convertible security determine its ranking in a companys capital structure. In the case of subordinated convertible debentures, the holders claims on assets and earnings are subordinated to the claims of other creditors, and are senior to the claims of preferred and common shareholders. In the case of convertible preferred stock, the holders claims on assets and earnings are subordinated to the claims of all creditors and are senior to the claims of common shareholders.
Convertible securities have characteristics similar to both debt and equity securities. Due to the conversion feature, the market value of convertible securities tends to move together with the market value of
3
the underlying common stock. As a result, selection of convertible securities, to a great extent, is based on the potential for capital appreciation that may exist in the underlying stock. The value of convertible securities is also affected by prevailing interest rates, the credit quality of the issuer, and any call provisions. In some cases, the issuer may cause a convertible security to convert to common stock. In other situations, it may be advantageous for a Fund to cause the conversion of convertible securities to common stock. If a convertible security converts to common stock, a Fund may hold such common stock in its portfolio even if it does not ordinarily invest in common stock.
Custodial Receipts
Certain Funds may acquire securities in the form of custodial receipts that evidence ownership of future interest payments, principal payments or both on certain U.S. Treasury notes or bonds in connection with programs sponsored by banks and brokerage firms. These are not considered U.S. government securities and are not backed by the full faith and credit of the U.S. government. These notes and bonds are held in custody by a bank on behalf of the owners of the receipts.
Debt Instruments
Corporate Debt Securities. Corporate debt securities may include bonds and other debt securities of U.S. and non-U.S. issuers, including obligations of industrial, utility, banking and other corporate issuers. All debt securities are subject to the risk of an issuers inability to meet principal and interest payments on the obligation and may also be subject to price volatility due to such factors as fluctuation of market interest rates, market perception of the creditworthiness of the issuer and general market liquidity.
Inflation-Linked Debt Securities. Inflation-linked securities include fixed and floating rate debt securities of varying maturities issued by the U.S. government, its agencies and instrumentalities, such as Treasury Inflation Protected Securities (TIPS), as well as securities issued by other entities such as corporations, municipalities, foreign governments and foreign issuers, including foreign issuers from emerging markets. See also Foreign Investments. Typically, such securities are structured as fixed income investments whose principal value is periodically adjusted according to the rate of inflation. The following two structures are common: (i) the U.S. Treasury and some other issuers issue inflation-linked securities that accrue inflation into the principal value of the security and (ii) other issuers may pay out the Consumer Price Index (CPI) accruals as part of a semi-annual coupon. Other types of inflation-linked securities exist which use an inflation index other than the CPI.
Inflation-linked securities issued by the U.S. Treasury, such as TIPS, have maturities of approximately five, ten, or twenty years, although it is possible that securities with other maturities will be issued in the future. Typically, TIPS pay interest on a semi-annual basis equal to a fixed percentage of the inflation-adjusted principal amount. For example, if a Fund purchased an inflation-indexed bond with a par value of $ 1,000 and a 3% real rate of return coupon (payable 1.5% semi-annually), and the rate of inflation over the first six months was 1%, the mid-year par value of the bond would be $1,010 and the first semi-annual interest payment would be $15.15 ($1,010 times 1.5%). If inflation during the second half of the year resulted in the whole years inflation of 3%, the end-of-year par value of the bond would be $1,030 and the second semi-annual interest payment would be $15.45 ($1,030 times 1.5%).
If the periodic adjustment rate measuring inflation falls, the principal value of inflation-indexed bonds will be adjusted downward, and consequently the interest payable on these securities (calculated with respect to a smaller principal amount) will be reduced. Repayment of the original bond principal upon maturity (as adjusted for inflation) is guaranteed in the case of TIPS, even during a period of deflation, although the inflation-adjusted principal received could be less than the inflation-adjusted principal that had accrued to the bond at the time of purchase. However, the current market value of the bonds is not guaranteed and will fluctuate. Other inflation-related bonds exist which may or may not provide a similar guarantee. If a guarantee of principal is not provided, the adjusted principal value of the bond repaid at maturity may be less than the original principal.
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The value of inflation-linked securities is expected to change in response to changes in real interest rates. Real interest rates in turn are tied to the relationship between nominal interest rates and the rate of inflation. Therefore, if the rate of inflation rises at a faster rate than nominal interest rates, real interest rates might decline, leading to an increase in value of inflation-linked securities.
While inflation-linked securities are expected to be protected from long-term inflationary trends, short-term increases in inflation may lead to a decline in value. If interest rates rise due to reasons other than inflation (for example, due to changes in currency exchange rates), investors in these securities may not be protected to the extent that the increase is not reflected in the bonds inflation measure.
The periodic adjustment of U.S. inflation-linked securities is tied to the Consumer Price Index for All Urban Consumers (CPI-U), which is not seasonably adjusted and which is calculated monthly by the U.S. Bureau of Labor Statistics. The CPI-U is a measurement of changes in the cost of living, made up of components such as housing, food, transportation and energy. Inflation-linked securities issued by a foreign government are generally adjusted to reflect a comparable inflation index calculated by that government. There can be no assurance that the CPI-U or a foreign inflation index will accurately measure the real rate of inflation in the prices of goods and services. Moreover, there can be no assurance that the rate of inflation in a foreign country will be correlated to the rate of inflation in the United States.
Increases in the principal amount of an inflation-linked security generally will be considered taxable ordinary income, even though investors do not receive their principal until maturity.
Variable and Floating Rate Instruments. Certain obligations purchased by the Funds may carry variable or floating rates of interest, may involve a conditional or unconditional demand feature and may include variable amount master demand notes. Variable and floating rate instruments are issued by a wide variety of issuers and may be issued for a wide variety of purposes, including as a method of reconstructing cash flows.
Subject to their investment objective policies and restrictions, certain Funds may acquire variable and floating rate instruments. A variable rate instrument is one whose terms provide for the adjustment of its interest rate on set dates and which, upon such adjustment, can reasonably be expected to have a market value that approximates its par value. The Funds may purchase extendable commercial notes. Extendable commercial notes are variable rate notes which normally mature within a short period of time (e.g., 1 month) but which may be extended by the issuer for a maximum maturity of thirteen months.
A floating rate instrument is one whose terms provide for the adjustment of its interest rate whenever a specified interest rate changes and which, at any time, can reasonably be expected to have a market value that approximates its par value. Floating rate instruments are frequently not rated by credit rating agencies; however, unrated variable and floating rate instruments purchased by a Fund will be determined by the Funds Adviser to be of comparable quality at the time of purchase to rated instruments eligible for purchase under the Funds investment policies. In making such determinations, a Funds Adviser will consider the earning power, cash flow and other liquidity ratios of the issuers of such instruments (such issuers include financial, merchandising, bank holding and other companies) and will continuously monitor their financial condition. There may be no active secondary market with respect to a particular variable or floating rate instrument purchased by a Fund. The absence of such an active secondary market could make it difficult for the Fund to dispose of the variable or floating rate instrument involved in the event the issuer of the instrument defaults on its payment obligations, and the Fund could, for this or other reasons, suffer a loss to the extent of the default. Variable or floating rate instruments may be secured by bank letters of credit or other assets. A Fund may purchase a variable or floating rate instrument to facilitate portfolio liquidity or to permit investment of the Funds assets at a favorable rate of return.
As a result of the floating and variable rate nature of these investments, the Funds yields may decline, and they may forego the opportunity for capital appreciation during periods when interest rates
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decline; however, during periods when interest rates increase, the Funds yields may increase, and they may have reduced risk of capital depreciation.
Past periods of high inflation, together with the fiscal measures adopted to attempt to deal with it, have seen wide fluctuations in interest rates, particularly prime rates charged by banks. While the value of the underlying floating or variable rate securities may change with changes in interest rates generally, the nature of the underlying floating or variable rate should minimize changes in value of the instruments. Accordingly, as interest rates decrease or increase, the potential for capital appreciation and the risk of potential capital depreciation is less than would be the case with a portfolio of fixed rate securities. A Funds portfolio may contain floating or variable rate securities on which stated minimum or maximum rates, or maximum rates set by state law limit the degree to which interest on such floating or variable rate securities may fluctuate; to the extent it does, increases or decreases in value may be somewhat greater than would be the case without such limits. Because the adjustment of interest rates on the floating or variable rate securities is made in relation to movements of the applicable banks prime rates or other short-term rate securities adjustment indices, the floating or variable rate securities are not comparable to long-term fixed rate securities. Accordingly, interest rates on the floating or variable rate securities may be higher or lower than current market rates for fixed rate obligations of comparable quality with similar maturities.
Variable Amount Master Demand Notes. Variable amount master demand notes are demand notes that permit the indebtedness to vary and provide for periodic adjustments in the interest rate according to the terms of the instrument. Because master demand notes are direct lending arrangements between a Fund and the issuer, they are not normally traded. Although there is no secondary market in such notes, a Fund may demand payment of principal and accrued interest. While the notes are not typically rated by credit rating agencies, issuers of variable amount master demand notes (which are normally manufacturing, retail, financial, brokerage, investment banking and other business concerns) must satisfy the same criteria as those set forth with respect to commercial paper, if any. A Funds Adviser will consider the earning power, cash flow, and other liquidity ratios of the issuers of such notes and will continuously monitor their financial status and ability to meet payment on demand. In determining average weighted portfolio maturity, a variable amount master demand note will be deemed to have a maturity equal to the period of time remaining until the principal amount can be recovered from the issuer through demand.
Limitations on the Use of Variable and Floating Rate Notes. Variable and floating rate instruments for which no readily available market exists (e.g., illiquid securities) will be purchased in an amount which, together with securities with legal or contractual restrictions on resale or for which no readily available market exists (including repurchase agreements providing for settlement more than seven days after notice), exceeds 15% of a Funds net assets only if such instruments are subject to a demand feature that will permit the Fund to demand payment of the principal within seven days after demand by the Fund. There is no limit on the extent to which a Fund may purchase demand instruments that are not illiquid or deemed to be liquid in accordance with the Advisers liquidity determination procedures. If not rated, such instruments must be found by the Funds Adviser to be of comparable quality to instruments in which the Fund may invest. A rating may be relied upon only if it is provided by a NRSRO that is not affiliated with the issuer or guarantor of the instruments.
Zero-Coupon, Pay-in-Kind and Deferred Payment Securities. Zero-coupon securities are securities that are sold at a discount to par value and on which interest payments are not made during the life of the security. Upon maturity, the holder is entitled to receive the par value of the security. Pay-in-kind securities are securities that have interest payable by delivery of additional securities. Upon maturity, the holder is entitled to receive the aggregate par value of the securities. A Fund accrues income with respect to zero-coupon and pay-in-kind securities prior to the receipt of cash payments. Deferred payment securities are securities that remain zero-coupon securities until a predetermined date, at which time the stated coupon rate becomes effective and interest becomes payable at regular intervals. While interest payments are not made on such securities, holders of such securities are deemed to have received phantom income. Because a Fund will distribute phantom income to shareholders, to the extent that shareholders elect to receive dividends in cash rather than reinvesting such dividends in additional shares, the applicable Fund will have
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fewer assets with which to purchase income-producing securities. Zero-coupon, pay-in-kind and deferred payment securities may be subject to greater fluctuation in value and lesser liquidity in the event of adverse market conditions than comparably rated securities paying cash interest at regular interest payment periods.
Demand Features
Some of the Funds may acquire securities that are subject to puts and standby commitments (Demand Features) to purchase the securities at their principal amount (usually with accrued interest) within a fixed period (usually seven days) following a demand by the Fund. The Demand Feature may be issued by the issuer of the underlying securities, a dealer in the securities or by another third party, and may not be transferred separately from the underlying security. The underlying securities subject to a put may be sold at any time at market rates. The Funds expect that they will acquire puts only where the puts are available without the payment of any direct or indirect consideration. However, if advisable or necessary, a premium may be paid for put features. A premium paid will have the effect of reducing the yield otherwise payable on the underlying security.
Under a stand-by commitment, a dealer would agree to purchase, at a Funds option, specified securities at a specified price. A Fund will acquire these commitments solely to facilitate portfolio liquidity and does not intend to exercise its rights thereunder for trading purposes. Stand-by commitments may also be referred to as put options. A Fund will generally limit its investments in stand-by commitments to 25% of its total assets.
The purpose of engaging in transactions involving puts is to maintain flexibility and liquidity to permit the Fund to meet redemption requests and remain as fully invested as possible.
Equity Securities, Warrants and Rights
Common Stock. Common stock represents a share of ownership in a company and usually carries voting rights and may earn dividends. Unlike preferred stock, common stock dividends are not fixed but are declared at the discretion of the issuers board of directors. Common stock occupies the most junior position in a companys capital structure. As with all equity securities, the price of common stock fluctuates based on changes in a companys financial condition and on overall market and economic conditions.
Common Stock Warrants and Rights. Common stock warrants entitle the holder to buy common stock from the issuer of the warrant at a specific price (the strike price) for a specific period of time. The market price of warrants may be substantially lower than the current market price of the underlying common stock, yet warrants are subject to similar price fluctuations. As a result, warrants may be more volatile investments than the underlying common stock. If a warrant is exercised, a Fund may hold common stock in its portfolio even if it does not ordinarily invest in common stock.
Rights are similar to warrants but normally have a shorter duration and are typically distributed directly by the issuers to existing shareholders, while warrants are typically attached to new debt or preferred stock issuances.
Warrants and rights generally do not entitle the holder to dividends or voting rights with respect to the underlying common stock and do not represent any rights in the assets of the issuer company. Warrants and rights will expire if not exercised on or prior to the expiration date.
Preferred Stock. Preferred stock is a class of stock that generally pays dividends at a specified rate and has preference over common stock in the payment of dividends and liquidation. Preferred stock generally does not carry voting rights. As with all equity securities, the price of preferred stock fluctuates based on changes in a companys financial condition and on overall market and economic conditions.
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Initial Public Offerings. The Funds may purchase securities in initial public offerings (IPOs). These securities are subject to many of the same risks as investing in companies with smaller market capitalizations. Securities issued in IPOs have no trading history, and information about the companies may be available for very limited periods. The prices of securities sold in IPOs may be highly volatile. At any particular time or from time to time, a Fund may not be able to invest in securities issued in IPOs, or invest to the extent desired, because, for example, only a small portion of the securities being offered in an IPO may be made available to the Fund. In addition, under certain market conditions, a relatively small number of companies may issue securities in IPOs. Similarly, as the number of Funds to which IPO securities are allocated increases, the number of securities issued to any one Fund may decrease. The investment performance of a Fund during periods when it is unable to invest significantly or at all in IPOs may be lower than during periods when the Fund is able to do so. In addition, as a Fund increases in size, the impact of IPOs on the Funds performance will generally decrease.
Foreign Investments
Some of the Funds may invest in certain obligations or securities of foreign issuers. For purposes of a Funds investment policies and unless described in the Funds Confidential Offering Memorandum, an issuer of a security will be deemed to be located in a particular country if: (i) the principal trading market for the security is in such country, (ii) the issuer is organized under the laws of such country or (iii) the issuer derives at least 50% of its revenues or profits from such country or has at least 50% of its total assets situated in such country. Possible investments include equity securities and debt securities (e.g., bonds and commercial paper) of foreign entities, obligations of foreign branches of U.S. banks and of foreign banks, including, without limitation, Eurodollar Certificates of Deposit, Eurodollar Time Deposits, Eurodollar Bankers Acceptances, Canadian Time Deposits and Yankee Certificates of Deposit, and investments in Canadian Commercial Paper, and Europaper. Securities of foreign issuers may include sponsored and unsponsored American Depositary Receipts (ADRs), European Depositary Receipts (EDRs), and Global Depositary Receipts (GDRs). Sponsored ADRs are listed on the New York Stock Exchange; unsponsored ADRs are not. Therefore, there may be less information available about the issuers of unsponsored ADRs than the issuers of sponsored ADRs. Unsponsored ADRs are restricted securities. EDRs and GDRs are not listed on the New York Stock Exchange. As a result, it may be difficult to obtain information about EDRs and GDRs.
Risk Factors of Foreign Investments. The following is a summary of certain risks associated with foreign investments.
Political and Exchange Risks. Foreign investments may subject a Fund to investment risks that differ in some respects from those related to investments in obligations of U.S. domestic issuers. Such risks include potential future adverse political and economic developments, possible imposition of withholding taxes on interest or other income, possible seizure, nationalization or expropriation of foreign deposits, possible establishment of exchange controls or taxation at the source, greater fluctuations in value due to changes in exchange rates, or the adoption of other foreign governmental restrictions which might adversely affect the payment of principal and interest on such obligations.
Higher Transaction Costs. Foreign investments may entail higher custodial fees and sales commissions than domestic investments.
Accounting and Regulatory Differences. Foreign issuers of securities or obligations are often subject to accounting treatment and engage in business practices different from those of domestic issuers of similar securities or obligations. In addition, foreign issuers are usually not subject to the same degree of regulation as domestic issuers, and their securities may trade on relatively small markets, causing their securities to experience potentially higher volatility and more limited liquidity than securities of domestic issuers. Foreign branches of U.S. banks and foreign banks are not regulated by U.S. banking authorities and may be subject to less stringent reserve requirements than those applicable to domestic branches of U.S. banks. In addition, foreign banks generally are not bound by accounting, auditing, and financial reporting
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standards comparable to those applicable to U.S. banks. Dividends and interest paid by foreign issuers may be subject to withholding and other foreign taxes which may decrease the net return on foreign investments as compared to dividends and interest paid to a Fund by domestic companies.
Currency Risk. Foreign securities may be denominated in foreign currencies, although foreign issuers may also issue securities denominated in U.S. dollars. The value of a Funds investments denominated in foreign currencies and any funds held in foreign currencies will be affected by changes in currency exchange rates, the relative strength of those currencies and the U.S. dollar, and exchange-control regulations.
Changes in the foreign currency exchange rates also may affect the value of dividends and interest earned, gains and losses realized on the sale of securities and net investment income and gains, if any, to be distributed to shareholders by a Fund. The exchange rates between the U.S. dollar and other currencies are determined by the forces of supply and demand in foreign exchange markets. Accordingly, the ability of a Fund that invests in foreign securities as part of its principal investment strategy to achieve its investment objective may depend, to a certain extent, on exchange rate movements.
In addition, while the volume of transactions effected on foreign stock exchanges has increased in recent years, in most cases it remains appreciably below that of domestic securities exchanges. Accordingly, a Funds foreign investments may be less liquid and their prices may be more volatile than comparable investments in securities of U.S. companies. Moreover, the settlement periods for foreign securities, which are often longer than those for securities of U.S. issuers, may affect Fund liquidity. In buying and selling securities on foreign exchanges, purchasers normally pay fixed commissions that are generally higher than the negotiated commissions charged in the United States. In addition, there is generally less government supervision and regulation of securities exchanges, brokers and issuers located in foreign countries than in the United States.
Limitations on the Use of Foreign Investments. Investments in all types of foreign obligations or securities will not exceed 25% of the net assets of the Core Bond Trust.
Obligations of Supranational Entities. Obligations of supranational entities include securities designated or supported by governmental entities to promote economic reconstruction or development of international banking institutions and related government agencies. Examples include the International Bank for Reconstruction and Development (the World Bank), the European Coal and Steel Community, the Asian Development Bank and the Inter-American Development Bank. Each supranational entitys lending activities are limited to a percentage of its total capital (including callable capital contributed by its governmental members at the entitys call), reserves and net income. There is no assurance that participating governments will be able or willing to honor their commitments to make capital contributions to a supranational entity.
Sovereign Obligations. Sovereign debt includes investments in securities issued or guaranteed by a foreign sovereign government or its agencies, authorities or political subdivisions. An investment in sovereign debt obligations involves special risks not present in corporate debt obligations. The issuer of the sovereign debt or the governmental authorities that control the repayment of the debt may be unable or unwilling to repay principal or interest when due, and a Fund may have limited recourse in the event of a default. During periods of economic uncertainty, the market prices of sovereign debt, and the Funds net asset value (NAV), may be more volatile than prices of U.S. debt obligations. In the past, certain emerging markets have encountered difficulties in servicing their debt obligations, withheld payments of principal and interest and declared moratoria on the payment of principal and interest on their sovereign debts.
A sovereign debtors willingness or ability to repay principal and pay interest in a timely manner may be affected by, among other factors, its cash flow situation, the extent of its foreign currency reserves, the availability of sufficient foreign exchange, the relative size of the debt service burden, the sovereign debtors policy toward principal international lenders and local political constraints. Sovereign debtors may
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also be dependent on expected disbursements from foreign governments, multilateral agencies and other entities to reduce principal and interest arrearages on their debt. The failure of a sovereign debtor to implement economic reforms, achieve specified levels of economic performance or repay principal or interest when due may result in the cancellation of third-party commitments to lend funds to the sovereign debtor, which may further impair such debtors ability or willingness to service its debts.
Inverse Floaters and Interest Rate Caps
Inverse floaters are instruments whose interest rates bear an inverse relationship to the interest rate on another security or the value of an index. The market value of an inverse floater will vary inversely with changes in market interest rates and will be more volatile in response to interest rate changes than that of a fixed rate obligation. Interest rate caps are financial instruments under which payments occur if an interest rate index exceeds a certain predetermined interest rate level, known as the cap rate, which is tied to a specific index. These financial products will be more volatile in price than securities which do not include such a structure.
Investment Company Securities and Exchange Traded Funds
Investment Company Securities. A Fund may acquire the securities of other investment companies to the extent permitted under the 1940 Act and consistent with its investment objective and strategies. As a shareholder of another investment company, a Fund would bear, along with other shareholders, its pro rata portion of the other investment companys expenses, including advisory fees. These expenses would be in addition to the advisory and other expenses that a Fund bears directly in connection with its own operations. Except as described below, the 1940 Acts limits currently require that, as determined immediately after a purchase is made, (i) not more than 5% of the value of a funds total assets will be invested in the securities of any one investment company, (ii) not more than 10% of the value of its total assets will be invested in the aggregate in securities of investment companies as a group and (iii) not more than 3% of the outstanding voting stock of any one investment company will be owned by a fund.
Effective July 31, 2006, under Rule 12d1-1 under the 1940 Act, any of the Funds may invest in affiliated and unaffiliated money market funds without limit subject to the acquiring Funds investment policies and restrictions and the conditions of the rule.
Pursuant to Rule 12d1-2 under the 1940 Act effective as of July 31, 2006, funds of funds that previously were permitted only to invest in affiliated funds, government securities and short-term paper are now permitted under certain circumstances to invest in: (1) unaffiliated investment companies (subject to certain limits), (2) other types of securities (such as stocks, bonds and other securities) not issued by an investment company that are consistent with the funds investment policies and (3) affiliated or unaffiliated money market funds as part of cash sweep arrangements. One consequence of these new rules is that any fund, whether or not previously designated as a fund of funds, may invest without limit in affiliated funds if the acquisition is consistent with the investment policies of the fund and the restrictions of the rules. A Fund investing in affiliated funds under these new rules could not invest in a Fund that did not have a policy prohibiting it from investing in shares of other funds in reliance on Section 12(d)(1)(F) and (G) of the 1940 Act.
The Funds may not rely on Rule 12d1-2 because they themselves have a policy prohibiting them from investing in shares of other Funds in reliance on Section 12(d)(1)(F) and (G) of the 1940 Act.
Exchange Traded Funds (ETFs). ETFs are ownership interests in unit investment trusts, depositary receipts, and other pooled investment vehicles that hold a portfolio of securities or stocks designed to track the price performance and dividend yield of a particular broad-based, sector or international index. Broad based ETFs typically track a broad group of stocks from different industries and market sectors. For example, iShares S&P 500 Index Fund and Standard and Poors Depositary Receipts are ETFs that track
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the S&P 500 Index. Sector ETFs track companies represented in related industries within a sector of the economy. International ETFs track a group of stocks from a specific country.
ETFs also may hold a portfolio of debt securities. For example, iShares Lehman 1-3 Year Treasury Bond Fund invests in a portfolio of publicly issued, U.S. Treasury securities designed to track the Lehman Brothers 1-3 Year Treasury Index. Similarly, iShares iBoxx $ Investment Grade Corporate Bond Fund is designed to track a segment of the U.S. investment grade corporate bond market as defined by the iBoxx $ Liquid Investment Grade Index.
ETFs invest in a securities portfolio that includes substantially all of the securities (in substantially the same weights) as the securities included in the designated index. ETFs are traded on an exchange and, in some cases may not be redeemed. The results of ETFs will not match the performance of the designated index due to reductions in the performance attributable to transaction and other expenses, including fees paid by the ETF to service providers. ETFs are subject to risks specific to the performance of a few component securities if such securities represent a highly concentrated weighting in the designated index. ETFs are eligible to receive their portion of dividends, if any, accumulated on the securities held in trust, less fees and expenses of the trust.
The investment vehicles issuing ETFs may not be actively managed. Rather, the investment vehicles objective is to track the performance of a specified index. Therefore, securities may be purchased, retained and sold at times when an actively managed fund would not do so. As a result, you can expect greater risk of loss (and a correspondingly greater prospect of gain) from changes in the value of securities that are heavily weighted in the index than would be the case if the investment vehicle was not fully invested in such securities.
Select sector ETFs and other types of ETFs continue to be developed. As new products are developed, the Funds may invest in them to the extent consistent with the Funds investment objective, policies and restrictions.
Unless permitted by the 1940 Act or an order or rule issued by the Securities and Exchange Commission (SEC) (see Investment Company Securities for more information), the Funds investments in unaffiliated ETFs are subject to certain percentage limitations of the 1940 Act regarding investments in other investment companies. As a general matter, these percentage limitations currently require a Fund to limit its investments in any one issue of ETFs to 5% of the Funds total assets and 3% of the outstanding voting securities of the ETF issue. Moreover, a Funds investments in all ETFs may not currently exceed 10% of the Funds total assets under the 1940 Act, when aggregated with all other investments in investment companies.
SEC exemptive orders granted to various iShares funds (which are ETFs) and other ETFs and their investment advisers permit the Funds to invest beyond the 1940 Act limits, subject to certain terms and conditions, including a finding of the Board of Trustees that the advisory fees charged by the adviser are for services that are in addition to, and not duplicative of, the advisory services provided to those ETFs.
Index Investing by the Equity Index Trust
The Equity Index Trust attempts to track the performance of the S&P 500 Index (the Index) to achieve a correlation between the performance of the Fund and that of the Index of at least 0.95, without taking into account expenses. A correlation of 1.00 would indicate perfect correlation, which would be achieved when the Funds net asset value, including the value of its dividend and capital gains distributions, increases or decreases in exact proportion to changes in the Index. The Funds ability to correlate its performance with the Index, however, may be affected by, among other things, changes in securities markets, the manner in which the Index is calculated by Standard & Poors Corporation (S&P) and the timing of purchases and redemptions. In the future, the Trustees of the Trust, subject to the approval of Shareholders,
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may select another index if such a standard of comparison is deemed to be more representative of the performance of common stocks.
S&P chooses the stocks to be included in the Index largely on a statistical basis. Inclusion of a stock in the Index in no way implies an opinion by S&P as to its attractiveness as an investment. The Index is determined, composed and calculated by S&P without regard to the Equity Index Trust. S&P is neither a sponsor of, nor in any way affiliated with the Equity Index Trust, and S&P makes no representation or warranty, expressed or implied on the advisability of investing in the Equity Index Trust or as to the ability of the Index to track general stock market performance. S&P disclaims all warranties of merchantability or fitness for a particular purpose or use with respect to the Index or any data included in the Index. S&P 500 is a service mark of S&P.
The weights of stocks in the Index are based on each stocks relative total market value, i.e., market price per share times the number of Shares outstanding. Because of this weighting, approximately 50% of the Index is currently composed of the 50 largest companies in the Index, and the Index currently represents over 65% of the market value of all U.S. common stocks listed on the New York Stock Exchange. Typically, companies included in the Index are the largest and most dominant firms in their respective industries.
JPMIM generally selects stocks for the Equity Index Trust in the order of their weights in the Index beginning with the heaviest weighted stocks. The percentage of the Equity Index Trusts assets to be invested in each stock is approximately the same as the percentage it represents in the Index. No attempt is made to manage the Equity Index Trust in the traditional sense using economic, financial and market analysis. The Equity Index Trust is managed using a computer program to determine which stocks are to be purchased and sold to replicate the Index to the extent feasible. From time to time, administrative adjustments may be made in the Fund because of changes in the composition of the Index, but such changes should be infrequent.
Loan Assignments and Participations
Some of the Funds may invest in fixed and floating rate loans (Loans). Loans may include senior floating rate loans (Senior Loans) and secured and unsecured loans, second lien or more junior loans and bridge loans (Junior Loans). Loans are typically arranged through private negotiations between borrowers in the U.S. or in foreign or emerging markets which may be corporate issuers or issuers of sovereign debt obligations (Obligors) and one or more financial institutions and other lenders (Lenders). Generally, the Funds invest in Loans by purchasing assignments of all or a portion of Loans (Assignments) or Loan participations (Participations) from third parties.
A Fund has direct rights against the Obligor on the Loan when it purchases an Assignment. Because Assignments are arranged through private negotiations between potential assignees and potential assignors, however, the rights and obligations acquired by a Fund as the purchaser of an Assignment may differ from, and be more limited than, those held by the assigning Lender. With respect to Participations, typically, a Fund will have a contractual relationship only with the Lender and not with the Obligor. The agreement governing Participations may limit the rights of a Fund to vote on certain changes which may be made to the Loan agreement, such as waiving a breach of a covenant. However, the holder of a Participation will generally have the right to vote on certain fundamental issues such as changes in principal amount, payment dates and interest rate. Participations may entail certain risks relating to the creditworthiness of the parties from which the Participations are obtained.
A Loan is typically originated, negotiated and structured by a U.S. or foreign commercial bank, insurance company, finance company or other financial institution (the Agent) for a group of Loan investors. The Agent typically administers and enforces the Loan on behalf of the other Loan investors in the syndicate. The Agents duties may include responsibility for the collection of principal and interest payments from the Obligor and the apportionment of these payments to the credit of all Loan investors. The Agent is also typically responsible for monitoring compliance with the covenants contained in the Loan agreement based upon reports prepared by the Obligor. In addition, an institution, typically but not always
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the Agent, holds any collateral on behalf of the Loan investors. In the event of a default by the Obligor, it is possible, though unlikely, that the Fund could receive a portion of the borrowers collateral. If the Fund receives collateral other than cash, any proceeds received from liquidation of such collateral will be available for investment as part of the Funds portfolio.
In the process of buying, selling and holding Senior Loans, a Fund may receive and/or pay certain fees. These fees are in addition to interest payments received and may include facility fees, commitment fees, commissions and prepayment penalty fees. When a Fund buys or sells a Loan it may pay a fee. In certain circumstances, a Fund may receive a prepayment penalty fee upon prepayment of a Loan.
Additional Information concerning Senior Loans. Senior Loans typically hold the most senior position in the capital structure of the Obligor, are typically secured with specific collateral and have a claim on the assets and/or stock of the Obligor that is senior to that held by subordinated debtholders and shareholders of the Obligor. Collateral for Senior Loans may include (i) working capital assets, such as accounts receivable and inventory; (ii) tangible fixed assets, such as real property, buildings and equipment; (iii) intangible assets, such as trademarks and patent rights; and/or (iv) security interests in shares of stock of subsidiaries or affiliates.
Additional Information concerning Junior Loans. Junior Loans include secured and unsecured loans including subordinated loans, second lien and more junior loans, and bridge loans. Second lien and more junior loans (Junior Lien Loans) are generally second or further in line in terms of repayment priority. In addition, Junior Lien Loans may have a claim on the same collateral pool as the first lien or other more senior liens or may be secured by a separate set of assets. Junior Lien Loans generally give investors priority over general unsecured creditors in the event of an asset sale.
Junior Loans that are bridge loans or bridge facilities (Bridge Loans) are short-term loan arrangements (e.g., 12 to 18 months) typically made by an Obligor in anticipation of intermediate-term or long-term permanent financing. Most Bridge Loans are structured as floating-rate debt with step-up provisions under which the interest rate on the Bridge Loan rises the longer the Loan remains outstanding. In addition, Bridge Loans commonly contain a conversion feature that allows the Bridge Loan investor to convert its Loan interest to senior exchange notes if the Loan has not been prepaid in full on or prior to its maturity date. Bridge Loans may be subordinate to other debt and may be secured or undersecured.
Additional Information concerning Unfunded Commitments. Unfunded Commitments are contractual obligations pursuant to which the Fund agrees to invest in a Loan at a future date. Typically, the Fund receives a commitment fee for entering into the Unfunded Commitment.
Additional Information concerning Synthetic Letters of Credit. Loans include synthetic letters of credit. In a synthetic letter of credit transaction, the Lender typically creates a special purpose entity or a credit-linked deposit account for the purpose of funding a letter of credit to the borrower. When a Fund invests in a synthetic letter of credit, the Fund is typically paid a rate based on the Lenders borrowing costs and the terms of the synthetic letter of credit. Synthetic letters of credit are typically structured as Assignments with the Fund acquiring direct rights against the Obligor.
Limitations on Investments in Loan Assignments and Participations. If a government entity is a borrower on a Loan, the Fund will consider the government to be the issuer of a Participation or Assignment for purposes of a Funds fundamental investment policy that it will not invest 25% or more of its total assets in securities of issuers conducting their principal business activities in the same industry (i.e., foreign government).
Risk Factors of Loan Assignments and Participations. Loans are subject to the risks associated with debt obligations in general including interest rate risk, credit risk, and market risk. The credit risk when a Loan is acquired from a Lender includes the credit risk associated with the Obligor of the underlying Loan. The Fund may incur additional credit risk when the Fund acquires a participation in a Loan from another
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lender because the Fund must assume the risk of insolvency or bankruptcy of the other lender from which the Loan was acquired. To the extent that Loans involve Obligors in foreign or emerging markets, such Loans are subject to the risks associated with foreign investments or investments in emerging markets in general. The following outlines some of the additional risks associated with Loan Assignments and Participations.
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High Yield Securities Risk. The Loans that a Fund invests in may not be rated by a NRSRO, will not be registered with the SEC or any state securities commission and will not be listed on any national securities exchange. To the extent that such high yield Loans are rated, they typically will be rated below investment grade and are subject to an increased risk of default in the payment of principal and interest as well as the other risks described under High Yield/High Risk Securities/Junk Bonds. Loans are vulnerable to market sentiment such that economic conditions or other events may reduce the demand for Loans and cause their value to decline rapidly and unpredictably. |
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Liquidity Risk. Although the Funds limit their investments in illiquid securities to no more than 15% of the Funds net assets at the time of purchase, Loans that are deemed to be liquid at the time of purchase may become illiquid or less liquid. No active trading market may exist for certain Loans and certain Loans may be subject to restrictions on resale or have a limited secondary market. Certain Loans may be subject to irregular trading activity, wide bid/ask spreads and extended trade settlement periods. The inability to dispose of certain Loans in a timely fashion or at a favorable price could result in losses to a Fund. |
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Collateral, Subordination and Litigation Risk. With respect to Loans that are secured, a Fund is subject to the risk that collateral securing the Loan will decline in value or have no value or that the Funds lien is or will become junior in payment to other liens. A decline in value, whether as a result of bankruptcy proceedings or otherwise, could cause the Loan to be undercollateralized or unsecured. There may be no formal requirement for the Obligor to pledge additional collateral. In addition, collateral may consist of assets that may not be readily liquidated, and there is no assurance that the liquidation of such assets would satisfy an Obligors obligation on a Loan. |
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If an Obligor becomes involved in bankruptcy proceedings, a court may invalidate the Loan or the Funds security interest in loan collateral or subordinate the Funds rights under a Senior Loan or Junior Loan to the interest of the Obligors other creditors, including unsecured creditors, or cause interest or principal previously paid to be refunded to the Obligor. If a court required interest or principal to be refunded, it could negatively affect Fund performance. Such action by a court could be based, for example, on a fraudulent conveyance claim to the effect that the Obligor did not receive fair consideration for granting the security interest in the Loan collateral to a Fund. For Senior Loans made in connection with a highly leveraged transaction, consideration for granting a security interest may be deemed inadequate if the proceeds of the Loan were not received or retained by the Obligor, but were instead paid to other persons (such as shareholders of the Obligor) in an amount which left the Obligor insolvent or without sufficient working capital. There are also other events, such as the failure to perfect a security interest due to faulty documentation or faulty official filings, which could lead to the invalidation of a Funds security interest in Loan collateral. If the Funds security interest in Loan collateral is invalidated or the Senior Loan is subordinated to other debt of an Obligor in bankruptcy or other proceedings, the Fund would have substantially lower recovery, and perhaps no recovery on the full amount of the principal and interest due on the Loan, or the Fund could have to refund interest. |
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Lenders and investors in Loans can be sued by other creditors and shareholders of the Obligors. Losses can be greater than the original Loan amount and occur years after the principal and interest on the Loan have been repaid. |
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Agent Risk. Selling Lenders, Agents and other entities who may be positioned between a Fund and the Obligor will likely conduct their principal business activities in the banking, finance |
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and financial services industries. Investments in Loans may be more impacted by a single economic, political, or regulatory occurrence affecting such industries than other types of investments. Entities engaged in such industries may be more susceptible to, among other things, fluctuations in interest rates, changes in the Federal Open Market Committees monetary policy, government regulations concerning such industries and concerning capital raising activities generally and fluctuations in the financial markets generally. An Agent, Lender or other entity positioned between a Fund and the Obligor may become insolvent or enter Federal Deposit Insurance Corporation ( FDIC ) receivership or bankruptcy. The Fund might incur certain costs and delays in realizing payment on a Loan, or suffer a loss of principal and/or interest if assets or interests held by the Agent, Lender or other party positioned between the Fund and the Obligor are determined to be subject to the claims of the Agents, Lenders or such other partys creditors. |
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Regulatory Changes. To the extent that legislation or state or federal regulators that regulate certain financial institutions impose additional requirements or restrictions with respect to the ability of such institutions to make Loans, particularly in connection with highly leveraged transactions, the availability of Loans for investment may be adversely affected. Furthermore, such legislation or regulation could depress the market value of Loans held by the Fund. |
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Inventory Risk. Affiliates of the Adviser may participate in the primary and secondary market for Loans. Because of limitations imposed by applicable law, the presence of the Advisers affiliates in the Loan market may restrict a Funds ability to acquire some Loans, affect the timing of such acquisition or affect the price at which the Loan is acquired. |
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Information Risk. There is typically less publicly available information concerning Loans than other types of fixed income investments. As a result, a Fund generally will be dependent on reports and other information provided by the Obligor, either directly or through an Agent, to evaluate the Obligors creditworthiness or to determine the Obligors compliance with the covenants and other terms of the Loan Agreement. Such reliance may make investments in Loans more susceptible to fraud than other types of investments. In addition, because the Adviser may wish to invest in the publicly traded securities of an Obligor, it may not have access to material non-public information regarding the Obligor to which other investors have access. |
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Junior Loan Risk. Junior Loans are subject to the same general risks inherent to any Loan investment. Due to their lower place in the Obligors capital structure and possible unsecured status, Junior Loans involve a higher degree of overall risk than Senior Loans of the same Obligor. Junior Loans that are Bridge Loans generally carry the expectation that the Obligor will be able to obtain permanent financing in the near future. Any delay in obtaining permanent financing subjects the Bridge Loan investor to increased risk. An Obligors use of Bridge Loans also involves the risk that the Obligor may be unable to locate permanent financing to replace the Bridge Loan, which may impair the Obligors perceived creditworthiness. |
Miscellaneous Investment Strategies and Risks
Borrowings. A Fund may borrow for temporary purposes and/or for investment purposes. Such a practice will result in leveraging of a Funds assets and may cause a Fund to liquidate portfolio positions when it would not be advantageous to do so. This borrowing may be secured or unsecured. If a Fund utilizes borrowings, for investment purposes or otherwise, it may ordinarily pledge up to 331/3% of its total assets to secure such borrowings. Provisions of the 1940 Act require a Fund to maintain continuous asset coverage (that is, total assets including borrowings, less liabilities exclusive of borrowings) of 300% of the amount borrowed, with an exception for borrowings not in excess of 5% of the Funds total assets made for temporary administrative or emergency purposes. Any borrowings for temporary administrative purposes in excess of 5% of the Funds total assets must maintain continuous asset coverage. If the 300% asset coverage should decline as a result of market fluctuations or other reasons, a Fund may be required to sell some of its portfolio holdings within three days to reduce the debt and restore the 300% asset coverage, even though it
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may be disadvantageous from an investment standpoint to sell securities at that time. Borrowing will tend to exaggerate the effect on net asset value of any increase or decrease in the market value of a Funds portfolio. Money borrowed will be subject to interest costs which may or may not be recovered by appreciation of the securities purchased. A Fund may also be required to maintain minimum average balances in connection with such borrowing or to pay a commitment or other fee to maintain a line of credit; either of these requirements would increase the cost of borrowing over the stated interest rate.
Certain types of investments are considered to be borrowings under precedents issued by the SEC. Such investments are subject to the limitations as well as asset segregation requirements.
New Financial Products. New options and futures contracts and other financial products, and various combinations thereof, including over-the-counter ( OTC ) products, continue to be developed. These various products may be used to adjust the risk and return characteristics of certain Funds investments. These various products may increase or decrease exposure to security prices, interest rates, commodity prices, or other factors that affect security values, regardless of the issuers credit risk. If market conditions do not perform as expected, the performance of a Fund would be less favorable than it would have been if these products were not used. In addition, losses may occur if counterparties involved in transactions do not perform as promised. These products may expose the Fund to potentially greater return as well as potentially greater risk of loss than more traditional fixed income investments.
Private Placements, Restricted Securities and Other Unregistered Securities. Subject to its policy limitation, a Fund may acquire investments that are illiquid or have limited liquidity, such as commercial obligations issued in reliance on the so-called private placement exemption from registration afforded by Section 4(2) under the Securities Act, and cannot be offered for public sale in the United States without first being registered under the Securities Act. An illiquid investment is any investment that cannot be disposed of within seven days in the normal course of business at approximately the amount at which it is valued by a Fund. The price a Fund pays for illiquid securities or receives upon resale may be lower than the price paid or received for similar securities with a more liquid market. Accordingly the valuation of these securities will reflect any limitations on their liquidity.
A Fund is subject to a risk that should the Fund decide to sell illiquid securities when a ready buyer is not available at a price the Fund deems representative of their value, the value of the Funds net assets could be adversely affected. Where an illiquid security must be registered under the Securities Act before it may be sold, a Fund may be obligated to pay all or part of the registration expenses, and a considerable period may elapse between the time of the decision to sell and the time the Fund may be permitted to sell a security under an effective registration statement. If, during such a period, adverse market conditions were to develop, a Fund might obtain a less favorable price than prevailed when it decided to sell.
The Funds may invest in commercial paper issued in reliance on the exemption from registration afforded by Section 4(2) of the Securities Act and other restricted securities (i.e., other securities subject to restrictions on resale). Section 4(2) commercial paper (4(2) Paper) is restricted as to disposition under federal securities law and is generally sold to institutional investors, such as the Funds, that agree that they are purchasing the paper for investment purposes and not with a view to public distribution. Any resale by the purchaser must be in an exempt transaction. 4(2) Paper is normally resold to other institutional investors through or with the assistance of the issuer or investment dealers who make a market in 4(2) Paper, thus providing liquidity. The Funds believe that 4(2) Paper and possibly certain other restricted securities which meet the criteria for liquidity established by the Trustees are quite liquid. The Funds intend, therefore, to treat restricted securities that meet the liquidity criteria established by the Board of Trustees, including 4(2) Paper and Rule 144A securities, as determined by the Funds Adviser, as liquid and not subject to the investment limitation applicable to illiquid securities.
The ability of the Trustees to determine the liquidity of certain restricted securities is permitted under an SEC Staff position set forth in the adopting release for Rule 144A under the Securities Act (Rule 144A). Rule 144A is a nonexclusive safe-harbor for certain secondary market transactions involving securities
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subject to restrictions on resale under federal securities laws. Rule 144A provides an exemption from registration for resales of otherwise restricted securities to qualified institutional buyers. Rule 144A was expected to further enhance the liquidity of the secondary market for securities eligible for resale. The Funds believe that the Staff of the SEC has left the question of determining the liquidity of all restricted securities to the Trustees. The Trustees have directed each Funds Adviser to consider the following criteria in determining the liquidity of certain restricted securities:
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the frequency of trades and quotes for the security; |
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the number of dealers willing to purchase or sell the security and the number of other potential buyers : |
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dealer undertakings to make a market in the security; and |
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the nature of the security and the nature of the marketplace trades. |
Certain 4(2) Paper programs cannot rely on Rule 144A because, among other things, they were established before the adoption of the rule. However, the Trustees may determine for purposes of the Trusts liquidity requirements that an issue of 4(2) Paper is liquid if the following conditions, which are set forth in a 1994 SEC no-action letter, are met:
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The 4(2) Paper must not be traded flat or in default as to principal or interest; |
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The 4(2) Paper must be rated in one of the two highest rating categories by at least two NRSROs, or if only one NRSRO rates the security, by that NRSRO, or if unrated, is determined by a Funds Adviser to be of equivalent quality; |
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The Funds Adviser must consider the trading market for the specific security, taking into account all relevant factors, including but not limited to, whether the paper is the subject of a commercial paper program that is administered by an issuing and paying agent bank and for which there exists a dealer willing to make a market in that paper, or is administered by a direct issuer pursuant to a direct placement program; |
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The Funds Adviser shall monitor the liquidity of the 4(2) Paper purchased and shall report to the Board of Trustees promptly if any such securities are no longer determined to be liquid if such determination causes a Fund to hold more than 10% of its net assets in illiquid securities in order for the Board of Trustees to consider what action, if any, should be taken on behalf of the Trust, unless the Funds Adviser is able to dispose of illiquid assets in an orderly manner in an amount that reduces the Funds holdings of illiquid assets to less than 10% of its net assets; and |
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The Funds Adviser shall report to the Board of Trustees on the appropriateness of the purchase and retention of liquid restricted securities under these guidelines no less frequently than quarterly. |
Securities Issued in Connection with Reorganizations and Corporate Restructuring. Debt securities may be downgraded and issuers of debt securities including investment grade securities may default in the payment of principal or interest or be subject to bankruptcy proceedings. In connection with reorganizing or restructuring of an issuer, an issuer may issue common stock or other securities to holders of its debt securities. A Fund may hold such common stock and other securities even though it does not ordinarily invest in such securities.
Temporary Defensive Positions. To respond to unusual market conditions, certain of the Funds may invest their assets in cash or cash equivalents. Cash equivalents are highly liquid, high quality instruments with maturities of three months or less on the date they are purchased (Cash Equivalents) for temporary defensive purposes . These investments may result in a lower yield than lower-quality or longer
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term investments and may prevent the Funds from meeting their investment objectives. The percentage of Fund assets that a Fund may invest in cash or cash equivalents is described in the Funds Confidential Offering Memorandum. They include securities issued by the U.S. government, its agencies and instrumentalities, repurchase agreements with maturities of 7 days or less (other than equity repurchase agreements), certificates of deposit, bankers acceptances, commercial paper (rated in one of the two highest rating categories), variable rate master demand notes, money market mutual funds (including affiliated money market funds), and bank money market deposit accounts.
Mortgage-Related Securities
Mortgages (Directly Held). Mortgages are debt instruments secured by real property. Unlike mortgage-backed securities, which generally represent an interest in a pool of mortgages, direct investments in mortgages involve prepayment and credit risks of an individual issuer and real property. Consequently, these investments require different investment and credit analysis by a Funds Adviser.
Directly placed mortgages may include residential mortgages, multifamily mortgages, mortgages on cooperative apartment buildings, commercial mortgages, and sale-leasebacks. These investments are backed by assets such as office buildings, shopping centers, retail stores, warehouses, apartment buildings and single-family dwellings. In the event that a Fund forecloses on any non-performing mortgage, and acquires a direct interest in the real property, such Fund will be subject to the risks generally associated with the ownership of real property. There may be fluctuations in the market value of the foreclosed property and its occupancy rates, rent schedules and operating expenses. There may also be adverse changes in local, regional or general economic conditions, deterioration of the real estate market and the financial circumstances of tenants and sellers, unfavorable changes in zoning, building, environmental and other laws, increased real property taxes, rising interest rates, reduced availability and increased cost of mortgage borrowings, the need for unanticipated renovations, unexpected increases in the cost of energy, environmental factors, acts of God and other factors which are beyond the control of a Fund or the Funds Adviser. Hazardous or toxic substances may be present on, at or under the mortgaged property and adversely affect the value of the property. In addition, the owners of property containing such substances may be held responsible, under various laws, for containing, monitoring, removing or cleaning up such substances. The presence of such substances may also provide a basis for other claims by third parties. Costs of clean up or of liabilities to third parties may exceed the value of the property. In addition, these risks may be uninsurable. In light of these and similar risks, it may be impossible to dispose profitably of properties in foreclosure.
Mortgage-Backed Securities (CMOs and REMICs). Mortgage-backed securities include collateralized mortgage obligations (CMOs) and Real Estate Mortgage Investment Conduits (REMICs). (A REMIC is a CMO that qualifies for special tax treatment under the Internal Revenue Code of 1986, as amended (the Code ) and invests in certain mortgages principally secured by interests in real property and other permitted investments).
Mortgage-backed securities represent pools of mortgage loans assembled for sale to investors by:
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various governmental agencies such as the Government National Mortgage Association (Ginnie Mae); |
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government-related organizations such as the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac); and |
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non-governmental issuers such as commercial banks, savings and loan institutions, mortgage bankers, and private mortgage insurance companies. (Non-governmental mortgage securities cannot be treated as U.S. government securities for purposes of investment policies). |
There are a number of important differences among the agencies and instrumentalities of the U.S. government that issue mortgage-related securities and among the securities that they issue.
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Ginnie Mae Securities. Mortgage-related securities issued by Ginnie Mae include Ginnie Mae Mortgage Pass-Through Certificates which are guaranteed as to the timely payment of principal and interest by Ginnie Mae. Ginnie Maes guarantee is backed by the full faith and credit of the United States. Ginnie Mae is a wholly-owned U.S. government corporation within the Department of Housing and Urban Development. Ginnie Mae certificates also are supported by the authority of Ginnie Mae to borrow funds from the U.S. Treasury to make payments under its guarantee.
Fannie Mae Securities. Mortgage-related securities issued by Fannie Mae include Fannie Mae Guaranteed Mortgage Pass-Through Certificates which are solely the obligations of Fannie Mae and are not backed by or entitled to the full faith and credit of the United States. Fannie Mae is a government-sponsored organization owned entirely by private stockholders. Fannie Mae Certificates are guaranteed as to timely payment of the principal and interest by Fannie Mae.
Freddie Mac Securities. Mortgage-related securities issued by Freddie Mac include Freddie Mac Mortgage Participation Certificates. Freddie Mac is a corporate instrumentality of the United States, created pursuant to an Act of Congress, which is owned by private stockholders. Freddie Mac Certificates are not guaranteed by the United States or by any Federal Home Loan Bank and do not constitute a debt or obligation of the United States or of any Federal Home Loan Bank. Freddie Mac Certificates entitle the holder to timely payment of interest, which is guaranteed by Freddie Mac. Freddie Mac guarantees either ultimate collection or timely payment of all principal payments on the underlying mortgage loans. When Freddie Mac does not guarantee timely payment of principal, Freddie Mac may remit the amount due on account of its guarantee of ultimate payment of principal at any time after default on an underlying mortgage, but in no event later than one year after it becomes payable.
For more information on recent events impacting Fannie Mae and Freddie Mac securities, see Recent Events Regarding Fannie Mae and Freddie Mac Securities under the heading Risk Factors of Mortgage-Related Securities below.
CMOs and guaranteed REMIC pass-through certificates (REMIC Certificates) issued by Fannie Mae, Freddie Mac, Ginnie Mae and private issuers are types of multiple class pass-through securities. Investors may purchase beneficial interests in REMICs, which are known as regular interests or residual interests. The Funds do not currently intend to purchase residual interests in REMICs. 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 pass-through certificates (the Mortgage Assets). The obligations of Fannie Mae, Freddie Mac or Ginnie Mae under their respective guaranty of the REMIC Certificates are obligations solely of Fannie Mae, Freddie Mac or Ginnie Mae, respectively.
Fannie Mae REMIC Certificates. 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 REMIC Certificates. Freddie Mac guarantees the timely payment of interest, 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 residential mortgages or participation 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. Freddie Mac also guarantees timely payment of principal on certain PCs referred to as Gold PCs.
Ginnie Mae REMIC Certificates. Ginnie Mae guarantees the full and timely payment of interest and principal on each class of securities (in accordance with the terms of those classes as specified in the related
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offering circular supplement). The Ginnie Mae guarantee is backed by the full faith and credit of the United States of America.
REMIC Certificates issued by Fannie Mae, Freddie Mac and Ginnie Mae are treated as U.S. Government securities for purposes of investment policies.
CMOs and REMIC Certificates provide for the redistribution of cash flow to 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. This reallocation of interest and principal results in the redistribution of prepayment risk across different classes. This allows for the creation of bonds with more or less risk than the underlying collateral exhibits. 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, principal only structures, interest only structures, inverse floaters and parallel pay CMOs and REMIC Certificates. Certain of these structures may be more volatile than other types of CMO and REMIC structures. 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 the 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 which generally require that specified amounts of principal be applied on each payment date to one or more classes of 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 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 of principal 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 the PAC classes. The Z-Bonds in which the Funds may invest may bear the same non-credit-related risks as do other types of Z-Bonds. Z-Bonds in which the Fund may invest will not include residual interest.
Total Annual Operating Expenses set forth in the fee table section of the Confidential Offering Memorandum do not include any expenses associated with investments in certain structured or synthetic products that may rely on the exception for the definition of investment company provided by section 3(c)(1) or 3(c)(7) of the 1940 Act.
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Limitations on the use of Mortgage-Backed Securities
Bond Funds. The Bond Funds invest in mortgage-backed securities may invest in mortgage-backed securities issued by private issuers including Guaranteed CMOs and REMIC pass-through securities. The Bond Funds may also invest in mortgage-backed securities that are rated in one of the four highest rating categories by at least one NRSRO at the time of investment or, if unrated, determined by JPMIM to be of comparable quality.
Mortgage Dollar Rolls. When a Fund enters into mortgage dollar rolls, it sells securities for delivery in the current month and simultaneously contracts with the same counterparty to repurchase similar (same type, coupon and maturity) but not identical securities on a specified future date. When a Fund enters into mortgage dollar rolls, the Fund earmarks and reserves until the settlement date Fund assets, in cash or liquid securities in an amount equal to the forward purchase price. The Fund benefits to the extent of:
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any difference between the price received for the securities sold and the lower forward price for the future purchase (often referred to as the drop); or |
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fee income plus the interest earned on the cash proceeds of the securities sold until the settlement date of the forward purchase. |
Unless such benefits exceed the income, capital appreciation or gains on the securities sold as part of the mortgage dollar roll, the investment performance of a Fund will be less than what the performance would have been without the use of mortgage dollar rolls. The benefits of mortgage dollar rolls may depend upon JPMIMs ability to predict mortgage prepayments and interest rates. There is no assurance that mortgage dollar rolls can be successfully employed. The Funds currently intend to enter into mortgage dollar rolls that are accounted for as a financing transaction. For purposes of diversification and investment limitations, mortgage dollar rolls are considered to be mortgage-backed securities.
Stripped Mortgage-Backed Securities. Stripped Mortgage-Backed Securities (SMBS) are derivative multi-class mortgage securities issued outside the REMIC or CMO structure. SMBS are usually structured with two classes that receive different proportions of the interest and principal distributions from a pool of mortgage assets. A common type of SMBS will have one class receiving all of the interest from the mortgage assets (IOs), while the other class will receive all of the principal (POs). Mortgage IOs receive monthly interest payments based upon a notional amount that declines over time as a result of the normal monthly amortization and unscheduled prepayments of principal on the associated mortgage POs.
In addition to the risks applicable to Mortgage-Related Securities in general, SMBS are subject to the following additional risks:
Prepayment/Interest Rate Sensitivity. SMBS are extremely sensitive to changes in prepayments and interest rates. Even though these securities have been guaranteed by an agency or instrumentality of the U.S. government, under certain interest rate or prepayment rate scenarios, the Funds may lose money on investments in SMBS.
Interest Only SMBS. Changes in prepayment rates can cause the return on investment in IOs to be highly volatile. Under extremely high prepayment conditions, IOs can incur significant losses.
Principal Only SMBS. POs are bought at a discount to the ultimate principal repayment value. The rate of return on a PO will vary with prepayments, rising as prepayments increase and falling as prepayments decrease. Generally, the market value of these securities is unusually volatile in response to changes in interest rates.
Yield Characteristics. Although SMBS may yield more than other mortgage-backed securities, their cash flow patterns are more volatile and there is a greater risk that any premium paid will not be fully
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recouped. JPMIM will seek to manage these risks (and potential benefits) by investing in a variety of such securities and by using certain analytical and hedging techniques.
The Bond Funds may invest in SMBS to enhance revenues or hedge against interest rate risk. The Funds invest in SMBS issued or guaranteed by the U.S. government, its agencies or instrumentalities (Agency SMBS). To the extent that Non Agency SMBS are issued, the Funds may buy them to the extent such investment is consistent with the applicable Funds investment objective, strategies and policies.
Adjustable Rate Mortgage Loans. The Bond Funds may invest in adjustable rate mortgage loans (ARMs). ARMs eligible for inclusion in a mortgage pool will 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 gross margin, which is a fixed percentage spread over the Index Rate established for each ARM at the time of its origination.
Adjustable interest rates can cause payment increases that some borrowers 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 achieve 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. These limitations on periodic increases in interest rates and on changes in monthly payments protect borrowers from unlimited interest rate and payment increases.
Certain ARMs may provide for periodic adjustments of scheduled payments in order to amortize fully the mortgage loan by its stated maturity. Other ARMs may permit their stated maturity to be extended or shortened in accordance with the portion of each payment that is applied to interest as affected by the periodic interest rate adjustments.
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. Commonly utilized indices include the one-year, three-year and five-year constant maturity Treasury bill 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 (LIBOR), 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 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.
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In general, changes in both prepayment rates and interest rates will change the yield on Mortgage-Backed Securities. The rate of principal prepayments with respect to ARMs has fluctuated in recent years. As is the case with fixed mortgage loans, ARMs may be subject to a greater rate of principal prepayments in a declining interest rate environment. For example, if prevailing interest rates fall significantly, ARMs could be subject to higher prepayment rates than if prevailing interest rates remain constant because the availability of fixed rate mortgage loans at competitive interest rates may encourage mortgagors to refinance their ARMs to lock-in a lower fixed interest rate. Conversely, if prevailing interest rates rise significantly, ARMs may prepay at lower rates than if prevailing rates remain at or below those in effect at the time such ARMs were originated. As with fixed rate mortgages, there can be no certainty as to the rate of prepayments on the ARMs in either stable or changing interest rate environments. In addition, there can be no certainty as to whether increases in the principal balances of the ARMs due to the addition of deferred interest may result in a default rate higher than that on ARMs that do not provide for negative amortization.
Other factors affecting prepayment of ARMs include changes in mortgagors housing needs, job transfers, unemployment, mortgagors net equity in the mortgage properties and servicing decisions.
Risk Factors of Mortgage-Related Securities. The following is a summary of certain risks associated with Mortgage- Related Securities.
Guarantor Risk. There can be no assurance that the U.S. government would provide financial support to Fannie Mae or Freddie Mac if necessary in the future. Although certain mortgage-related securities are guaranteed by a third party or otherwise similarly secured, the market value of the security, which may fluctuate, is not so secured.
Interest Rate Sensitivity. If a Fund purchases a mortgage-related security at a premium, that portion may be lost if there is a decline in the market value of the security whether resulting from changes in interest rates or prepayments in the underlying mortgage collateral. As with other interest-bearing securities, the prices of such securities are inversely affected by changes in interest rates. Although the value of a mortgage-related security may decline when interest rates rise, the converse is not necessarily true since in periods of declining interest rates the mortgages underlying the securities are prone to prepayment. For this and other reasons, a mortgage-related securitys stated maturity may be shortened by unscheduled prepayments on the underlying mortgages and, therefore, it is not possible to predict accurately the securitys return to the Fund. In addition, regular payments received in respect of mortgage-related securities include both interest and principal. No assurance can be given as to the return a Fund will receive when these amounts are reinvested.
Market Value. The market value of the Funds adjustable rate Mortgage-Backed Securities may be adversely affected if interest rates increase faster than the rates of interest payable on such securities or by the adjustable rate mortgage loans underlying such securities. Furthermore, adjustable rate Mortgage-Backed Securities or the mortgage loans underlying such securities may contain provisions limiting the amount by which rates may be adjusted upward and downward and may limit the amount by which monthly payments may be increased or decreased to accommodate upward and downward adjustments in interest rates. When the market value of the properties underlying the Mortgage-Backed Securities suffer broad declines on a regional or national level, the values of the corresponding Mortgage-Backed Securities or Mortgage-Backed Securities as a whole, may be adversely affected as well.
Prepayments. Adjustable rate Mortgage-Backed Securities have less potential for capital appreciation than fixed rate Mortgage-Backed Securities because their coupon rates will decline in response to market interest rate declines. The market value of fixed rate Mortgage-Backed Securities may be adversely affected as a result of increases in interest rates and, because of the risk of unscheduled principal prepayments, may benefit less than other fixed rate securities of similar maturity from declining interest rates. Finally, to the extent Mortgage-Backed Securities are purchased at a premium, mortgage foreclosures and unscheduled principal prepayments may result in some loss of the Funds principal investment to the extent of the premium paid. On the other hand, if such securities are purchased at a discount, both a
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scheduled payment of principal and an unscheduled prepayment of principal will increase current and total returns and will accelerate the recognition of income.
Recent Events Regarding Fannie Mae and Freddie Mac Securities. The value of Fannie Mae and Freddie Macs securities fell sharply in 2008 due to concerns that the firms did not have sufficient capital to offset losses. In mid-2008, the U.S. Treasury was authorized to increase the size of home loans that Fannie Mae and Freddie Mac could purchase in certain residential areas and, until 2009, to lend Fannie Mae and Freddie Mac emergency funds and to purchase the companies stock. More recently, in September 2008, the U.S. Treasury announced that Fannie Mae and Freddie Mac had been placed in conservatorship by the Federal Housing Finance Agency (FHFA), a newly created independent regulator. In addition to placing the companies in conservatorship, the U.S. Treasury announced three additional steps that it intended to take with respect to Fannie Mae and Freddie Mac. First, the U.S. Treasury has entered into Preferred Stock Purchase Agreements (PSPAs) under which, if the FHFA determines that Fannie Maes or Freddie Macs liabilities have exceeded its assets under generally accepted accounting principles, the U.S. Treasury will contribute cash capital to the company in an amount equal to the difference between liabilities and assets. The PSPAs are designed to provide protection to the senior and subordinated debt and the mortgagebacked securities issued by Fannie Mae and Freddie Mac. Second, the U.S. Treasury established a new secured lending credit facility that is available to Fannie Mae and Freddie Mac until December 2009. Third, the U.S. Treasury initiated a temporary program to purchase Fannie Mae and Freddie Mac mortgagebacked securities, which is expected to continue until December 2009. No assurance can be given that the U.S. Treasury initiatives discussed above with respect to the debt and mortgage-backed securities issued by Fannie Mae and Freddie Mac will be successful.
Yield Characteristics. The yield characteristics of Mortgage-Backed Securities differ from those of traditional fixed income securities. The major differences typically include more frequent interest and principal payments, usually monthly, and the possibility that prepayments of principal may be made at any time. Prepayment rates are influenced by changes in current interest rates and a variety of economic, geographic, social and other factors and cannot be predicted with certainty. As with fixed rate mortgage loans, adjustable rate mortgage loans may be subject to a greater prepayment rate in a declining interest rate environment. The yields to maturity of the Mortgage-Backed Securities in which the Funds invest will be affected by the actual rate of payment (including prepayments) of principal of the underlying mortgage loans. The mortgage loans underlying such securities generally may be prepaid at any time without penalty. In a fluctuating interest rate environment, a predominant factor affecting the prepayment rate on a pool of mortgage loans is the difference between the interest rates on the mortgage loans and prevailing mortgage loan interest rates taking into account the cost of any refinancing. In general, if mortgage loan interest rates fall sufficiently below the interest rates on fixed rate mortgage loans underlying mortgage pass-through securities, the rate of prepayment would be expected to increase. Conversely, if mortgage loan interest rates rise above the interest rates on the fixed rate mortgage loans underlying the mortgage pass-through securities, the rate of prepayment may be expected to decrease.
Municipal Securities
Municipal Securities are issued to obtain funds for a wide variety of reasons. For example, municipal securities may be issued to obtain funding for the construction of a wide range of public facilities such as:
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bridges, |
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highways, |
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roads, |
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schools, |
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waterworks and sewer systems, and |
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other utilities. |
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Other public purposes for which Municipal Securities may be issued include:
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refunding outstanding obligations, |
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obtaining funds for general operating expenses, and |
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obtaining funds to lend to other public institutions and facilities. |
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In addition, certain debt obligations known as Private Activity Bonds may be issued by or on behalf of municipalities and public authorities to obtain funds to provide: |
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water, sewage and solid waste facilities, |
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qualified residential rental projects, |
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certain local electric, gas and other heating or cooling facilities, |
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qualified hazardous waste facilities, |
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high-speed intercity rail facilities, |
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governmentally-owned airports, docks and wharves and mass transportation facilities, |
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qualified mortgages, |
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student loan and redevelopment bonds, and |
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bonds used for certain organizations exempt from Federal income taxation. |
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Certain debt obligations known as Industrial Development Bonds under prior Federal tax law may have been issued by or on behalf of public authorities to obtain funds to provide: |
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privately operated housing facilities, |
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sports facilities, |
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industrial parks, |
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convention or trade show facilities, |
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airport, mass transit, port or parking facilities, |
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air or water pollution control facilities, |
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sewage or solid waste disposal facilities, and |
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facilities for water supply. |
Other private activity bonds and industrial development bonds issued to fund the construction, improvement, equipment or repair of privately-operated industrial, distribution, research, or commercial facilities may also be Municipal Securities, however, the size of such issues is limited under current and prior
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Federal tax law. The aggregate amount of most private activity bonds and industrial development bonds is limited (except in the case of certain types of facilities) under Federal tax law by an annual volume cap. The volume cap limits the annual aggregate principal amount of such obligations issued by or on behalf of all governmental instrumentalities in the state.
The two principal classifications of Municipal Securities consist of general obligation and limited (or revenue) issues. General obligation bonds are obligations involving the credit of an issuer possessing taxing power and are payable from the issuers general unrestricted revenues and not from any particular fund or source. The characteristics and method of enforcement of general obligation bonds vary according to the law applicable to the particular issuer, and payment may be dependent upon appropriation by the issuers legislative body. Limited obligation bonds are payable only from the revenues derived from a particular facility or class of facilities or, in some cases, from the proceeds of a special excise or other specific revenue source. Private activity bonds and industrial development bonds generally are revenue bonds and thus not payable from the unrestricted revenues of the issuer. The credit and quality of such bonds is generally related to the credit of the bank selected to provide the letter of credit underlying the bond. Payment of principal of and interest on industrial development revenue bonds is the responsibility of the corporate user (and any guarantor).
The Funds may also acquire moral obligation issues, which are normally issued by special purpose authorities, and in other tax-exempt investments including pollution control bonds and tax-exempt commercial paper. Each Fund that may purchase municipal bonds may purchase:
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Short-term tax-exempt General Obligations Notes, |
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Tax Anticipation Notes, |
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Bond Anticipation Notes, |
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Revenue Anticipation Notes, |
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Project Notes, and |
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Other forms of short-term tax-exempt loans. |
Such notes are issued with a short-term maturity in anticipation of the receipt of tax funds, the proceeds of bond placements, or other revenues. Project Notes are issued by a state or local housing agency and are sold by the Department of Housing and Urban Development. While the issuing agency has the primary obligation with respect to its Project Notes, they are also secured by the full faith and credit of the United States through agreements with the issuing authority which provide that, if required, the Federal government will lend the issuer an amount equal to the principal of and interest on the Project Notes.
There are, of course, variations in the quality of Municipal Securities, both within a particular classification and between classifications. Also, the yields on Municipal Securities depend upon a variety of factors, including:
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general money market conditions, |
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coupon rate, |
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the financial condition of the issuer, |
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general conditions of the municipal bond market, |
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the size of a particular offering, |
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the maturity of the obligations, and |
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the rating of the issue. |
The ratings of Moodys and S&P represent their opinions as to the quality of Municipal Securities. However, ratings are general and are not absolute standards of quality. Municipal Securities with the same maturity, interest rate and rating may have different yields while Municipal Securities of the same maturity and interest rate with different ratings may have the same yield. Subsequent to its purchase by a Fund, an issue of Municipal Securities may cease to be rated or its rating may be reduced below the minimum rating required for purchase by the Fund. JPMIM will consider such an event in determining whether the Fund should continue to hold the obligations.
Municipal Securities may include obligations of municipal housing authorities and single-family mortgage revenue bonds. Weaknesses in Federal housing subsidy programs and their administration may result in a decrease of subsidies available for payment of principal and interest on housing authority bonds. Economic developments, including fluctuations in interest rates and increasing construction and operating costs, may also adversely impact revenues of housing authorities. In the case of some housing authorities, inability to obtain additional financing could also reduce revenues available to pay existing obligations.
Single-family mortgage revenue bonds are subject to extraordinary mandatory redemption at par in whole or in part from the proceeds derived from prepayments of underlying mortgage loans and also from the unused proceeds of the issue within a stated period which may be within a year from the date of issue.
Municipal leases are obligations issued by state and local governments or authorities to finance the acquisition of equipment and facilities. Municipal leases may be considered to be illiquid. They may take the form of a lease, an installment purchase contract, a conditional sales contract, or a participation interest in any of the above. The Board of Trustees is responsible for determining the credit quality of unrated municipal leases, on an ongoing basis, including an assessment of the likelihood that the lease will not be canceled.
Premium Securities. During a period of declining interest rates, many Municipal Securities in which the Funds may invest likely will bear coupon rates higher than current market rates, regardless of whether the securities were initially purchased at a premium.
Risk Factors in Municipal Securities. The following is a summary of certain risks associated with Municipal Securities.
Tax Risk. The Code imposes certain continuing requirements on issuers of tax-exempt bonds regarding the use, expenditure and investment of bond proceeds and the payment of rebates to the United States of America. Failure by the issuer to comply subsequent to the issuance of tax-exempt bonds with certain of these requirements could cause interest on the bonds to become includable in gross income retroactive to the date of issuance.
Housing Authority Tax Risk. The exclusion from gross income for federal income tax purposes for certain housing authority bonds depends on qualification under relevant provisions of the Code and on other provisions of federal law. These provisions of federal law contain requirements relating to the cost and location of the residences financed with the proceeds of the single-family mortgage bonds and the income levels of tenants of the rental projects financed with the proceeds of the multi-family housing bonds. Typically, the issuers of the bonds, and other parties, including the originators and servicers of the single-family mortgages and the owners of the rental projects financed with the multi-family housing bonds, covenant to meet these requirements. However, there is no assurance that the requirements will be met. If such requirements are not met:
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the interest on the bonds may become taxable, possibly retroactively from the date of issuance; |
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the value of the bonds may be reduced; |
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you and other Shareholders may be subject to unanticipated tax liabilities; |
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a Fund may be required to sell the bonds at the reduced value; |
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it may be an event of default under the applicable mortgage; |
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the holder may be permitted to accelerate payment of the bond; and |
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the issuer may be required to redeem the bond. |
In addition, if the mortgage securing the bonds is insured by the Federal Housing Administration (FHA), the consent of the FHA may be required before insurance proceeds would become payable.
Information Risk. Information about the financial condition of issuers of Municipal Securities may be less available than that of corporations having a class of securities registered under the Securities Exchange Act of 1934, as amended (the Securities Exchange Act).
State and Federal Laws. An issuers obligations under its Municipal Securities are subject to the provisions of bankruptcy, insolvency, and other laws affecting the rights and remedies of creditors. These laws may extend the time for payment of principal or interest, or restrict the Funds ability to collect payments due on Municipal Securities. In addition, recent amendments to some statutes governing security interests (e.g., Revised Article 9 of the Uniform Commercial Code (UCC)) change the way in which security interests and liens securing Municipal Securities are perfected. These amendments may have an adverse impact on existing Municipal Securities (particularly issues of Municipal Securities that do not have a corporate trustee who is responsible for filing UCC financing statements to continue the security interest or lien).
Litigation and Current Developments. Litigation or other conditions may materially adversely affect the power or ability of an issuer to meet its obligations for the payment of interest on and principal of its Municipal Securities. Such litigation or conditions may from time to time have the effect of introducing uncertainties in the market for tax-exempt obligations, or may materially affect the credit risk with respect to particular bonds or notes. Adverse economic, business, legal or political developments might affect all or a substantial portion of a Funds Municipal Securities in the same manner.
New Legislation. From time to time, proposals have been introduced before Congress for the purpose of restricting or eliminating the federal income tax exemption for interest on tax exempt bonds, and similar proposals may be introduced in the future. The Supreme Court has held that Congress has the constitutional authority to enact such legislation. It is not possible to determine what effect the adoption of such proposals could have on (i) the availability of Municipal Securities for investment by the Funds, and (ii) the value of the investment portfolios of the Funds.
Limitations on the Use of Municipal Securities
The Funds may invest in Municipal Securities if JPMIM determines that such Municipal Securities offer attractive yields. The Funds may invest in Municipal Securities either by purchasing them directly or by purchasing certificates of accrual or similar instruments evidencing direct ownership of interest payments or principal payments, or both, on Municipal Securities, provided that, in the opinion of counsel to the initial seller of each such certificate or instrument, any discount accruing on such certificate or instrument that is purchased at a yield not greater than the coupon rate of interest on the related Municipal Securities will to the same extent as interest on such Municipal Securities be exempt from federal income tax and state income tax
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(where applicable) and not treated as a preference item for individuals for purposes of the federal alternative minimum tax.
The Funds may also invest in Municipal Securities by purchasing from banks participation interests in all or part of specific holdings of Municipal Securities. Such participation interests may be backed in whole or in part by an irrevocable letter of credit or guarantee of the selling bank. The selling bank may receive a fee from a Fund in connection with the arrangement. A Fund will not purchase participation interests unless it receives an opinion of counsel or a ruling of the Internal Revenue Service that interest earned by it on Municipal Securities in which it holds such participation interest is exempt from federal income tax and state income tax (where applicable) and not treated as a preference item for individuals for purposes of the federal alternative minimum tax. Each Fund will limit its investment in municipal leases to no more than 5% of its total assets.
Options and Futures Transactions
A Fund may purchase and sell (a) exchange traded and OTC put and call options on securities, indexes of securities and futures contracts on securities and indexes of securities and (b) futures contracts on securities and indexes of securities. Each of these instruments is a derivative instrument as its value derives from the underlying asset or index.
Subject to its investment objective and policies, a Fund may use futures contracts and options for hedging and risk management purposes and to seek to enhance portfolio performance. A Fund may not use futures contracts and options for speculation.
Options and futures contracts may be used to manage a Funds exposure to changing interest rates and/or security prices. Some options and futures strategies, including selling futures contracts and buying puts, tend to hedge a Funds investments against price fluctuations. Other strategies, including buying futures contracts and buying calls, tend to increase market exposure. Options and futures contracts may be combined with each other or with forward contracts in order to adjust the risk and return characteristics of a Funds overall strategy in a manner deemed appropriate by the Funds Adviser and consistent with the Funds objective and policies. Because combined options positions involve multiple trades, they result in higher transaction costs and may be more difficult to open and close out.
The use of options and futures is a highly specialized activity which involves investment strategies and risks different from those associated with ordinary portfolio securities transactions, and there can be no guarantee that their use will increase a Funds return. While the use of these instruments by a Fund may reduce certain risks associated with owning its portfolio securities, these techniques themselves entail certain other risks. If a Funds Adviser applies a strategy at an inappropriate time or judges market conditions or trends incorrectly, options and futures strategies may lower a Funds return. Certain strategies limit a Funds possibility to realize gains, as well as its exposure to losses. A Fund may also experience losses if the prices of its options and futures positions were poorly correlated with its other investments, or if it could not close out its positions because of an illiquid secondary market. In addition, the Fund will incur transaction costs, including trading commissions and option premiums, in connection with its futures and options transactions, and these transactions could significantly increase the Funds turnover rate.
The Funds have filed a 4.5 notice under the Commodity Exchange Act and are operated by a person who has claimed an exclusion from the definition of the term commodity pool operator under the Commodity Exchange Act and, therefore, who is not subject to registration or regulation as a pool operator under the Commodity Exchange Act.
Purchasing Put and Call Options. By purchasing a put option, a Fund obtains the right (but not the obligation) to sell the instrument underlying the option at a fixed strike price. In return for this right, a Fund pays the current market price for the option (known as the option premium). Options have various types of underlying instruments, including specific securities, indexes of securities, indexes of securities prices, and
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futures contracts. A Fund may terminate its position in a put option it has purchased by allowing it to expire or by exercising the option. A Fund may also close out a put option position by entering into an offsetting transaction, if a liquid market exists. If the option is allowed to expire, a Fund will lose the entire premium it paid. If a Fund exercises a put option on a security, it will sell the instrument underlying the option at the strike price. If a Fund exercises an option on an index, settlement is in cash and does not involve the actual purchase or sale of securities. If an option is American style, it may be exercised on any day up to its expiration date. A European style option may be exercised only on its expiration date.
The buyer of a typical put option can expect to realize a gain if the value of the underlying instrument falls substantially. However, if the price of the instrument underlying the option does not fall enough to offset the cost of purchasing the option, a put buyer can expect to suffer a loss (limited to the amount of the premium paid, plus related transaction costs).
The features of call options are essentially the same as those of put options, except that the purchaser of a call option obtains the right to purchase, rather than sell, the instrument underlying the option at the options strike price. A call buyer typically attempts to participate in potential price increases of the instrument underlying the option with risk limited to the cost of the option if security prices fall. At the same time, the buyer can expect to suffer a loss if security prices do not rise sufficiently to offset the cost of the option.
Selling (Writing) Put and Call Options. When a Fund writes a put option, it takes the opposite side of the transaction from the options purchaser. In return for the receipt of the premium, a Fund assumes the obligation to pay the strike price for the instrument underlying the option if the other party to the option chooses to exercise it. A Fund may seek to terminate its position in a put option it writes before exercise by purchasing an offsetting option in the market at its current price. If the market is not liquid for a put option a Fund has written, however, it must continue to be prepared to pay the strike price while the option is outstanding, regardless of price changes, and must continue to post margin as discussed below. If the market value of the underlying securities does not move to a level that would make exercise of the option profitable to its holder, the option will generally expire unexercised, and the Fund will realize as profit the premium it received.
If the price of the underlying instrument rises, a put writer would generally expect to profit, although its gain would be limited to the amount of the premium it received. If security prices remain the same over time, it is likely that the writer will also profit, because it should be able to close out the option at a lower price. If security prices fall, the put writer would expect to suffer a loss. This loss should be less than the loss from purchasing and holding the underlying instrument directly, however, because the premium received for writing the option should offset a portion of the decline.
Writing a call option obligates a Fund to sell or deliver the options underlying instrument in return for the strike price upon exercise of the option. The characteristics of writing call options are similar to those of writing put options, except that writing calls generally is a profitable strategy if prices remain the same or fall. Through receipt of the option premium a call writer offsets part of the effect of a price decline. At the same time, because a call writer must be prepared to deliver the underlying instrument in return for the strike price, even if its current value is greater, a call writer gives up some ability to participate in security price increases.
The writer of an exchange traded put or call option on a security, an index of securities or a futures contract is required to deposit cash or securities or a letter of credit as margin and to make mark to market payments of variation margin as the position becomes unprofitable.
Certain Funds may sell covered options. A call option is covered if the writer either owns the underlying security (or comparable securities satisfying the cover requirements of the securities exchanges) or has the right to acquire such securities. A put option is covered if the writer segregates cash, high-grade short-term debt obligations, or other permissible collateral equal to the exercise price. As the writer of a
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covered call option, the Fund foregoes, during the options life, the opportunity to profit from increases in the market value of the security covering the call option above the sum of the premium and the strike price of the call, but has retained the risk of loss should the price of the underlying security decline. As the Fund writes covered calls over more of its portfolio, its ability to benefit from capital appreciation becomes more limited. The writer of an option has no control over the time when it may be required to fulfill its obligation, but may terminate its position by entering into an offsetting option. Once an option writer has received an exercise notice, it cannot effect an offsetting transaction in order to terminate its obligation under the option and must deliver the underlying security at the exercise price.
When the Fund writes covered put options, it bears the risk of loss if the value of the underlying stock declines below the exercise price minus the put premium. If the option is exercised, the Fund could incur a loss if it is required to purchase the stock underlying the put option at a price greater than the market price of the stock at the time of exercise plus the put premium the Fund received when it wrote the option. While the Funds potential gain in writing a covered put option is limited to distributions earned on the liquid assets securing the put option plus the premium received from the purchaser of the put option, the Fund risks a loss equal to the entire exercise price of the option minus the put premium.
Engaging in Straddles and Spreads. In a straddle transaction, a Fund either buys a call and a put or sells a call and a put on the same security. In a spread, a Fund purchases and sells a call or a put. A Fund will sell a straddle when the Funds Adviser believes the price of a security will be stable. The Fund will receive a premium on the sale of the put and the call. A spread permits a Fund to make a hedged investment that the price of a security will increase or decline.
Options on Indexes. Options on securities indexes are similar to options on securities, except that the exercise of securities index options is settled by cash payment and does not involve the actual purchase or sale of securities. In addition, these 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. A Fund, in purchasing or selling index options, is subject to the risk that the value of its portfolio securities may not change as much as an index because a Funds investments generally will not match the composition of an index.
For a number of reasons, a liquid market may not exist and thus a Fund may not be able to close out an option position that it has previously entered into. When a Fund purchases an OTC option (as defined below), it will be relying on its counterparty to perform its obligations and the Fund may incur additional losses if the counterparty is unable to perform.
Exchange-Traded and OTC Options. All options purchased or sold by a Fund will be traded on a securities exchange or will be purchased or sold by securities dealers (OTC options) that meet the Funds creditworthiness standards. While exchange-traded options are obligations of the Options Clearing Corporation, in the case of OTC options, a Fund relies on the dealer from which it purchased the option to perform if the option is exercised. Thus, when a Fund purchases an OTC option, it relies on the dealer from which it purchased the option to make or take delivery of the underlying securities. Failure by the dealer to do so would result in the loss of the premium paid by a Fund as well as loss of the expected benefit of the transaction.
Provided that a Fund has arrangements with certain qualified dealers who agree that a Fund may repurchase any option it writes for a maximum price to be calculated by a predetermined formula, a Fund may treat the underlying securities used to cover written OTC options as liquid. In these cases, the OTC option itself would only be considered illiquid to the extent that the maximum repurchase price under the formula exceeds the intrinsic value of the option.
Futures Contracts. When a Fund purchases a futures contract, it agrees to purchase a specified quantity of an underlying instrument at a specified future date or , in the case of an index futures contract, to make a cash payment based on the value of a securities index. When a Fund sells a futures contract, it agrees to sell a specified quantity of the underlying instrument at a specified future date or in the case of an index
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futures contract, to receive a cash payment based on the value of a securities index. The price at which the purchase and sale will take place is fixed when a Fund enters into the contract. Futures can be held until their delivery dates or the position can be (and normally is) closed out before then. There is no assurance, however, that a liquid market will exist when the Fund wishes to close out a particular position.
When a Fund purchases a futures contract, the value of the futures contract tends to increase and decrease in tandem with the value of its underlying instrument. Therefore, purchasing futures contracts will tend to increase a Funds exposure to positive and negative price fluctuations in the underlying instrument, much as if it had purchased the underlying instrument directly. When a Fund sells a futures contract, by contrast, the value of its futures position will tend to move in a direction contrary to the value of the underlying instrument. Selling futures contracts, therefore, will tend to offset both positive and negative market price changes, much as if the underlying instrument had been sold.
The purchaser or seller of a futures contract is not required to deliver or pay for the underlying instrument unless the contract is held until the delivery date. However, when a Fund buys or sells a futures contract it will be required to deposit initial margin with a futures commission merchant (FCM). Initial margin deposits are typically equal to a small percentage of the contracts value. If the value of either partys position declines, that party will be required to make additional variation margin payments equal to the change in value on a daily basis. The party that has a gain may be entitled to receive all or a portion of this amount. A Fund may be obligated to make payments of variation margin at a time when it is disadvantageous to do so. Furthermore, it may not always be possible for a Fund to close out its futures positions. Until it closes out a futures position, a Fund will be obligated to continue to pay variation margin. Initial and variation margin payments do not constitute purchasing on margin for purposes of a Funds investment restrictions. In the event of the bankruptcy of an FCM that holds margin on behalf of a Fund, the Fund may be entitled to return of margin owed to it only in proportion to the amount received by the FCMs other customers, potentially resulting in losses to the Fund. Each Fund will earmark and reserve Fund assets, in cash or liquid securities, in connection with its use of options and futures contracts to the extent required by the staff of the SEC. Each Fund will earmark and reserve liquid assets in an amount equal to the current mark-to-market exposure, on a daily basis, of a futures contract that is contractually required to cash settle. Such assets cannot be sold while the futures contract or option is outstanding unless they are replaced with other suitable assets. By setting aside assets equal only to its net obligation under cash-settled futures, a Fund will have the ability to have exposure to such instruments to a greater extent than if a Fund were required to set aside assets equal to the full notional value of such contracts. There is a possibility that earmarking and reservation of a large percentage of a Funds assets could impede portfolio management or a Funds ability to meet redemption requests or other current obligations.
The Funds only invest in futures contracts to the extent they could invest in the underlying instrument directly.
Cash Equitization. The objective where equity futures are used to equitize cash is to match the notional value of all futures contracts to a Funds cash balance. The notional values of the futures contracts and of the cash are monitored daily. As the cash is invested in securities and/or paid out to participants in redemptions, the Adviser simultaneously adjusts the futures positions. Through such procedures, a Fund not only gains equity exposure from the use of futures, but also benefits from increased flexibility in responding to client cash flow needs. Additionally, because it can be less expensive to trade a list of securities as a package or program trade rather than as a group of individual orders, futures provide a means through which transaction costs can be reduced. Such non-hedging risk management techniques involve leverage and thus, present, as do all leveraged transactions, the possibility of losses as well as gains that are greater than if these techniques involved the purchase and sale of the securities themselves rather than their synthetic derivatives.
Options on Futures Contracts. Futures contracts obligate the buyer to take and the seller to make delivery at a future date of a specified quantity of a financial instrument or an amount of cash based on the value of a securities index. Currently, futures contracts are available on various types of securities, including but not limited to U.S. Treasury bonds, notes and bills, Eurodollar certificates of deposit and on indexes of
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securities. Unlike a futures contract, which requires the parties to buy and sell a security or make a cash settlement payment based on changes in a financial instrument or securities index on an agreed date, an option on a futures contract entitles its holder to decide on or before a future date whether to enter into such a contract. If the holder decides not to exercise its option, the holder may close out the option position by entering into an offsetting transaction or may decide to let the option expire and forfeit the premium thereon. The purchaser of an option on a futures contract pays a premium for the option but makes no initial margin payments or daily payments of cash in the nature of variation margin payments to reflect the change in the value of the underlying contract as does a purchaser or seller of a futures contract.
The seller of an option on a futures contract receives the premium paid by the purchaser and may be required to pay initial margin. Amounts equal to the initial margin and any additional collateral required on any options on futures contracts sold by a Fund are earmarked by a Fund and set aside by the Fund, as required by the 1940 Act and the SECs interpretations thereunder.
Combined Positions. Certain Funds may purchase and write options in combination with futures or forward contracts, to adjust the risk and return characteristics of the overall position. For example, a Fund may purchase a put option and write a call option on the same underlying instrument, in order to construct a combined position whose risk and return characteristics are similar to selling a futures contract. Another possible combined position would involve writing a call option at one strike price and buying a call option at a lower price, in order to reduce the risk of the written call option in the event of a substantial price increase. Because combined options positions involve multiple trades, they result in higher transaction costs and may be more difficult to open and close out.
Correlation of Price Changes. Because there are a limited number of types of exchange-traded options and futures contracts, it is likely that the standardized options and futures contracts available will not match a Funds current or anticipated investments exactly. A Fund may invest in options and futures contracts based on securities with different issuers, maturities, or other characteristics from the securities in which it typically invests, which involves a risk that the options or futures position will not track the performance of a Funds other investments.
Options and futures contracts prices can also diverge from the prices of their underlying instruments, even if the underlying instruments match the Funds investments well. Options and futures contracts prices are affected by such factors as current and anticipated short term interest rates, changes in volatility of the underlying instrument, and the time remaining until expiration of the contract, which may not affect security prices the same way. Imperfect correlation may also result from differing levels of demand in the options and futures markets and the securities markets, from structural differences in how options and futures and securities are traded, or from imposition of daily price fluctuation limits or trading halts. A Fund may purchase or sell options and futures contracts with a greater or lesser value than the securities it wishes to hedge or intends to purchase in order to attempt to compensate for differences in volatility between the contract and the securities, although this may not be successful in all cases. If price changes in a Funds options or futures positions are poorly correlated with its other investments, the positions may fail to produce anticipated gains or result in losses that are not offset by gains in other investments.
Liquidity of Options and Futures Contracts. There is no assurance that a liquid market will exist for any particular option or futures contract at any particular time even if the contract is traded on an exchange. In addition, exchanges may establish daily price fluctuation limits for options and futures contracts and may halt trading if a contracts price moves up or down more than the limit in a given day. On volatile trading days when the price fluctuation limit is reached or a trading halt is imposed, it may be impossible for a Fund to enter into new positions or close out existing positions. If the market for a contract is not liquid because of price fluctuation limits or otherwise, it could prevent prompt liquidation of unfavorable positions, and could potentially require a Fund to continue to hold a position until delivery or expiration regardless of changes in its value. As a result, a Funds access to other assets held to cover its options or futures positions could also be impaired. (See Exchange-Traded and OTC Options above for a discussion of the liquidity of options not traded on an exchange.)
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Position Limits. Futures exchanges can limit the number of futures and options on futures contracts that can be held or controlled by an entity. If an adequate exemption cannot be obtained, a Fund or the Funds Adviser may be required to reduce the size of its futures and options positions or may not be able to trade a certain futures or options contract in order to avoid exceeding such limits.
Asset Coverage for Futures Contracts and Options Positions. A Fund will comply with guidelines established by the SEC with respect to coverage of options and futures contracts by mutual funds, and if the guidelines so require, will set aside or earmark appropriate liquid assets in the amount prescribed. Such assets cannot be sold while the futures contract or option is outstanding, unless they are replaced with other suitable assets. As a result, there is a possibility that the reservation of a large percentage of a Funds assets could impede portfolio management or a Funds ability to meet redemption requests or other current obligations.
Real Estate Investment Trusts (REITs)
Certain of the Funds may invest in equity interests or debt obligations issued by REITs. REITs are pooled investment vehicles which invest primarily in income producing real estate or real estate related loans or interest. REITs are generally classified as equity REITs, mortgage REITs or a combination of equity and mortgage REITs. Equity REITs invest the majority of their assets directly in real property and derive income primarily from the collection of rents. Equity REITs can also realize capital gains by selling property that has appreciated in value. Mortgage REITs invest the majority of their assets in real estate mortgages and derive income from the collection of interest payments. Similar to regulated investment companies, REITs are not taxed on income distributed to shareholders provided they comply with several requirements of the Code. A Fund will indirectly bear its proportionate share of expenses incurred by REITs in which a Fund invests in addition to the expenses incurred directly by a Fund.
Investing in REITs involves certain unique risks in addition to those risks associated with investing in the real estate industry in general. Equity REITs may be affected by changes in the value of the underlying property owned by the REITs, while mortgage REITs may be affected by the quality of any credit extended. REITs are dependent upon management skills and on cash flows, are not diversified and are subject to default by borrowers and self-liquidation. REITs are also subject to the possibilities of failing to qualify for tax free pass-through of income under the Code and failing to maintain their exemption from registration under the 1940 Act.
REITs (especially mortgage REITs) are also subject to interest rate risks. When interest rates decline, the value of a REITs investment in fixed rate obligations can be expected to rise. Conversely, when interest rates rise, the value of a REITs investment in fixed rate obligations can be expected to decline. In contrast, as interest rates on adjustable rate mortgage loans are reset periodically, yields on a REITs investment in such loans will gradually align themselves to fluctuate less dramatically in response to interest rate fluctuations than would investments in fixed rate obligations.
Investment in REITs involves risks similar to those associated with investing in small capitalization companies. These risks include:
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In addition, small capitalization stocks, such as REITs, historically have been more volatile in price than the larger capitalization stocks included in the S&P 500 Index.
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Repurchase Agreements
Repurchase agreements may be entered into with brokers, dealers or banks that meet the Advisers credit guidelines. A Fund will enter into repurchase agreements only with member banks of the Federal Reserve System and securities dealers believed by the Adviser to be creditworthy. In a repurchase agreement, a Fund buys a security from a seller that has agreed to repurchase the same security at a mutually agreed upon date and price. The resale price normally is in excess of the purchase price, reflecting an agreed upon interest rate. This interest rate is effective for the period of time a Fund is invested in the agreement and is not related to the coupon rate on the underlying security. A repurchase agreement may also be viewed as a fully collateralized loan of money by a Fund to the seller. Except in the case of a tri-party agreement, the maximum maturity of a repurchase agreement will be seven days. In the case of a tri-party agreement, the maximum maturity of a repurchase agreement will be 95 days, or as limited by the specific repurchase agreement. The securities which are subject to repurchase agreements, however, may have maturity dates in excess of 95 days from the effective date of the repurchase agreement. Repurchase agreements maturing in more than seven days are treated as illiquid for purposes of the Funds restrictions on purchases of illiquid securities. A Fund will always receive securities as collateral during the term of the agreement whose market value is at least equal to 100% of the dollar amount invested by the Fund in each agreement plus accrued interest. The repurchase agreements further authorize the Fund to demand additional collateral in the event that the dollar value of the collateral falls below 100%. A Fund will make payment for such securities only upon physical delivery or upon evidence of book entry transfer to the account of the custodian. Repurchase agreements are considered under the 1940 Act to be loans collateralized by the underlying securities.
All of the Funds that are permitted to invest in repurchase agreements may engage in repurchase agreement transactions that are collateralized fully as defined in Rule 5b-3 of the 1940 Act, which has the effect of enabling a Fund to look to the collateral, rather than the counterparty, for determining whether its assets are diversified for 1940 Act purposes. Certain Funds may, in addition, engage in repurchase agreement transactions that are collateralized by money market instruments, debt securities, loan participations, equity securities or other securities including securities that are rated below investment grade by the requisite NRSROs or unrated securities of comparable quality. For these types of repurchase agreement transactions, the Fund would look to the counterparty, and not the collateral, for determining such diversification.
A repurchase agreement is subject to the risk that the seller may fail to repurchase the security. In the event of default by the seller under a repurchase agreement construed to be a collateralized loan, the underlying securities would not be owned by the Fund, but would only constitute collateral for the sellers obligation to pay the repurchase price. Therefore, a Fund may suffer time delays and incur costs in connection with the disposition of the collateral. The collateral underlying repurchase agreements may be more susceptible to claims of the sellers creditors than would be the case with securities owned by the Fund.
Reverse Repurchase Agreements.
In a reverse repurchase agreement, a Fund sells a security and agrees to repurchase the same security at a mutually agreed upon date and price reflecting the interest rate effective for the term of the agreement. For purposes of the 1940 Act, a reverse repurchase agreement is considered borrowing by a Fund and, therefore, a form of leverage. Leverage may cause any gains or losses for a Fund to be magnified. The Funds will invest the proceeds of borrowings under reverse repurchase agreements. In addition, except for liquidity purposes, a Fund will enter into a reverse repurchase agreement only when the expected return from the investment of the proceeds is greater than the expense of the transaction. A Fund will not invest the proceeds of a reverse repurchase agreement for a period which exceeds the duration of the reverse repurchase agreement. A Fund would be required to pay interest on amounts obtained through reverse repurchase agreements, which are considered borrowings under federal securities laws. The repurchase price is generally equal to the original sales price plus interest. Reverse repurchase agreements are usually for seven days or less and cannot be repaid prior to their expiration dates. Each Fund will earmark and reserve Fund assets, in cash or liquid securities, in an amount at least equal to its purchase obligations under its reverse repurchase
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agreements. Reverse repurchase agreements involve the risk that the market value of the portfolio securities transferred may decline below the price at which a Fund is obliged to purchase the securities. All forms of borrowing (including reverse repurchase agreements) are limited in the aggregate and may not exceed 331/3% of a Funds total assets , except as permitted by law .
Securities Lending
To generate additional income, each of the Funds may lend up to 331/3% of such Funds total assets pursuant to agreements requiring that the loan be continuously secured by cash as collateral equal to at least 100% of the market value plus accrued interest on the securities lent. Pursuant to a securities lending agreement approved by the Board of Trustees between JPMorgan Chase Bank and the Trust on behalf of the Funds, collateral for loans will consist only of cash. The Fund receives payments from the borrowers equivalent to the dividends and interest which would have been earned on the securities lent while simultaneously seeking to earn interest on the investment of cash collateral in U.S. government securities, shares of an investment trust or mutual fund, commercial paper, repurchase agreements, variable and floating rate instruments, restricted securities, asset-backed securities, and the other types of investments permitted by the Confidential Offering Memorandum and the investment guidelines approved by the Trusts board of trustees.
Under the Securities Lending Agreement, JPMorgan Chase Bank performs a daily mark to market of the loaned security and requests additional cash collateral if the amount of cash received from the borrower is less than 100% of the value of the loaned security. The Fund does not have the right to vote proxies for securities on loan. However, JPMIM may terminate a loan if the vote is considered material with respect to an investment.
Securities lending involves counterparty risk, including the risk that the loaned securities may not be returned or returned in a timely manner and/or a loss of rights in the collateral if the borrower or the lending agent defaults or fails financially. This risk is increased when the Funds loans are concentrated with a single or limited number of borrowers. There are no limits on the number of borrowers a Fund may use and a Fund may lend securities to only one or a small group of borrowers. Funds participating in securities lending bear the risk of loss in connection with investments of the cash collateral received from the borrowers, which do not trigger additional collateral requirements from the borrower.
To the extent that the value or return of a Funds investments of the cash collateral declines below the amount owed to a borrower, the Fund may incur losses that exceed the amount it earned on lending the security. In situations where JPMIM does not believe that it is prudent to sell the cash collateral investments in the market, the Fund may borrow money to repay the borrower the amount of cash collateral owed to the borrower upon return of the loaned securities. This will result in financial leverage, which may cause the Fund to be more volatile because financial leverage tends to exaggerate the effect of any increase or decrease in the value of the Funds securities.
Short-Term Funding Agreements
Short-term funding agreements issued by insurance companies are sometimes referred to as Guaranteed Investment Contracts (GICs), while those issued by banks are referred to as Bank Investment Contracts (BICs). Pursuant to such agreements, a Fund makes cash contributions to a deposit account at a bank or insurance company. The bank or insurance company then credits to the Fund on a monthly basis guaranteed interest at either a fixed, variable or floating rate. These contracts are general obligations of the issuing bank or insurance company (although they may be the obligations of an insurance company separate account) and are paid from the general assets of the issuing entity.
A Fund will purchase short-term funding agreements only from banks and insurance companies which, at the time of purchase, are rated in one of the three highest rating categories and have assets of $1 billion or more. Generally, there is no active secondary market in short-term funding agreements. Therefore,
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short-term funding agreements may be considered by a Fund to be illiquid investments. To the extent that a short-term funding agreement is determined to be illiquid, such agreements will be acquired by a Fund only if, at the time of purchase, no more than 15% of the Funds net assets will be invested in short-term funding agreements and other illiquid securities.
Structured Investments
A structured investment is a security having a return tied to an underlying index or other security or asset class. Structured investments generally are individually negotiated agreements and may be traded over-the-counter. Structured investments are organized and operated to restructure the investment characteristics of the underlying security. This restructuring involves the deposit with or purchase by an entity, such as a corporation or trust, or specified instruments (such as commercial bank loans) and the issuance by that entity or one or more classes of securities (structured securities) backed by, or representing interests in, the underlying instruments. The cash flow on the underlying instruments may be apportioned among the newly issued structured securities to create securities with different investment characteristics, such as varying maturities, payment priorities and interest rate provisions, and the extent of such payments made with respect to structured securities is dependent on the extent of the cash flow on the underlying instruments. Because structured securities typically involve no credit enhancement, their credit risk generally will be equivalent to that of the underlying instruments. Investments in structured securities are generally of a class of structured securities that is either subordinated or unsubordinated to the right of payment of another class. Subordinated structured securities typically have higher yields and present greater risks than unsubordinated structured securities. Structured instruments include structured notes. In addition to the risks applicable to investments in structured investments and debt securities in general, structured notes bear the risk that the issuer may not be required to pay interest on the structured note if the index rate rises above or falls below a certain level. Structured securities are typically sold in private placement transactions, and there currently is no active trading market for structured securities. Investments in government and government-related restructured debt instruments are subject to special risks, including the inability or unwillingness to repay principal and interest, requests to reschedule or restructure outstanding debt and requests to extend additional loan amounts. Structured investments include a wide variety of instruments including, without limitation, CDOs.
Structured instruments that are registered under the federal securities laws may be treated as liquid. In addition, many structured instruments may not be registered under the federal securities laws. In that event, a Funds ability to resell such a structured instrument may be more limited than its ability to resell other Fund securities. The Funds will treat such instruments as illiquid, and will limit their investments in such instruments to no more than 15% of each Funds net assets, when combined with all other illiquid investments of each Fund.
Total Annual Operating Expenses set forth in the fee table section of the Confidential Offering Memorandum do not include any expenses associated with investments in certain structured or synthetic products that may rely on the exception for the definition of investment company provided by section 3(c)(1) or 3(c)(7) of the 1940 Act.
Swaps and Related Swap Products
Swap transactions may include, but are not limited to, interest rate swaps, currency swaps, cross-currency interest rate swaps, forward rate agreements, contracts for differences, total return swaps, index swaps, basket swaps, specific security swaps, fixed income sectors swaps, commodity swaps, asset-backed swaps (ABX), credit default swaps, interest rate caps, price lock swaps, floors and collars and swaptions (collectively defined as swap transactions).
A Fund may enter into swap transactions for any legal purpose consistent with its investment objective and policies, such as for the purpose of attempting to obtain or preserve a particular return or spread at a lower cost than obtaining that return or spread through purchases and/or sales of instruments in cash markets, to protect against currency fluctuations, to protect against any increase in the price of securities
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a Fund anticipates purchasing at a later date, or to gain exposure to certain markets in the most economical way possible.
Swap agreements are two-party contracts entered into primarily by institutional counterparties for periods ranging from a few weeks to several years. In a standard swap transaction, two parties agree to exchange the returns (or differentials in rates of return) that would be earned or realized on specified notional investments or instruments. The gross returns to be exchanged or swapped between the parties are calculated by reference 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 commodity, or in a basket of securities representing a particular index. The purchaser of an interest rate cap or floor, upon payment of a fee, has the right to receive payments (and the seller of the cap or floor is obligated to make payments) to the extent a specified interest rate exceeds (in the case of a cap) or is less than (in the case of a floor) a specified level over a specified period of time or at specified dates. The purchaser of an interest rate collar, upon payment of a fee, has the right to receive payments (and the seller of the collar is obligated to make payments) to the extent that a specified interest rate falls outside an agreed upon range over a specified period of time or at specified dates. The purchaser of an option on an interest rate swap, also known as a swaption, upon payment of a fee (either at the time of purchase or in the form of higher payments or lower receipts within an interest rate swap transaction) has the right, but not the obligation, to initiate a new swap transaction of a pre-specified notional amount with pre-specified terms with the seller of the swaption as the counterparty.
The notional amount of a swap transaction is the agreed upon basis for calculating the payments that the parties have agreed to exchange. For example, one swap counterparty may agree to pay a floating rate of interest (e.g., 3 month LIBOR) calculated based on a $10 million notional amount on a quarterly basis in exchange for receipt of payments calculated based on the same notional amount and a fixed rate of interest on a semi-annual basis. In the event a Fund is obligated to make payments more frequently than it receives payments from the other party, it will incur incremental credit exposure to that swap counterparty. This risk may be mitigated somewhat by the use of swap agreements which call for a net payment to be made by the party with the larger payment obligation when the obligations of the parties fall due on the same date. Under most swap agreements entered into by a Fund, payments by the parties will be exchanged on a net basis, and a Fund will receive or pay, as the case may be, only the net amount of the two payments.
The amount of a Funds potential gain or loss on any swap transaction is not subject to any fixed limit. Nor is there any fixed limit on a Funds potential loss if it sells a cap or collar. If a Fund buys a cap, floor or collar, however, the Funds potential loss is limited to the amount of the fee that it has paid. When measured against the initial amount of cash required to initiate the transaction, which is typically zero in the case of most conventional swap transactions, swaps, caps, floors and collars tend to be more volatile than many other types of instruments.
The use of swap transactions, caps, floors and collars involves investment techniques and risks that are different from those associated with portfolio security transactions. If a Funds Adviser is incorrect in its forecasts of market values, interest rates, and other applicable factors, the investment performance of the Fund will be less favorable than if these techniques had not been used. These instruments are typically not traded on exchanges. Accordingly, there is a risk that the other party to certain of these instruments will not perform its obligations to a Fund or that a Fund may be unable to enter into offsetting positions to terminate its exposure or liquidate its position under certain of these instruments when it wishes to do so. Such occurrences could result in losses to a Fund. A Funds Adviser will consider such risks and will enter into swap and other derivatives transactions only when it believes that the risks are not unreasonable.
A Fund will earmark and reserve Fund assets, in cash or liquid securities, in an amount sufficient at all times to cover its current obligations under its swap transactions, caps, floors and collars. If a Fund enters into a swap agreement on a net basis, it will earmark and reserve assets with a daily value at least equal to the excess, if any, of a Funds accrued obligations under the swap agreement over the accrued amount a Fund is entitled to receive under the agreement. If a Fund enters into a swap agreement on other than a net basis, or
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sells a cap, floor or collar, it will earmark and reserve assets with a daily value at least equal to the full amount of a Funds accrued obligations under the agreement. A Fund will not enter into any swap transaction, cap, floor, or collar, unless the counterparty to the transaction is deemed creditworthy by the Funds Adviser. If a counterparty defaults, a Fund may have contractual remedies pursuant to the agreements related to the transaction. The swap markets in which many types of swap transactions are traded have 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 markets for certain types of swaps (e.g., interest rate swaps) have become relatively liquid. The markets for some types of caps, floors and collars are less liquid.
The liquidity of swap transactions, caps, floors and collars will be as set forth in guidelines established by a Funds Adviser and approved by the Trustees which are based on various factors, including: (1) the availability of dealer quotations and the estimated transaction volume for the instrument, (2) the number of dealers and end users for the instrument in the marketplace, (3) the level of market making by dealers in the type of instrument, (4) the nature of the instrument (including any right of a party to terminate it on demand) and (5) the nature of the marketplace for trades (including the ability to assign or offset a Funds rights and obligations relating to the instrument). Such determination will govern whether the instrument will be deemed within the applicable liquidity restriction on investments in securities that are not readily marketable.
During the term of a swap, cap, floor or collar, changes in the value of the instrument are recognized as unrealized gains or losses by marking to market to reflect the market value of the instrument. When the instrument is terminated, a Fund will record a realized gain or loss equal to the difference, if any, between the proceeds from (or cost of) the closing transaction and a Funds basis in the contract.
The federal income tax treatment with respect to swap transactions, caps, floors, and collars may impose limitations on the extent to which a Fund may engage in such transactions.
Credit Default Swaps. As described above, swap agreements are two party contracts entered into primarily by institutional investors for periods ranging from a few weeks to more than one year. In the case of a credit default swap (CDS), the contract gives one party (the buyer) the right to recoup the economic value of a decline in the value of debt securities of the reference issuer if the credit event (a downgrade or default) occurs. This value is obtained by delivering a debt security of the reference issuer to the party in return for a previously agreed payment from the other party (frequently, the par value of the debt security). CDS include credit default swaps which are contracts on individual securities and Credit Default Swap Indices ( CDX ) which are contracts on baskets or indices of securities.
Credit default swaps may require initial premium (discount) payments as well as periodic payments (receipts) related to the interest leg of the swap or to the default of a reference obligation. A Fund will earmark and reserve assets in cash or liquid securities to cover any accrued payment obligations when it is the buyer of CDS. In cases where a Fund is a seller of a CDS contract, the Fund will earmark and reserve assets, in cash and liquid securities to cover its obligation.
If a Fund is a seller of protection under a CDS contract, the Fund would be required to pay the par (or other agreed upon) value of a referenced debt obligation to the counterparty in the event of a default or other credit event by the reference issuer, such as a U.S. or foreign corporate issuer, with respect to such debt obligations. In return, a Fund would receive from the counterparty a periodic stream of payments over the term of the contract provided that no event of default has occurred. If no default occurs, a Fund would keep the stream of payments and would have no payment obligations. As the seller of protection, a Fund would be subject to investment exposure on the notional amount of the swap.
If a Fund is a buyer of protection under a CDS contract, the Fund would have the right to deliver a referenced debt obligation and receive the par (or other agreed-upon) value of such debt obligation from the counterparty in the event of a default or other credit event (such as a downgrade in credit rating) by the
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reference issuer, such as a U.S. or foreign corporation, with respect to its debt obligations. In return, the Fund would pay the counterparty a periodic stream of payments over the term of the contract provided that no event of default has occurred. If no default occurs, the counterparty would keep the stream of payments and would have no further obligations to the Fund.
The use of CDSs, like all swap agreements, is subject to certain risks. If a counterpartys creditworthiness declines, the value of the swap would likely decline. Moreover, there is no guarantee that a Fund could eliminate its exposure under an outstanding swap agreement by entering into an offsetting swap agreement with the same or another party. In addition to general market risks, CDSs involve liquidity, credit and counterparty risks . The recent increase in corporate defaults further raises these liquidity and credit risks, increasing the possilibity that sellers will not have sufficient funds to make payments. As an unregulated instrument, CDSs are difficult to value and therefore susceptible to liquidity and credit risks. Corporate defaults of underlying name have nothing to do with whether a counterparty can make payments. Counterparty risks also stem from the lack of regulation of CDSs. Collateral posting requirements are individually negotiated between counterparties and there is no regulatory requirement concerning the amount of collateral that a counterparty must post to secure its obligations under a CDS. Because they are unregulated, there is no requirement that parties to a contract be informed in advance when a CDS is sold. As a result, investors may have difficulty identifying the party responsible for payment of their claims.
If a counterpartys credit becomes significantly impaired, multiple requests for collateral posting in a short period of time could increase the risk that the Fund may not receive adequate collateral. There is no readily available market for trading out of CDS contracts. In order to eliminate a position it has taken in a CDS, the Fund must terminate the existing CDS contract or enter into an offsetting trade. The Fund may only exit its obligations under a CDS contract by terminating the contract and paying applicable breakage fees, which could result in additional losses to the Fund. Furthermore, the cost of entering into an offsetting CDS position could cause the Fund to incur losses.
Temporary Liquidity Guarantee Program (TLGP) Securities
The Core Bond Trust and the Intermediate Bond Trust may invest in securities guaranteed by the Federal Deposit Insurance Corporation (FDIC) under its Temporary Liquidity Guarantee Program (TLGP), announced on October 14, 2008. Under this program, the FDIC guarantees, with the full faith and credit of the U.S. government, the payment of principal and interest on the debt issued by private entities through the earlier of the maturity date of the debt or June 30, 2012. The interest on securities guaranteed by the FDIC under the TLGP may be subject to state and local income taxes.
Treasury Receipts
A Fund may purchase interests in separately traded interest and principal component parts of U.S. Treasury obligations that are issued by banks or brokerage firms and are created by depositing U.S. Treasury notes and U.S. Treasury bonds into a special account at a custodian bank. Receipts include Treasury Receipts (TRs), Treasury Investment Growth Receipts (TIGRs), and Certificates of Accrual on Treasury Securities (CATS). Receipts in which an entity other than the government separates the interest and principal components are not considered government securities unless such securities are issued through the Treasury Separate Trading of Registered Interest and Principal of Securities (STRIPS) program.
U.S. Government Obligations
U.S. government obligations may include direct obligations of the U.S. Treasury, including Treasury bills, notes and bonds, all of which are backed as to principal and interest payments by the full faith and credit of the United States, and separately traded principal and interest component parts of such obligations that are transferable through the Federal book-entry system known as STRIPS and Coupon Under Book Entry Safekeeping (CUBES). The Funds may also invest in TIPS.
The principal and interest components of United States Treasury bonds with remaining maturities of longer than ten years are eligible to be traded independently under the STRIPS program. Under the STRIPS program, the principal and interest components are separately issued by the United States Treasury at the request of depository financial institutions, which then trade the component parts separately. The interest component of STRIPS may be more volatile than that of United States Treasury bills with comparable maturities.
Other obligations include those issued or guaranteed by U.S. government agencies or instrumentalities. These obligations may or may not be backed by the full faith and credit of the United
40
States. Securities which are backed by the full faith and credit of the United States include obligations of Ginnie Mae, the Farmers Home Administration, and the Export-Import Bank. In the case of securities not backed by the full faith and credit of the United States, the Funds must look principally to the federal agency issuing or guaranteeing the obligation for ultimate repayment and may not be able to assert a claim against the United States itself in the event the agency or instrumentality does not meet its commitments. Securities in which the Funds may invest that are not backed by the full faith and credit of the United States include, but are not limited to: (i) obligations of the Tennessee Valley Authority, the Federal Home Loan Banks and the U.S. Postal Service, each of which has the right to borrow from the U.S. Treasury to meet its obligations; (ii) securities issued by Freddie Mac and Fannie Mae, which are supported only by the credit of such securities, but for which the Secretary of the Treasury has discretionary authority to purchase limited amounts of the agencys obligations; and (iii) obligations of the Federal Farm Credit System and the Student Loan Marketing Association, each of whose obligations may be satisfied only by the individual credits of the issuing agency.
When-Issued Securities, Delayed Delivery Securities and Forward Commitments
Securities may be purchased on a when-issued or delayed delivery basis. For example, delivery of and payment for these securities can take place a month or more after the date of the purchase commitment. The purchase price and the interest rate payable, if any, on the securities are fixed on the purchase commitment date or at the time the settlement date is fixed. The value of such securities is subject to market fluctuation and for money market instruments and other fixed income securities, no interest accrues to a Fund until settlement takes place. At the time a Fund makes the commitment to purchase securities on a when-issued or delayed delivery basis, it will record the transaction, reflect the value each day of such securities in determining its NAV and, if applicable, calculate the maturity for the purposes of average maturity from that date. At the time of settlement a when-issued security may be valued at less than the purchase price. To facilitate such acquisitions, each Fund will earmark and reserve Fund assets, in cash or liquid securities, in an amount at least equal to such commitments. On delivery dates for such transactions, each Fund will meet its obligations from maturities or sales of the securities earmarked and reserved for such purpose and/or from cash flow. If a Fund chooses to dispose of the right to acquire a when-issued security prior to its acquisition, it could, as with the disposition of any other portfolio obligation, incur a gain or loss due to market fluctuation. Also, a Fund may be disadvantaged if the other party to the transaction defaults.
Forward Commitments. Securities may be purchased for delivery at a future date, which may increase their overall investment exposure and involves a risk of loss if the value of the securities declines prior to the settlement date. In order to invest a Funds assets immediately, while awaiting delivery of securities purchased on a forward commitment basis, short-term obligations that offer same-day settlement and earnings will normally be purchased. When a Fund makes a commitment to purchase a security on a forward commitment basis, cash or liquid securities equal to the amount of such Funds commitments will be reserved for payment of the commitment. For the purpose of determining the adequacy of the securities reserved for payment of commitments, the reserved securities will be valued at market value. If the market value of such securities declines, additional cash, cash equivalents or highly liquid securities will be reserved for payment of the commitment so that the value of the Funds assets reserved for payment of the commitments will equal the amount of such commitments purchased by the respective Fund.
Purchases of securities on a forward commitment basis may involve more risk than other types of purchases. Securities purchased on a forward commitment basis and the securities held in the respective Funds portfolio are subject to changes in value based upon the publics perception of the issuer and changes, real or anticipated, in the level of interest rates. Purchasing securities on a forward commitment basis can involve the risk that the yields available in the market when the delivery takes place may actually be higher or lower than those obtained in the transaction itself. On the settlement date of the forward commitment transaction, the respective Fund will meet its obligations from then available cash flow, sale of securities reserved for payment of the commitment, sale of other securities or, although it would not normally expect to do so, sale of the forward commitment securities themselves (which may have a value greater or lesser than such Funds payment obligations). The sale of securities to meet such obligations may result in the
41
realization of capital gains or losses. Purchasing securities on a forward commitment basis can also involve the risk of default by the other party on its obligation, delaying or preventing the Fund from recovering the collateral or completing the transaction.
To the extent a Fund engages in forward commitment transactions, it will do so for the purpose of acquiring securities consistent with its investment objective and policies and not for the purpose of investment leverage.
Limitations on the Use of When-Issued Securities, Delayed Delivery Securities and Forward Commitments. No Fund intends to purchase when-issued securities for speculative purposes but only for the purpose of acquiring portfolio securities. Because a Fund will set aside cash or liquid portfolio securities to satisfy its purchase commitments in the manner described, the Funds liquidity and the ability of JPMIM to manage the Fund might be affected in the event its commitments to purchase when-issued securities ever exceeded 40% of the value of its assets. Commitments to purchase when-issued securities will not, under normal market conditions, exceed 25% of a Funds total assets. A Fund may dispose of a when-issued security or forward commitment prior to settlement if JPMIM deems it appropriate to do so.
INVESTMENT RESTRICTIONS
The following investment restrictions are Fundamental and may be changed with respect to a particular Fund only by a vote of a majority of the outstanding Shares of that Fund. See Additional InformationMiscellaneous in this Supplement. Additional investment restrictions may be found in the Confidential Offering Memorandum.
FUNDAMENTAL POLICIES
The Funds have adopted certain investment restrictions that are fundamental and may not be changed without approval by a majority vote of the Funds shareholders. Such majority is defined in the 1940 Act as the lesser of (i) 67% or more of the voting securities of the Funds present in person or by proxy at a meeting, if the holders of more than 50% of the outstanding voting securities are present or represented by proxy; or (ii) more than 50% of the outstanding voting securities of the Funds.
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1. |
Borrowing. The Funds may (i) borrow for non-leveraging, temporary or emergency purposes and (ii) engage in reverse repurchase agreements, make other investments or engage in other transactions, that may involve a borrowing, in a manner consistent with the Funds investment objective and program, provided that the combination of (i) and (ii) shall not exceed 331/3% of the value of the Funds total assets (including the amount borrowed) less liabilities (other than borrowings) or such other percentage permitted by law. Any borrowings which come to exceed this amount will be reduced in accordance with applicable law. The Funds may borrow from banks or other persons to the extent permitted by applicable law. |
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Senior Securities. The Funds may not issue senior securities, except as permitted under the 1940 Act. |
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3. |
Underwriting. The Funds may not underwrite securities issued by other persons, except to the extent that the Funds may be deemed to be an underwriter, within the meaning of the Securities Act, in connection with the purchase and sale of its portfolio securities in the ordinary course of pursuing its investment objective, policies and program. |
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Purchases of Commodities. The Funds may not purchase or sell physical commodities, except that it may (i) enter into futures contracts and options thereon in accordance with applicable law and (ii) purchase or sell physical commodities if acquired as a result of ownership of securities or other instruments. The Funds will not consider stock index futures contracts, currency contracts, hybrid investments, swaps or other similar instruments to be commodities. |
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5. |
Loans. The Funds may not lend any security or make any loan if, as a result, more than 331/3% of its total assets would be lent to other parties. This limitation does not apply to purchases of publicly distributed or privately placed debt securities or money market instruments or to entering into repurchase agreements by the Funds. |
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Concentration. The Funds may not purchase the securities of any issuer if, as a result, more than 25% of the Funds total assets would be invested in the securities of issuers, the principal business activities of which are in the same industry, provided that this limitation does not apply to investment in obligations issued or guaranteed by the United States government, state or local governments, or their agencies or instrumentalities. |
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7. |
Real Estate. The Funds may not purchase or sell real estate, except that the Funds may purchase (i) securities of issuers that invest or deal in real estate, (ii) securities that are directly or indirectly secured by real estate or interests in real estate, and (iii) securities that represent interests in real estate, and the Funds may acquire and dispose of real estate or interests in real estate acquired through the exercise of its rights as a holder of debt obligations secured by real estate or interests therein. In addition, the Funds may make direct investments in mortgages. |
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8. |
Diversification. The Funds may not, with respect to 75% of its total assets, purchase the securities of any issuer (other than securities issued or guaranteed by the U.S. Government or any of its agencies or instrumentalities, or securities of other investment companies) if, as a result, (i) more than 5% of the Funds total assets would be invested in the securities of that issuer, or (ii) the Funds would hold more than 10% of the voting securities of any one issuer. |
NON-FUNDAMENTAL POLICIES
The following investment restrictions are Non-Fundamental except as noted otherwise and therefore can be changed by the Board of Trustees without prior shareholder approval.
The following policy applies to the Equity Index Trust:
The Fund may not invest more than 10% of its total assets in securities issued or guaranteed by the United States, its agencies or instrumentalities. Repurchase agreements held in margin deposits and segregated accounts for futures contracts are not considered issued or guaranteed by the United States, its agencies or instrumentalities for purposes of the 10% limitation.
Portfolio Turnover
A portfolio turnover rate is, in summary, the percentage computed by dividing the lesser of a Funds purchases or sales of securities (excluding short-term securities) by the average market value of the Fund. The Adviser intends to manage each Funds assets by buying and selling securities to help attain its investment objective. The table below sets forth the Funds portfolio turnover rates for the last two fiscal years. A rate of 100% indicates that the equivalent of all of a Funds assets have been sold and reinvested in a year. High portfolio turnover may affect the amount, timing and character of distributions, and, as a result, may increase the amount of taxes payable by shareholders. Higher portfolio turnover also results in higher transaction costs. To the extent that net short term capital gains are realized by a Fund, any distributions resulting from such gains are considered ordinary income for federal income tax purposes. See Distribution and Tax Matters below.
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Funds |
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Fiscal Year Ended |
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Fiscal Year Ended |
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Core Bond Trust |
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16 |
% |
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13 |
% |
Equity Index Trust |
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15 |
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14 |
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Intermediate Bond Trust |
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17 |
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11 |
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DISTRIBUTIONS AND TAX MATTERS
The following discussion is a brief summary of some of the important federal (and, where noted, state) income tax consequences affecting each Fund and its shareholders. Except as otherwise noted in the Confidential Offering Memorandum, the Funds are not intended for foreign shareholders. As a result, this section does not address the tax consequences affecting any shareholder who, as to the United States, is a nonresident alien individual, foreign trust or estate, foreign corporation, or foreign partnership. This section is based on the Code, the regulations thereunder, published rulings and court decisions, all as currently in effect. These laws are subject to change, possibly on a retroactive basis. The discussion is very general, and therefore prospective investors are urged to consult their tax advisors about the impact an investment in a Fund may have on their own tax situations and the possible application of foreign, state and local law.
Special tax rules apply to investments through defined contribution plans and other tax-qualified plans. Shareholders should consult their tax advisers to determine the suitability of shares of the Fund as an investment through such plans and the precise effect of an investment on their particular tax situation.
Each Fund generally will be treated as a separate entity for federal income tax purposes, and thus the provisions of the Code generally will be applied to each Fund separately. Net long-term and short-term capital gains, net income and operating expenses therefore will be determined separately for each Fund.
Qualification as a Regulated Investment Company. Each Fund intends to elect to be treated and qualify each year as a regulated investment company under Subchapter M of the Code. In order to qualify for the special tax treatment accorded regulated investment companies and their shareholders, each Fund must, among other things:
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(a) |
derive at least 90% of its gross income for each taxable year from (i) dividends, interest, payments with respect to certain securities loans, and gain from the sale or other disposition of stock, securities, or foreign currencies, or other income (including but not limited to gain from options, futures, or forward contracts) derived with respect to its business of investing in such stock, securities, or currencies and (ii) net income derived from interests in qualified publicly traded partnerships (QPTP, defined below); |
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(b) |
diversify its holdings so that, at the end of each quarter of the Funds taxable year, (i) at least 50% of the market value of the Funds total assets is represented by cash and cash items, U.S. government securities, securities of other regulated investment companies, and other securities limited in respect of any one issuer to not greater than 5% of the value of the Funds total assets and not more than 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of the Funds total assets is invested in (x) the securities (other than those of the U.S. government or other regulated investment companies) of any one issuer or of two or more issuers that the Fund controls and that are engaged in the same, similar, or related trades or businesses, or (y) in the securities of one or more QPTPs (as defined below); and |
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(c) |
distribute with respect to each taxable year at least 90% of the sum of its investment company taxable income (as that term is defined in the Code, without regard to the deduction for dividends paidgenerally, taxable ordinary income and any excess of net short-term capital gains over net long-term capital losses) and net tax-exempt interest income, for such year. |
In general, for purposes of the 90% gross income requirement described in paragraph (a) above, income derived from a partnership will be treated as qualifying income only to the extent such income is attributable to items of income of the partnership which would be qualifying income if realized by the regulated investment company. However, 100% of the net income derived from an interest in a QPTP (generally, a partnership (i) the interests in which are traded on an established securities market or readily tradable on a secondary market or the substantial equivalent thereof, and (ii) that derives less than 90% of its
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income from the qualifying income described in paragraph (a)(i) above) will be treated as qualifying income. In general, such entities will be treated as partnerships for federal income tax purposes because they meet the passive income requirement under Code section 7704(c)(2). Although income from a QPTP is qualifying income as discussed above, investments in QPTP cannot exceed 25% of the Funds assets. In addition, although in general the passive loss rules of the Code do not apply to regulated investment companies, such rules do apply to a regulated investment company with respect to items attributable to an interest in a QPTP.
For purposes of paragraph (b) above, the term outstanding voting securities of such issuer will include the equity securities of a QPTP. Also, for purposes of the diversification test in (b) above, the identification of the issuer (or, in some cases, issuers) of a particular Fund investment can depend on the terms and conditions of that investment. In some cases, identification of the issuer (or issuers) is uncertain under current law, and an adverse determination of future guidance by the Internal Revenue Service (IRS) with respect to issuer identification for a particular type of investment may adversely affect the Funds ability to meet the diversification test in (b) above.
Gains from foreign currencies (including foreign currency options, foreign currency futures and foreign currency forward contracts) currently constitute qualifying income for purposes of the 90% test. However, the Treasury Department has the authority to issue regulations (possibly with retroactive effect) excluding from the definition of qualifying income a funds foreign currency gains to the extent that such income is not directly related to the funds principal business of investing in stock or securities.
If the Fund qualifies as a regulated investment company that is accorded special tax treatment, the Fund will not be subject to federal income tax on income distributed in a timely manner to its shareholders in the form of dividends (including Capital Gain Dividends, defined below).
If a Fund were to fail to qualify as a regulated investment company accorded special tax treatment in any taxable year, the Fund would be subject to taxation on its taxable income at corporate rates, and all distributions from earnings and profits, including any distributions of net tax-exempt income and net long-term capital gain, would be taxable to shareholders as ordinary income. Some portions of such distributions may be eligible for the dividends-received deduction in the case of corporate shareholders and may be eligible to be treated as qualified dividend income in the case of shareholders taxed as individuals, provided, in both cases, the shareholder meets certain holding period and other requirements in respect of the Funds shares (as described below). In addition, the Fund could be required to recognize unrealized gain, pay substantial taxes and interest and make substantial distributions before re-qualifying as a regulated investment company that is accorded special tax treatment.
Each Fund intends to distribute at least annually to its shareholders all or substantially all of its investment company taxable income (computed without regard to the dividends-paid deduction) and may distribute its net capital gain (that is the excess of net long-term capital gain over net short-term capital loss). Any taxable income including any net capital gain retained by a Fund will be subject to tax at regular corporate tax rates. If a Fund retains any net capital gain, such gain will be subject to tax at regular corporate rates on the amount retained, but the Fund may designate the retained amount as undistributed capital gain in a timely notice to its shareholders who would, in turn, be (i) required to include in income for federal income tax purposes, as long-term capital gain, their respective shares of the undistributed amount, and (ii) entitled to credit their respective shares of the tax paid by the Fund on such undistributed amount against their federal income tax liabilities, if any, and to claim refunds on a properly-filed U.S. tax return to the extent the credit exceeds such liabilities. If a Fund makes this designation, for federal income tax purposes, the tax basis of shares owned by a shareholder of the Fund will be increased by an amount equal under current law to the difference between the amount of undistributed capital gain included in the shareholders gross income under clause (i) of the preceding sentence and the tax deemed paid by the shareholder under clause (ii) of the preceding sentence. A Fund is not required to, and there can be no assurance a Fund will, make this designation if it retains all or a portion of its net capital gain in a taxable year.
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In determining its net capital gain for Capital Gain Dividend purposes, a regulated investment company must treat any net capital loss or any net long-term capital loss incurred after October 31 as if it had been incurred in the succeeding year. Treasury regulations permit a regulated investment company, in determining its investment company taxable income and net capital gain, to elect to treat all of part of any net capital loss, any net long-term capital loss or any net foreign currency loss incurred after October 31 as if it had been incurred in the succeeding year.
Excise Tax on Regulated Investment Companies.
If a Fund fails to distribute in a calendar year an amount generally equal to the sum of 98% of its ordinary income for such year and 98% of its capital gain net income for the one-year period ending October 31 (or later if the Fund is permitted to elect and so elects), plus any retained amount from the prior year, the Fund will be subject to a nondeductible 4% excise tax on the undistributed amounts. For these purposes, the Fund will be treated as having distributed any amount on which it is subject to corporate income tax for the taxable year ending within the calendar year. The Funds intend to make distributions sufficient to avoid imposition of the 4% excise tax, although there can be no assurance that a Fund will be able to do so, and each Fund reserves the right to pay an excise tax rather than make an additional distribution when circumstances warrant (e.g., the excise tax amount is deemed by a Fund to be de minimis). Certain derivative instruments give rise to ordinary income and loss. If a Fund has a taxable year that begins in one calendar year and ends in the next calendar year, the Fund will be required to make this excise tax distribution during its taxable year. There is a risk that a Fund could recognize income prior to making this excise tax distribution and could recognize losses after making this distribution. As a result, an excise tax distribution could constitute a return of capital (see discussion below).
Fund Distributions.
The Funds anticipate distributing substantially all of their net investment income for each taxable year. Distributions are taxable to shareholders even if they are paid from income or gains earned by the Fund before a shareholders investment (and thus were included in the price the shareholder paid). Distributions are taxable whether shareholders receive them in cash or reinvest them in additional shares. A shareholder whose distributions are reinvested in shares will be treated as having received a dividend equal to the fair market value of the new shares issued. For federal income tax purposes, distributions of net investment income are taxable generally as ordinary income. Taxes on distributions of capital gain are determined by how long a Fund owned the investment that generated it, rather than how long a shareholder may have owned shares in the Fund. Distributions of net capital gain from the sale of investments that a Fund owned for more than one year and that are properly designated by the Fund as capital gain dividends (Capital Gain Dividends) will be taxable as long-term capital gain. Distributions of capital gain are made generally after applying any available capital loss carryovers. For taxable years beginning before January 1, 2011, the long-term capital gain tax rate applicable to most individuals is 15% (with lower rates applying to taxpayers in the 10% and 15% rate brackets). A distribution of gain from the sale of investments that a Fund owned for one year or less will be taxable as ordinary income.
For taxable years beginning before January 1, 2011, distributions of investment income designated by a Fund as derived from qualified dividend income will be taxed in the hands of individuals at the rates applicable to long-term capital gain. In order for some portion of the dividends received by a Fund shareholder to be qualified dividend income, the Fund must meet holding-period and other requirements with respect to some portion of the dividend-paying stocks in its portfolio, and the shareholder must meet holding-period and other requirements with respect to the Funds shares. A dividend will not be treated as qualified dividend income (at either the Fund or shareholder level) (i) if the dividend is received with respect to any share of stock held for fewer than 61 days during the 121-day period beginning on the date which is 60 days before the date on which such share becomes ex-dividend with respect to such dividend (or, in the case of certain preferred stock, 91 days during the 181-day period beginning 90 days before such date), (ii) to the extent that the recipient is under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property, (iii) if the recipient elects to
46
have the dividend income treated as investment interest for purposes of the limitation on deductibility of investment interest, or (iv) if the dividend is received from a foreign corporation that is (a) not eligible for the benefits of a comprehensive income tax treaty with the U.S. (with the exception of dividends paid on stock of such a foreign corporation readily tradable on an established securities market in the U.S.) or (b) treated as a passive foreign investment company (PFIC, as defined below). The Bond Funds do not expect a significant portion of their distributions to be derived from qualified dividend income.
In general, distributions of investment income designated by a Fund as derived from qualified dividend income will be treated as qualified dividend income by a non-corporate taxable shareholder so long as the shareholder meets the holding period and other requirements described above with respect to the Funds shares. In any event, if the qualified dividend income received by a Fund during any taxable year is equal to or greater than 95% of its gross income, then 100% of the Funds dividends (other than dividends that are properly designated as Capital Gain Dividends) will be eligible to be treated as qualified dividend income. For this purpose, the only gain included in the term gross income is the excess of net short-term capital gain over net long-term capital loss.
If a Fund receives dividends from an underlying fund, and the underlying fund designates such dividends as qualified dividend income, then the Fund may, in turn, designate a portion of its distributions as qualified dividend income as well, provided the Fund meets the holding-period and other requirements with respect to shares of the underlying fund.
Any loss realized upon a taxable disposition of shares held for six months or less will be treated as long-term capital loss to the extent of any Capital Gain Dividends received by the shareholder with respect to those shares. All or a portion of any loss realized upon a taxable disposition of Fund shares will be disallowed if other shares of such Fund are purchased within 30 days before or after the disposition. In such a case, the basis of the newly purchased shares will be adjusted to reflect the disallowed loss.
A distribution paid to shareholders by a Fund in January of a year generally is deemed to have been received by shareholders on December 31 of the preceding year, if the distribution was declared and payable to shareholders of record on a date in October, November, or December of that preceding year. The Funds will provide federal tax information annually, including information about dividends and distributions paid during the preceding year to taxable investors and others requesting such information.
If a Fund makes a distribution to its shareholders in excess of its current and accumulated earnings and profits in any taxable year, the excess distribution will be treated as a return of capital to the extent of each shareholders tax basis in its shares, and thereafter as capital gain. A return of capital is not taxable, but it does reduce the shareholders tax basis in its shares, which reduces the loss (or increases the gain) on a subsequent taxable disposition by such shareholder of its shares.
Dividends and distributions on a Funds shares are generally subject to federal income tax as described herein to the extent they do not exceed the Funds realized income and gains, even though such dividends and distributions may economically represent a return of a particular shareholders investment. Such dividends and distributions are likely to occur in respect of shares purchased at a time when the Funds net asset value reflects gains that are either unrealized, or realized but not distributed.
For corporate shareholders (other than shareholders that are S corporations), the dividends-received deduction generally will apply (subject to a holding period requirement imposed by the Code) to a Funds dividends paid from investment income to the extent derived from dividends received from U.S. corporations. The Bond Funds do not expect a significant portion of their distributions to be eligible for the corporate dividends-received deduction.
Sale or Redemption of Shares. The sale, exchange, or redemption of Fund shares may give rise to a gain or loss. In general, any gain or loss realized upon a taxable disposition of Fund shares will be treated as long-term capital gain or loss if the shares were held for more than one year. Otherwise, the gain or loss on
47
the taxable disposition will be treated as short-term capital gain or loss. However, any loss realized upon a taxable disposition of Fund shares held by a shareholder for six months or less will be treated as a long-term, rather than short-term, to the extent of any Capital Gain Dividends received (or deemed received) by the shareholder with respect to such shares. Capital gain of a corporate shareholder is taxed at the same rate as ordinary income. Depending on a shareholders percentage ownership in the Fund, a partial redemption of Fund shares could cause the shareholder to be treated as receiving a dividend, taxable as ordinary income in an amount equal to the full amount of the distribution, rather than capital gain income.
Fund Investments. Certain investment and hedging activities of the Funds, including transactions in options, swaptions, futures contracts, hedging transactions, forward contracts, straddles, swaps, short sales, foreign currencies, inflation-linked securities and foreign securities, will be subject to special tax rules (including mark-to-market, constructive sale, straddle, wash sale and short sale rules). In a given case, these rules may accelerate income to a Fund, defer losses to a Fund, cause adjustments in the holding periods of a Funds securities, convert long-term capital gain into short-term capital gain, convert short-term capital losses into long-term capital loss, or otherwise affect the character of a Funds income. These rules could therefore affect the amount, timing and character of distributions to shareholders.
Because the tax rules applicable to these types of transactions are in some cases uncertain under current law, an adverse determination or future guidance by the IRS with respect to these rules (which determination or guidance could be retroactive) may affect whether the Fund has made sufficient distributions, and otherwise satisfied the relevant requirements, to maintain its qualification as a regulated investment company and avoid a Fund-level tax. Certain of the Funds investments in derivative instruments and foreign currency-denominated instruments, and any of the Funds hedging activities are likely cause differences between a Funds book income and its taxable income. If a Funds book income exceeds its taxable income, the distribution (if any) of such excess generally will be treated as (i) a dividend to the extent of the Funds remaining earnings and profits (including earnings and profits arising from tax-exempt income), (ii) thereafter, as a return of capital to the extent of the recipients basis in its shares, and (iii) thereafter, as gain from the sale or exchange of a capital asset. If a Funds book income is less than taxable income, the Fund could be required to make distributions exceeding book income to qualify as a regulated investment company that is accorded special tax treatment. The Funds will endeavor to make any available elections pertaining to such transactions in a manner believed to be in the best interest of the Fund and its shareholders.
The Funds participation in repurchase agreements and loans of securities may affect the amount, timing, and character of distributions to shareholders. With respect to any security subject to a repurchase agreement that is treated for U.S. income tax purposes as a loan by the Fund or any security subject to a securities loan, any (i) amounts received by the Fund in place of dividends earned on the security during the period that such security was not directly held by the Fund will not give rise to qualified dividend income or to distributions eligible for the corporate dividends-received deduction and (ii) withholding taxes accrued on dividends during the period that such security was not directly held by the Fund will not qualify as a foreign tax paid by the Fund and therefore cannot be passed through to shareholders even if the Fund meets the requirements described in Foreign Taxes, below.
Certain debt securities purchased by the Funds are issued at original issue discount and thus do not make periodic cash interest payments. Similarly, zero-coupon bonds do not make periodic interest payments. Generally, the amount of the original issue discount is treated as interest income and is included in a Funds taxable income (and required to be distributed) over the term of the debt security, even though payment of that amount is not received until a later time, usually when the debt security matures. In addition, payment-in-kind securities will give rise to income that is required to be distributed and is taxable even though the Fund holding the security receives no interest payment in cash on the security during the year. Because each Fund distributes substantially all of its net investment income to its shareholders (including such imputed interest), a Fund may have to sell portfolio securities in order to generate the cash necessary for the required distributions. Such sales may occur at a time when the Adviser would not otherwise have chosen to sell such securities and may result in a taxable gain or loss. Some of the Funds may invest in inflation-linked debt
48
securities. Increases in the principal amount of an inflation-linked debt security generally will be original issue discount, which is taxable as ordinary income and is required to be distributed, even though the Fund will not receive the principal, including any increase thereto, until maturity.
Some debt obligations with a fixed maturity date of more than one year from the date of issuance that are acquired by the Fund in the secondary market may be treated as having market discount. Very generally, market discount is the excess of the stated redemption price of a debt obligation over the purchase price of such obligation (or in the case of an obligation issued with OID, its revised issue price). Generally, any gain recognized on the disposition of, and any partial payment of principal on, a debt security having market discount is treated as ordinary income to the extent the gain, or principal payment, does not exceed the accrued market discount on such debt security. Alternatively, the Fund may elect to accrue market discount currently, in which case the discount accrues (as ordinary income) ratably in equal daily installments or, if the Fund so elects, at a constant (compound) interest rate. Either election will affect the character and timing of recognition of income by the Fund.
Some debt obligations with a fixed maturity date of one year or less from the date of issuance that are acquired by the Fund may be treated as having OID or, in certain cases, acquisition discount (very generally, the excess of the stated redemption price over the purchase price). The Fund will be required to include the OID or acquisition discount in income (as ordinary income) over the term of the debt security, even though payment of that amount is not received until a later time, usually when the debt security matures. The OID or acquisition discount accrues ratably in equal daily installments or, if the Fund so elects, at a constant (compound) interest rate. This election will affect the character and timing of recognition of income.
A Fund investing in the foregoing kinds of securities may be required to liquidate other investments, including at times when it is not advantageous to do so, in order to satisfy its distribution requirements and to eliminate any possible taxation at the Fund level.
A Fund may invest in debt obligations that are in the lowest rated categories (or are unrated), including debt obligations of issuers that are not currently paying interest or that are in default. Investments in debt obligations that are at risk of being in default (or are presently in default) present special tax issues for a Fund. Tax rules are not entirely clear about issues such as when a Fund 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 and how payments received on obligations in default should be allocated between principal and income. These and other related issues will be addressed by each Fund when, as and if it invests in such securities, in order to seek to ensure that it distributes sufficient income to preserve its status as a regulated investment company and does not become subject to U.S. federal income or excise tax.
Transactions of certain Funds in foreign currencies, foreign currency denominated debt securities and certain foreign currency options, future contracts and forward contracts (and similar instruments) may result in ordinary income or loss to a Fund to the extent such income or loss results from fluctuations in the value of the foreign currency concerned.
Special tax considerations apply if a Fund invests in investment companies that are taxable as partnerships for federal income tax purposes. In general, the Fund will not recognize income earned by such an investment company until the close of the investment companys taxable year. The Fund will recognize such income as it is earned by the investment company for purposes of determining whether it is subject to the 4% excise tax. Therefore, if the Fund and such an investment company have different taxable years, the Fund may be compelled to make distributions in excess of the income recognized from such an investment company in order to avoid the imposition of the 4% excise tax. A Funds receipt of a non-liquidating cash distribution from an investment company taxable as a partnership generally will result in recognized gain (but not loss) only to the extent that the amount of the distribution exceeds the Funds adjusted basis in shares of such investment company before the distribution. A Fund that receives a liquidating cash distribution from an investment company taxable as a partnership will recognize capital gain or loss to the extent of the
49
difference between the proceeds received by the Fund and the Funds adjusted tax basis in shares of such investment company; however, the Fund will recognize ordinary income, rather than capital gain, to the extent that the Funds allocable share of unrealized receivables (including any accrued but untaxed market discount) exceeds the shareholders share of the basis in those unrealized receivables.
Some of the Funds may invest in REITs. Such investments in REIT equity securities may require a Fund to accrue and distribute income not yet received. In order to generate sufficient cash to make the requisite distributions, the Fund may be required to sell securities in its portfolio (including when it is not advantageous to do so) that it otherwise would have continued to hold. A Funds investments in REIT equity securities may at other times result in the Funds receipt of cash in excess of the REITs earnings; if the Fund distributes such amounts, such distribution could constitute a return of capital to Fund shareholders for federal income tax purposes. Dividends received by a Fund from a REIT generally will not qualify for the corporate dividends-received deduction and will not constitute qualified dividend income.
A Fund may invest directly or indirectly (including through REITs) in residual interests in real estate mortgage investment conduits (REMICs) or equity interests in taxable mortgage pools (TMPs). Under a Notice issued by the IRS in October 2006 and Treasury regulations that have not yet been issued (but may apply with retroactive effect), a portion of a Funds income (including income allocated to the Fund from a REIT or other pass-through entity) that is attributable to a residual interest in a REMIC or an equity interest in a TMP (referred to in the Code as an excess inclusion) will be subject to federal income taxation in all events. This notice also provides, and these regulations are expected to provide, that excess inclusion income of a regulated investment company, such as the Funds, will be allocated to shareholders of the regulated investment company in proportion to the dividends received by such shareholders, with the same consequences as if the shareholders held the related interest directly.
In general, excess inclusion income allocated to shareholders (i) cannot be offset by net operating losses (subject to a limited exception for certain thrift institutions), and (ii) will constitute unrelated business taxable income (UBTI) to entities (including a qualified pension plan, an individual retirement account, a 401(k) plan, a Keogh plan or other tax-exempt entity) subject to tax on UBTI, thereby potentially requiring such an entity that is allocated excess inclusion income, and otherwise might not be required to file a tax return, to file a tax return and pay tax on such income. Under current law, the Fund serves to block unrelated business taxable income (UBTI) from being realized by its tax-exempt shareholders. Notwithstanding the foregoing, a tax-exempt shareholder will recognize UBTI by virtue of its investment in the Fund if shares in the Fund constitute debt-financed property in the hands of the tax-exempt shareholder within the meaning of Code Section 514(b). Furthermore, a tax-exempt shareholder may recognize UBTI if the Fund recognizes excess inclusion income derived from direct or indirect investments in REMIC residual interests or TMPs if the amount of such income recognized by the Fund exceeds the Funds investment company taxable income (after taking into account deductions for dividends paid by the Fund).
Under legislation enacted in December 2006, a charitable remainder trust (CRT), as defined in section 664 of the Code that realizes unrelated business taxable income (UBTI) for a taxable year must pay an excise tax annually of an amount equal to such UBTI. Under IRS guidance issued in October 2006, a CRT will not recognize UBTI solely as a result of investing in a Fund that recognizes excess inclusion income. Rather, if at any time during any taxable year a CRT (or one of certain other tax-exempt shareholders, such as the United States, a state or political subdivision, or an agency or instrumentality thereof, and certain energy cooperatives) is a record holder of a share in a Fund that recognizes excess inclusion income, then the Fund will be subject to a tax on that portion of its excess inclusion income for the taxable year that is allocable to such shareholders at the highest federal corporate income tax rate. The extent to which this IRS guidance remains applicable in light of the December 2006 legislation is unclear. To the extent permitted under the 1940 Act, each Fund may elect to specially allocate any such tax to the applicable CRT, or other shareholder, and thus reduce such shareholders distributions for the year by the amount of the tax that relates to such shareholders interest in the Fund. The Funds have not yet determined whether such an election will be made. CRTs are urged to consult their tax advisors concerning the consequences of investing in the Fund.
50
A Funds investments in certain PFICs could subject the Fund to a U.S. federal income tax (including interest charges) on distributions received from the company or on proceeds received from the disposition of shares in the company. This tax cannot be eliminated by making distributions to Fund shareholders.
A PFIC is any foreign corporation in which (i) 75% or more of the gross income for the taxable year is passive income, or (ii) the average percentage of the assets (generally by value, but by adjusted tax basis in certain cases) that produce or are held for the production of passive income is at least 50%. Generally, passive income for this purpose means dividends, interest (including income equivalent to interest), royalties, rents, annuities, the excess of gains over losses from certain property transactions and commodities transactions, and foreign currency gains. Passive income for this purpose does not include rents and royalties received by the foreign corporation from active business and certain income received from related persons. If a Fund is in a position to treat a PFIC as a qualified electing fund (QEF), the Fund will be required to include its share of the companys income and net capital gain annually, regardless of whether it receives any distributions from the company. Alternately, a Fund may make an election to mark the gains (and to a limited extent losses) in such holdings to the market as though it had sold (and, solely for purposes of this mark-to-market election, repurchased) its holdings in those PFICs on the last day of the Funds taxable year. Such gains and losses are treated as ordinary income and loss. The QEF and mark-to-market elections may have the effect of accelerating the recognition of income (without the receipt of cash) and increasing the amount required to be distributed by the Fund to avoid taxation. Making either of these elections therefore may require the Fund to liquidate other investments (including at times when it is not advantageous to do so) to meet its distribution requirement, which also may accelerate the recognition of gain and affect the Funds total return. A fund that invests in PFICs by virtue of the funds investment in other investment companies may not make such elections; rather, such underlying investment companies investing directly in the PFICs would decide whether to make such elections. Dividends paid by PFICs will not be eligible to be treated as qualified dividend income.
Backup Withholding. Each Fund generally is required to withhold and remit to the U.S. Treasury a percentage of the taxable dividends and other distributions paid to, and the proceeds of share sales, exchanges, or redemptions made by, any individual shareholder who fails to properly furnish the Fund with a correct taxpayer identification number (TIN), who has under-reported dividend or interest income, or who fails to certify to the Fund that he or she is not subject to such backup withholding. The backup withholding tax rate is 28% for amounts paid through 2010. The backup withholding rate will be 31% for amounts paid after December 31, 2010, unless Congress enacts tax legislation providing otherwise.
Backup withholding is not an additional tax. Any amounts withheld may be credited against the shareholders U.S federal income tax liability, provided the appropriate information is furnished to the IRS.
Foreign Taxes. Certain Funds may be subject to foreign withholding taxes or other foreign taxes with respect to income (possibly including, in some cases, capital gain) received from sources within foreign countries. Tax conventions between certain countries and the U.S. may reduce or eliminate such taxes.
The Funds net income will be reduced by foreign taxes paid or withheld. Shareholders generally will not be entitled to claim a credit or deduction with respect to foreign taxes incurred by a Fund.
The foregoing is only a general description of the treatment of foreign source income or foreign taxes under the United States federal income tax laws. Shareholders are advised to consult their own tax advisors.
State and Local Tax Matters. Depending on the residence of the shareholders for tax purposes, distributions may also be subject to state and local taxation. Rules of state and local taxation regarding qualified dividend income, ordinary income dividends and capital gain dividends from regulated investment companies may differ from U.S. federal income tax rules in many respects. Shareholders are urged to consult
51
their tax advisors as to the consequences of these and other state and local tax rules affecting investment in the Funds.
Most states provide that a regulated investment company may pass through (without restriction) to its shareholders state and local income tax exemptions available to direct owners of certain types of U.S. government securities (such as U.S. Treasury obligations). Thus, for residents of these states, distributions derived from a Funds investment in certain types of U.S. government securities should be free from state and local income taxation to the extent that the interest income from such investments would have been exempt from state and local taxes if such securities had been held directly by the respective shareholders. Certain states, however, do not allow a regulated investment company to pass through to its shareholders the state and local income tax exemptions available to direct owners of certain types of U.S. government securities unless a Fund holds at least a required amount of U.S. government securities. Accordingly, for residents of these states, distributions derived from a Funds investment in certain types of U.S. government securities may not be entitled to the exemptions from state and local income taxes that would be available if the shareholders had purchased U.S. government securities directly. The exemption from state and local income taxes does not preclude states from asserting other taxes on the ownership of U.S. government securities. To the extent that a Fund invests to a substantial degree in U.S. government securities which are subject to favorable state and local tax treatment, shareholders of the Fund will be notified as to the extent to which distributions from the Fund are attributable to interest on such securities.
Tax Shelter Reporting Regulations. If a shareholder realizes a loss on disposition of a Funds shares of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder, the shareholder must file with the IRS a disclosure statement on Form 8886. Direct shareholders of portfolio securities are in many cases excepted from this reporting requirement, but under current guidance, shareholders of a regulated investment company are not excepted. Future guidance may extend the current exception from this reporting requirement to shareholders of most or all regulated investment companies. The fact that a loss is reportable under these regulations does not affect the legal determination of whether the taxpayers treatment of the loss is proper. Shareholders should consult their tax advisers to determine the applicability of these regulations in light of their individual circumstances.
General Considerations.
The federal income tax discussion set forth above is for general information only. Prospective investors should consult their tax advisers regarding the specific federal tax consequences of purchasing, holding, and disposing of shares of each of the Funds, as well as the effects of state, local and foreign tax law and any proposed tax law changes.
Capital Loss Carryforwards
For Federal income tax purposes, the following Funds had capital loss carryforwards for the fiscal year ended February 28, 2009 (amounts in thousands):
|
|
|
|
|
|
|
|
Capital Loss |
|
|
|
Fund |
|
Carryforwards |
|
Expiration Date |
|
Core Bond Trust |
|
$ |
5,179 |
|
2/28/2015 |
|
|
|
9,887 |
|
1/28/2017 |
|
|
|
|
||
Total |
|
|
15,066 |
|
|
|
|
|
|
|
|
Equity Index Trust |
|
|
9,624 |
|
2/28/2017 |
|
|
|
|
||
Total |
|
|
9,624 |
|
|
52
|
|
|
|
|
|
|
|
Capital Loss |
|
|
|
Fund |
|
Carryforwards |
|
Expiration Date |
|
Intermediate Bond Trust |
|
|
1,000 |
|
2/28/2014 |
|
|
|
1,123 |
|
2/28/2015 |
|
|
|
134 |
|
2/29/2016 |
|
|
|
713 |
|
2/28/2017 |
|
|
|
|
||
Total |
|
|
2,970 |
|
|
To the extent that these capital losses are used to offset future capital gain, it is probably that gain so offset will not be distributed to shareholders.
VALUATION
The net asset value (NAV) of a class of a Fund is equal to the value of all of the assets attributable to that class, minus the liabilities attributable to such class, divided by the number of outstanding shares of such class. The following is a discussion of the procedures used by the Funds in valuing their assets.
Equity securities listed on a North American, Central American, South American or Caribbean securities exchange shall generally be valued at the last sale price on the exchange on which the security is principally traded that is reported before the time when the net assets of the Funds are valued. The value of securities listed on the NASDAQ Stock Market, Inc. shall generally be the NASDAQ Official Closing Price.
Generally, trading of foreign securities on most foreign markets is completed before the close in trading in U.S. markets. Additionally, trading on foreign markets may also take place on days on which the U.S. markets, and the Funds, are closed. The Funds have implemented fair value pricing on a daily basis for all equity securities, except for North American, Central American, South American or Caribbean equity securities, held by the Funds. The fair value pricing utilizes the quotations of an independent pricing service, unless the Adviser determines in accordance with procedures adopted by the Board, that use of another fair valuation methodology is appropriate. To the extent that foreign equity securities are not fair valued utilizing quotations of an independent pricing service, such securities shall generally be valued using the price of the last sale or official close of the primary exchange on which the security is purchased that is reported before the time when the net assets of the Funds are valued. If there has been no sale on the primary exchange on the valuation date, and the average of bid and ask quotations are less than or equal to the last sale price of local shares on the valuation date, the security shall be valued at the last sale price of the local shares.
For purposes of calculating NAV, all assets and liabilities initially expressed in foreign currencies will be converted into U.S. dollars at the prevailing market rates from an approved independent pricing service as of 4:00 PM EST.
Swaps shall generally be valued by a Board approved independent or affiliated pricing service or at an evaluated price provided by a counterparty or third-party broker. Certain swaps, in accordance with the Funds pricing procedures, may be valued by J.P. Morgan Worldwide Securities Services Global Derivatives Service (GDS), a service offering within JPMorgan Chase Bank, N.A. (JPMorgan Chase Bank), an affiliate of JPMIM. This product is supplied to other affiliated and non-affiliated entities. The swap valuation prices provided by GDS to the Funds are the same prices that are provided to other affiliated and non-affiliated entities. Futures, options and other derivatives are valued on the basis of available market quotations.
Securities of other open-end investment companies are valued at their respective NAVs.
Fixed income securities with a remaining maturity of 61 days or more are valued using market quotations available from and supplied daily by a Board approved independent or affiliated third party pricing services or brokers/dealers of comparable securities. It is anticipated that such pricing services and
53
brokers/dealers will provide bid-side quotations. Emerging market debt securities, in accordance with the Funds pricing procedures, may be valued using market quotations provided by Emerging Markets Research, a pricing product supplied by JPMorgan Securities, Inc., an affiliate of the Funds Adviser. This product is supplied to other affiliated and non-affiliated entities for pricing purposes. All parties, including the Funds, are provided access to this product at no charge and the prices reflected are the same prices used to price the securities that comprise the JPMorgan Emerging Markets Bond Indices. Generally, short-term investments which mature in 60 days or less are valued at amortized cost if their original maturity was 60 days or less, or by amortizing their value on the 61st day prior to maturity if their original maturity when acquired by the Fund was more than 60 days.
Securities or other assets for which market quotations are not readily available or for which market quotations do not represent the value at the time of pricing (including certain illiquid securities) are fair valued in accordance with procedures established by and under the general supervision and responsibility of the Trustees. The Board of Trustees has established a Valuation Committee to assist the Board in its oversight of the valuation of the Funds securities. The Funds Administrator has established a Fair Valuation Committee (FVC) to (1) make fair value determinations in certain pre-determined situations as outlined in the procedures approved by the Board and (2) provide recommendations to the Boards Valuation Committee in other situations. This FVC includes senior representatives from Funds management as well as the Funds investment adviser. Fair value situations could include, but are not limited to: (1) a significant event that affects the value of a Funds securities (e.g., news relating to natural disasters affecting an issuers operations or earnings announcements); (2) illiquid securities; (3) securities that may be defaulted or de-listed from an exchange and are no longer trading; or (4) any other circumstance in which the FVC believes that market quotations do not accurately reflect the value of a security.
ADDITIONAL INFORMATION REGARDING THE CALCULATION OF PER SHARE NET ASSET VALUE
The net asset value of each Fund is determined as of the times specified in the Confidential Offering Memorandum. The net asset value per share of each Fund is calculated by determining the value of the securities and other assets of the Fund, less the liabilities allocable only to such Fund, and dividing such amount by the number of Shares of the Fund outstanding.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
J.P. Morgan Institutional Investments Inc. (JPMII) serves as the placement agent (Placement Agent) of the Funds shares pursuant to a placement agency agreement (Placement Agency Agreement) with the Trust, which is subject to annual approval by the Board. The Placement Agent is a subsidiary of JPMorgan Chase & Co. The Placement Agent, located at 245 Park Avenue, 22rd Floor, New York, NY 10167, is a broker-dealer registered with the SEC.
Shares of the Funds may be purchased only by certain clients of JPMIM and its affiliates who maintain separately managed private accounts, and who are also accredited investors, as defined in Regulation D under the Securities Act. Eligible investors are institutional investors such as corporations, pension and profit sharing plans, financial institutions, endowments, and foundations. The Funds are not intended for individuals or accounts established for the benefit of individuals (other than certain pension and profit-sharing plans sponsored by employers or unions for the benefit of individual plan participants). Subscriptions may be accepted or rejected, in whole or in part, in the sole discretion of JPMIM. Shares of the Funds may also be purchased by certain investors outside of the United States consistent with applicable regulatory requirements.
Purchases-in-Kind
The Funds may, at their own option, accept securities in payment for shares. The securities delivered in such a transaction are valued in the same manner as they would be valued for purposes of computing a
54
Funds NAV, as described in the section entitled Valuation. This is a taxable transaction to the shareholder. Purchases by means of in-kind contributions of securities will only be accepted if a variety of conditions are satisfied, including without limitation the following: (i) the securities must be traded on a public securities market or have quoted bid and asked prices available; (ii) JPMIM must determine that acceptance is in the best interest of the Fund and conforms with the applicable Funds fundamental objectives, policies and restrictions; and (iii) a Fund may not accept unregistered securities which, if transferred, would be required to be registered.
Redemptions-in-Kind
Subject to compliance with applicable regulations, each Fund has reserved the right to pay the redemption price of its shares, either totally or partially, by a distribution in-kind of readily marketable portfolio securities (instead of cash). The securities so distributed would be valued at the same amount as that assigned to them in calculating the NAV of the shares being sold. If a Shareholder received a distribution in-kind, the Shareholder could incur brokerage or other charges in converting the securities to cash. The Trust has not filed an election under Rule 18f-1 under the 1940 Act.
Redemptions
The Trust may suspend the right of redemption or postpone the date of payment for Shares during any period when:
|
|
|
|
|
trading on the New York Stock Exchange (the Exchange) is broadly restricted by the applicable rules and regulations of the SEC; |
|
|
|
|
|
the Exchange is closed for other than customary weekend and holiday closing; |
|
|
|
|
|
the SEC has by order permitted such suspension; or |
|
|
|
|
|
the SEC has declared a market emergency. |
Cut-Off Times for Purchase and Redemption Orders
Orders to purchase, exchange or redeem shares received by the Funds by the cut-off times indicated in the Confidential Offering Memorandum will be processed at the NAV next calculated after the order is received by the Fund.
MANAGEMENT OF THE TRUST
The management and affairs of the Trust are supervised by the Board of Trustees under Delaware law. The Trustees and Officers of the Trust and their principal occupations during the past five years, addresses and year of birth are set forth below. Each may have held other positions with the named companies during that period. The Trust pays the fees to unaffiliated Trustees for their service as trustees. Unless otherwise noted, the business address of each Trustee and each officer is 245 Park Avenue, New York, New York 10167.
TRUSTEES
The Trustees of the Trust are responsible for the management and supervision of each Fund. The Trustees approve all significant agreements with those companies that furnish services to the Funds. These companies are as follows:
|
|
|
J.P. Morgan Investment Management Inc. |
|
Investment Adviser |
J.P. Morgan Institutional Investments Inc. |
|
Placement Agent |
JPMorgan Funds Management, Inc. |
|
Administrator |
JPMorgan Chase Bank, N.A. |
|
Custodian, Fund Accountant, and Securities |
|
|
Lending Agent |
55
Effective April 22, 2009, the shareholders of the Trust elected a new Board of Trustees, consisting of 13 Trustees. None of the former Trustees is currently a member of the current Board of Trustees and none of the former Trustees owned securities of beneficial ownership as of December 31, 2009 in any of the Funds of the Trust.
The aggregate compensation paid to each for the former Trustees of the Trust by the Trust and the other Funds in the Fund Complex for the calendar year ended December 31, 2008 is set forth below:
|
|
|
|
|
|
|
|
NAME OF TRUSTEE |
|
TOTAL |
|
TOTAL |
|
||
Cheryl Ballenger |
|
$ |
26,735 |
|
$ |
44,750 |
|
Jerry B. Lewis |
|
|
26,735 |
|
|
44,750 |
|
John R. Rettberg |
|
|
26,735 |
|
|
44,750 |
|
John F. Ruffle |
|
|
26,735 |
|
|
44,750 |
|
Kenneth Whipple, Jr. |
|
|
26,735 |
|
|
44,750 |
|
John F. Williamson |
|
|
12,837 |
|
|
43,383 |
|
* Fund Complex comprises the Funds, the Pacholder Fund and five funds of the J.P. Morgan Series Trust II.
Committees of the Former Board
The former Board had an audit committee (the Audit Committee) composed entirely of Trustees who were not interested persons of the Funds, the Funds investment adviser or its affiliates as that term is defined in the 1940 Act. The Audit Committee operated pursuant to a written charter, which was adopted in September 2005 and reviewed on December 11, 2008. The Audit Committee was responsible for conferring with the Funds independent accountants, reviewing the scope and procedures of the year-end audit, reviewing annual and semi-annual financial statements and recommending the selection of the Funds independent accountants. In addition, the Audit Committee could address questions arising with respect to the valuation of certain securities in the Funds portfolios. Jerry B. Lewis, Chairman of the Audit Committee, had been designated as an audit committee financial expert. Mr. Lewis was an independent Trustee of the Funds.
The former Board also had a nominating committee composed entirely of Trustees who were not interested persons of the Funds, the Funds investment adviser or its affiliates as that term is defined in the 1940 Act (the Nominating Committee). The Nominating Committee did not have a charter. Pursuant to the Trusts Policies for Board Governance, the Nominating Committee selected and nominated prospective candidates. The Nominating Committee evaluated candidates on their ability to continue to contribute to the independence and effectiveness of the Board. The Nominating Committee could consider candidates submitted by shareholders of the Funds. The Nominating Committee considered and evaluated candidates submitted by shareholders on the basis of the same criteria as those used to consider and evaluate candidates identified by the Nominating Committee.
The Audit Committee for the previous Board met four times for the fiscal year ended February 28, 2009. The Nominating Committee for the previous Board met three times for the fiscal year ended February 28, 2009.
Current Board of Trustees
The names of the current Board of Trustees of the Trust, together with information regarding the year of their birth, positions with the Trust, principal occupations and other board memberships in any
56
company with a class of securities registered pursuant to Section 12 of the Securities Exchange Act or subject to the requirements of Section 15(d) of the Exchange Act or any company registered as an investment company under the 1940 Act, are shown below.
The following table contains basic information regarding the Trustees that oversee operations of the Trust and other investment companies within the J.P. Morgan Funds Complex.
|
|
|
|
|
|
|
Name (Year of Birth); |
|
Principal Occupations During |
|
Number of |
|
Other Directorships Held |
|
|
|
||||
Independent Trustees William J. Armstrong |
|
Retired; CFO and Consultant, EduNeering, Inc. (Internet business education supplier) (2000-2001); Vice President and Treasurer, Ingersoll-Rand Company (manufacturer of industrial equipment) (1972- 2000). |
|
132 |
|
None. |
|
|
|
|
|
|
|
John F. Finn |
|
President and Chief Executive Officer, Gardner, Inc. (wholesale distributor to outdoor power equipment industry) (1979-present). |
|
132 |
|
Director, Cardinal Health, Inc (CAH) (1994- present); Director, Greif, Inc. (GEF) (packaging manufacturer) (2007- present). |
|
|
|
|
|
|
|
Dr. Matthew Goldstein |
|
Chancellor, City University of New York (1999present); President, Adelphi University (New York) (1998-1999). |
|
132 |
|
Director, Bronx-Lebanon Hospital Center; Director, United Way of New York City (2002-present). |
|
|
|
|
|
|
|
Robert J. Higgins |
|
Retired; Director of Administration of the State of Rhode Island (2003-2004); President - Consumer Banking and Investment Services, Fleet Boston Financial (1971-2002). |
|
132 |
|
None. |
|
|
|
|
|
|
|
Peter C. Marshall |
|
Self-employed business consultant (2000-present); Senior Vice President, W.D. Hoard, Inc. (corporate parent of DCI Marketing, Inc.) (2000- 2002); President, DCI Marketing, Inc. (1992-2000). |
|
132 |
|
Director, Center for Deaf and Hard of Hearing (1990-present). |
57
|
|
|
|
|
|
|
Name (Year of Birth); |
|
Principal Occupations During |
|
Number of |
|
Other Directorships Held |
|
|
|
||||
Marilyn McCoy* |
|
Vice President of Administration and Planning, Northwestern University (1985-present). |
|
132 |
|
Trustee, Carleton College (2003-present). |
|
|
|
|
|
|
|
William G. Morton, Jr. |
|
Retired; Chairman Emeritus (2001-2002), and Chairman and Chief Executive Officer, Boston Stock Exchange (1985- 2001). |
|
132 |
|
Trustee, Stratton Mountain School (2001- present). |
|
|
|
|
|
|
|
Robert A. Oden, Jr. |
|
President, Carleton College (2002-present); President, Kenyon College (1995-2002). |
|
132 |
|
Trustee, American University in Cairo (1999-present); Trustee, Carleton College (2002- present). |
|
|
|
|
|
|
|
Fergus Reid, III |
|
Chairman, Joe Pietryka, Inc. (formerly Lumelite Corporation) (plastics manufacturing) (2003- present); Chairman and Chief Executive Officer, Lumelite Corporation (1985-2002). |
|
132 |
|
Trustee, Morgan Stanley Funds (164 portfolios) (1992-present). |
|
|
|
|
|
|
|
Frederick W. Ruebeck |
|
Advisor, Jerome P. Green & Associates, LLC (broker- dealer) (2000-present); Chief Investment Officer, Wabash College (2004-present); self- employed consultant (2000- present); Director of Investments, Eli Lilly and Company (pharmaceuticals) (1988-1999). |
|
132 |
|
Trustee, Wabash College (1988-present); Chairman, Indianapolis Symphony Orchestra Foundation (1994- present). |
|
|
|
|
|
|
|
James J. Schonbachler |
|
Retired; Managing Director of Bankers Trust Company (financial services) (1968- 1998). |
|
132 |
|
None. |
58
|
|
|
|
|
|
|
Name (Year of Birth); |
|
Principal Occupations During |
|
Number of |
|
Other Directorships Held |
|
|
|
||||
Interested Trustees Frankie D. Hughes** |
|
Principal and Chief Investment Officer, Hughes Capital Management, Inc. (fixed income asset management) (1993-present) |
|
132 |
|
None. |
|
|
|
|
|
|
|
Leonard M. Spalding, Jr.*** |
|
Retired; Chief Executive Officer, Chase Mutual Funds (investment company) (1989- 1998); President & Chief Executive Officer, Vista Capital Management (investment management) (1990-1998); Chief Investment Executive, Chase Manhattan Private Bank (investment management) (1990-1998). |
|
132 |
|
Director, Glenview Trust Company, LLC (2001- present); Trustee, St. Catharine College (1998- present); Trustee, Bellarmine University (2000-present); Director, Springfield-Washington County Economic Development Authority (1997-present); Trustee, Catholic Education Foundation (2005- present). |
(1) A Fund Complex means two or more registered investment companies that hold themselves out to investors as related companies for purposes of investment and investor services or have a common investment adviser or have an investment adviser that is an affiliated person of the investment adviser of any of the other registered investment companies. The J.P. Morgan Funds Complex for which the Board of Trustees currently serves includes ten registered investment companies (132 funds).
* Ms. McCoy has served as Vice President of Administration and Planning for Northwestern University since 1985. William M. Daley, Head of Corporate Responsibility for JPMorgan Chase, has served as a member of the Board of Trustees of Northwestern University since 2005. JPMIM, investment adviser to the Funds, is an indirect, wholly-owned subsidiary of JPMorgan Chase. The Funds distributor, JPMDS, is a direct, wholly-owned subsidiary of JPMorgan Chase.
** Ms. Hughes is treated as an interested person based on the portfolio holdings of clients of Hughes Capital Management, Inc.
*** Mr. Spalding is treated as an interested person due to his ownership of JPMorgan Chase stock.
The following table shows the dollar range of each Trustees beneficial ownership as of December 31, 2008 , in each fund, including the Funds, that the Trustee oversees and each Trustees aggregate ownership in any funds that the Trustee oversees in the J.P. Morgan Funds complex:
|
|
|
|
|
|
|
|
|
AGGREGATE DOLLAR RANGE |
|
|
|
|
OF EQUITY SECURITIES IN ALL |
|
|
|
|
REGISTERED INVESTMENT |
|
|
DOLLAR RANGE OF |
|
COMPANIES OVERSEEN BY THE |
|
|
EQUITY SECURITIES |
|
TRUSTEE IN THE FAMILY OF |
NAME OF TRUSTEE |
|
IN THE FUNDS |
|
INVESTMENT COMPANIES(1),(2) |
|
|
|||
Independent Trustees |
|
|
|
|
William J. Armstrong |
|
None |
|
Over $100,000 |
John F. Finn |
|
None |
|
Over $100,000 |
Dr. Matthew Goldstein |
|
None |
|
Over $100,000 |
Robert J. Higgins |
|
None |
|
Over $100,000 |
Peter C. Marshall |
|
None |
|
Over $100,000 |
Marilyn McCoy |
|
None |
|
Over $100,000 |
59
|
|
|
|
|
|
|
|
|
AGGREGATE DOLLAR RANGE |
|
|
|
|
OF EQUITY SECURITIES IN ALL |
|
|
|
|
REGISTERED INVESTMENT |
|
|
DOLLAR RANGE OF |
|
COMPANIES OVERSEEN BY THE |
|
|
EQUITY SECURITIES |
|
TRUSTEE IN THE FAMILY OF |
NAME OF TRUSTEE |
|
IN THE FUNDS |
|
INVESTMENT COMPANIES(1),(2) |
|
|
|||
William G. Morton, Jr. |
|
None |
|
Over $100,000 |
Robert A. Oden, Jr. |
|
None |
|
Over $100,000 |
Fergus Reid, III |
|
None |
|
Over $100,000 |
Frederick W. Ruebeck |
|
None |
|
Over $100,000 |
James J. Schonbachler |
|
None |
|
Over $100,000 |
Interested Trustees |
|
|
|
|
Frankie D. Hughes |
|
None |
|
Over $100,000 |
Leonard M. Spalding, Jr. |
|
None |
|
Over $100,000 |
(1) A Family of Investment Companies means any two or more registered investment companies that share the same investment adviser or principal underwriter and hold themselves out to investors as related companies for purposes of investment and investor services. The Family of Investment Companies for which the Board of Trustees currently serves includes ten registered investment companies (132 funds).
(2) For Mr. Spalding, this amount includes deferred compensation balances through participation in the J.P. Morgan Funds Deferred Compensation Plan for Eligible Trustees as of December 31, 2008. For Ms. Mc Coy and Messrs. Finn, Higgins, Marshall and Oden, these amounts include deferred compensation balances through participation in the Deferred Compensation Plan for Eligible Trustees as of December 31, 2008.
Each Trustee serves for an indefinite term, subject to the Trusts current retirement policy of the Trust, which is age 75 for all Trustees, except for Mr. Reid, for whom it is age 78. The Board of Trustees decides upon general policies and is responsible for overseeing the business affairs of the Trust.
As of December 31, 2008, none of the independent Trustees or their immediate family members owned securities of the Adviser or JPMorgan Distribution Services, Inc. (JPMDS) or a person (other than a registered investment company) directly or indirectly controlling, controlled by or under common control with the Adviser or JPMDS.
Committees of the Current Board
The Current Board of Trustees has four standing committees: the Audit Committee, the Compliance Committee, the Governance Committee and the Investments Committee.
The members of the Audit Committee are Messrs. Armstrong (Chair), Finn, Higgins, Ruebeck and Schonbachler. The purposes of the Audit Committee are to: (i) appoint and determine compensation of the Funds independent registered public accounting firm; (ii) evaluate the independence of the Funds independent registered public accounting firm; (iii) oversee the performance of the Funds audit, accounting and financial reporting policies, practices and internal controls; (iv) approve non-audit services, as required by the statutes and regulations administered by the SEC, including the 1940 Act and the Sarbanes-Oxley Act of 2002; (v) assist the Board in its oversight of the valuation of the Funds securities by the Adviser, as well as any sub-adviser; (vi) oversee the quality and objectivity of the Funds independent audit and the financial statements of the Funds; and (vii) act as a liaison between the Funds independent registered public accounting firm and the full Board. The Audit Committee has delegated the valuation responsibilities to the Valuation Sub-Committee, comprised of Messrs. Higgins, Ruebeck, Armstrong and Finn. When the Funds valuation procedures require Board action, but it is impracticable or impossible to hold a meeting of the entire Board, the Valuation Sub-Committee acts in lieu of the full Board.
The members of the Compliance Committee are Mmes. McCoy and Hughes (Chair) and Messrs. Oden and Spalding. The primary purposes of the Compliance Committee are to (i) oversee the Funds compliance with legal and regulatory and contractual requirements and the Funds compliance policies and
60
procedures; and (ii) consider the appointment, compensation and removal of the Funds Chief Compliance Officer.
The members of the Governance Committee are Messrs. Reid (Chair), Goldstein, Marshall and Morton, who are each an Independent Trustee of the Funds. The duties of the Governance Committee include, but are not limited to, (i) selection and nomination of persons for election or appointment as Trustees; (ii) periodic review of the compensation payable to the non-interested Trustees; (iii) establishment of non-interested Trustee expense policies; (iv) periodic review and evaluation of the functioning of the Board and its committees; (v) selection of independent legal counsel to the non-interested trustees and legal counsel to the Funds; (vi) oversight of ongoing litigation affecting the Funds, the Adviser or the non-interested trustees; (vii) oversight of regulatory issues or deficiencies affecting the Fund (except financial matters considered by the Audit Committee); and (viii) oversight and review of matters with respect to service providers to the Funds (except the Funds independent registered public accounting firm). When evaluating a person as a potential nominee to serve as an Independent Trustee, the Governance Committee may consider, among other factors, (i) whether or not the person is independent and whether the person is otherwise qualified under applicable laws and regulations to serve as a Trustee; (ii) whether or not the person is willing to serve, and willing and able to commit the time necessary for the performance of the duties of an Independent Trustee; (iii) the contribution that the person can make to the Board and the Funds, with consideration being given to the persons business experience, education and such other factors as the Committee may consider relevant; (iv) the character and integrity of the person; (v) the desirable personality traits, including independence, leadership and the ability to work with the other members of the Board; and (vi) to the extent consistent with the 1940 Act, such recommendations from management as are deemed appropriate. The process of identifying nominees involves the consideration of candidates recommended by one or more of the following: current Independent Trustees, officers, shareholders and other sources that the Governance Committee deems appropriate. The Governance Committee will review nominees recommended to the Board by shareholders and will evaluate such nominees in the same manner as it evaluates nominees identified by the Governance Committee. Nominee recommendations may be submitted to the Secretary of the trust at the Trusts principal business address.
Each member of the Board, except for Mr. Reid, serves on the Investments Committee and Mr. Spalding acts as Chairperson. The Investments Committee has three sub-committees divided by asset type and different members of the Investments Committee serve on the sub-committee with respect to each asset type. For the Equity Index Trust, the sub-committee members are Messrs. Higgins (Chair), Finn, Morton and Ms. McCoy. For the Bond Funds, the sub-committee members are Messrs. Ruebeck (Chair), Oden and Schonbachler and Ms. Hughes. The function of the Investments Committee and its sub-committees is to assist the Board in the oversight of the investment management services provided by the Adviser to the Funds. The primary purpose of each sub-committee is to (i) assist the Board in the oversight of the investment management services provided by the Adviser to the Funds designated for review by each sub-committee; and (ii) review and make recommendations to the Investments Committee and/or the Board, concerning the approval of proposed new or continued advisory and distribution arrangements for the Funds or for new Funds. The full Board may delegate to the Investments Committee from time to time the authority to make Board level decisions on an interim basis when it is impractical to convene a meeting of the full Board. Each of the sub-committees receives reports concerning investment management topics, concerns or exceptions with respect to particular Funds that the sub-committee is assigned to oversee, and works to facilitate the understanding by the Investments Committee and the Board of particular issues related to investment management of the Funds reviewed by the sub-committee.
Trustee Compensation
The Funds of the J.P. Morgan Funds Complex overseen by the Trustees pay each Trustee an annual fee of $220,000 and reimburse each Trustee for expenses incurred in connection with service as a Trustee. In addition, the Funds pay the Chairman $198,000 and the Vice Chairman $66,000. The Chairman and Vice Chairman receive no additional compensation for service as committee or sub-committee chairmen. Committee chairs and sub-committee chairs who are not already receiving an additional fee are each paid
61
$44,000 and $33,000 respectively. The Trustees may hold various other directorships unrelated to the J.P. Morgan Funds Complex. The Funds bear expenses related to administrative and staffing services provided to the Chairman, in lieu of establishing an office of the Chairman, in the amount of $6,000 per month.
Trustee aggregate compensation paid by the Trust and J.P. Morgan Funds Complex for the calendar year ended December 31, 2008 is set forth below:
|
|
|
|
|
||
|
|
TOTAL COMPENSATION |
|
TOTAL COMPENSATION |
||
NAME OF TRUSTEE |
|
FROM TRUST (1) |
|
FROM FUND COMPLEX (2) |
||
|
|
|||||
Independent Trustees |
|
|
|
|
|
|
William J. Armstrong |
|
None |
|
$ |
264,000 |
|
John F. Finn |
|
None |
|
|
0 |
^ |
Dr. Matthew Goldstein |
|
None |
|
|
253,000 |
|
Robert J. Higgins |
|
None |
|
|
0 |
^^ |
Peter C. Marshall |
|
None |
|
|
286,000 |
|
Marilyn McCoy |
|
None |
|
|
264,000 |
|
William G. Morton, Jr. |
|
None |
|
|
220,000 |
|
Robert A. Oden, Jr. |
|
None |
|
|
154,000 |
^^^ |
Fergus Reid, III |
|
None |
|
|
418,000 |
|
Frederick W. Ruebeck |
|
None |
|
|
253,000 |
|
James J. Schonbachler |
|
None |
|
|
220,000 |
|
Interested Trustees |
|
|
|
|
|
|
Frankie D. Hughes(3) |
|
None |
|
|
124,361 |
|
Leonard M. Spalding, Jr. |
|
None |
|
|
264,000 |
|
(1) The Trustees became Trustees of the JPMorgan Institutional Trust effective April 22, 2009.
(2) A Fund Complex means two or more registered investment companies that (i) hold themselves out to investors as related companies for purposes of investment and investor services or (ii) have a common investment adviser or have an investment adviser that is an affiliated person of the investment adviser of any of the other registered investment companies. The J.P. Morgan Funds Complex for which the Board of Trustees currently serves includes ten registered investment companies (143 funds).
(3) Includes amounts paid to Ms. Hughes prior to November 14, 2008, for her participation in Board meetings and service as a Trustee nominee.
^ Does not include $220,000 of Deferred Compensation.
^^ Does not include $253,000 of Deferred Compensation.
^^^ Does not include $66,000 of Deferred Compensation.
The Funds executive officers (listed below) are generally employees of JPMIM or one of its affiliates. The officers conduct and supervise the business operations of the Funds. As of December 31, 2008 , the Trust has no employees and as of this date, did not provide any compensation to any non-employees of the Trust.
OFFICERS
The officers of the Funds, together with their year of birth, information regarding their positions held with the Funds and principal occupations are shown below. The contact address for each of the officers unless otherwise noted is 245 Park Avenue, New York, NY 10167.
62
|
|
|
NAME (YEAR OF BIRTH), |
|
PRINCIPAL OCCUPATIONS |
|
||
|
|
|
George C.W.
Gatch (1962), |
|
Managing Director, J.P. Morgan Investment Management Inc.; Director and President, JPMorgan Distribution Services, Inc. and JPMorgan Funds Management, Inc. since 2005. Mr. Gatch is CEO and President of J.P. Morgan Funds. Mr. Gatch has been an employee of JPMorgan since 1986 and has held positions such as President and CEO of DKB Morgan, a Japanese mutual fund company, which was a joint venture between J.P. Morgan and Dai-Ichi Kangyo Bank, as well as positions in business management, marketing, and sales. |
|
|
|
Robert L.
Young (1963), |
|
Director and Vice President, JPMorgan Distribution Services, Inc. and JPMorgan Funds Management, Inc.; Chief Operating Officer, J.P. Morgan Funds since 2005, and One Group Mutual Funds from 2001 until 2005. Mr. Young was Vice President and Treasurer, JPMorgan Funds Management, Inc. (formerly One Group Administrative Services) and Vice President and Treasurer, JPMorgan Distribution Services, Inc. (formerly One Group Dealer Services, Inc.) from 1999 to 2005. |
|
|
|
Patricia A.
Maleski (1960), |
|
Managing Director, JPMorgan Funds Management, Inc.; Head of Funds Administration and Board Liaison; J.P. Morgan Funds. Ms. Maleski has been with J.P. Morgan Funds since 2001. |
|
|
|
Frank J.
Nasta (1964), |
|
Managing Director and Associate General Counsel, JPMorgan Chase since 2008; Previously, Director, Managing Director, General Counsel and Corporate Secretary, J.W. Seligman & Co. Incorporated; Secretary of each of the investment companies of the Seligman Group of Funds and Seligman Data Corp.; Director and Corporate Secretary, Seligman Advisors, Inc. and Seligman Services, Inc. |
|
|
|
Stephen M.
Ungerman (1953) |
|
Managing Director, JPMorgan Chase & Co.; Mr. Ungerman was head of Fund Administration Pooled Vehicles from 2000 to 2004. Mr. Ungerman has been with JPMorgan Chase & Co. since 2000. |
|
|
|
Paul L.
Gulinello (1950), |
|
Vice President and Anti Money Laundering Compliance Officer for JPMorgan Asset Management Americas, additionally responsible for personal trading and compliance testing since 2004; Treasury Services Operating Risk Management and Compliance Executive supporting all JPMorgan Treasury Services business units from July 2000 to 2004. |
|
|
|
Michael J.
Tansley (1964), |
|
Vice President, JPMorgan Funds Management, Inc. from July 2008; prior to joining JPMorgan Chase, Mr. Tansley worked for General Electric, as Global eFinance Leader in GE Money from 2004 through 2008 and Vice President and Controller of GE Asset Management from 1998. |
63
|
|
|
NAME (YEAR OF BIRTH), |
|
|
POSITIONS HELD WITH |
|
PRINCIPAL OCCUPATIONS |
THE FUNDS (SINCE) |
|
DURING PAST 5 YEARS |
|
||
|
|
|
Jessica K.
Ditullio (1962),** |
|
Vice President and Assistant General Counsel, JPMorgan Chase & Co. since 2005: Ms. Ditullio has served as attorney with various titles for JPMorgan Chase & Co. (formerly Bank One Corporation) since 1990. |
|
|
|
Elizabeth A.
Davin (1964), |
|
Vice President and Assistant General Counsel, JPMorgan Chase & Co. since 2004; Senior Counsel, JPMorgan Chase & Co. (formerly Bank One Corporation) from 2004 to 2005; Assistant General Counsel and Associate General Counsel and Vice President, Gartmore Global Investments, Inc. 1999 to 2004. |
|
|
|
John T.
Fitzgerald (1975) |
|
Vice President and Assistant General Counsel, JPMorgan Chase & Co. since 2005; Associate, Willkie Farr & Gallagher LLP (law firm) from 2002 to 2005. |
|
|
|
Brian L.
Duncan (1965), |
|
Vice President, JPMorgan Funds Management, Inc. since June 2007, prior to joining JPMorgan Chase, Mr. Duncan worked for Penn Treaty American Corporation as Vice President and Controller from 2004 through 2007 and Assistant Vice President for Financial Reporting from 2003-2004. |
|
|
|
Laura S.
Melman (1966) |
|
Vice President, JPMorgan Funds Management, Inc. since August 2006, responsible for Taxation; Vice President of Structured Products the Bank of New York Co., Inc. from 2001 until 2006. |
|
|
|
Jeffrey D.
House (1972) |
|
Vice President, JPMorgan Funds Management, Inc. since July 2006; formerly, Senior Manager of Financial Services at BISYS Fund Services, Inc. from 1995 until 2006. |
|
|
|
Francesco
Tango (1971) |
|
Vice President, JPMorgan Funds Management, Inc. since January 2003; Associate, JPMorgan Funds Management Inc. since 1999. |
|
|
|
* The contact address for the officer is 1111 Polaris Parkway, Columbus, OH 43240.
** Prior to April 28, 2009, Ms. Ditullio was Secretary and Mr. Nasta was Assistant Secretary.
As of December 31, 2008 , the officers and Trustees as a group owned less than 1% of the shares of each Fund.
THE ADVISER
The Trust has retained J.P. Morgan Investment Management Inc. (JPMIM) as investment adviser to provide investment advice and portfolio management services to the Funds, pursuant to an advisory agreement (the Advisory Agreement). Under the Advisory Agreement, JPMIM manages the investment of the assets of each Fund and obtains and evaluates economic, statistical and financial information to formulate and implement investment policies for each Fund. Any investment program undertaken by JPMIM is and will at all times be subject to the policies and control of the Trustees. JPMIM also provides certain administrative services to each Fund.
64
The Advisory Agreement provides that JPMIM shall not be protected against any liability to the Funds shareholders by reason of willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from reckless disregard of its obligations or duties thereunder.
Effective October 1, 2003, JPMIM became a wholly-owned subsidiary of JPMorgan Asset Management Holdings Inc., which, in turn, is a wholly-owned subsidiary of JPMorgan Chase & Co. (JPMorgan Chase). JPMIM is a registered investment adviser under the Investment Advisers Act of 1940, as amended , (the Advisers Act) . JPMIM acts as investment adviser to individuals, governments, corporations, employee benefit plans, labor unions and state and local governments, mutual funds and other institutional investors.
The investment advisory services JPMIM provides to the Funds are not exclusive under the terms of the Advisory Agreement. JPMIM is free to and does render similar investment advisory services to others. JPMIM serves as investment adviser to personal investors and other investment companies and acts as fiduciary for trusts, estates and employee benefit plans. Investors in the Funds are required to maintain separately managed private accounts with JPMIM or its affiliates. Certain of the assets of trusts and estates under management are invested in common trust funds for which JPMIM serves as trustee. The accounts which are managed or advised by JPMIM have varying investment objectives, and JPMIM invests assets of such accounts in investments substantially similar to, or the same as, those which are expected to constitute the principal investments of the Funds. Such accounts are supervised by employees of JPMIM who may also be acting in similar capacities for the Funds. See the Portfolio Transactions section. The Funds are managed by employees of JPMIM who, in acting for their customers, including the Funds, do not discuss their investment decisions with any personnel of JPMorgan Chase or any personnel of other divisions of JPMIM or with any of their affiliated persons, with the exception of certain other investment management affiliates of JPMorgan Chase which execute transactions on behalf of the Funds.
As compensation for the services rendered and related expenses such as salaries of advisory personnel borne by JPMIM under the Advisory Agreement, the Fund has agreed to pay JPMIM a fee, which is computed daily and may be paid monthly, equal to a percentage of each Funds average daily net assets specified in the Confidential Offering Memorandum. In the interest of limiting total expenses of the Fund, JPMIM and the Administrator have entered into an expense limitation agreement with the Trust (Expense Limitation Agreement), pursuant to which JPMIM and the Administrator have agreed to waive or limit their fees and to assume other expenses so that the total annual fund operating expenses (other than interest, taxes, brokerage commissions, other expenditures which are capitalized in accordance with generally accepted accounting principles, placement related expenses (if any), and other extraordinary expenses not incurred in the ordinary course of the Funds business) are limited to the following amounts with respect to each Fund: 0.10% of the average daily net assets of the JPMorgan Equity Index Trust, and 0.15% of the average daily net assets of the JPMorgan Intermediate Bond Trust and JPMorgan Core Bond Trust, for the period through June 30, 2009 .
For the fiscal year end as indicated, the operational Funds of the Trust paid the following investment advisory fees to JPMIM (waived amounts in parentheses ), (amounts in thousands) as follows:
ADVISORY FEES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
Fiscal Year Ended |
|
Fiscal Year Ended |
|
||||||||||||
Fund |
|
Paid |
|
Waived |
|
Paid |
|
Waived |
|
Paid |
|
Waived |
|
||||||
Core Bond Trust |
|
$ |
3,281 |
|
$ |
(4,866 |
) |
$ |
3,590 |
|
$ |
(4,820 |
) |
$ |
2,805 |
|
$ |
(4,599 |
) |
Equity Index Trust |
|
|
223 |
|
|
(834 |
) |
|
236 |
|
|
(871 |
) |
|
137 |
|
|
(742 |
) |
Intermediate Bond Trust |
|
|
283 |
|
|
(656 |
) |
|
334 |
|
|
(642 |
) |
|
188 |
|
|
(710 |
) |
65
Other Accounts Managed by the Funds Portfolio Managers.
The following tables show information regarding other accounts managed by portfolio managers of the Funds listed in this Confidential Offering Supplement as of February 28, 2009 :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Performance Based Fee Advisory Accounts |
|
||||||||||||||||
|
|
Registered Investment |
|
Other Pooled Investment |
|
Other Accounts |
|
||||||||||||
|
|
Number of |
|
Total |
|
Number of |
|
Total |
|
Number of |
|
Total |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Bond Trust |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Douglas Swanson |
|
|
6 |
|
$ |
7,796.470 |
|
|
7 |
|
$ |
4,807.572 |
|
|
52 |
|
$ |
6,938.330 |
|
Christopher Nauseda |
|
|
3 |
|
|
5,419.840 |
|
|
0 |
|
|
0 |
|
|
31 |
|
|
2,097.314 |
|
Equity Index Trust |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bala Iyer |
|
|
9 |
|
|
6,660.961 |
|
|
4 |
|
|
404.264 |
|
|
23 |
|
|
714.314 |
|
Michael Loeffler |
|
|
8 |
|
|
5,941.843 |
|
|
1 |
|
|
385.986 |
|
|
29 |
|
|
603.520 |
|
Intermediate Bond |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Douglas Swanson |
|
|
6 |
|
|
9,858.546 |
|
|
7 |
|
|
4,807.572 |
|
|
52 |
|
|
6,938.330 |
|
Scott Grimshaw |
|
|
6 |
|
|
2,906.628 |
|
|
0 |
|
|
0 |
|
|
40 |
|
|
2,773.015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Based Fee Advisory Accounts |
|
||||||||||||||||
|
|
Registered Investment |
|
Other Pooled |
|
Other Accounts |
|
||||||||||||
|
|
Number of |
|
Total |
|
Number of |
|
Total |
|
Number of |
|
Total |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Core Bond Trust |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Douglas Swanson |
|
|
0 |
|
$ |
0 |
|
|
0 |
|
$ |
0 |
|
|
0 |
|
$ |
0 |
|
Christopher Nauseda |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
Equity Index Trust |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bala Iyer |
|
|
0 |
|
|
0 |
|
|
2 |
|
|
423.594 |
|
|
0 |
|
|
0 |
|
Michael Loeffler |
|
|
0 |
|
|
0 |
|
|
1 |
|
|
385.986 |
|
|
0 |
|
|
0 |
|
Intermediate Bond |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Douglas Swanson |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
Scott Grimshaw |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
Potential Conflict of Interest
The chart above shows the number, type and market value as of February 28, 2009 of the accounts other than the Fund that are managed by the Funds portfolio managers. The potential for conflicts of interest exists when portfolio managers manage other accounts with similar investment objectives and strategies as the Funds (Similar Accounts). Potential conflicts may include, for example, conflicts between investment strategies and conflicts in the allocation of investment opportunities.
Responsibility for managing the Advisers and its affiliates clients portfolios is organized according to investment strategies within asset classes. Generally, client portfolios with similar strategies are managed by portfolio managers in the same portfolio management group using the same objectives, approach and philosophy. Underlying sectors or strategy allocations within a larger portfolio are likewise managed by portfolio managers who use the same approach and philosophy as similarly managed portfolios. Therefore, portfolio holdings, relative position sizes and industry and sector exposures tend to be similar across similar portfolios and strategies, which minimizes the potential for conflicts of interest.
66
JPMIM and/or its affiliates may receive more compensation with respect to certain Similar Accounts than that received with respect to the Funds or may receive compensation based in part on the performance of certain Similar Accounts. This may create a potential conflict of interest for JPMIM and its affiliates or the portfolio managers by providing an incentive to favor these Similar Accounts when, for example, placing securities transactions. In addition, JPMIM or its affiliates could be viewed as having a conflict of interest to the extent that JPMIM or an affiliate has a proprietary investment in Similar Accounts, the portfolio managers have personal investments in Similar Accounts or the Similar Accounts are investment options in JPMIMs or its affiliates employee benefit plans. Potential conflicts of interest may arise with both the aggregation and allocation of securities transactions and allocation of investment opportunities because of market factors or investment restrictions imposed upon the Adviser and its affiliates by law, regulation, contract or internal policies. Allocations of aggregated trades, particularly trade orders that were only partially completed due to limited availability and allocation of investment opportunities generally, could raise a potential conflict of interest, as JPMIM or its affiliates may have an incentive to allocate securities that are expected to increase in value to favored accounts. Initial public offerings, in particular, are frequently of very limited availability. JPMIM and its affiliates may be perceived as causing accounts they manage to participate in an offering to increase JPMIMs and its affiliates overall allocation of securities in that offering. A potential conflict of interest also may be perceived to arise if transactions in one account closely follow related transactions in a different account, such as when a purchase increases the value of securities previously purchased by another account, or when a sale in one account lowers the sale price received in a sale by a second account. If JPMIM or its affiliates manage accounts that engage in short sales of securities of the type in which the Fund invests, JPMIM or its affiliates could be seen as harming the performance of the Fund for the benefit of the accounts engaging in short sales if the short sales cause the market value of the securities to fall.
As an internal policy matter, the Adviser may from time to time maintain certain overall investment limitations on the securities positions or positions in other financial instruments the Adviser or its affiliates will take on behalf of its various clients due to, among other things, liquidity concerns and regulatory restrictions. Such policies may preclude a Fund from purchasing particular securities or financial instruments, even if such securities or financial instruments would otherwise meet the Funds objectives.
The goal of JPMIM and its affiliates is to meet their fiduciary obligation with respect to all clients. JPMIM and its affiliates have policies and procedures that seek to manage the conflicts. JPMIM and its affiliates monitor a variety of areas, including compliance with fund guidelines, review of allocation decisions and compliance with the Advisers Codes of Ethics and JPMorgan Chase & Co.s Code of Conduct. With respect to the allocation of investment opportunities, JPMIM and its affiliates also have certain policies designed to achieve fair and equitable allocation of investment opportunities among its clients over time. For example:
Orders for the same equity security traded through a single trading desk or system are aggregated on a continual basis throughout each trading day consistent with JPMIMs and its affiliates duty of best execution for its clients. If aggregated trades are fully executed, accounts participating in the trade will be allocated their pro rata share on an average price basis. Partially completed orders generally will be allocated among the participating accounts on a pro-rata average price basis, subject to certain limited exceptions. For example, accounts that would receive a de minimis allocation relative to their size may be excluded from the order. Another exception may occur when thin markets or price volatility require that an aggregated order be completed in multiple executions over several days. If partial completion of the order would result in an uneconomic allocation to an account due to fixed transaction or custody costs, JPMIM and its affiliates may exclude small orders until 50% of the total order is completed. Then the small orders will be executed. Following this procedure, small orders will lag in the early execution of the order, but will be completed before completion of the total order.
Purchases of money market instruments and fixed income securities cannot always be allocated pro-rata across the accounts with the same investment strategy and objective. However, JPMIM and its affiliates
67
attempt to mitigate any potential unfairness by basing non-pro rata allocations traded through a single trading desk or system upon an objective predetermined criteria for the selection of investments and a disciplined process for allocating securities with similar duration, credit quality and liquidity in the good faith judgment of JPMIM or its affiliates so that fair and equitable allocation will occur over time.
Portfolio Manager Compensation
JPMIMs portfolio managers participate in a competitive compensation program that is designed to attract and retain outstanding people and closely link the performance of investment professionals to client investment objectives. The total compensation program includes a base salary fixed from year to year and a variable performance bonus consisting of cash incentives and restricted stock and may include mandatory notional investments (as described below) in selected mutual funds advised by the Adviser and its affiliates. These elements reflect individual performance and the performance of JPMIMs business as a whole.
Each portfolio managers performance is formally evaluated annually based on a variety of factors including the aggregate size and blended performance of the portfolios such portfolio manager manages. Individual contribution relative to client goals carries the highest impact. Portfolio manager compensation is primarily driven by meeting or exceeding clients risk and return objectives, relative performance to competitors or competitive indices and compliance with firm policies and regulatory requirements. In evaluating each portfolio managers performance with respect to the mutual funds he or she manages, the funds pre-tax performance is compared to the appropriate market peer group and to each Funds benchmark index listed in the Funds Confidential Offering Memorandum over one, three and five year periods (or such shorter time as the portfolio manager has managed the fund). Investment performance is generally more heavily weighted to the long-term.
Awards of restricted stock are granted as part of an employees annual performance bonus and comprise from 0% to 35% of a portfolio managers total bonus. As the level of incentive compensation increases, the percentage of compensation awarded in restricted stock also increases. Up to 50% of the restricted stock portion of a portfolio managers bonus may instead be subject to a mandatory notional investment in selected mutual funds advised by the Adviser or its affiliates. When these awards vest over time, the portfolio manager receives cash equal to the market value of the notional investment in the selected mutual funds.
Ownership of Securities
The following table indicates for each Fund the dollar range of shares beneficially owned by each Funds portfolio managers as of February 28, 2009. Due to the nature of these Funds, portfolio managers typically will not own shares of the Funds.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar Range of Shares in the Fund |
|||||||||||||
|
|
|
|
$1 - |
|
$10,001- |
|
$50,001- |
|
$100,001- |
|
$500,001- |
|
over |
Fund |
|
None |
|
$10,000 |
|
$50,000 |
|
$100,000 |
|
$500,000 |
|
$1,000,000 |
|
$1,000.000 |
Core Bond Trust |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Douglas Swanson |
|
X |
|
|
|
|
|
|
|
|
|
|
|
|
Christopher Nauseda |
|
X |
|
|
|
|
|
|
|
|
|
|
|
|
Equity Index Trust |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bala Iyer |
|
X |
|
|
|
|
|
|
|
|
|
|
|
|
Michael Loeffler |
|
X |
|
|
|
|
|
|
|
|
|
|
|
|
Intermediate Bond Trust |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Douglas Swanson |
|
X |
|
|
|
|
|
|
|
|
|
|
|
|
Scott Grimshaw |
|
X |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68
CODES OF ETHICS
The Trust and JPMIM have adopted codes of ethics pursuant to Rule 17j-1 under the 1940 Act and pursuant to Rule 204A-1 under the Advisers Act with respect to JPMIM. Each of these codes permits personnel subject to such code to invest in securities, including securities that may be purchased or held by the Funds. Such purchases, however, are subject to procedures reasonably necessary to prevent access persons from engaging in any unlawful conduct set forth in Rule 17j-1.
The Trusts code of ethics includes policies which require access persons (as defined in Rule 17j-1) to: (i) place the interest of Trust shareholders first; (ii) conduct personal securities transactions in a manner that avoids any actual or potential conflict of interest or any abuse of a position of trust and responsibility; and (iii) refrain from taking inappropriate advantage of his or her position with the Trust or a Fund. The Trusts code of ethics prohibits any access person from: (i) employing any device, scheme or artifice to defraud the Trust or a Fund; (ii) making to the Trust or a Fund any untrue statement of a material fact or omit to state to the Trust or a Fund a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading; (iii) engaging in any act, practice, or course of business which operates or would operate as a fraud or deceit upon the Trust or a Fund; or (iv) engaging in any manipulative practice with respect to the Trust or a Fund. The Trusts code of ethics permits personnel subject to the code to invest in securities, including securities that may be purchased or held by a Fund so long as such investment transactions are not in contravention of the above noted policies and prohibitions.
The code of ethics adopted by the Adviser requires that all employees must: (i) place the interest of the accounts which are managed by the Adviser first; (ii) conduct all personal securities transactions in a manner that is consistent with the code of ethics and the individual employees position of trust and responsibility; and (iii) refrain from taking inappropriate advantage of their position. Employees of the Adviser are also prohibited from certain mutual fund trading activity including excessive trading of shares of a mutual fund as described in the applicable Funds Prospectuses or SAI and effecting or facilitating a mutual fund transaction to engage in market timing. The Advisers code of ethics permits personnel subject to the code to invest in securities including securities that may be purchased or held by a Fund subject to certain restrictions. However, all employees are required to preclear securities trades (except for certain types of securities such as non-proprietary mutual fund shares and U.S. government securities). Each of the Advisers affiliated sub-advisers has also adopted the code of ethics described above.
Portfolio Transactions
Investment Decisions and Portfolio Transactions. Pursuant to the Advisory Agreement, JPMIM determines, subject to the general supervision of the Board of Trustees of the Trust and in accordance with each Funds investment objective and restrictions, which securities are to be purchased and sold by each such Fund and which brokers are to be eligible to execute its portfolio transactions. JPMIM operates independently in providing services to their respective clients. Investment decisions are the product of many factors in addition to basic suitability for the particular client involved. Thus, for example, a particular security may be bought or sold for certain clients even though it could have been bought or sold for other clients at the same time. Likewise, a particular security may be bought for one or more clients when one or more other clients are selling the security. In some instances, one client may sell a particular security to another client. It also happens that two or more clients may simultaneously buy or sell the same security, in which event each days transactions in such security are, insofar as possible, averaged as to price and allocated between such clients in a manner which in the opinion of JPMIM is equitable to each and in accordance with the amount being purchased or sold by each. There may be circumstances when purchases or sales of portfolio securities for one or more clients will have an adverse effect on other clients.
Brokerage and Research Services. On behalf of the Funds, JPMIM places orders for all purchases and sales of portfolio securities, enters into repurchase agreements, and may enter into reverse repurchase agreements and execute loans of portfolio securities on behalf of a Fund unless otherwise prohibited.
69
Fixed income and debt securities and municipal bonds and notes are generally traded at a net price with dealers acting as principal for their own accounts without a stated commission. The price of the security usually includes profit to the dealers. 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. Transactions on stock exchanges (other than foreign stock exchanges) involve the payment of negotiated brokerage commissions. Such commissions vary among different brokers. Also, a particular broker may charge different commissions according to such factors as the difficulty and size of the transaction. Transactions in foreign securities generally involve payment of fixed brokerage commissions, which are generally higher than those in the U.S. On occasion, certain securities may be purchased directly from an issuer, in which case no commissions or discounts are paid.
In connection with portfolio transactions, the overriding objective is to obtain the best execution of purchase and sales orders. As permitted by Section 28(e) of the Securities Exchange Act, JPMIM may cause the Funds to pay a broker-dealer which provides brokerage and research services to JPMIM, or the Funds and/or other accounts for which JPMIM exercises investment discretion an amount of commission for effecting a securities transaction for a Fund in excess of the amount other broker-dealers would have charged for the transaction if JPMIM determines in good faith that the greater commission is reasonable in relation to the value of the brokerage and research services provided by the executing broker-dealer viewed in terms of either a particular transaction or JPMIMs overall responsibilities to accounts over which it exercises investment discretion. Not all of such services are useful or of value in advising the Funds. JPMIM reports to the Board of Trustees regarding overall commissions paid by the Funds and their reasonableness in relation to the benefits to the Funds. In accordance with Section 28(e) of the Securities Exchange Act and consistent with applicable SEC guidance and interpretation, the term brokerage and research services includes (i) advice as to the value of securities; (ii) the advisability of investing in, purchasing or selling securities; (iii) the availability of securities or of purchasers or sellers of securities; (iv) furnishing analyses and reports concerning issues, industries, securities, economic factors and trends, portfolio strategy and the performance of accounts; and (v) effecting securities transactions and performing functions incidental thereto (such as clearance, settlement, and custody) or required by rule or regulation in connection with such transactions.
Brokerage and research services received from such broker-dealers will be in addition to, and not in lieu of, the services required to be performed by an Adviser under the Advisory Agreement (or with respect to a Sub-Adviser, under the sub-advisory agreement). The fees that the Funds pay to JPMIM are not reduced as a consequence of JPMIMs receipt of brokerage and research services. To the extent the Funds portfolio transactions are used to obtain such services, the brokerage commissions paid by the Funds will exceed those that might otherwise be paid by an amount that cannot be presently determined. Such services generally would be useful and of value to JPMIM in serving one or more of its other clients and, conversely, such services obtained by the placement of brokerage business of other clients generally would be useful to JPMIM in carrying out its obligations to the Funds. While such services are not expected to reduce the expenses of JPMIM, JPMIM would, through use of the services, avoid the additional expenses that would be incurred if it should attempt to develop comparable information through its own staff.
Subject to the overriding objective of obtaining the best execution of orders, JPMIM may allocate a portion of a Funds brokerage transactions to affiliates of JPMIM. Under the 1940 Act, persons affiliated with a Fund and persons who are affiliated with such persons are prohibited from dealing with the Fund as principal in the purchase and sale of securities unless an exemptive order allowing such transactions is obtained from the SEC. The SEC has granted exemptive orders permitting each Fund to engage in principal transactions with J.P. Morgan Securities Inc., an affiliated broker, involving taxable and tax exempt money market instruments (including commercial paper, banker acceptances and medium term notes) and repurchase agreements. The orders are subject to certain conditions. An affiliated person of a Fund may serve as its broker in listed or over-the-counter
70
transactions conducted on an agency basis provided that, among other things, the fee or commission received by such affiliated broker is reasonable and fair compared to the fee or commission received by non-affiliated brokers in connection with comparable transactions.
In addition, a Fund may not purchase securities during the existence of any underwriting syndicate for such securities of which JPMorgan Chase Bank or an affiliate is a member or in a private placement in which JPMorgan Chase Bank or an affiliate serves as placement agent, except pursuant to procedures adopted by the Board of Trustees that either comply with rules adopted by the SEC or with interpretations of the SECs staff. Each Fund expects to purchase securities from underwriting syndicates of which certain affiliates of JPMorgan Chase act as a member or manager. Such purchases will be effected in accordance with the conditions set forth in Rule 10f-3 under the 1940 Act and related procedures adopted by the Trustees, including a majority of the Trustees who are not interested persons of a Fund. Among the conditions are that the issuer of any purchased securities will have been in operation for at least three years, that not more than 25% of the underwriting will be purchased by a Fund and all other accounts over which the same investment adviser has discretion, and that no shares will be purchased from JPMDS or any of its affiliates.
On those occasions when JPMIM deems the purchase or sale of a security to be in the best interests of a Fund as well as other customers, including other Funds, JPMIM, to the extent permitted by applicable laws and regulations, may, but is not obligated to, aggregate the securities to be sold or purchased for a Fund with those to be sold or purchased for other customers in order to obtain best execution, including lower brokerage commissions if appropriate. In such event, allocation of the securities so purchased or sold as well as any expenses incurred in the transaction will be made by JPMIM in the manner it considers to be most equitable and consistent with its fiduciary obligations to a Fund. In some instances, this procedure might adversely affect a Fund.
If a Fund that writes options effects a closing purchase transaction with respect to an option written by it, normally such transaction will be executed by the same broker-dealer who executed the sale of the option. The writing of options by a Fund will be subject to limitations established by each of the exchanges governing the maximum number of options in each class which may be written by a single investor or group of investors acting in concert, regardless of whether the options are written on the same or different exchanges or are held or written in one or more accounts or through one or more brokers. The number of options that a Fund may write may be affected by options written by JPMIM for other investment advisory clients. An exchange may order the liquidation of positions found to be in excess of these limits, and it may impose certain other sanctions.
Allocation of transactions, including their frequency, to various broker-dealers is determined by a Funds Adviser based on its best judgment and in a manner deemed fair and reasonable to Shareholders. The primary consideration is prompt execution of orders in an effective manner at the most favorable price. Subject to this consideration, in selecting broker-dealers to execute a particular transaction, and in evaluating the best overall terms available, a Funds Adviser is authorized to consider the brokerage and research services (as those terms are defined in Section 28(e) of the Securities Exchange Act) provided to the Funds and/or other accounts over which a Funds Adviser exercises investment discretion. A Funds Adviser may cause a Fund to pay a broker-dealer that furnishes brokerage and research services a higher commission than that which might be charged by another broker-dealer for effecting the same transaction, provided that a Funds Adviser determines in good faith that such commission is reasonable in relation to the value of the brokerage and research services provided by such broker-dealer, viewed in terms of either the particular transaction or the overall responsibilities of a Funds Adviser to the Funds. Such brokerage and research services might consist of reports and statistics on specific companies or industries, general summaries of groups of bonds and their comparative earnings and yields, or broad overviews of the securities markets and the economy, to the extent such services are permissible under the safe harbor requirements of Section 28(e) of the Securities Exchange Act and consistent with applicable SEC guidance and interpretation. Shareholders of the Funds should understand that the services provided by such brokers may be useful to a Funds Adviser
71
in connection with its services to other clients and not all the services may be used by JPMIM in connection with the Fund.
Under JPMIMs policy, soft dollar services refer to arrangements that fall within the safe harbor requirements of Section 28(e) of the Securities Exchange Act, as amended, which allow JPMIM to allocate client brokerage transactions to a broker-dealer in exchange for products or services that are research and brokerage-related and enhance the investment decision-making process. These services include third party research, market data services, and proprietary broker-dealer research. The Funds have stopped participating in soft dollar arrangements for market data services and third-party research. However, the Funds continue to receive proprietary research where broker-dealers typically incorporate the cost of such research into their commission structure. Many brokers do not assign a hard dollar value to the research they provide, but rather bundle the cost of such research into their commission structure. It is noted in this regard that some research that is available only under a bundled commission structure is particularly important to the investment process. For the fiscal year ended February 28, 2009 , with respect to the Funds, JPMIM did not allocate any funds for brokerage commissions to brokers who provided broker research.
Investment decisions for each Fund are made independently from those for the other Funds or any other investment company or account managed by an Adviser. Any such other investment company or account may also invest in the same securities as the Trust. When a purchase or sale of the same security is made at substantially the same time on behalf of a given Fund and another Fund, investment company or account, the transaction will be averaged as to price, and available investments allocated as to amount, in a manner which JPMIM of the given Fund believes to be equitable to the Fund and such other investment company or account. In some instances, this procedure may adversely affect the price paid or received by a Fund or the size of the position obtained by a Fund. To the extent permitted by law, JPMIM may aggregate the securities to be sold or purchased by it for a Fund with those to be sold or purchased by it for other Funds or for other investment companies or accounts in order to obtain best execution. In making investment recommendations for the Trust, JPMIM will not inquire or take into consideration whether an issuer of securities proposed for purchase or sale by the Trust is a customer of JPMIM or their parents or subsidiaries or affiliates and in dealing with its commercial customers, JPMIM and their respective parent, subsidiaries, and affiliates will not inquire or take into consideration whether securities of such customers are held by the Trust.
For the fiscal year end as indicated, the Funds of the Trust that paid brokerage commissions and the amounts paid for such period were as follows (amounts in thousands):
BROKERAGE COMMISSIONS
|
|
|
|
|
|
|
|
|
|
Funds |
Fiscal Year Ended |
Fiscal Year Ended |
Fiscal Year Ended |
||||||
|
February 28, 2007 |
February 29, 2008 |
February 28, 2009 |
||||||
Core Bond Trust |
|
$ |
|
|
$ |
|
|
$ |
|
Equity Index Trust |
|
|
48 |
|
|
45 |
|
|
61 |
Intermediate Bond Trust |
|
|
^ |
|
|
|
|
|
|
^ Amount rounds to less than $1,000.
During the last fiscal year, JPMIM utilized JPMorgan Securities, Inc. (JPMSI) to execute portfolio transactions for the Funds.
As of February 28, 2009 , certain Funds owned securities of their regular broker dealers (or parents) as shown below:
72
|
|
|
|
|
|
|
|
|
|
Value of Securities Owned |
|
Fund |
|
Name of Broker-Dealer |
|
$(000s) |
|
Core Bond Trust |
|
ABN AMRO Inc. |
|
$ 2,867 |
|
|
|
Banc of America Securities LLC |
|
28,292 |
|
|
|
Bank of America Corporation |
|
10,641 |
|
|
|
Barclays Capital Inc. |
|
2,321 |
|
|
|
Bear Stearns & Co. Inc.* |
|
22,907 |
|
|
|
Citigroup Global Markets Inc. |
|
27,877 |
|
|
|
Credit Suisse First Boston LLC |
|
15,138 |
|
|
|
Goldman Sachs and Company |
|
16,027 |
|
|
|
HSBC Securities Inc. |
|
7,854 |
|
|
|
Lehman Brothers Inc. |
|
2,882 |
|
|
|
Merrill Lynch & Co. Inc. |
|
14,185 |
|
|
|
UBS Financial Services Inc. |
|
814 |
|
|
|
|
|
|
|
Equity Index Trust |
|
Bank of America Corporation |
|
941 |
|
|
|
Citigroup Global Markets Inc. |
|
304 |
|
|
|
Goldman Sachs and Company |
|
1,500 |
|
|
|
JPMorgan Securities Inc.** |
|
3,177 |
|
|
|
|
|
|
|
Intermediate Bond Trust |
|
ABN AMRO Inc. |
|
306 |
|
|
|
Banc of America Securities LLC |
|
705 |
|
|
|
Bank of America Corporation |
|
2,131 |
|
|
|
Barclays Capital Inc. |
|
307 |
|
|
|
Bear Stearns & Co. Inc.* |
|
2,106 |
|
|
|
Citigroup Global Markets Inc. |
|
3,261 |
|
|
|
Credit Suisse First Boston LLC |
|
2,495 |
|
|
|
Goldman Sachs and Company |
|
3,225 |
|
|
|
HSBC Securities Inc. |
|
2,577 |
|
|
|
Lehman Brothers Inc. |
|
144 |
|
|
|
Merrill Lynch & Co. Inc. |
|
1,576 |
|
|
|
UBS Financial Services Inc. |
|
176 |
|
* Bear Stearns Companies Inc. and its affiliates are affiliated with JPMorgan Chase & Co. These securities were purchased prior to their affiliation with the Funds.
** Investment in affiliate. This security is included in an index in which the Fund, as an index fund, invests.
Investment decisions for each Fund of the Trust are made independently from those for the other Funds. Other investment companies or accounts managed by JPMIM may also invest in the same securities as the Trust. When a purchase or sale of the same security is made at substantially the same time on behalf of a given Fund and another Fund, investment company or account, the transaction will be averaged as to price, and available investments allocated as to amount, in a manner which the Adviser of the given Fund believes to be equitable to the Fund(s) and such other investment company or account. In some instances, this procedure may adversely affect the price paid or received by a Fund or the size of the position obtained by a Fund. To the extent permitted by law, JPMIM may aggregate the securities to be sold or purchased by it for a Fund with those to be sold or purchased by it for other Funds or for other investment companies or accounts in order to obtain best execution. As provided by the Investment Advisory Agreement, in making investment recommendations for the Trust, JPMIM will not inquire or take into consideration whether an issuer of securities proposed for purchase or sale by the Trust is a customer of JPMIM or their parents or subsidiaries or affiliates and, in dealing with its commercial customers, JPMIM and their respective parent, subsidiaries, and affiliates will not inquire or take into consideration whether securities of such customers are held by the Trust.
73
Administrator
JPMorgan Funds Management, Inc., 1111 Polaris Parkway, Columbus, Ohio 43240 serves as administrator for the Trust (JPMFM or the Administrator) pursuant to an administration agreement (Administration Agreement). JPMFM is an affiliate of JPMIM, the Adviser of the Trust, and an indirect wholly-owned subsidiary of JPMorgan Chase.
The Administrator assists in supervising all operations of each Fund to which it serves (other than those performed under the Advisory Agreement, the Custodian Agreement and the Transfer Agency Agreement for that Fund). Under the Administration Agreement, the Administrator has agreed to maintain the necessary office space for the Funds, to price the Fund securities of each Fund it serves and compute the net asset value and net income of the Funds on a daily basis, to maintain each Funds financial accounts and records, and to furnish certain other services required by the Funds with respect to each Fund. The Administrator prepares annual and semi-annual reports to the SEC, prepares federal and state tax returns, and generally assists in all aspects of the Trusts operations other than those performed under the Advisory Agreement, the Custodian Agreement and the Transfer Agency Agreement. Under the Administration Agreement, the Administrator may, at its expense, subcontract with any entity or person concerning the provision of services under the Administration Agreement.
Unless sooner terminated, the Administration Agreement between the Trust and the Administrator will continues in effect for annual periods beyond October 31, unless written notice not to renew is given of each year, provided that such continuance is specifically approved at least annually by the vote of a majority of those members of the Board of Trustees who are not parties to the Administration Agreement or interested persons of any such party by the non-renewing party to the other party at least 60 days prior to the expiration of the then-current term. The Administration Agreement may be terminated with respect to the Trust only upon mutual agreement of the parties to the Administration Agreement and for cause (as defined in the Administration Agreement) by the party alleging cause.
J.P. Morgan Investor Services, Co (JPMIS) serves as the Funds sub-administrator. For its services as sub-administrator, JPMIS receives a portion of the fees payable to the Administrator.
ADMINISTRATIVE FEES
( amounts in thousands)
The Administrator is entitled to a fee for its services, which is calculated daily and paid monthly, at the annual rate of ten-hundredths of one percent (0.10%) of the aggregate daily net assets of all the Funds. The Trust paid fees for administrative services to JPMorgan Funds Management, Inc. as Administrator for the fiscal year end as indicated (waived amounts in parentheses) as follows:
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|
|
|
|
|
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|
|
|
|
Funds |
Fiscal Year Ended |
|
Fiscal Year Ended |
|
Fiscal Year Ended |
|
|||||||||||
|
Paid |
Waived |
Paid |
Waived |
Paid |
Waived |
|||||||||||
Core Bond Trust |
|
$ |
|
|
($2,715 |
) |
|
$ |
|
|
($2,803 |
) |
|
$ |
|
($2,468 |
) |
Equity Index Trust |
|
|
|
|
(313 |
) |
|
|
|
|
( 443 |
) |
|
|
|
(352 |
) |
Intermediate Bond Trust |
|
|
|
|
(423 |
) |
|
|
|
|
( 325 |
) |
|
|
|
(299 |
) |
The Administration Agreement provides that the Administrator shall not be liable for any error of judgment or mistake of law or any loss suffered by the Funds in connection with the matters to which the Administration Agreement relates, except a loss resulting from willful misfeasance, bad faith, or negligence in the performance of its duties, or from the reckless disregard by it of its obligations and duties thereunder.
74
Placement Agent
J.P. Morgan Institutional Investments Inc. (JPMII) serves as the placement agent (Placement Agent) of the Funds shares pursuant to a placement agency agreement (Placement Agency Agreement) with the Trust, which is subject to annual approval by the Board. The Placement Agent is a subsidiary of JPMorgan Chase & Co. The Placement Agent is located at 245 Park Avenue, 22rd Floor, New York, NY 10167 , and is a broker-dealer and member of NASD.
The Placement Agency Agreement is terminable with respect to a Fund without penalty, at any time, by the Fund by not less than 30 days written notice to the Placement Agent, or by the Placement Agent upon not less than 30 days written notice to the Trust.
The Placement Agency Agreement will continue in effect with respect to each Fund for successive one-year periods, provided that each such continuance is specifically approved by the Trustees of the Trust, including by the vote of a majority of the Trustees who are not interested persons of the Trust (as defined in the 1940 Act). If the Placement Agency Agreement is terminated (or not renewed) with respect to one or more Funds, it may continue in effect with respect to any Fund as to which it has not been terminated (or has been renewed).
Custodian, Transfer Agent, Accounting Agent and Dividend Disbursing Agent
Pursuant to a Global Custody Agreement with JPMorgan Chase Bank, 270 Park Avenue, New York, NY 10017, JPMorgan Chase Bank serves as the Funds custodian and fund accounting agent and is responsible for holding portfolio securities and cash and maintaining the books of account and records of portfolio transactions. JPMorgan Chase Bank is an affiliate of JPMIM.
With respect to fund accounting services, the following schedule shall be employed in the calculation of the fees payable for the services provided under the JPMorgan Custody Agreement. For purposes of determining the asset levels at which a Tier applies, assets for that fund type across the entire J.P. Morgan Funds Complex (which shall be defined to include any 1940 Act fund, commingled funds or Rule 3c-7 fund which is advised or subadvised by an entity which is a wholly-owned subsidiary of JPMorgan Chase & Co.) shall be used.
|
|
|
U.S Equity Funds: |
|
0.0085% of the first $12.5 billion |
|
0.00 50 % on the next $7.5 billion |
|
0.0035% on the next $10 billion |
|
0.0025% for such assets over $30 billion |
|
|
|
U.S. Fixed Income Funds: |
|
0.0090% of the first $12.5 billion |
|
0.0050% on the next $7.5 billion |
|
0.0035% on the next $10 billion |
|
0.0020% for such assets over $30 billion |
The minimum total annual fund accounting charge per Fund is $20,000.
For custodian services, each Fund pays to JPMorgan Chase Bank annual safekeeping fees of between 0.001% and 0.60% of the assets held by the custodian (depending on the domicile in which the asset is held), calculated monthly in arrears, fees between $4.50 and $150 for securities trades (depending on the domicile in which the trade is settled) and $5 for receipt of principal and/or interest on fixed income securities. JPMorgan Chase Bank is also reimbursed for its reasonable out-of-pocket or incidental expenses, including, but not limited to, legal fees.
JPMorgan Chase Bank also is paid $15, $35 or $60 per proxy (depending on the country where the issuer is located) for its service which helps facilitate the voting of proxies throughout the world.
75
In addition, JPMorgan Chase Bank provides derivative servicing with respect to swaps, swaptions and bond and currency options. The fees for these services include a transaction fee of up to $40 per new contract, a fee of up to $10 per contract amendment (including transactions such as trade amendments, cancellations, terminations, novations, option exercise, option expiries, maturities or credit events) and a daily fee of up to $0.40 per contract per day for position management services.
Boston Financial Data Services, Inc. (BFDS), 2 Heritage Drive, North Quincy, MA 02171, serves as Transfer Agent and Dividend Disbursing Agent for each Fund pursuant to a Transfer Agency Agreement with the Trust (the Transfer Agency Agreement). Under the Transfer Agency Agreement, BFDS has agreed:
|
|
|
|
(i) |
to issue and redeem Shares of the Trust; |
|
|
|
|
(ii) |
to address and mail all communications by the Trust to its Shareholders, including reports to Shareholders, dividend and distribution notices, and proxy material for its meetings of Shareholders; |
|
|
|
|
(iii) |
to respond to correspondence or inquiries by Shareholders and others relating to its duties; |
|
|
|
|
(iv) |
to maintain Shareholder accounts and certain sub-accounts; and |
|
|
|
|
(v) |
to make periodic reports to the Trusts Board of Trustees concerning the Trusts operations. |
Securities Lending Agent
To generate additional income, certain Funds may lend up to 331/3% of their assets pursuant to agreements (borrower agreements) requiring that the loan be continuously secured by cash or securities issued by the U.S. government or its agencies or its instrumentalities (U.S. government securities). JPMorgan Chase Bank, an affiliate of the Funds, serves as lending agent pursuant to a securities lending agreement approved by the Board of Trustees (the Securities Lending Agreement).
Under the Securities Lending Agreement, JPMorgan Chase Bank acting as agent for the Funds loans securities to approved borrowers pursuant to approved Borrower Agreements in exchange for collateral equal to at least 100% of the market value of the loaned securities plus accrued interest. During the term of the loan, the Funds receive payments from borrowers equivalent to the dividends and interest that would have been earned on securities lent while simultaneously seeking to earn income on the investment of cash collateral in accordance with investment guidelines contained in the Securities Lending Agreement. For loans secured by cash, the Funds retain the interest on cash collateral investments but are required to pay the borrower a rebate for the use of cash collateral. For loans secured by U.S. government securities, the borrower pays a borrower fee to the lending agent on behalf of the Funds. The net income earned on the securities lending (after payment of rebates and the lending agents fee) is included in the Statement of Operations as income from securities lending (net in the Funds financial statements). Information on the investment of cash collateral is shown in the Schedule of Portfolio Investments (in the Funds financial statements).
Under the Securities Lending Agreement, JPMorgan Chase Bank is entitled to a fee equal to (i) 0.06% calculated on an annualized basis and accrued daily, based upon the value of collateral received from borrowers for each loan of U.S. securities outstanding during a given month; and (ii) 0.1142% calculated on an annualized basis and accrued daily, based upon the value of collateral received from borrowers for each loan of non-U.S. securities outstanding during a given month. For the year ended February 29, 2008, JPMorgan Chase Bank has voluntarily reduced its fees to (i) 0.05% for each loan of U.S. securities and (ii) 0.10% for each loan of the non-U.S. securities, respectively. Effective March 1, 2008, JPMorgan Chase Bank voluntarily reduced its fees to (i) 0.03% for each loan of U.S. securities and (ii) 0.09% for each loan of non-U.S. securities outstanding in a given month. Effective July 1, 2008, JPMorgan Chase Bank is entitled
76
to a fee under the Securities Lending Agreement as follows: (i) 0.03% of the average dollar value of loans of U.S. securities outstanding during a given month; and (ii) 0.09% of the average dollar value of loans of non-U.S. securities outstanding during a given month. The purpose of these fees is to cover the custodial, administrative and related costs of securities lending including securities movement, settlement of trades involving cash received as collateral, custody of collateral and marking to market loans.
ADDITIONAL INFORMATION
Proxy Voting Policies and Procedures
The Board of Trustees has delegated to the Funds investment adviser, JPMIM, proxy voting authority with respect to the Funds portfolio securities. To ensure that the proxies of portfolio companies are voted in the best interests of the Funds, the Funds Board of Trustees has adopted JPMIMs detailed proxy voting procedures (the Procedures) that incorporate guidelines (Guidelines) for voting proxies on specific types of issues. The Guidelines have been developed with the objective of encouraging corporate action that enhances shareholder value.
JPMIM and its affiliated advisers are part of a global asset management organization with the capability to invest in securities of issuers located around the globe. Because the regulatory framework and the business cultures and practices vary from region to region, the Guidelines are customized for each region to take into account such variations. Separate Guidelines cover the regions of (1) North America, (2) Europe, Middle East, Africa, Central America and South America (3) Asia (ex-Japan) and (4) Japan, respectively.
Notwithstanding the variations among the Guidelines, all of the Guidelines have been designed with the uniform objective of encouraging corporate action that enhances shareholder value. As a general rule, in voting proxies of a particular security, JPMIM will apply the Guidelines of the region in which the issuer of such security is organized. Except as noted below, proxy voting decisions will be made in accordance with the Guidelines covering a multitude of both routine and non-routine matters that JPMIM and its affiliated advisers have encountered globally, based on many years of collective investment management experience.
To oversee and monitor the proxy-voting process, JPMIM has established a proxy committee and appointed a proxy administrator in each global location where proxies are voted. The primary function of each proxy committee is to review periodically general proxy-voting matters, review and approve the Guidelines annually, and provide advice and recommendations on general proxy-voting matters as well as on specific voting issues. The procedures permit an independent voting service, currently Institutional Shareholder Services, Inc. (ISS) in the United States, to perform certain services otherwise carried out or coordinated by the proxy administrator.
Although for many matters the Guidelines specify the votes to be cast, for many others, the Guidelines contemplate case-by-case determinations. In addition, there will undoubtedly be proxy matters that are not contemplated by the Guidelines. For both of these categories of matters and to override the Guidelines, the Procedures require a certification and review process to be completed before the vote is cast. That process is designed to identify actual or potential material conflicts of interest (between the Fund on the one hand, and the Funds investment adviser, placement agent or an affiliate of any of the foregoing, on the other hand) and ensure that the proxy vote is cast in the best interests of the Fund. When a potential material conflict of interest has been identified, the proxy administrator and a subgroup of proxy committee members (composed of a member from the Investment Department and one or more members from the Legal, Compliance or Risk Management Departments) will evaluate the potential conflict of interest and determine whether such conflict actually exists, and if so, will recommend how JPMIM will vote the proxy. In addressing any material conflict, JPMIM may take one or more of the following measures (or other appropriate action): removing or walling off from the proxy voting process certain JPMIM personnel with knowledge of the conflict, voting in accordance with any applicable Guideline if the application of the Guideline would objectively result in the casting of a proxy vote in a predetermined manner, or deferring the vote to ISS, which will vote in accordance with its own recommendation.
77
The following summarizes some of the more noteworthy types of proxy voting policies of the U.S. Guidelines:
|
|
|
JPMIM considers votes on director nominees on a case-by-case basis. Votes generally will be withheld from directors who: (a) attend less than 75% of board and committee meetings without a valid excuse; (b) implement or renew a dead-hand poison pill; (c) are affiliated directors who serve on audit, compensation or nominating committees or are affiliated directors and the full board serves on such committees or the company does not have such committees; or (d) ignore a shareholder proposal that is approved for two consecutive years by a majority of either the shares outstanding or the votes cast. |
|
|
|
JPMIM votes proposals to classify boards on a case-by-case basis, but will vote in favor of such proposal if the issuers governing documents contain each of eight enumerated safeguards (for example, a majority of the board is composed of independent directors and the nominating committee is composed solely of such directors). |
|
|
|
JPMIM also considers management poison pill proposals on a case-by-case basis, looking for shareholder-friendly provisions before voting in favor. |
|
|
|
JPMIM votes against proposals for a super-majority vote to approve a merger. |
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|
|
JPMIM considers proposals to increase common and/or preferred shares and to issue shares as part of a debt restructuring plan on a case-by-case basis, taking into account the extent of dilution and whether the transaction will result in a change in control. |
|
|
|
JPMIM votes proposals on a stock option plan, based primarily on a detailed, quantitative analysis that takes into account factors such as estimated dilution to shareholders equity and dilution to voting power. JPMIM generally considers other management compensation proposals on a case-by-case basis. |
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|
|
JPMIM also considers on a case-by-case basis proposals to change an issuers state of incorporation, mergers and acquisitions and other corporate restructuring proposals and certain social and environmental issue proposals. |
The Funds proxy voting records for the most recent 12-month period ended June 30 are available on the SECs website at www.sec.gov or by calling the following toll-free number 1-800-343-1113.
Description of Shares
The Trust is an open-end, management investment company organized as Delaware statutory trust. Each Fund represents a separate series of shares of beneficial interest. The Trust presently includes three series, which represent interests in the following:
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|
|
|
1. |
JPMorgan Core Bond Trust; |
|
|
|
|
2. |
JPMorgan Equity Index Trust; and |
|
|
|
|
3. |
JPMorgan Intermediate Bond Trust |
The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares ($0.0001 par value) of one or more series and classes within any series and to divide or combine the shares of any series or class without materially changing the proportionate beneficial interest of such shares of such series or class in the assets held with respect to that series. Each share represents an equal beneficial interest in the net assets of a Fund with each other share of that Fund. The Trustees may authorize the issuance of shares of additional series and the creation of classes of shares within any series with such preferences, voting powers, rights, duties and privileges as the Trustees may determine; however, the Trustees may not classify or change outstanding shares in a manner materially adverse to shareholders of
78
each share. Upon liquidation of a Fund, shareholders are entitled to share pro rata in the net assets of a Fund available for distribution to such shareholders. The rights of redemption and exchange are described in the Confidential Offering Memorandum and elsewhere in this Confidential Offering Memorandum Supplement.
The shareholders of each Fund are entitled to one vote for each dollar of NAV (and a proportionate fractional vote with respect to the remainder of the NAV of shares, if any), on matters on which shares of a Fund shall be entitled to vote. Subject to the 1940 Act, the Trustees themselves have the power to alter the number of the Trustees, provided that there are no fewer than three, and to appoint their own successors, provided, however, that immediately after such appointment the requisite majority of the Trustees have been elected by the shareholders of the Trust. The voting rights of shareholders are not cumulative with respect to the election of Trustees. It is the intention of the Trust not to hold meetings of shareholders annually. The Trustees may call meetings of shareholders for action by shareholder vote as may be required by either the 1940 Act or the Declaration of Trust.
Each share of a series or class represents an equal proportionate interest in the assets in that series or class with each other share of that series or class. The shares of each series or class participate equally in the earnings, dividends and assets of the particular series or class. Any general liabilities of the Trust which are not readily identifiable as being held with respect to any particular series or class shall be allocated and charged by the Trustees to and among any one or more of the series in such manner and on such basis as the Trustees in their sole discretion deem fair and equitable. Except as other wise provided by the trustees, shares have no pre-emptive or conversion rights, and when issued, are fully paid and non-assessable. Shares of each series or class generally vote together, except when required under federal securities laws to vote separately on matters that may affect a particular class, such as the approval of distribution plans for a particular class, or when the Trustees have determined that the matter voted upon will only affect a series or class.
The Trustees of the Trust may, without shareholder approval (unless otherwise required by applicable law): (i) cause the Trust to merge or consolidate with or into one or more trusts (or series thereof to the extent permitted by law, partnerships, associations, corporations or other business entities (including trusts, partnerships, associations, corporations, or other business entities created by the Trustees to accomplish such merger or consolidation) so long as the surviving or resulting entity is an investment company as defined in the 1940 Act, or is a series thereof, that will succeed to or assume the Trusts registration under the 1940 Act and that is formed, organized, or existing under the laws of the U.S. or of a state, commonwealth, possession or territory of the U.S., unless otherwise permitted under the 1940 Act; (ii) cause any one or more series or classes of the Trust to merge or consolidate with or into any one or more other series or classes of the Trust, one or more trusts (or series or classes thereof to the extent permitted by law), partnerships, associations, corporations; (iii) cause the shares to be exchanged under or pursuant to any state or federal statute to the extent permitted by law; or (iv) cause the Trust to reorganize as a corporation, limited liability company or limited liability partnership under the laws of Delaware or any other state or jurisdiction. However, the exercise of such authority may be subject to certain restrictions under the 1940 Act.
The Trustees may, without shareholder vote, generally restate, amend or otherwise supplement the Trusts governing instruments, including the Declarations of Trust and the By-Laws, without the approval of shareholders, subject to limited exceptions, such as the right to elect Trustees.
The Trustees, without obtaining any authorization or vote of shareholders, may change the name of any series or class or dissolve or terminate any series or class of shares.
Shares have no subscription or preemptive rights and only such conversion or exchange rights as the Trustees may grant in their discretion. When issued for payment as described in the Confidential Offering Memorandum and this Confidential Offering Memorandum Supplement, the Trusts Shares will be fully paid and non-assessable. In the event of a liquidation or dissolution of the Trust, Shares of a Fund are entitled to receive the assets available for distribution belonging to the Fund, and a proportionate distribution, based
79
upon the relative asset values of the respective Funds, of any general assets not belonging to any particular Fund which are available for distribution.
Rule 18f-2 under the 1940 Act provides that any matter required to be submitted to the holders of the outstanding voting securities of an investment company such as the Trust shall not be deemed to have been effectively acted upon unless approved by the holders of a majority of the outstanding Shares of each Fund affected by the matter. For purposes of determining whether the approval of a majority of the outstanding Shares of a Fund will be required in connection with a matter, a Fund will be deemed to be affected by a matter unless it is clear that the interests of each Fund in the matter are identical, or that the matter does not affect any interest of the Fund. Under Rule 18f-2, the approval of an investment advisory agreement or any change in investment policy would be effectively acted upon with respect to a Fund only if approved by a majority of the outstanding Shares of such Fund. However, Rule 18f-2 also provides that the ratification of independent public accountants, the approval of principal underwriting contracts, and the election of Trustees may be effectively acted upon by Shareholders of the Trust voting without regard to series.
Shareholder and Trustee Liability
The Trusts Declaration of Trust provides that if any Shareholder or former Shareholder of any series shall be held personally liable solely by reason of being or having been a Shareholder, such Shareholder or former Shareholder shall be held harmless from and indemnified against all loss and expense arising from such liability. Under the Declaration of Trust, neither the Trust, the Trustees, nor any officer, employee, or agent of the Trust shall have any power to bind personally any Shareholders, nor, except as specifically provided therein, to call upon any Shareholder for the payment of any sum of money or assessment whatsoever other than such as the Shareholder may at any time personally agree to pay. The Declaration of Trust grants to Shareholders the same limitation of personal liability as is extended to shareholders of a private corporation for profit incorporated in the State of Delaware.
The Trusts Declaration of Trust states further that no Trustee of the Trust shall be personally liable to any person other than the Trust or a beneficial owner for any act, omission or obligation of the Trust or any Trustee. The Declaration of Trust also states that a Trustee shall not be liable for any act or omission or any conduct whatsoever in his capacity as Trustee, unless the Trustee would be subject to liability to the Trust or to Shareholders by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of the office of Trustee thereunder.
Portfolio Holdings Disclosure
No sooner than thirty days after the end of each month, each Fund will make available upon request a complete, uncertified schedule of its portfolio holdings as of the last day of that month. Not later than sixty days after the end of each quarter, each Fund will make available a complete, certified schedule of its portfolio holdings as of the last day of that quarter. In addition to providing hard copies upon request, the Funds will post these quarterly schedules on the SECs website at www.sec.gov. Shareholders may request portfolio holdings schedules at no charge by contacting their client relationship or client service manager.
The Funds publicly available uncertified complete list of portfolio holdings information, as described above, may also be provided regularly pursuant to a standing request, such as on a monthly or quarterly basis, to (i) third party service providers, rating and ranking agencies, financial intermediaries, and affiliated persons of the Funds and (ii) clients of JPMIM or its affiliates that invest in the Funds or such clients consultants. No compensation or other consideration is received by the Funds or JPMIM, or any other person for these disclosures. A list of the entities that receive the Funds portfolio holdings information on such basis and the frequency with which it is provided to them is provided below:
80
|
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All Funds |
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|
Lipper, Inc. |
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Monthly |
|
30 days after month end |
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|
|
|
|
JPMorgan Core Bond Trust |
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|
|
|
Akzo Nobel |
|
Monthly |
|
30 days after month end |
College Access Foundation of California |
|
Monthly |
|
30 days after month end |
Detroit Symphony Orchestra |
|
Monthly |
|
30 days after month end |
New England Pension Consultants |
|
Monthly |
|
30 days after month end |
St. Lawrence University |
|
Monthly |
|
30 days after month end |
Joint Commission on Accreditation of Healthcare |
|
Quarterly |
|
30 days after month end |
Organizations |
|
|
|
|
JPMorgan Intermediate Bond Trust |
|
|
|
|
Brunswick Corporation |
|
Monthly |
|
30 days after month end |
JPMorgan Equity Index Trust |
|
|
|
|
Detroit Symphony Orchestra |
|
Monthly |
|
30 days after month end |
Sauer-Dan Foss |
|
Quarterly |
|
30 days after month end |
In addition, certain service providers to the Funds or JPMIM, Administrator, or the Placement Agent may for legitimate business purposes receive the Funds portfolio holdings information earlier than 30 days after month end, such as rating and ranking agencies, pricing services, proxy voting service providers, accountants, attorneys, custodians, securities lending agents, brokers in connection with Fund transactions and in providing price quotations, and transfer agents. These service providers include the following: The JPMorgan Chase Bank, N.A.; Financial Graphic Solutions, Inc.; Ropes & Gray, LLP ; Digital Publishing Solutions, Inc.; FT Interactive Data; Institutional Shareholder Services, Inc.; J.J. Kenny; and Morgan Stanley & Co. Other service providers (e.g., the Funds administrator) are identified elsewhere in the registration statement. In addition, when a Fund redeems a shareholder in kind, the shareholder generally receives its proportionate share of the Funds portfolio holdings and, therefore, the shareholder and its agent may receive such information earlier than 30 days after month end. Such holdings are released on conditions of confidentiality, which include appropriate trading prohibitions. Conditions of confidentiality include confidentiality terms included in written agreements, implied by the nature of the relationship (e.g., attorney-client relationship), or required by fiduciary or regulatory principles (e.g., custody services provided by financial institutions). Disclosure of a Funds portfolio securities as an exception to the Funds normal business practice requires the business unit proposing such exception to identify a legitimate business purpose for the disclosure and submit the proposal to the Funds Treasurer for approval following business and compliance review. Additionally, no compensation or other consideration is received by a Fund or JPMIM, or any other person for these disclosures. The Funds Trustees will review annually a list of such entities that have received such information, the frequency of such disclosures and the business purpose therefor. These procedures are designed to address conflicts of interest between the Funds shareholders on the one hand and JPMIM or any affiliated person of the Fund or such entities on the other hand by creating a structured review and approval process which seeks to ensure that disclosure of information about the Funds portfolio securities is in the best interests of the Funds shareholders. There can be no assurance, however that a Funds policies and procedures with respect to the disclosure of portfolio holdings information will prevent the misuse of such information by individuals or firms in possession of such information.
Portfolio holdings of each Fund will be disclosed on a quarterly basis on forms required to be filed with the SEC as follows: (i) portfolio holdings as of the end of each fiscal year will be filed as part of the annual report filed on Form N-CSR; (ii) portfolio holdings as of the end of the first and third fiscal quarters will be filed on Form N-Q; and (iii) portfolio holdings as of the end of the six month period will be filed as part of the semi-annual report filed on Form N-CSR. The Trusts Form N-CSRs and Form N-Qs will be available on the SECs website at www.sec.gov.
Finally, the Funds release information concerning any and all portfolio holdings when required by law. Such releases may include providing information concerning holdings of a specific security to the issuer of such security.
81
Miscellaneous
The Trust is not required to hold a meeting of Shareholders for the purpose of electing Trustees except that (i) the Trust is required to hold a Shareholders meeting for the election of Trustees at such time as less than a majority of the Trustees holding office have been elected by Shareholders and (ii) if, as a result of a vacancy on the Board of Trustees, less than two-thirds of the Trustees holding office have been elected by the Shareholders, that vacancy may only be filled by a vote of the Shareholders. In addition, Trustees may be removed from office by a written consent signed by the holders of Shares representing two-thirds of the outstanding Shares of the Trust at a meeting duly called for the purpose, which meeting shall be held upon the written request of the holders of Shares representing not less than 10% of the outstanding Shares of the Trust. Except as set forth above, the Trustees may continue to hold office and may appoint successor Trustees.
As used in the Trusts Confidential Offering Memorandum and in this Supplement, assets belonging to a Fund means the consideration received by the Trust upon the issuance or sale of Shares in that Fund, together with all income, earnings, profits, and proceeds derived from the investment thereof, including any proceeds from the sale, exchange, or liquidation of such investments, and any funds or payments derived from any reinvestment of such proceeds, and any general assets of the Trust not readily identified as belonging to a particular Fund that are allocated to that Fund by the Trusts Board of Trustees. The Board of Trustees may allocate such general assets in any manner it deems fair and equitable. It is anticipated that the factor that will be used by the Board of Trustees in making allocations of general assets to particular Funds will be the relative net asset values of the respective Funds at the time of allocation. Assets belonging to a particular Fund are charged with the direct liabilities and expenses in respect of that Fund, and with a share of the general liabilities and expenses of the Trust not readily identified as belonging to a particular Fund that are allocated to that Fund in proportion to the relative net asset values of the respective Funds at the time of allocation. The timing of allocations of general assets and general liabilities and expenses of the Trust to particular Funds will be determined by the Board of Trustees of the Trust and will be in accordance with generally accepted accounting principles. Determinations by the Board of Trustees of the Trust as to the timing of the allocation of general liabilities and expenses and as to the timing and allocable portion of any general assets with respect to a particular Fund are conclusive. As used in the Confidential Offering Memorandum and in this Supplement, a vote of a majority of the outstanding Shares of the Trust, a particular Fund means the affirmative vote of the lesser of (a) more than 50% of the outstanding Shares of the Trust or such Fund or (b) 67% or more of the Shares of the Trust or such Fund present at a meeting at which the holders of more than 50% of the outstanding Shares of the Trust or such Fund are represented in person or by proxy.
The Trust is registered with the SEC as an open-end, management investment company. Such registration does not involve supervision by the SEC of the management or policies of the Trust.
The Confidential Offering Memorandum and this Supplement omit certain of the information contained in the Registration Statement filed with the SEC. Copies of such information may be obtained from the SEC upon payment of the prescribed fee.
The Confidential Offering Memorandum and this Supplement are not an offering of the securities herein described in any State in which such offering may not lawfully be made. No salesperson, dealer, or other person is authorized to give any information or make any representation other than those contained in the Confidential Offering Memorandum and this Supplement.
As of May 31, 2009 , the following persons were the owners of record of, or known by the Trust to own beneficially more than 5% of the outstanding Shares of the following Funds. Shareholders designated by an asterisk hold record of, or known by the trust to own beneficially 25% or more of a Fund. Such shareholders are controlling persons under the 1940 Act. As a result, those shareholders would have the
82
ability to vote a majority of the shares of the Funds on any matter requiring the approval of shareholders of such Funds .
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TRUST1 |
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NAME AND ADDRESS OF SHAREHOLDER |
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PERCENTAGE |
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CORE BOND TRUST |
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INSTITUTIONAL |
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STRAFE & CO* |
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54.33 |
% |
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SHARES |
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BOIA-ONE GROUP OPERATIONS |
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1111 POLARIS PKWY |
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PO BOX 710027 |
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COLUMBUS OH 43271-0001 |
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JPMIM AS AGENT FBO ROCKWELL* |
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9.40 |
% |
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ATTN CLIENT SERVICES |
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1111 POLARIS PKWY STE 3F |
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COLUMBUS OH 43240-2031 |
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EQUITY INDEX TRUST |
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INSTITUTIONAL |
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STRAFE & CO* |
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79.98 |
% |
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SHARES |
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BOIA-ONE GROUP OPERATIONS |
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1111 POLARIS PKWY |
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PO BOX 710027 |
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COLUMBUS OH 43271-0001 |
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JPMIM AS AGENT FOR FIRST ENERGY CORP NDT NON |
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13.24 |
% |
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QUALIFIED EQUITIES* |
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ATTN CLIENT SERVICES |
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1111 POLARIS PKWY FL 3 # OH1-0213 |
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COLUMBUS OH 43240-2031 |
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INTERMEDIATE BOND TRUST |
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INSTITUTIONAL |
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STRAFE & CO* |
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31.78 |
% |
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SHARES |
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BOIA-ONE GROUP OPERATIONS |
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1111 POLARIS PKWY |
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PO BOX 710027 |
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COLUMBUS OH 43271-0001 |
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JPMIM AS AGENT FBO BRUNSWICK* |
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22.90 |
% |
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ATTN CLIENT SERVICES |
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1111 POLARIS PKWY STE 3F |
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COLUMBUS OH 43240-2031 |
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JPMIM AS AGENT FBO UHHS* |
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12.16 |
% |
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ATTN CLIENT SERVICES |
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1111 POLARIS PKWY STE 3F |
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COLUMBUS OH 43240-2031 |
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JPMIM AS AGENT FBO TEXTRON* |
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12.10 |
% |
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ATTN CLIENT SERVICES |
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1111 POLARIS PKWY STE 3F |
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COLUMBUS OH 43240-2031 |
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JPMIM AS AGENT FOR POLYONE* |
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8.99 |
% |
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ATTN CLIENT SERVICES |
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1111 POLARIS PKWY STE 3F |
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COLUMBUS OH 43240-2031 |
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JPMIM AS AGENT FBO UHC* |
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5.40 |
% |
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ATTN CLIENT SERVICES |
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1111 POLARIS PKWY STE 3F |
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COLUMBUS OH 43240-2031 |
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83
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1 Shares of the Funds are offered only to certain clients of either JPMIM or its affiliates who maintain one or more separately managed private accounts, and who areaccredited investors, within the meaning of Regulation D under the Securities Act. Due to JPMIM or its affiliates voting or investment power with respect to the Funds, JPMorgan Chase & Co. may be deemed to be a controlling person of such shares under the 1940 Act. |
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* The shareholder of record is a subsidiary or affiliate of JPMorgan Chase & Co. (a JPMorgan Affiliate). Typically, the shares are held for the benefit of underlying accounts for which the JPMorgan Affiliate may have voting or investment power. To the extent that JPMorgan Affiliates own 25% or more of a class of shares of a Fund, JPMorgan Chase & Co. may be deemed to be a controlling person of such shares under the 1940 Act. |
Financial Statements
The Financial Statements of the Trust for the fiscal year ended February 28, 2009 have been audited by PricewaterhouseCoopers LLP, the independent registered public accounting firm to the Trust, as indicated in their reports with respect thereto, and are incorporated herein by reference. These Financial Statements are available to shareholder without charge upon request by calling their Client Service Manager.
84
APPENDIX ADESCRIPTION OF RATINGS
The following is a summary of published ratings by major credit rating agencies. Credit ratings evaluate only the safety of principal and interest payments, not the market value risk of lower quality securities. Credit rating agencies may fail to change credit ratings to reflect subsequent events on a timely basis. Although JPMIM considers security ratings when making investment decisions, it also performs its own investment analysis and does not rely solely on the ratings assigned by credit agencies.
Unrated securities will be treated as non-investment grade securities unless JPMIM determines that such securities are the equivalent of investment grade securities. Securities that have received different ratings from more than one agency are considered investment grade if at least one agency has rated the security investment grade.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
Standard & Poors Rating Service (S&P)
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A-1 |
Highest category of commercial paper. Capacity to meet financial commitment is strong. Obligations designated with a plus sign (+) indicate that capacity to meet financial commitment is extremely strong. |
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A-2 |
Issues somewhat more susceptible to adverse effects of changes in circumstances and economic conditions than obligations in higher rating categories. However, the capacity to meet financial commitments is satisfactory. |
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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. |
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B |
Regarded as having significant speculative characteristics. 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. |
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C |
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. |
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D |
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 S&P Rating Service 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. |
Fitch Ratings (Fitch)
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F1 |
HIGHEST CREDIT QUALITY. Indicates the strongest capacity for timely payment of financial commitments; may have an added + to denote any exceptionally strong credit feature. |
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F2 |
GOOD CREDIT QUALITY. 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. |
A-1
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F3 |
FAIR CREDIT QUALITY. The capacity for timely payment of financial commitments is adequate; however, near-term adverse changes could result in a reduction to non-investment grade. |
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B |
SPECULATIVE. Minimal capacity for timely payment of financial commitments, plus vulnerability to near-term adverse changes in financial and economic conditions. |
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C |
HIGH DEFAULT RISK. Default is a real possibility. Capacity for meeting financial commitments is solely reliant upon a sustained, favorable business and economic environment. |
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RD |
Indicates an entity that has defaulted on one or more of its financial commitments, although it continues to meet other obligations. |
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D |
DEFAULT. Denotes actual or imminent payment default. |
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+ or - |
may be appended to a rating to denote relative status within major rating categories. |
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PIF |
denotes a security that is paid-in-full, matured, called, or refinanced. |
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NR |
indicates that Fitch Ratings does not rate the issuer or issue in question. |
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Withdrawn |
A rating is withdrawn when Fitch Ratings deems the amount of information available to be inadequate for rating purposes, or when an obligation matures, is called, or refinanced, or for any other reason Fitch Ratings deems sufficient. |
Moodys Investors Service, Inc. (Moodys)
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Prime-1 |
Superior ability for repayment, often evidenced by such characteristics as: leading market positions in well-established industries; high rates of return on funds employed; conservative capitalization structure with moderate reliance on debt and ample asset protection; broad margins in earnings coverage of fixed financial charges and high internal cash generation; and well-established access to a range of financial markets and assured sources of alternate liquidity. |
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Prime-2 |
Strong capacity for repayment. This will normally be evidenced by many of the characteristics cited above but to a lesser degree. Earnings trends and coverage ratios, while sound, may be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained. |
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Prime-3 |
Acceptable capacity for repayment. The effect of industry characteristics and market compositions may be more pronounced. Variability in earnings and profitability may result in changes in the level of debt protection measurements and may require relatively high financial leverage. Adequate alternate liquidity is maintained. |
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Not Prime |
Does not fall within any of the Prime rating categories. |
Dominion Bond Rating Service (DBRS)
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R-1 |
Prime Credit Quality |
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R-2 |
Adequate Credit Quality |
A-2
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R-3 |
Speculative |
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D |
Default |
All three DBRS rating categories for short term debt use high, middle or low as subset grades to designate the relative standing of the credit within a particular rating category. The following comments provide separate definitions for the three grades in the Prime Credit Quality area.
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R-1 (high) |
Short term debt rated R-1 (high) is of the highest credit quality, and indicates an entity which possesses 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 which 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 which DBRS has established for an R-1 (high), few entities are strong enough to achieve this rating. |
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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 to only a small degree. Given the extremely tough definition which DBRS has for the R-1 (high) category (which few companies are able to achieve), entities rated R-1 (middle) are also considered strong credits which typically exemplify above average strength in key areas of consideration for debt protection. |
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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 is not normally as favorable as with higher rating categories, but these considerations are still respectable. Any qualifying negative factors which exist are considered manageable, and the entity is normally of sufficient size to have some influence in its industry. |
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R-2 (high); |
Short term debt rated R-2 is of adequate credit quality and within the three subset grades, debt protection ranges from having reasonable ability for timely repayment to a level which is considered only just adequate. The liquidity and debt ratios of entities in the R-2 classification are not as strong as those in the R-1 category, and the past and future trend may suggest some risk of maintaining the strength of key ratios in these areas. Alternative sources of liquidity support are considered satisfactory; however, even the strongest liquidity support will not improve the commercial paper rating of the issuer. The size of the entity may restrict its flexibility, and its relative position in the industry is not typically as strong as an R-1 credit. Profitability trends, past and future, may be less favorable, earnings not as stabled, and there are often negative qualifying factors present which could also make the entity more vulnerable to adverse changes in financial and economic conditions. |
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R-3 (high); |
Short term debt rated R-3 is speculative, and within the three subset grades, the capacity for timely payment ranges from mildly speculative to doubtful. R-3 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-3 ratings would normally have very limited access to alternative sources of liquidity. Earnings 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. |
A-3
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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 suspended, discontinued, or reinstated by DBRS. |
DESCRIPTION OF BANK RATINGS
Moodys
Moodys Bank Financial Strength Ratings (BFSRs) represent Moodys opinion of a banks intrinsic safety and soundness and, as such, exclude certain external credit risks and credit support elements that are addressed by Moodys Bank Deposit Ratings. In addition to commercial banks, Moodys BFSRs may also be assigned to other types of financial institutions such as multilateral development banks, government-sponsored financial institutions and national development financial institutions.
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A |
These banks possess superior intrinsic financial strength. Typically they will be major financial institutions with highly valuable and defensible business franchises, strong financial fundamentals, and a very predictable and stable operating environment. |
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B |
These banks possess strong intrinsic financial strength. Typically, they will be institutions with valuable and defensible business franchises, good financial fundamentals, and a predictable and stable operating environment. |
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C |
These banks possess adequate intrinsic financial strength. Typically, they will be institutions with more limited but still valuable and defensible business franchises. These banks will display either acceptable financial fundamentals within a predictable and stable operating environment, or good financial fundamentals within a less predictable and stable operating environment. |
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D |
Banks rated D display modest intrinsic financial strength, potentially requiring some outside support at times. Such institutions may be limited by one or more of the following factors; a weak business franchise; financial fundamentals that are deficient in one or more respects; or an unpredictable and unstable operating environment. |
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E |
Banks rated E display very modest intrinsic financial strength, with a higher likelihood of periodic outside support or an eventual need for outside assistance. Such institutions may be limited by one or more of the following factors: a weak and limited business franchise; financial fundamentals that are materially deficient in one or more respects; or a highly unpredictable or unstable operating environment. |
Where appropriate, a + modifier will be appended to ratings below the A category and a modifier will be appended to ratings above the E category to distinguish those banks that fall in intermediate categories.
A-4
DESCRIPTION OF BOND RATINGS
S&P
Corporate and Municipal Bond Ratings
Investment Grade
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AAA |
Debt rated AAA has the highest rating assigned by S&P Rating Service. Capacity to pay interest and repay principal is extremely strong. |
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AA |
Debt rated AA has a very strong capacity to pay interest and repay principal and differs from the highest rated issues only to a small degree. |
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A |
Debt rated A has a strong capacity to pay interest and repay principal; it is somewhat more susceptible, however, to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories. |
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BBB |
Debt rated BBB is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions, or changing circumstances are more likely to impair the obligors capacity to pay interest and repay principal for debt in this category in higher-rated categories. |
Speculative Grade
Debt rated BB, CCC, CC, and C is regarded as having predominantly speculative characteristics with respect to capacity to pay interest and repay principal. BB indicates the least degree of speculation and C the highest. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major exposures to adverse conditions.
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BB |
Debt rated BB has less near-term vulnerability to default than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to inadequate capacity to meet timely interest and principal payments. The BB rating category is also used for debt subordinated to senior debt that is assigned an actual or implied BBB- rating. |
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B |
Debt rated B has a greater vulnerability to default but currently has the capacity to meet interest payments and principal repayments. Adverse business, financial, or economic conditions will likely impair capacity or willingness to pay interest and repay principal. |
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The B rating category is also used for debt subordinated to senior debt that is assigned an actual or implied BB or BB- rating. |
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CCC |
Debt rated CCC has a currently identifiable vulnerability to default and is dependent upon favorable business, financial, and economic conditions to meet timely payment of interest and repayment of principal. In the event of adverse business, financial or economic conditions, it is not likely to have the capacity to pay interest and repay principal. The CCC rating category is also used for debt subordinated to senior debt that is assigned an actual or implied B or B- rating. |
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CC |
The rating CC is typically applied to debt subordinated to senior debt that is assigned an actual or implied CCC rating. |
A-5
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C |
The rating C is typically applied to debt subordinated to senior debt that is assigned an actual or implied CCC- debt rating. The C rating may be used to cover a situation where a bankruptcy petition has been filed, but debt service payments are continued. |
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C1 |
The rating C1 is reserved for income bonds on which no interest is being paid. |
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D |
Debt rated D is in payment default. The D rating category is used when interest payments or principal payments are not made on the date due even if the applicable grace period has not expired, unless S&P Rating Service believes that such payments will be made during such grace period. The D rating will also be used upon the filing of bankruptcy petition if debt service payments are jeopardized. |
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.
c: The c subscript is used to provide additional information to investors that the bank may terminate its obligation to purchase tendered bonds if the long-term credit rating of the issuer is below an investment-grade level and/or the issuers bonds are deemed taxable.
p: The letter p indicates that the rating is provisional. A provisional rating assumes the successful completion of the project being financed by the debt being rated and indicates that payment of debt service requirements is largely or entirely dependent upon the successful and timely completion of the project. This rating, however, while addressing credit quality subsequent to completion of the project, makes no comment on the likelihood of, or the risk of default upon failure of, such completion. The investor should exercise his own judgment with respect to such likelihood and risk.
*: Continuance of the ratings is contingent upon Standard & Poors receipt of an executed copy of the escrow agreement or closing documentation confirming investments and cash flows.
r: The r is attached to highlight derivative, hybrid, and certain other obligations that S&P Rating Service believes may experience high volatility or high variability in expected returns due to non-credit risks. Examples of such obligations are: securities whose principal or interest return is indexed to equities, commodities, or currencies; certain swaps and options; and interest only and principal only mortgage securities.
The absence of an r symbol should not be taken as an indication that an obligation will exhibit no volatility or variability in total return.
N.R. Not rated.
Debt obligations of issuers outside the United States and its territories are rated on the same basis as domestic corporate and municipal issues. The ratings measure the creditworthiness of the obligor but do not take into account currency exchange and related uncertainties.
A-6
Moodys
Long-Term Ratings: Bonds and Preferred Stock
Investment Grade
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Aaa |
Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as gilt edged. Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. |
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Aa |
Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present that make the long-term risks appear somewhat larger than with Aaa securities. |
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A |
Bonds which are rated A possess many favorable investment attributes and are to be considered as upper-medium-grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present that suggest a susceptibility to impairment sometime in the future. |
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Baa |
Bonds which are rated Baa are considered as medium-grade obligations (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. |
Non-Investment Grade
|
|
Ba |
Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well-assured. The protection of interest and principal payments may be no more than moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. |
|
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B |
Bonds which are rated B generally lack characteristics of a desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. |
|
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Caa |
Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. |
|
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Ca |
Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. |
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C |
Bonds which are rated C are the lowest rated class of bonds and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment. |
Moodys applies numerical modifiers, 1, 2, and 3 in each generic rating classified from Aa through Caa in its corporate bond rating system. The modifier 1 indicates that the security ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the issue ranks in the lower end of its generic rating category.
A-7
Corporate Short-Term Debt Ratings
Moodys short-term debt ratings are opinions of the ability of issuers to repay punctually senior debt obligations. These obligations have an original maturity not exceeding one year, unless explicitly noted
Moodys employs the following three designations, all judged to be investment grade, to indicate the relative repayment ability of rated issuers:
|
|
PRIME-1 |
Issuers rated Prime-1 (or supporting institutions) have a superior ability for repayment of senior short-term debt obligations. Prime-1 repayment ability will often be evidenced by many of the following characteristics: leading market positions in well-established industries; high rates of return on funds employed; conservative capitalization structure with moderate reliance on debt and ample asset protection; broad margins in earnings coverage of fixed financial charges and high internal cash generation; and well-established access to a range of financial markets and assured sources of alternate liquidity. |
|
|
PRIME-2 |
Issuers rated Prime-2 (or supporting institutions) have a strong ability for repayment of senior short-term debt obligations. This will normally be evidenced by many of the characteristics cited above but to a lesser degree. Earnings trends and coverage ratios, while sound, may be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained. |
|
|
PRIME-3 |
Issuers rated Prime-3 (or supporting institutions) have an acceptable ability for repayment of senior short-term obligations. The effect of industry characteristics and market compositions may be more pronounced. Variability in earnings and profitability may result in changes in the level of debt protection measurements and may require relatively high financial leverage. Adequate alternate liquidity is maintained. |
NOT PRIME: Issuers rated Not Prime do not fall within any of the Prime rating categories.
Fitch
Investment Grade
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|
AAA |
HIGHEST CREDIT QUALITY. AAA ratings denote the lowest expectation of credit risk. They are assigned only in case of exceptionally strong capacity for timely payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events. |
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|
AA |
VERY HIGH CREDIT QUALITY. AA ratings denote a very low expectation of credit risk. They indicate very strong capacity for timely payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events. |
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|
A |
HIGH CREDIT QUALITY. A ratings denote a low expectation of credit risk. The capacity for timely 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. |
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BBB |
GOOD CREDIT QUALITY. BBB ratings indicate that there is currently a low expectation of credit risk. The capacity for timely payment of financial commitments is considered adequate, but adverse changes in circumstances and in economic conditions are more likely to impair this capacity. This is the lowest investment-grade category. |
A-8
Speculative Grade
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BB |
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. |
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B |
HIGHLY SPECULATIVE. 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. |
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CCC, |
HIGH DEFAULT RISK. Default is a real possibility. Capacity for meeting financial commitments is solely reliant upon sustained, favorable business or economic developments. A CC rating indicates that default of some kind appears probable. C ratings signal imminent default. |
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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. |
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D |
Indicates an entity or sovereign that has defaulted on all of its financial obligations. |
DBRS
Bond and Long-Term Debt Rating Scale
The DBRS long-term debt rating scale is meant to give an indication of the risk that a borrower will not fulfill its full obligations in a timely manner, with respect to both interest and principal commitments. Every DBRS rating is based on quantitative and qualitative considerations relevant to the borrowing entity. 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.
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AAA |
Bonds rated AAA are 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 which would detract from the performance of the entity, the strength of liquidity and coverage ratios is unquestioned and the entity has established a creditable track record of superior performance. Given the extremely tough definition which DBRS has established for this category, few entities are able to achieve a AAA rating. |
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AA |
Bonds rate AA are of superior credit quality, and protection of interest and principal is considered high. In many cases, they differ from bonds rated AAA only to a small degree.Given the extremely tough definition which DBRS has for the AAA category (which few companies are able to achieve), entities rated AA are also considered to be strong credits which typically exemplify above-average strength in key areas of consideration and are unlikely to be significantly affected by reasonably foreseeable events. |
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A |
Bonds rated A are of satisfactory credit quality. Protection of interest and principal is still substantial, but the degree of strength is less than with AA rated entities. While a respectable rating, entities in the A category are considered to be more susceptible to adverse economic |
A-9
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|
conditions and have greater cyclical tendencies than higher rated companies. |
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BBB |
Bonds rated BBB are of adequate credit quality. Protection of interest and principal is considered adequate, but the entity is more susceptible to adverse changes in financial and economic conditions, or there may be other adversities present which reduce the strength of the entity and its rated securities. |
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BB |
Bonds rated BB are defined to be speculative, where the degree of protection afforded interest and principal is uncertain, particularly during periods of economic recession. Entities in the BB area typically have limited access to capital markets and additional liquidity support and, in many cases, small size or lack of competitive strength may be additional negative considerations. |
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B |
Bonds rated B are highly speculative and there is a reasonably high level of uncertainty which exists 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. |
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CCC/ |
Bonds rated in any of these categories are very highly speculative and are in danger of default of interest and principal. The degree of adverse elements present is more severe than bonds rated B, Bonds rated below B often have characteristics which, if not remedied, may lead to default. In practice, there is little difference between the C to CCC categories, with CC and C normally used to lower ranking debt of companies where the senior debt is rated in the CCC to B range. |
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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 suspended, discontinued, or reinstated by DBRS. |
DESCRIPTION OF INSURANCE RATINGS
Moodys
Insurance Financial Strength Ratings
Moodys Insurance Financial Strength Ratings are opinions of the ability of insurance companies to repay punctually senior policyholder claims and obligations. Specific obligations are considered unrated unless they are individually rated because the standing of a particular insurance obligation would depend on an assessment of its relative standing under those laws governing both the obligation and the insurance company.
Moodys rating symbols for Insurance Financial Strength Ratings are identical to those used to indicate the credit quality of long-term obligations. These rating gradations provide investors with a system for measuring an insurance companys ability to meet its senior policyholder claims and obligations.
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Aaa |
Insurance companies rated in this category offer exceptional financial security. While the credit profile of these companies is likely to change, such changes as can be visualized are most unlikely to impair their fundamentally strong position. |
A-10
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Aa |
These insurance companies offer excellent financial security. Together with the Aaa group, they constitute what are generally known as high grade companies. They are rated lower than Aaa companies because long-term risks appear somewhat larger. |
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A |
Insurance companies rated in this category offer good financial security. However, elements may be present which suggest a susceptibility to impairment sometime in the future. |
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Baa |
Insurance companies rated in this category offer adequate financial security. However, certain protective elements may be lacking or may be characteristically unreliable over any great length of time. |
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Ba |
Insurance companies rated in this category offer questionable financial security. Often the ability of these companies to meet policyholder obligations may be very moderate and thereby not well safeguarded in the future. |
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B |
Insurance companies rated in this category offer poor financial security. Assurance of punctual payment of policyholder obligations over any long period of time is small. |
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Caa |
Insurance companies rated in this category offer very poor financial security. They may be in default on their policyholder obligations or there may be present elements of danger with respect to punctual payment of policyholder obligations and claims. |
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Ca |
Insurance companies rated in this category offer extremely poor financial security. Such companies are often in default on their policyholder obligations or have other marked shortcomings. |
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C |
Insurance companies rated in this category are the lowest rated class of insurance company and can be regarded as having extremely poor prospects of ever offering financial security. |
Moodys appends numerical modifiers 1, 2, and 3 to each generic rating classification from Aa through Caa. Numeric modifiers are used to refer to the ranking within a group with 1 being the highest and 3 being the lowest. However, the financial strength of companies within a generic rating symbol (Aa, for example) is broadly the same.
Short-Term Insurance Financial Strength Ratings
These ratings represents Moodys opinions of the ability of the insurance company to repay punctually its short-term senior policyholder claims and obligations. The ratings apply to senior policyholder obligations that mature or are payable within one year or less.
Specific obligations are considered unrated unless individually rated because the standing of a particular insurance obligation would depend on an assessment of its relative standing under those laws governing both the obligation and the insurance company.
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P-1 |
Insurers (or supporting institutions) rated Prime-1 have a superior ability for repayment of senior short-term policyholder claims and obligations. |
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P-2 |
Insurers (or supporting institutions) rated Prime-2 have a strong ability for repayment of senior short-term policyholder claims and obligations. |
|
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P-3 |
Insurers (or supporting institutions) rated Prime-3 have an acceptable ability for repayment of senior short-term policyholder claims and obligations. |
A-11
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NP |
Insurers (or supporting institutions) rated Not Prime (NP) do not fall within any of the Prime rating categories. |
S&P
An insurer rated BBB or higher is regarded as having financial security characteristics that outweigh any vulnerabilities, and is highly likely to have the ability to meet financial commitments.
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AAA |
Extremely Strong financial security characteristics. AAA is the highest Insurer Financial Strength Rating assigned by S&P Rating Service. |
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AA |
Very Strong financial security characteristics, differing only slightly from those rated higher. |
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A |
Strong financial security characteristics, but is somewhat more likely to be affected by adverse business conditions than are insurers with higher ratings. |
|
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BBB |
Good financial security characteristics, but is more likely to be affected by adverse business conditions than are higher rated insurers. |
An insurer rated BB or lower is regarded as having vulnerable characteristics that may outweigh its strengths. BB indicates the least degree of vulnerability within the range; CC the highest.
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BB |
Marginal financial security characteristics. Positive attributes exist, but adverse business conditions could lead to insufficient ability to meet financial commitments. |
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B |
Weak financial security characteristics. Adverse business conditions will likely impair its ability to meet financial commitments. |
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CCC |
Very Weak financial security characteristics, and is dependent on favorable business conditions to meet financial commitments. |
|
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CC |
Extremely Weak financial security characteristics and is likely not to meet some of its financial commitments. |
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R |
An insurer rated R is under regulatory supervision owing to its financial condition. During the pendency of the regulatory supervision, the regulators may have the power to favor one class of obligations over others or pay some obligations and not others. The rating does not apply to insurers subject only to nonfinancial actions such as market conduct violations. |
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NR |
Not Rated, which implies no opinion about the insurers financial security. |
Plus (+) or minus () following ratings from AA to CCC show relative standing within the major rating categories.
A-12
Fitch
Insurer Financial Strength Ratings
A Fitch insurer financial strength rating (IFS rating) provides an assessment of the financial strength of an insurance organization, and its capacity to meet senior obligations to policyholders and contractholders on a timely basis. The IFS rating is assigned to the insurance organization itself, and no liabilities or obligations of the insurer are specifically rated unless otherwise stated (for example, Fitch may separately rate the debt obligations of an insurer). The IFS rating can be assigned to insurance and reinsurance companies in all insurance sectors, including the life & health, property & casualty, mortgage, financial guaranty and title insurance sectors, as well as managed care companies such as health maintenance organizations.
The IFS rating uses the same ratings scale and symbols used by Fitch for its international ratings of long-term debt obligations and issuers. However, the definitions associated with the ratings reflect the unique aspects of the IFS rating within an insurance industry context. Ratings in the AA through CCC categories may be amended with a plus or minus sign to show relative standing within the major rating category. Ratings of BBB and higher are considered to be Secure, and those of BB+ and lower are considered to be Vulnerable.
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AAA |
EXCEPTIONALLY STRONG. Companies assigned this highest rating are viewed as possessing exceptionally strong capacity to meet policyholder and contract obligations. For such companies, risk factors are minimal and the impact of any adverse business and economic factors is expected to be extremely small. |
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AA |
VERY STRONG. Companies are viewed as possessing very strong capacity to meet policyholder and contract obligations. Risk factors are modest, and the impact of any adverse business and economic factors is expected to be very small. |
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A |
STRONG. Companies are viewed as possessing strong capacity to meet policyholder and contract obligations. Risk factors are moderate, and the impact of any adverse business and economic factors is expected to be small. |
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BBB |
GOOD. Companies are viewed as possessing good capacity to meet policyholder and contract obligations. Risk factors are somewhat high, and the impact of any adverse business and economic factors is expected to be material, yet manageable. |
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BB |
Moderately Weak. Companies are viewed as moderately weak with an uncertain capacity to meet policyholder and contract obligations. Though positive factors are present, overall risk factors are high, and the impact of any adverse business and economic factors is expected to be significant. |
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B |
Weak. Companies are viewed as weak with a poor capacity to meet policyholder and contract obligations. Risk factors are very high, and the impact of any adverse business and economic factors is expected to be very significant. |
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CCC, |
Very Weak. Companies rated in any of these three categories are viewed as very weak with a very poor capacity to meet policyholder and contract obligations. Risk factors are extremely high, and the impact of any adverse business and economic factors is expected to be insurmountable. A CC rating indicates that some form of insolvency or liquidity impairment appears probable. A C rating signals that insolvency or a liquidity impairment appears imminent. |
A-13
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|
DDD, |
Distressed. These ratings are assigned to companies that have either failed to make payments on their obligations in a timely manner, are deemed to be insolvent, or have been subjected to some form of regulatory intervention. Within the DDD-D range, those companies rated DDD have the highest prospects for resumption of business operations or, if liquidated or wound down, of having a vast majority of their obligations to policyholders and contractholders ultimately paid off, though on a delayed basis (with recoveries expected in the range of 90-100%). Those rated DD show a much lower likelihood of ultimately paying off material amounts of their obligations in a liquidation or wind down scenario (in a range of 50-90%). Those rated D are ultimately expected to have very limited liquid assets available to fund obligations, and therefore any ultimate payoffs would be quite modest (at under 50%). |
+ or - may be appended to a rating to indicate the relative position of a credit within the rating category. Such suffixes are not added to ratings in the AAA category or to ratings below the CCC category.
Short-Term Insurer Financial Strength Ratings
A Fitch Short-Term Insurer Financial Strength Rating (ST-IFS Rating) provides an assessment of the near-term financial health of an insurance organization, and its capacity to meet senior obligations to policyholders and contractholders that would be expected to be due within one year. The analysis supporting the ST-IFS Rating encompasses all of the factors considered within the context of the IFS Rating, but with greater weighting given to an insurers near-term liquidity, financial flexibility and regulatory solvency characteristics, and less weight given to longer-term issues such as competitiveness and earnings trends.
Fitch will only assign a ST-IFS rating to insurers that also have been assigned an IFS rating. Currently, ST-IFS ratings are used primarily by U.S. life insurance companies that sell short-term funding agreements.
The ST-IFS rating uses the same international ratings scale used by Fitch for short-term debt and issuer ratings. Ratings of F1, F2 and F3 are considered to be Secure, while those of B and below are viewed as Vulnerable.
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F1 |
STRONG. Insurers are viewed as having a strong capacity to meet their near-term obligations. When an insurer rated in this rating category is designated with a (+) sign, it is viewed as having a very strong capacity to meet near-term obligations. |
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F2 |
MODERATELY STRONG. Insurers are viewed as having a moderately strong capacity to meet their near-term obligations. |
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F3 |
MODERATE. Insurers are viewed as having a moderate capacity to meet their near-term obligations, and a near-term adverse change in business or economic factors would likely move the insurer to a vulnerable rating category. |
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B |
WEAK. Insurers are viewed as having a weak capacity to meet their near-term obligations. |
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C |
VERY WEAK. Insurers are viewed as having a very weak capacity to meet their near-term obligations. |
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D |
DISTRESSED. Insurers have either been unable to meet near-term obligations, or the failure to meet such obligations is imminent. |
A-14
DESCRIPTION OF SHORT-TERM MUNICIPAL BOND RATINGS
Moodys
Moodys ratings for short-term municipal obligations are designated Moodys Investment Grade (MIG) or Variable Moodys Investment Grade (VMIG), in the case of variable rate demand obligations (VRDOs). For VRDOs, a two-component rating is assigned. The first element represents an evaluation of the degree of risk associated with scheduled principal and interest payments, and the other represents an evaluation of the degree of risk associated with the demand feature. The short-term rating assigned to the demand feature of VRDOs is designated as VMIG. When either the long- or short-term aspect of a VRDO is not rated, that piece is designated NR, e.g., Aaa/NR or NR/VMIG 1. MIG ratings terminate at the retirement of the obligation while VMIG rating expiration will be a function of each issues specific structural or credit features. Those short-term obligations that are of speculative quality are designated SG.
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MIG1/VMIG1 |
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. |
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MIG2/VMIG2 |
Strong credit quality. Margins of protection are ample although not so large as in the preceding group. |
|
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MIG3/VMIG3 |
Acceptable credit quality. Liquidity and cash flow protection may be narrow and marketing access for refinancing is likely to be less well established. |
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SG |
Speculative quality. Debt instruments in this category lack margins of protection. |
S&P
An S&P Rating Service note rating reflects the liquidity concerns 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.
|
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SP-1 |
Strong capacity to pay principal and interest. Those issues determined to possess overwhelming safety characteristics will be given a plus (+) designation. |
|
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SP-2 |
Satisfactory capacity to pay principal and interest. |
|
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SP-3 |
Speculative capacity to pay principal and interest. |
DESCRIPTION OF PREFERRED STOCK RATINGS
Moodys
Because of the fundamental differences between preferred stocks and bonds, a variation of our familiar bond rating symbols is used in the quality ranking of preferred stock. The symbols, presented below, are designed to avoid comparison with bond quality in absolute terms. It should always be borne in mind that preferred stock occupies a junior position to bonds within a particular capital structure and that these securities are rated within the universe of preferred stocks.
|
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aaa |
Top-quality preferred stock. This rating indicates good asset protection and the least risk of dividend impairment within the universe of preferred stocks. |
A-15
|
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aa |
High-grade preferred stock. This rating indicates that there is a reasonable assurance the earnings and asset protection will remain relatively well maintained in the foreseeable future. |
|
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a |
Upper-medium grade preferred stock. While risks are judged to be somewhat greater than in the aaa and aa classifications, earnings and asset protection are, nevertheless, expected to be maintained at adequate levels. |
|
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baa |
Medium-grade preferred stock, neither highly protected nor poorly secured. Earnings and asset protection appear adequate at present but may be questionable over any great length of time. |
|
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ba |
Considered to have speculative elements and its future cannot be considered well assured. Earnings and asset protection may be very moderate and not well safeguarded during adverse periods. Uncertainty of position characterizes preferred stocks in this class. |
|
|
b |
Lacks the characteristics of a desirable investment. Assurance of dividend payments and maintenance of other terms of the issue over any long period of time may be small. |
|
|
caa |
Likely to be in arrears on dividend payments. This rating designation does not purport to indicate the future status of payments. |
|
|
ca |
Speculative in a high degree and is likely to be in arrears on dividends with little likelihood of eventual payments. |
|
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c |
Lowest rated class of preferred or preference stock. Issues so rated can thus be regarded as having extremely poor prospects of ever attaining any real investment standing. |
Note: Moodys applies numerical modifiers 1, 2, and 3 in each rating classification; the modifier 1 indicates that the security ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking and the modifier 3 indicates that the issue ranks in the lower end of its generic rating category.
DBRS
Preferred Share Rating Scale
The DBRS preferred share rating scale is used in the Canadian securities market and is meant to give an indication of the risk that a borrower will not fulfill its full obligations in a timely manner, with respect to both dividend and principal commitments. Every DBRS rating is based on quantitative and qualitative considerations relevant to the borrowing entity. 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.
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Pfd-1 |
Preferred shares rated Pfd-1 are of superior credit quality, and are supported by entities with strong earnings and balance sheet characteristics. Pfd-1 generally corresponds with companies whose senior bonds are rated in the AAA or AA categories. As is the case with all rating categories, the relationship between senior debt ratings and preferred share ratings should be understood as one where the senior debt rating effectively sets a ceiling for the preferred shares issued by the entity. However, there are cases where the preferred share rating could be lower than the normal relationship with the issuers senior debt rating. |
A-16
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Pfd-2 |
Preferred shares rated Pfd-2 are of satisfactory credit quality. Protection of dividends and principal is still substantial, but earnings, the balance sheet, and coverage ratios are not as strong as Pfd-1 rated companies. Generally, Pfd-2 ratings correspond with companies whose senior bonds are rated in the A category. |
|
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Pfd-3 |
Preferred shares rated Pfd-3 are of adequate credit quality. While protection of dividends and principal is still considered acceptable, the issuing entity is more susceptible to adverse changes in financial and economic conditions, and there may be other adversities present which detract from debt protection. Pfd-3 ratings generally correspond with companies whose senior bonds are rated in the higher end of the BBB category. |
|
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Pfd-4 |
Preferred shares rated Pfd-4 are speculative, where the degree of protection afforded to dividends and principal is uncertain, particularly during periods of economic adversity. Companies with preferred shares rated Pfd-4 generally coincide with entities that have senior bond ratings ranging from the lower end of the BBB category through the BB category. |
|
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Pfd-5 |
Preferred shares rated Pfd-5 are highly speculative and the ability of the entity to maintain timely dividend and principal payments in the future is highly uncertain. The Pfd-5 rating generally coincides with companies with senior bond ratings of B or lower. Preferred shares rated Pfd-5 often have characteristics which, if not remedied, may lead to default. |
|
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D |
This category indicates preferred shares that are in arrears of paying either dividends or principal. |
A-17
PART C: OTHER INFORMATION
Item 23. Exhibits
Exhibits filed pursuant to Form N-1A:
(a) (1) Certificate of Trust is incorporated by reference to Registrants Initial Registration Statement on Form N-1A, SEC File No. 811-21638.
(a) (2) Declaration of Trust is incorporated by reference to Registrants Initial Registration Statement on Form N-1A, SEC File No. 811-21638.
(a) (3) Schedule A to the Declaration of Trust. Filed herewith.
(b) By-Laws of JPMorgan Institutional Trust, as amended and restated June 20, 2007, is incorporated by reference to Amendment No. 8 to Registrants Registration Statement filed on January 18, 2008.
(c) None.
(d) Investment Advisory Agreement between the Registrant and J.P. Morgan Investment Management Inc. is incorporated by reference to Amendment No. 4 to Registrants Registration Statement filed on October 28, 2005.
(e) Not applicable.
(f) Not applicable.
(g) (1) Global Custody and Fund Accounting Agreement with JPMorgan Chase Bank is incorporated by reference to Amendment No. 4 to Registrants Registration Statement filed on October 28, 2005.
(g) (l) (a) Amendment to Global Custody and Fund Accounting Agreement, including Schedules C and D, dated September 1, 2007, is incorporated by reference to Amendment No. 8 to Registrants Registration Statement filed on January 18, 2008.
(g) (1) (b) Amendment to Global Custody and Fund Accounting Agreement, including Schedules A and C, dated April 21, 2008. Incorporated herein by reference to Amendment No. 10 to the Registrants Registration Statement filed on June 27, 2008.
(g) (1) (c) Form of Amended Schedule A to the Global Custody & Fund Accounting Agreement (amended as of June 30, 2008). Incorporated herein by reference to Amendment No. 10 to the Registrants Registration Statement filed on June 27, 2008.
(h) (1) Transfer Agency Agreement between the Registrant and Boston Data Services, Inc. is incorporated by reference to Amendment No. 4 to Registrants Registration Statement filed on October 28, 2005.
(h) (1) (a) Amendment as of January 31, 2007 to the Transfer Agency Agreement between JPMorgan Funds and BFDS, dated February 19, 2005 is incorporated by reference to Amendment No. 8 to Registrants Registration Statement filed on June 28, 2007.
(h) (1) (b) Form of Amended Appendix A to the Transfer Agency Agreement (amended as of June 30, 2008). Incorporated herein by reference to Amendment No. 10 to the Registrants Registration Statement filed on June 27, 2008.
(h) (2) Form of Administration Agreement between the Registrant and JPMorgan Funds Management, Inc. (formerly known as One Group Administrative Services, Inc.) is incorporated by reference to Amendment No. 4 to Registrants Registration Statement filed on October 28, 2005.
(h) (3) Placement Agency Agreement between the Registrant and J.P. Morgan Institutional Investments Inc. is incorporated by reference to Amendment No. 4 to Registrants Registration Statement filed on October 28, 2005.
(h) (4) Placement Agency Agreement between the Registrant and J.P. Morgan Institutional Investments Inc., dated May 25, 2005, is incorporated by reference to Amendment No. 8 to Registrants Registration Statement filed on June 26, 2006.
(h) (5) Securities Lending Agreement between Registrant and JPMorgan Chase Bank, NA is incorporated by reference to Amendment No. 4 to Registrants Registration Statement filed on October 28, 2005.
(h) (5) (1) Amendment to Securities Lending Agreement dated July 1, 2008. Incorporated herein by reference to Amendment No. 11 to the Registrant's Registration Statement filed on May 22, 2009.
(i) Not applicable.
(j) Not applicable.
(k) Not applicable.
(l) Not applicable.
(h) (6) Form of Fee Waiver Agreement, dated July 1, 2009. Filed herewith.
(m) Not applicable. (n) Not applicable. (o) Reserved. (p) Codes of Ethics. (1) Fund Code of Ethics, effective February 1, 2005 (revised May 20, 2006). (2) Code of Ethics of Adviser. (Effective February 1, 2005, Revised
November 18, 2008). Filed herewith.
(99) (a) Powers of Attorney for the Trustees. Incorporated herein by reference to Amendment No. 11 to the Registrant's Registration Statement filed on May 22, 2009. (99) (b) Power of Attorney for George C.W. Gatch. Incorporated herein by reference to Amendment No. 10 to the Registrants Registration Statement filed on June 27, 2008. (99) (c) Power of Attorney for Patricia A. Maleski. Incorporated herein by reference to Amendment No. 10 to the Registrants Registration Statement filed on June 27, 2008. Item 24. Persons Controlled by or Under Common Control with the Registrant The Registrant is not directly or indirectly controlled by or under common control with any
person other than the Trustees. It does not have any subsidiaries. Item 25. Indemnification Article VII,
Section 3 of the Trusts Declaration of Trust provides that, subject
to the exceptions and limitations contained in the Trusts By-Laws:
(a) every person who is, has been, or becomes a Trustee or officer of the
Trust (hereinafter referred to as a Covered Person) shall be
indemnified by the Trust to the fullest extent permitted by law against
liability and against all expenses reasonably incurred or paid by him in
connection with any proceeding in which he becomes involved as a party or
otherwise by virtue of his being or having been a Trustee or officer of the
Trust and against amounts paid or incurred by him in the settlement thereof; and
(ii) expenses in connection with the defense of any proceeding of the
character described in clause (i) above shall be advanced by the Trust to
the Covered Person from time to time prior to final disposition of such
proceeding to the fullest extent permitted by law. Article VII, Section 2 of the Trusts By-Laws provides that
subject to the exceptions and limitations contained in Article VII,
Section 4 of the By-Laws the Trust shall indemnify its Covered Persons to
the fullest extent consistent with state law and the Investment Company Act of
1940, as amended (1940 Act). Without limitation of the foregoing,
the Trust shall indemnify each person who was or is a party or is threatened to
be made a party to any proceedings, by reason of alleged acts or omissions
within the scope of his or her service as a Trustee or officer of the Trust,
against judgments, fines, penalties, settlements and reasonable expenses
(including attorneys fees) actually incurred by him or her in connection
with such proceeding to the maximum extent consistent with state law and the
1940 Act. Subject to the exceptions and limitations contained in Section 4
of Article VII of the By-Laws, the Trust may, to the fullest extent consistent
with law, indemnify each person who is serving or has served at the request of
the Trust as a director, officer, partner, trustee, employee, agent or fiduciary
of another domestic or foreign corporation, partnership, joint venture, trust,
other enterprise or employee benefit plan (Other Position) and who
was or is a party or is threatened to be made a party to any proceeding by
reason of alleged acts or omissions while acting within the scope of his or her
service in such Other Position, against judgments, fines, settlements and
reasonable expenses (including attorneys fees) actually incurred by him or
her in connection with such proceeding to the maximum extent consistent with
state law and the 1940 Act. The indemnification and other rights provided by
Article VII of the By-Laws shall continue as to a person who has ceased to be a
Trustee or officer of the Trust.
Article VII, Section 4 of the Trusts By-Laws provides that:
(a) the Trust shall not indemnify a Covered Person or agent who shall have
been adjudicated by a court or body before which the proceeding was brought
(i) to be liable to the Trust or its Shareholders by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office (collectively, disabling
conduct) or (ii) not to have acted in good faith in the reasonable
belief that his action was in or not opposed to the best interest of the Trust;
and (b) the Trust shall not indemnify a Covered Person or agent unless the
court or other body before which the proceeding was brought determines that such
Trustee, officer or agent did not engage in disabling conduct or, with respect
to any proceeding disposed of (whether by settlement, pursuant to a consent
decree or otherwise) without an adjudication by the court or other body before
which the proceeding was brought, there has been a dismissal of the proceeding
by the court or other body before which it was brought for insufficiency of
evidence of any disabling conduct with which such a Covered Person or agent has
been charged and a determination that such Trustee, officer or agent did not
engage in disabling conduct by at least a majority of those Trustees who are
neither interested persons of the Trust (as that term is defined in
Section 2(a)(19) of the 1940 Act) nor parties to the proceeding based upon
a review of readily available facts (as opposed to a full trial-type inquiry).
Item 26. Business
and Other Connections of the Investment Adviser See Management of the
Trust in Part B. Information as to the directors and officers of the Adviser is included in its Form ADV filed with the SEC and is incorporated herein by reference. Item 27. Principal Underwriter Not applicable. Item 28. Location of Accounts and Records All accounts, books, records and documents required pursuant to Section 31(a) of the Investment Company Act of 1940, as amended, and the rules promulgated
thereunder are maintained in the physical possession of:
JPMorgan Funds Management, Inc. (named One Group Administrative Services, Inc. through February 15, 2005), the Registrants administrator, at 1111
Polaris Parkway, Columbus, Ohio 43240; JPMorgan Chase Bank, the
Registrants custodian at 270 Park Avenue, New York, NY 10017;
J.P. Morgan Investment Management Inc., the Registrants investment
adviser, at 245 Park Avenue, New York, NY 10167; Boston Financial Data
Services, Inc., the Registrants transfer agent, at 2 Heritage Drive, North
Quincy, Massachusetts 02171. Item 29. Management Services None. Item 30. Undertakings Not applicable.
SIGNATURES Pursuant to the requirements of the Investment Company Act of 1940, the Registrant has duly caused this amendment to its
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Columbus on the 26th day of June, 2009.
/s/ George C. W. Gatch* This amendment to the Registration Statement of the Registrant
has been signed below by the following persons in the capacities and on the
dates indicated on June, 2009. Fergus Reid, III* Marilyn McCoy* Fergus Reid, III Marilyn McCoy William J. Armstrong* William G. Morton* William J. Armstrong William G. Morton John F. Finn* Robert A. Oden, Jr.* John F. Finn Robert A. Oden, Jr. Matthew Goldstein* Frederick W. Ruebeck* Matthew Goldstein Frederick W. Ruebeck. Robert J. Higgins* James J. Schonbachler* Robert J. Higgins James J. Schonbachler Frankie D. Hughes* Leonard M. Spalding, Jr* Frankie D. Hughes Leonard M. Spalding, Jr. Peter C. Marshall* By George C. W. Gatch Peter C. Marshall George C. W. Gatch By Patricia A. Maleski* Patricia A. Maleski *By /s/ Jessica K. Ditullio Jessica K. Ditullio Exhibit Index (a)(3) Schedule A to the Declaration of Trust (h)(6) Form of Fee Waiver Agreement, dated July 1, 2009 (p)(1) Fund Code of Ethics (p)(2) Code of Ethics of Adviser (53
M0<#V.G4B=8:S-4"LN.5A-H Schedule A to the Declaration of Trust of JPMorgan Institutional Trust JPMorgan Intermediate Bond Trust JPMorgan Core Bond Trust JPMorgan Equity Index Trust July 1, 2009 JPMorgan Institutional Trust 245 Park Avenue New York, NY 10167 Dear Sirs: J.P. Morgan Investment Management Inc. and JPMorgan Funds Management, Inc. (collectively, JPMorgan Service Providers) hereby agree to waive fees owed to each JPMorgan Service Provider or to reimburse each Fund listed on Schedule A for the time periods so indicated. The JPMorgan Service Providers will waive fees or reimburse to the extent total operating expenses exceed the rate of average daily net assets also indicated on Schedule A. This expense limitation does not include acquired fund fees and expenses, dividend expenses on securities sold short, interest, taxes, placement related expenses (if any), and other extraordinary expenses not incurred in the ordinary course of the Funds business. The JPMorgan Service Providers understand and intend that the Funds will rely on this agreement in preparing and filings their registration statements on Form N-1A and in accruing the Funds expenses for purposes of calculating net asset value and for other purposes, and expressly permit the Funds to do so. Please acknowledge acceptance on the enclosed copy of this letter. Very truly yours, J.P. Morgan Investment Management Inc. JPMorgan Funds Management, Inc. By: By: Accepted By: JPMorgan Institutional Trust By: SCHEDULE A Fund Name Fiscal Year End Expense Cap Expense Cap Period End JPMorgan Intermediate Bond Trust Last day of February 0.15% June 30, 2010 JPMorgan Core Bond Trust Last day of February 0.15% June 30, 2010 JPMorgan Equity Index Trust Last day of February 0.10% June 30, 2010 FUND Effective February 1, 2005 A. Legal Requirements. Rule 17j-1 under the Investment
Company Act of 1940 (the "Act") makes it unlawful for any officer or trustee/director (as
well as other access persons) of JPMorgan Trust I, JPMorgan Trust II, Undiscovered
Managers Funds, UM Investment Trust, J.P. Morgan Fleming Mutual Fund Group, Inc. (Mid-Cap
Value), J.P. Morgan Mutual Fund Group (Short Term Bond II), JPMorgan Insurance Trust,
J.P. Morgan Mutual Fund Investment Trust (Mid Cap Growth), JPMorgan Institutional Trust
and the Pacholder High Yield Fund, Inc (each referred to individually and collectively as
the "Trust"), in connection with the purchase or sale1 by such person of a security
"held or to be acquired" by any investment portfolio of the Trust (a "Fund"): B. Trust Policies. _________________ 1
A purchase or sale includes the writing of an option to purchase or sell. 2
A covered security is any security under the broad definition of Section 2(a)(36) of
the Act except: (i) direct obligations of the United States government, (ii)
bankers acceptances, bank CDs, commercial paper, and high quality short-term debt
instruments (including repurchase agreements), and (iii) shares of open-end
investment companies, other than non-money market shares issued by the Trust. - 1 - 1. It is the policy of the Trust that no access person3 of the Trust or of a Fund
shall engage in any act, practice or course or conduct that would violate the provisions
of Rule 17j-1(b) set forth above. 2. In keeping with the recommendations of the Board of Governors of the Investment
Company Institute, the following general policies shall govern personal investment
activities of access persons of the Trust or of a Fund: _________________ 3
An access person is (i) each trustee/director or officer of the Trust, (ii)
each employee (if any) of the Trust who, in connection with his regular duties,
makes, participates in, or obtains information about the purchase or sale of a
security by the Trust or a Fund or whose functions relate to the
making of any
recommendations with respect to such purchases or sales, and (iii) any natural person
in a control relationship to the Trust or a Fund who obtains information concerning
recommendations made to the Trust or to a Fund with regard to the purchase or sale of
covered securities. - 2 - C. Reporting Requirements.4 In
order to provide the Trust with information to enable it to determine with reasonable
assurance whether the Trusts policies are being observed by its access persons: _________________ 4
An access person of the Trust who is also an access person of an investment
adviser or sub-adviser to the Trust need not submit reports otherwise required
by this Section C provided that either (i) such person submits to such
investment adviser or sub-adviser forms prescribed by the Code of Ethics of such
adviser or sub-adviser containing substantially the same information as called
for in the forms required by this Section C, or (ii) the information in such
report would duplicate information required to be recorded under Rule
204-2(a)(13) under the Investment Advisers Act of 1940. An access person of the
Trust who is also an access person of the Trusts principal underwriter
need not submit reports otherwise required by this Section C provided that such
person submits to the principal underwriter forms prescribed by the Code of
Ethics of such principal underwriter containing substantially the same
information as called for in the forms required by this Section C. An access
person of the Trust who is also an access person of the Trusts
administrator may submit reports required by this Section C on forms prescribed
by the Code of Ethics of such administrator provided that such forms contain
substantially the same information as called for in the forms required by this
Section C and comply with the requirements of Rule 17j-1(d)(1). Moreover, in the
case of reports under paragraph (b) of this Section C, any access person may
supply to the Trust in lieu of such reports with duplicate copies of broker
trade confirmations or account statements with respect to the access person
provided such confirmations and/or account statements are: (i) received by the
Trust within the time period and (ii) contain all the information required by
paragraph (b) of Section C. No Trustee is required to file a report if the sole
purpose for doing so would be to indicate the absence of reportable transactions
in covered securities during the relevant period. 5
Beneficial ownership of a security as used in this Section C is
determined in the same manner as it would be for the purposes of Section 16 of
the Securities Exchange Act of 1934, except that such determination should apply
to all covered securities. Generally, a person should consider himself the
beneficial owner of covered securities held by his spouse, his minor children, a
relative who shares his home, or other persons if by reason of any contract,
understanding, relationship, agreement or other arrangement, he obtains from
such covered securities benefits substantially equivalent to those of ownership.
He should - 3 - D. Preclearance Procedures. Investment
personnel of the Trust or a Fund shall obtain approval from the CCO or the relevant
investment adviser or sub-adviser before directly or indirectly acquiring beneficial
ownership in any securities in an initial public offering or in a limited offering.6 also consider himself the
beneficial owner of securities if he can vest or revest title in himself now or in
the future. 6
Investment personnel of the Trust or a Fund means (i) any employee
of the Trust (or of a company in a control relationship to the Fund) who, in
connection with his or her regular functions or duties, makes or participates in
making recommendations regarding the purchase or sale of securities by the Trust
or a Fund, and (ii) any natural person who - 4 - E. Notice to, and Review of, Holdings Reports by Access Persons. 1.
The CCO shall notify each access person of the Trust or of a Fund who may be required to
make reports pursuant to this Code that such person is subject to this reporting
requirement and shall deliver a copy of this Code to each such person. 2.
The CCO shall review reports submitted under Section C of this Code within 21 days of
submission. 3.
The CCO shall establish and maintain records of access persons of the Trust who are
required to make reports under Section C of this Code and shall establish and maintain
records of any delegate responsible for reviewing such reports. F. Reports to Trustees/Directors. 1.
The President of the Trust or his or her delegate shall report to the Board of
Trustees/Directors: 2.
The Board shall consider reports made to it hereunder and shall determine whether the
policies established in section B of this Code have been violated, and what sanctions, if
any, should be imposed. controls the Trust or a Fund and
who obtains information concerning recommendations made to the Trust or a Fund
regarding the purchase or sale of securities. Initial public
offering and limited offering shall have the same meaning as
set forth in Rule 17j-1(a)(6) and (8), respectively. - 5 - G. Approval of Codes and Material Amendments Thereto. 1.
The Board of Trustees/Directors of the Trust, including a majority of the independent
Trustees/Directors thereof, shall approve the Codes of Ethics of the Trust, of any
principal underwriter of the Trust, and of each investment adviser and sub-adviser to any
Fund. No principal underwriter of the Trust or investment adviser or sub-adviser to any
Fund may be appointed unless and until the Code of Ethics of that entity has been
approved by the Board of Trustees/Directors of the Trust, including a majority of the
independent Trustees/Directors thereof. Following initial approval of the Code of Ethics
of any principal underwriter of the Trust or any investment adviser or sub-adviser to any
Fund, any material change to such Code must be approved by the Board of
Trustees/Directors of the Trust, including a majority of the independent
Trustees/Directors thereof, within six months of said amendment. No amendment of this
Code may be made unless and until approved by the Board of Trustees/Directors of the
Trust, including a majority of the independent Trustees/Directors thereof. 2.
In approving a Code of Ethics, the Board of Trustees/Directors shall have secured a
certificate from the entity that adopted the Code that it has adopted procedures
reasonably necessary to prevent its access persons from violating the Code in question. H. Annual Report The
Trust, any principal underwriter thereof, and any investment adviser or sub-adviser to
any Fund shall, not less frequently than annually, furnish the Board of
Trustees/Directors of the Trust with a written report that: - 6 - This
Code, a copy of each Securities Transaction and Holdings Report by an access person, any
written report hereunder by the President of the Trust or his or her delegate, and lists
of all persons required to make reports shall be preserved with the Trusts records
for the period required by Rule 17j-1. Effective: February 1, 2005 - 7 - Exhibit A Holdings Report I. To the President or
Presidents delegate of the Funds*: II. As of that same date, I
held direct or indirect beneficial ownership of securities with the following
broker/dealer(s) or bank(s) (note: list accounts, not securities) This
report (i) excludes securities with respect to which I had no direct or indirect
influence or control, including investments through an automatic investment plan, (ii)
excludes securities not required to be reported, and (iii) is not an admission that I
have or had any direct or indirect beneficial ownership in the securities listed above. Date:_________________
Signature:________________________ JPMorgan Trust I, JPMorgan Trust II,
Undiscovered Managers Funds, UM Investment Trust, J.P. Morgan Fleming Mutual Fund Group,
Inc. (Mid-Cap Value), J.P. Morgan Mutual Fund Group (Short Term Bond II), JPMorgan
Insurance Trust and J.P. Morgan Mutual Fund Investment Trust (Mid Cap Growth), JPMorgan
Institutional Trust and the Pacholder High Yield Fund, Inc Exhibit B Securities Transaction
Report For the Calendar Quarter
Ended: _____, 200__ To the President or Presidents
delegate of the Funds*: I. II. This report (i) excludes
transactions with respect to which I had no direct or indirect influence or control,
including investments through an automatic investment plan, (ii) excludes transactions
not required to be reported, and (iii) is not an admission that I have or had any direct
or indirect beneficial ownership in the securities listed above. Date:_________________
Signature:________________________ JPMorgan Trust I, JPMorgan Trust II,
Undiscovered Managers Funds, UM Investment Trust, J.P. Morgan Fleming Mutual Fund Group,
Inc. (Mid-Cap Value), J.P. Morgan Mutual Fund Group (Short Term Bond II), JPMorgan
Insurance Trust and J.P. Morgan Mutual Fund Investment Trust (Mid Cap Growth), JPMorgan
Institutional Trust and the Pacholder High Yield Fund, Inc.
Code of Ethics of J.P. Morgan Alternative Asset Management, Inc. JPMorgan Asset Management (UK) Ltd. JPMorgan Investment Advisors Inc. J.P. Morgan Investment Management Inc. Security Capital Research & Management Inc. Bear Stearns Asset Management Inc. (collectively, JPMAM) Effective February 1, 2005 (Revised November 18, 2008) Table of Contents 1. Introduction and Standards 1 1.1. Adoption of the Code of Ethics 1 1.2. Standards of Business Conduct 1 1.3. General Definitions 2 2. Reporting Requirements 3 2.1. Holdings Reports 3 2.1.1. Content of Holdings Reports 4 2.1.2. Timing of Holdings Reports 4 2.2. Transaction Reports 4 2.2.1. Content of Transaction Reports 4 2.2.2. Timing of Transaction Reports 4 2.3. Consolidated Report 5 2.4. Exceptions from Reporting Requirements 5 3. Pre-approval of Certain Investments 5 4. Additional Restrictions and Corrective Action under the Personal Trading Policy and other related Policies and Procedures 5 4.1. Designated Broker Requirement 5 4.2. Blackout Provisions 5 4.3. Minimum Investment Holding Period and Market Timing Prohibition 6 4.4. Trade Reversals and Disciplinary Action 6 5. Books and Records to be Maintained by Investment Advisers 6 6. Confidentiality 7 7. Conflicts of Interest 7 7.1. Trading in Securities of Clients 7 7.2. Trading in Securities of Suppliers 7 7.3. Gifts 7 7.4. Entertainment 8 7.5. Political and Charitable Contributions 8 7.6. Outside Business Activities 8 8. Training 9 i 9. Escalation Guidelines 9 9.1. Violation Prior to Material Violation 9 9.2. Material Violations 9 ii 1. Introduction and Standards 1.1. Adoption of the Code of Ethics This Code of Ethics for JPMAM (the Code) has been adopted by the registered investment advisers named on the cover hereof in accordance with Rule 204A-1 under the Investment Advisers Act of 1940 (the Advisers Act). Rule 204A-1 requires, at a minimum, that an advisers code of ethics set forth standards of conduct, require compliance with federal securities laws and address personal trading by advisory personnel. While all J.P. Morgan Chase & Co. (JPMC) staff, including JPMAM Supervised Persons as defined below, are subject to the personal trading policies under the JPMC Code of Conduct, the JPMAM Code establishes more stringent standards reflecting the fiduciary obligations of JPMAM and its Supervised Persons. Where matters are addressed by both the JPMC Code of Conduct and this Code, Supervised Persons of JPMAM must observe and comply with the stricter standards set forth in this Code. JPMAM hereby designates the staff of its Compliance Department to act as designees for the respective chief compliance officers of the JPMAM registered investment advisers (CCO) in administering this Code. Anyone with questions regarding the Code or its application should contact the Compliance Department. 1.2. Standards of Business Conduct It is the duty of all Supervised Persons to place the interests of JPMAM clients before their own personal interests at all times and avoid any actual or potential conflict of interest. Given the access that Supervised Persons may have to proprietary and client information, JPMAM and its Supervised Persons must avoid even the appearance of impropriety with respect to personal trading, which must be oriented toward investment rather than short-term or speculative trading. Supervised Persons must also comply with applicable federal securities laws and report any violations of the Code promptly to the Compliance Department, which shall report any such violation promptly to the CCO. Access Persons, as defined below, must report, and JPMAM must review, their personal securities transactions and holdings periodically. See section 2. Reporting Requirements and the Personal Trading Policy for Investment Management Americas Staff (for internal use only), as defined below, for details regarding reporting procedures. Compliance with the Code, and other applicable policies and procedures, is a condition of employment. The rules, procedures, reporting and recordkeeping requirements contained in the Code are designed to prevent employees from violating the provisions of the Code. Failure by a Supervised Person to comply with the Code may adversely impact JPMAM and may constitute a violation of federal securities laws. The Compliance Department shall distribute to each Supervised Person a copy of the Code and any amendments, receipt of which shall be acknowledged in writing by the Supervised Person. Written acknowledgements shall be maintained by the Compliance Department in accordance with section 5. Books and Records to be Maintained by Investment Advisers. The form of acknowledgment shall be determined by the Compliance Department. At least annually, each CCO must review the adequacy of the Code and the policies and the procedures herein referenced. 1 1.3. General Definitions (a) Supervised Persons include: (1) Any partner, officer, director (or other person occupying a similar status or performing similar functions) and employees of JPMAM; (2) All employees of entities affiliated with JPMAM that have been authorized by the Office of the Corporate Secretary to act in an official capacity on behalf of a legal entity within JPMAM, sometimes referred to as dual hatted employees; (3) Certain consultants as well as any other persons who provide advice on behalf of JPMAM and are subject to JPMAMs supervision and control; and (4) All Access Persons, as defined in paragraph (b). (b) Access Persons include any partner, officer, director (or other person occupying a similar status or performing similar functions) of JPMAM, as well as any other Supervised Person who: (1) Has access to nonpublic information regarding any clients purchase or sale of securities, or nonpublic information regarding the portfolio holdings of any registered fund advised or sub-advised by JPMAM; or (2) Is involved in making securities recommendations to clients, including Funds, or who has access to such recommendations that are nonpublic. (c) Associated Account refers to an account in the name or for the direct or indirect benefit of a Supervised Person or a Supervised Persons spouse, domestic partner, minor children and any other person for whom the Supervised Person provides significant financial support, as well as to any other account over which the Supervised Person or any of these other persons exercise investment discretion, regardless of beneficial interest. Excluded from Associated Accounts are any 401(k) and deferred compensation plan accounts for which the Supervised Person has no investment discretion. (d) Automatic investment plan means a program in which regular periodic purchases (or withdrawals) are made automatically in (or from) investment accounts in accordance with a predetermined schedule and allocation. An automatic investment plan includes a dividend reinvestment plan. (e) Beneficial ownership is interpreted to mean any interest held directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, or any pecuniary interest in equity securities held or shared directly or indirectly, subject to the terms and conditions set forth under Rule 16a-1(a)(2) of the Securities Exchange Act of 1934. A Supervised Person who has questions regarding the definition of this term should consult the Compliance Department. Please note: Any report required under
section 2. Reporting Requirements may
contain a statement that the report will not be construed as an admission that the person making the report has any direct or indirect beneficial ownership in the security to which the report relates. (f) Client refers to any entity (e.g., person, corporation or Fund) for which JPMAM provides a service or has a fiduciary responsibility. (g) Federal securities laws means the Securities Act of 1933, the Securities Exchange Act of 1934, the Sarbanes-Oxley Act of 2002, the Investment Company Act of 1940 (1940 Act), the Advisers Act, Title V of the Gramm-Leach-Bliley Act (1999), any rules adopted by the Securities and Exchange Commission (SEC) under any of these statutes, the Bank Secrecy Act as it applies to funds and investment advisers, and any rules adopted there under by the SEC or the Department of the Treasury. 2 by the Securities and Exchange Commission (SEC) under any of these statutes, the Bank Secrecy Act as it applies to funds and investment advisers, and any rules adopted there under by the SEC or the Department of the Treasury. (h) Fund means an investment company registered under the 1940 Act. (i) Initial public offering means an offering of securities registered under the Securities Act of 1933, the issuer of which, immediately before the registration, was not subject to the reporting requirements of sections 13 or 15(d) of the Securities Exchange Act of 1934. (j) JPMAM is an abbreviation for JPMorgan Asset Management, the asset management business of JPMorgan Chase & Co. Within the context of this document, JPMAM refers to the U.S. registered investment advisers of JPMorgan Asset Management identified on the cover of this Code. (k) Limited offering means an offering that is exempt from registration under the Securities Act of 1933 pursuant to section 4(2) or section 4(6) or pursuant to Rules 504, 505 or 506 there under. (l) Personal Trading Policy refers to the Personal Trading Policy for Investment Management Americas Staff and/or the Personal Investment Policy for JPMAM Employees in EMEA, Asia and Japan, as applicable, and the procedures there under. (m) Reportable Security means a security as defined under section 202(a)(18) of the Advisers Act held for the direct or indirect benefit of an Access Person, including any note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security (including a certificate of deposit) or on any group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered
into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a security, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guaranty of, or warrant or right to subscribe to or purchase any of the foregoing. Also included in this definition are open-end mutual funds (except as noted below) and exchange traded funds. Excluded from this definition are: (1) Direct obligations of the Government of the United States; (2) Bankers acceptances, bank certificates of deposit, commercial paper and high quality short-term debt instruments, including repurchase agreements; (3) Shares issued by money market funds; and (4) Shares of other types of mutual funds, unless JPMAM acts as the investment adviser, sub-adviser or principal underwriter for the Fund. 2. Reporting Requirements 2.1. Holdings Reports 3 Access Persons must submit to the Compliance Department a report, in the form designated by the Compliance Department, of the Access Persons current securities holdings that meets the following requirements: 2.1.1. Content of Holdings Reports Each holdings report must contain, at a minimum: (a) The name of any broker, dealer or bank with which the Access Person maintains an Associated Account in which any Reportable Securities are held for the Access Persons direct or indirect benefit, as well as all pertinent Associated Account details (e.g., account title, account number, etc.); (b) The title and type of security, and as applicable the exchange ticker symbol or CUSIP number, number of shares, and principal amount of each Reportable Security in which the Access Person has any direct or indirect beneficial ownership; and (c) The date the Access Person submits the report. 2.1.2. Timing of Holdings Reports Access Persons must each submit a holdings report: (a) No later than 10 days after the person becomes an Access Person, and the information must be current as of a date no more than 45 days prior to the date the person becomes an Access Person. (b) At least once each 12-month period thereafter on January 30, and the information must be current as of a date no more than 45 days prior to the date the report was submitted. 2.2. Transaction Reports Access Persons must submit to the Compliance Department quarterly securities transactions reports, in the form designated by the Compliance Department, that meet the following requirements: 2.2.1. Content of Transaction Reports Each transaction report must contain, at a minimum, the following information about each transaction involving a Reportable Security in which the Access Person had, or as a result of the transaction acquired, any direct or indirect beneficial ownership: (a) The date of the transaction, the title, and as applicable the exchange ticker symbol or CUSIP number, interest rate and maturity date, number of shares, and principal amount of each Reportable Security involved; (b) The nature of the transaction (i.e., purchase, sale or any other type of acquisition or disposition); (c) The price of the security at which the transaction was effected; (d) The name of the broker, dealer or bank with or through which the transaction was effected; and (e) The date the Access Person submits the report. 4 2.2.2. Timing of Transaction Reports Each Access Person must submit a transaction report no later than 30 days after the end of each calendar quarter, which report must cover, at a minimum, all transactions during the quarter. 2.3. Consolidated Report At the discretion of the Compliance Department, the form of annual holdings report may be combined with the form of the concurrent quarterly transaction report, provided that such consolidated holdings and transaction report meets, at a minimum, the timing requirements of both such reports if submitted separately. 2.4. Exceptions from Reporting Requirements An Access Person need not submit: (a) Any report with respect to securities held in accounts over which the Access Person had no direct or indirect influence or control; (b) A transaction report with respect to transactions effected pursuant to an automatic investment plan; (c) A transaction report if the report would duplicate information contained in broker trade confirmations or account statements that the Compliance Department holds in its records so long as the Compliance Department receives the confirmations or statements no later than 30 days after the end of the applicable calendar quarter. 3. Pre-approval of Certain Investments Supervised Persons must obtain approval from the Compliance Department before they directly or indirectly acquire beneficial ownership in any reportable security, including initial public offerings and limited offerings. The Personal Trading Policy shall set forth the Compliance pre-clearance procedures as well as any exceptions to the pre-clearance requirement. 4. Additional Restrictions and Corrective Action under the Personal Trading Policy and other related Policies and Procedures In furtherance of the standards for personal trading set forth herein, JPMAM shall maintain a Personal Trading Policy with respect to the trading restrictions and corrective actions discussed under this section 4, and such other restrictions as may be deemed necessary or appropriate by JPMAM. 4.1. Designated Broker Requirement Any Associated Account, except as otherwise indicated in the Personal Trading Policy, must be maintained with a Designated Broker, as provided under the JPMC Code of Conduct and the Personal Trading Policy. 4.2. Blackout Provisions The personal trading and investment activities of Supervised Persons are subject to particular scrutiny because of the fiduciary nature of the business. Specifically, JPMAM must avoid even the appearance that its Supervised Persons conduct personal transactions in a manner that conflicts with the firms investment activities on behalf of clients. Towards this end, Supervised Persons may be restricted from conducting personal investment transactions during certain 5 periods (Blackout Periods), and may be instructed to reverse previously completed personal investment transactions (see section 4.4). Additionally, the Compliance Department may restrict the personal trading activity of any
Supervised Person if such activity has the appearance of violating the intent of the blackout provision or is deemed to present a possible conflict of interest. The Blackout Periods set forth in the Personal Trading Policy may reflect varying levels of restriction appropriate for different categories of Supervised Persons based upon their level of access to nonpublic client or proprietary information. 4.3. Minimum Investment Holding Period and Market Timing Prohibition Supervised Persons are subject to a minimum holding period, as set forth under the Personal Trading Policy, for all transactions in Reportable Securities, as defined under section 1.3. Supervised Persons are not permitted to conduct transactions for the purpose of market timing in any Reportable Security. Market timing is defined as an investment strategy using frequent purchases, redemptions, and/or exchanges in an attempt to profit from short-term market movements. Please see the Personal Trading Policy for further details on transactions covered or exempted from the minimum investment holding period. 4.4. Trade Reversals and Disciplinary Action Transactions by Supervised Persons are subject to reversal due to a conflict (or appearance of a conflict) with the firms fiduciary responsibility or a violation of the Code or the Personal Trading Policy. Such a reversal may be required even for a pre-cleared transaction that results in an inadvertent conflict or a breach of black out period requirements under the Personal Trading Policy. Disciplinary actions resulting from a violation of the Code will be administered in accordance with related JPMAM policies governing disciplinary action and escalation. All violations and disciplinary actions will be reported promptly by the Compliance Department to the JPMAM CCO. Violations will be reported at least quarterly to the firms executive committee and, where applicable, to the directors or trustees of an affected Fund. Violations by Supervised Persons of any laws that relate to JPMAMs operation of its business or any failure to cooperate with an internal investigation may result in disciplinary action up to and including immediate dismissal and, if applicable, termination of registration. 5. Books and Records to be Maintained by Investment Advisers (a) A copy of this Code and any other code of ethics adopted by JPMAM pursuant to Rule 204A-1 that has been in effect during the past five years; (b) A record of any violation of the Code, and any action taken as a result of that violation; (c) A record of all written acknowledgments for each person who is currently, or within the past five years was, a Supervised Person of JPMAM; (d) A record of each report made by an Access Personas required under section 2. Reporting Requirements; (e) A record of the names of persons who are currently, or within the past five years were, Access Persons; 6 (f) A record of any decision, and the reasons supporting the decision, to approve the acquisition of securities by Supervised Persons under section 3. Pre-approval of Certain Investments, for at least five years after the end of the fiscal year in which the approval is granted; and (g) Any other such record as may be required under the Code or the Personal Trading Policy. 6. Confidentiality Supervised Persons have a special responsibility to protect the confidentiality of information related to customers. This responsibility may be imposed by law, may arise out of agreements with customers, or may be based on policies or practices adopted by the firm. Certain jurisdictions have regulations relating specifically to the privacy of individuals and/or business and institutional customers. Various business units and geographic areas within JPMC have internal policies regarding customer privacy. The foregoing notwithstanding, JPMAM and its Supervised Persons must comply with all provisions under the Bank Secrecy Act, the USA Patriot Act and all other applicable federal securities laws, as well as applicable anti-money laundering and know your client policies, procedures and training requirements of JPMAM and JPMC. 7. Conflicts of Interest With regards to each of the following restrictions, more detailed guidelines may be found under the applicable JPMAM policy and/or the JPMC Code of Conduct. 7.1. Trading in Securities of Clients Supervised Persons should not invest in any securities of a client with which the Supervised Person has or recently had significant dealings or responsibility on behalf of JPMAM if such investment could be perceived as based on confidential information. 7.2. Trading in Securities of Suppliers Supervised Persons in possession of information regarding, or directly involved in negotiating, a contract material to a supplier of JPMAM may not invest in the securities of such supplier. If you own the securities of a company with which we are dealing and you are asked to represent JPMorgan Chase in such dealings you must: (a) Disclose this fact to your department head and the Compliance Department; and (b) Obtain prior approval from the Compliance Department before selling such securities. 7.3. Gifts A conflict of interest occurs when the personal interests of Supervised Persons interfere or could potentially interfere with their responsibilities to the firm and its clients. Supervised Persons should not accept inappropriate gifts, favors, entertainment, special accommodations, or other things of material value that could influence their decision-making or make them feel beholden to a person or firm. Similarly, Supervised Persons should not offer gifts, favors, entertainment or other things of value that could be viewed as overly generous or aimed at influencing decision-making or making a client feel beholden to the firm or the Supervised Person. More specific guidelines are set forth under the JPMC Code of Conduct and operating procedures for the JPMAM Gift, Entertainment and Political
Contributions Database. 7 Supervised Persons are required to log all gifts subject to reporting into the JPMAM Gift, Entertainment and Political Contributions Database and any violations of JPMAM Gift & Entertainment Polices are subject to the Escalation Guidelines. 7.4. Entertainment No Supervised Person may provide or accept extravagant or excessive entertainment to or from a client, prospective client, or any person or entity that does or seeks to do business with or on behalf of JPMAM. Supervised Persons may provide or accept a business entertainment event, such as dinner or a sporting event, of reasonable value, if the person or entity providing the entertainment is present, and only to the extent that such entertainment is permissible under the JPMC Code of Conduct and operating procedures for the JPMAM Gift, Entertainment and Political Contributions Database. Supervised Persons are required to log all entertainment subject to reporting into the JPMAM Gift, Entertainment and Political Contributions Database and any violations
of JPMAM Gift & Entertainment Polices are subject to the Escalation Guidelines. 7.5. Political and Charitable Contributions JPMorgan Chase has a strict policy that no political contributions made on behalf of JPMorgan Chase are allowed unless pre-approved. Supervised Persons are prohibited from making political contributions for the purpose of obtaining or retaining advisory contracts with government entities. In addition, Supervised Persons are prohibited from considering JPMAMs current or anticipated business relationships as a factor in making political or charitable donations. Additional restrictions, disclosures and other requirements regarding political activities are described under the JPMC Code of Conduct. Access Persons are required to pre-clear all personal
political contributions to the election campaigns of non-federal level candidates. All federal level contributions have to be reported in the database, but do not require pre-clearance. Contributions to the JPMorgan PACs are excluded from pre-clearance and reporting requirements. The Code of Ethics now specifically requires that, in addition to the reporting of political contributions, employees log all gift, entertainment, and charitable contributions into the Gift, Entertainment and Political Contributions Database and makes failure to do so a violation of the JPMAM Gift & Entertainment Polices subject to the Escalation Guidelines. 7.6. Outside Business Activities A Supervised Persons outside activities must not reflect adversely on the firm or give rise to a real or apparent conflict of interest with the Supervised Persons duties to the firm or its clients. Supervised Persons must be alert to potential conflicts of interest and be aware that they may be asked to discontinue any outside activity if a potential conflict arises. Supervised Persons may not, directly or indirectly: (a) Accept a business opportunity from someone doing business or seeking to do business with JPMAM that is made available to the Supervised Person because of the individuals position with the firm. (b) Take for oneself a business opportunity belonging to the firm. (c) Engage in a business opportunity that competes with any of the firms businesses. More specific guidelines are set forth under the conflicts of interest policy of JPMAM and under the JPMC Code of Conduct. Procedures and forms for pre-clearance of these activities by the Office of the Secretary of JPMC are available in the JPMC Procedures for Pre-Clearance of Outside Activities Referenced in the JPMC Code of Conduct. Supervised Persons must seek a new clearance for a previously approved activity whenever there is any material change in relevant circumstances, whether arising from a change in your job or association with JPMAM or 8 in your role with respect to that activity or organization. You are required to be continually alert to any real or apparent conflicts of interest with respect to investment management activities and promptly disclose any such conflicts to Compliance
and the Office of the Corporate Secretary. You must also notify the Office of the Secretary of JPMC when any approved outside activity terminates. Regardless of whether an activity is specifically addressed under JPMAM policies or the JPMC Code of Conduct, Supervised Persons should disclose any personal interest that might present a conflict of interest or harm the reputation of the firm. 8. Training There are several mandatory training courses given each year by Compliance (e.g., AML, Privacy, and Code of Conduct). Failure to attend and/or complete required Compliance training courses will now be subject to the Escalation Guidelines. 9. Escalation Guidelines Compliance maintains the Escalation Guidelines, which is applicable to employees of J.P. Morgan Alternative Asset Management, JPMorgan Investment Advisors, J.P. Morgan Investment Management and Security Capital Research & Management. Please note, the Escalation Guidelines is an internal Compliance document and is used to notify Group Heads and/or Managers of appropriate action that needs to be taken. 9.1. Violation Prior to Material Violation While the Group Head is notified of all violations, he/she is now required to have a face-to-face meeting with the employee when the employees next violation would be considered material, in order to stress the importance of the requirement and inform the employee about the ramifications for not following the policy. The employee is also required to acknowledge, in writing, (form to be provided by Compliance) that he/she is aware of the ramifications for noncompliance and he/she will be compliant going forward. The written acknowledgement is signed by both the employee and Group Head, and returned to Compliance for record keeping. 9.2. Material Violations All material violations now require the Group Head and HR to have a face-to-face meeting with the employee and to document the meeting specifics in the employee's personnel file. Once again, the employee will be required to acknowledge in writing the material nature of the violation and that he/she will be compliant going forward. The written acknowledgement, signed by both the employee and Group Head, will be returned to Compliance and HR for record keeping. There will now be a mandated suspension of trading privileges for six months for all material violations regardless of type. Transactions may be allowed for hardship reasons, but require pre-clearance by Compliance and the Group Head. A list of all individuals who have received material violations will be circulated to the appropriate Group Head and Eve Guernsey on a periodic basis and will be a factor in the employees annual compensation. 9
JPMorgan Institutional Trust
By:
George C. W. Gatch
President
Trustee and Chairman
Trustee
Trustee
Trustee
Trustee
Trustee
Trustee
Trustee
Trustee
Trustee
Trustee
Trustee
Trustee
President
Treasurer and Principal Financial Officer
Attorney-in-fact
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end
CODE OF ETHICS
(Revised May 20, 2006)
(1)
To employ any device, scheme or artifice to defraud the Trust or a Fund;
(2)
To make to the Trust or a Fund any untrue statement of a material fact or omit to
state to the Trust or a Fund a material fact necessary in order to make the
statements made, in light of the circumstances under which they are made, not
misleading;
(3)
To engage in any act, practice, or course of business which operates or would
operate as a fraud or deceit upon the Trust or a Fund; or
(4)
To engage in any manipulative practice with respect to the Trust or a Fund.
A
security is "held or to be acquired" if it is a covered security2 (or an option
for or exchangeable for a covered security) and within the most recent 15 days
(i) the covered security is or has been held by the Trust or a Fund, or (ii) the
covered security is being or has been considered by the Trust or a Fund or the
investment adviser for the Trust or a Fund for purchase by the Trust or the Fund.
(a)
It is the duty of all access persons of the Trust or of a Fund to place the interest
of Trust shareholders first;
(b)
All access persons of the Trust or of a Fund shall conduct personal securities
transactions in a manner that is consistent with this Code of Ethics and that avoids any
actual or potential conflict of interest or any abuse of a position of trust and
responsibility; and
(c)
No access person of the Trust or of a Fund shall take inappropriate advantage of his
or her position with the Trust or with a Fund.
(a)
Each person becoming an access person of the Trust or of a Fund on or after March 1, 2000, other than a trustee/director who is not an "interested person" of the
Trust (as defined in the Act), shall no later than 10 days after becoming such an access person submit a report in the form attached hereto as Exhibit A (an
"Initial Holdings Report") to the Trusts Chief Compliance Officer or his/her delegate (CCO) showing all holdings in covered
securities in which the person had any direct or indirect beneficial ownership5
(which information must be current as of a date no more than 45 days prior to
the date the person becomes an access person). Such Initial Holdings Report
shall also indicate all broker/dealers and banks with which the access person
held direct or indirect ownership of securities. Such reports need not show
holdings over which such person had no direct or indirect influence or control.
(b)
Each access person of the Trust or of a Fund, other than a trustee/director who
is not an interested person of the Trust (as defined in the Act),
shall submit reports each quarter in the form attached hereto as Exhibit B (a
Securities Transaction Report) to the Trusts CCO showing all
transactions in covered securities in which the person had, or by
reason of such transaction acquired, any direct or indirect beneficial
ownership. Such reports shall be filed no later than 30 days after the end of
each calendar quarter, but need not show transactions over which such person had
no direct or indirect influence or control.
(c)
Each trustee/director who is not an interested person of the Trust
(as defined in the Act) shall submit the same quarterly report as required under
paragraph (b), but only for a transaction in a covered security where he knew at
the time of the transaction or, in the ordinary course of fulfilling his
official duties as a trustee/director, should have known that during the 15-day
period immediately preceding or after the date of the transaction such security
is or was purchased or sold, or considered for purchase or sale, by the Trust or
the Fund. No report is required if the trustee/director had no direct or
indirect influence or control over the transaction.
(d)
Each access person of the Trust or of a Fund, other than a trustee/director who
is not an interested person (as defined in the Act), shall by
January 10 of each year submit to the Trusts CCO a report in the form
attached hereto as Exhibit A (an Annual Holdings Report) showing all
holdings in covered securities in which the person had any direct or indirect
beneficial ownership as of a date no more than 45 days before the report is
submitted. Such report need not show holdings over which such person had no
direct or indirect influence or control.
(a)
at the next meeting following the receipt of any Securities Transaction Report
with respect to each reported transaction in a security which was held or
acquired by the Trust or a Fund within 15 days before or after the date of the
reported transaction or at a time when, to the knowledge of the Secretary, the
Trust, a Fund, or the respective investment adviser or sub-adviser for the Trust
or a Fund, was considering the purchase or sale of such security, unless the
amount involved in the transaction was less than $50,000;
(b)
with respect to any transaction or holdings not required to be reported to the
Board by the operation of subparagraph (a) that the President of the Trust or
his or her delegate believes nonetheless may evidence a violation of this Code;
and
(c)
any apparent violation of the reporting requirements of Section C of this Code.
1.
describes
any issues arising under its Code of Ethics or procedures since the last report
to the Board of Trustees/Directors, including, but not limited to, information
about material violations of such Code or procedures and sanctions imposed in
response, and
2.
certifies
that the Fund, principal underwriter, or investment adviser or sub-adviser, as
applicable, has adopted procedures reasonably necessary to prevent its access
persons from violating its Code of Ethics.
Updated: April 28, 2009 to reflect the merger of the Boards
Initial
Holdings Report of ___________, 200__
(date a reporting person became an access person)
Annual
Holdings Report as of ____________, 200__
(date not more than 45 days prior to submission)
As
of the above date, I had direct or indirect beneficial ownership of the following
covered securities:
Title
Number
of SharesPrincipal
Amount of
Security
I
have no covered securities to report.
I
have no accounts to report.
During
the quarter referred to above, the following transactions were effected in securities of
which I had, or by reason of such transaction acquired, direct or indirect beneficial
ownership, and which are required to be reported pursuant to the Trusts Code of
Ethics:
Title of
Security (and
interest rate
and maturity
date, if
applicable)
Date of
TransactionNo. of Shares and
Principal Dollar
Amount of
Transaction (Price)Nature of
Transaction
(Purchase,
Sale, Other)Price at
Which
Transaction
EffectedBroker/
Dealer
or Bank
Through" Whom
Effected
I
have no securities transactions to report.
During
the quarter referred to above, I established the following account in which securities
were held for my direct or indirect benefit during the quarter (note: list accounts, not
securities):
Broker/Dealer or
Bank With Whom
Account EstablishedDate the Account
Was Established
I
have no accounts to report.