-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, L/C/GqWIfEeM8TIJ4z7d0+kctYY2Ax/imnJQe970PEROsvfLaFU0HQLvZcM9apV8 7Cyr4G4HUkeuD9NO7MOoyQ== 0001145443-09-002487.txt : 20091002 0001145443-09-002487.hdr.sgml : 20091002 20091002154224 ACCESSION NUMBER: 0001145443-09-002487 CONFORMED SUBMISSION TYPE: POS AMI PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 20091002 DATE AS OF CHANGE: 20091002 FILER: COMPANY DATA: COMPANY CONFORMED NAME: JPMorgan Institutional Trust CENTRAL INDEX KEY: 0001303608 IRS NUMBER: 201491791 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: POS AMI SEC ACT: 1940 Act SEC FILE NUMBER: 811-21638 FILM NUMBER: 091102252 BUSINESS ADDRESS: STREET 1: C/O JPMORGAN DISTRIBUTION SERVICES, INC. STREET 2: 1111 POLARIS PARKWAY CITY: COLUMBUS STATE: OH ZIP: 43240 BUSINESS PHONE: 800-480-4111 MAIL ADDRESS: STREET 1: C/O JPMORGAN DISTRIBUTION SERVICES, INC. STREET 2: 1111 POLARIS PARKWAY CITY: COLUMBUS STATE: OH ZIP: 43240 0001303608 S000007336 JPMorgan Intermediate Bond Trust C000020140 JPMorgan Intermediate Bond Trust 0001303608 S000007337 JPMorgan Core Bond Trust C000020141 JPMorgan Core Bond Trust 0001303608 S000007338 JPMorgan Equity Index Trust C000020142 JPMorgan Equity Index Trust POS AMI 1 d25481.htm

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 2, 2009

File No. 811-21638

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM N-1A

REGISTRATION STATEMENT

UNDER

   THE INVESTMENT COMPANY ACT OF 1940    x

AMENDMENT No. 13

 

JPMORGAN INSTITUTIONAL TRUST

(Exact Name of Registrant as Specified in Charter)

 

245 Park Avenue

New York, New York 10167

(Address of Principal Executive Offices)

Registrant’s 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.

Part A & B

This filing supersedes the Confidential Offering Memorandum Supplement, but not the Confidential Information Memorandum, of the Registrant dated June 26, 2009 and filed as Amendment No. 12 to the Registrant’s Registration Statement on Form N-1A (SEC File No. 811-21638).

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, as Supplemented October 2, 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-1009

 

TABLE OF CONTENTS

 

 

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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 Fund’s 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.

 

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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 CDO’s 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 banker’s 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

 

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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 & Poor’s Rating Service (“S&P”), Prime-2 or better by Moody’s Investors Service, Inc. (“Moody’s”), 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 Moody’s, 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 company’s 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

 

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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 issuer’s 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 year’s 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 bond’s 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 Fund’s Adviser to be of comparable quality at the time of purchase to rated instruments eligible for purchase under the Fund’s investment policies. In making such determinations, a Fund’s 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 Fund’s 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 Fund’s 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 Fund’s 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 Fund’s 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 Adviser’s liquidity determination procedures. If not rated, such instruments must be found by the Fund’s 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 Fund’s 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 issuer’s board of directors. Common stock occupies the most junior position in a company's capital structure. As with all equity securities, the price of common stock fluctuates based on changes in a company's 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 company’s 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 Fund’s performance will generally decrease.

 

Foreign Investments

 

Some of the Funds may invest in certain obligations or securities of foreign issuers. For purposes of a Fund’s investment policies and unless described in the Fund’s 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 Fund’s 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 Fund’s 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 entity’s lending activities are limited to a percentage of its total capital (including “callable capital” contributed by its governmental members at the entity’s 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 Fund’s 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 debtor’s 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 debtor’s 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 debtor’s 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 company’s 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 Act’s limits currently require that, as determined immediately after a purchase is made, (i) not more than 5% of the value of a fund’s 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 Fund’s 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 fund's 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 Poor’s 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 vehicle’s 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 Fund’s 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 Fund’s 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 Fund’s total assets and 3% of the outstanding voting securities of the ETF issue. Moreover, a Fund’s investments in all ETFs may not currently exceed 10% of the Fund’s 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 Fund’s 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 Fund’s 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 & Poor’s 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 stock’s 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 Trust’s 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 Agent’s 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 borrower's 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 Fund’s 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 Lender’s 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 Fund’s 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.

 

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.

 

Liquidity Risk. Although the Funds limit their investments in illiquid securities to no more than 15% of the Fund’s 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.

 

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 Fund’s 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 Obligor’s obligation on a Loan.

 

If an Obligor becomes involved in bankruptcy proceedings, a court may invalidate the Loan or the Fund’s security interest in loan collateral or subordinate the Fund’s rights under a Senior Loan or Junior Loan to the interest of the Obligor’s 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 Fund’s security interest in Loan collateral. If the Fund’s 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.

 

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.

 

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 Committee’s 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 Agent’s, Lender’s or such other party’s creditors.

 

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.

 

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 Adviser’s affiliates in the Loan market may restrict a Fund’s ability to acquire some Loans, affect the timing of such acquisition or affect the price at which the Loan is acquired.

 

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 Obligor’s creditworthiness or to determine the Obligor’s 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.

 

Junior Loan Risk. Junior Loans are subject to the same general risks inherent to any Loan investment. Due to their lower place in the Obligor’s 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 Obligor’s 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 Obligor’s 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 Fund’s 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 33?% 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 Fund’s total assets made for temporary administrative or emergency purposes. Any borrowings for temporary administrative purposes in excess of 5% of the Fund’s 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 Fund’s 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 issuer’s 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 Fund’s 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 Fund’s 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

 

16

 

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 Fund’s Adviser to consider the following criteria in determining the liquidity of certain restricted securities:

 

 

•

the frequency of trades and quotes for the security;

 

 

•

the number of dealers willing to purchase or sell the security and the number of other potential buyers:

 

 

•

dealer undertakings to make a market in the security; and

 

 

•

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 Trust’s 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:

 

 

•

The 4(2) Paper must not be traded flat or in default as to principal or interest;

 

 

•

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 Fund’s Adviser to be of equivalent quality;

 

 

•

The Fund’s 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;

 

 

•

The Fund’s 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 Fund’s Adviser is able to dispose of illiquid assets in an orderly manner in an amount that reduces the Fund’s holdings of illiquid assets to less than 10% of its net assets; and

 

 

•

The Fund’s 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

 

17

 

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 Fund’s 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 Fund’s 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 Fund’s 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:

 

 

•

various governmental agencies such as the Government National Mortgage Association (“Ginnie Mae”);

 

 

•

government-related organizations such as the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”); and

 

 

•

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.

 

18

 

 

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 Mae’s 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

 

19

 

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.

 

20

 

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:

 

 

•

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

 

 

•

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 JPMIM’s 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

 

21

 

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 Fund’s 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 Fund’s portfolio and therefore in the net asset value of the Fund’s shares will be a function of the length of the interest rate reset periods and the degree of volatility in the applicable indices.

 

22

 

 

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 security’s stated maturity may be shortened by unscheduled prepayments on the underlying mortgages and, therefore, it is not possible to predict accurately the security’s 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 Fund’s 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 Fund’s principal investment to the extent of the premium paid. On the other hand, if such securities are purchased at a discount, both a

 

23

 

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 Mac’s 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 Mae’s or Freddie Mac’s 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 mortgage-backed 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 mortgage-backed 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:

 

 

1.

bridges,

 

 

2.

highways,

 

 

3.

roads,

 

 

4.

schools,

 

 

5.

waterworks and sewer systems, and

 

24

 

 

 

6.

other utilities.

 

Other public purposes for which Municipal Securities may be issued include:

 

 

1.

refunding outstanding obligations,

 

 

2.

obtaining funds for general operating expenses, and

 

 

3.

obtaining funds to lend to other public institutions and facilities.

 

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:

 

 

1.

water, sewage and solid waste facilities,

 

 

2.

qualified residential rental projects,

 

 

3.

certain local electric, gas and other heating or cooling facilities,

 

 

4.

qualified hazardous waste facilities,

 

 

5.

high-speed intercity rail facilities,

 

 

6.

governmentally-owned airports, docks and wharves and mass transportation facilities,

 

 

7.

qualified mortgages,

 

 

8.

student loan and redevelopment bonds, and

 

 

9.

bonds used for certain organizations exempt from Federal income taxation.

 

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:

 

 

1.

privately operated housing facilities,

 

 

2.

sports facilities,

 

 

3.

industrial parks,

 

 

4.

convention or trade show facilities,

 

 

5.

airport, mass transit, port or parking facilities,

 

 

6.

air or water pollution control facilities,

 

 

7.

sewage or solid waste disposal facilities, and

 

 

8.

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

 

25

 

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 issuer’s 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 issuer’s 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:

 

 

1.

Short-term tax-exempt General Obligations Notes,

 

 

2.

Tax Anticipation Notes,

 

 

3.

Bond Anticipation Notes,

 

 

4.

Revenue Anticipation Notes,

 

 

5.

Project Notes, and

 

 

6.

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:

 

 

•

general money market conditions,

 

 

•

coupon rate,

 

 

•

the financial condition of the issuer,

 

 

•

general conditions of the municipal bond market,

 

 

•

the size of a particular offering,

 

26

 

 

 

•

the maturity of the obligations, and

 

 

•

the rating of the issue.

 

The ratings of Moody’s 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:

 

27

 

 

•

the interest on the bonds may become taxable, possibly retroactively from the date of issuance;

 

 

•

the value of the bonds may be reduced;

 

 

•

you and other Shareholders may be subject to unanticipated tax liabilities;

 

 

•

a Fund may be required to sell the bonds at the reduced value;

 

 

•

it may be an event of default under the applicable mortgage;

 

 

•

the holder may be permitted to accelerate payment of the bond; and

 

 

•

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 issuer’s 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 Fund’s 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 Fund’s 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

 

28

 

(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 Fund’s 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 Fund’s 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 Fund’s overall strategy in a manner deemed appropriate by the Fund’s Adviser and consistent with the Fund’s 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 Fund’s 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 Fund’s Adviser applies a strategy at an inappropriate time or judges market conditions or trends incorrectly, options and futures strategies may lower a Fund’s return. Certain strategies limit a Fund’s 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 Fund’s 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

 

29

 

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 option’s 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 option’s 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 option’s 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

 

30

 

covered call option, the Fund foregoes, during the option’s 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 Fund’s 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 Fund’s 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 Fund’s 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 Fund’s 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

 

31

 

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 Fund’s 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 contract’s value. If the value of either party’s 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 Fund’s 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 FCM’s 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 Fund’s assets could impede portfolio management or a Fund’s 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 Fund’s 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

 

32

 

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 SEC’s 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 Fund’s 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 Fund’s other investments.

 

Options and futures contracts prices can also diverge from the prices of their underlying instruments, even if the underlying instruments match the Fund’s 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 Fund’s 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 contract’s 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 Fund’s 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.)

 

33

 

 

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 Fund’s 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 Fund’s assets could impede portfolio management or a Fund’s 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 REIT’s investment in fixed rate obligations can be expected to rise. Conversely, when interest rates rise, the value of a REIT’s 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 REIT’s 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:

 

 

•

limited financial resources;

 

 

•

infrequent or limited trading; and

 

 

•

more abrupt or erratic price movements than larger company securities.

 

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 Adviser’s 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 Fund’s 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 seller’s 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 seller’s 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

 

35

 

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 33?% of a Fund’s total assets, except as permitted by law.

 

Securities Lending

 

To generate additional income, each of the Funds may lend up to 33 ?% of such Fund’s 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 Trust’s 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 Fund’s 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 Fund’s 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 Fund’s 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,

 

36

 

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 Fund’s 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 Fund’s 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 Fund’s 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 Fund’s potential gain or loss on any swap transaction is not subject to any fixed limit. Nor is there any fixed limit on a Fund’s potential loss if it sells a cap or collar. If a Fund buys a cap, floor or collar, however, the Fund’s 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 Fund’s 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 Fund’s 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 Fund’s 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

 

38

 

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 Fund’s 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 Fund’s 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 Fund’s 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 Fund’s 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 Fund’s 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

 

39

 

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 counterparty’s 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 counterparty’s 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.

 

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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 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 agency’s 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 Fund’s 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 Fund’s 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 Fund’s assets reserved for payment of the commitments will equal the amount of such commitments purchased by the respective Fund.

 

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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 Fund’s portfolio are subject to changes in value based upon the public’s 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 Fund’s payment obligations). The sale of securities to meet such obligations may result in the 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 Fund’s 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 Fund’s 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 Information—Miscellaneous” 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.

 

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 33 ⅓% 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.

 

2.

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.

 

4.

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.

 

5.

Loans. The Funds may not lend any security or make any loan if, as a result, more than 33 ⅓% 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.

 

6.

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.

 

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.

 

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 Fund’s purchases or sales of securities (excluding short-term securities) by the average market value of the Fund. The Adviser intends to manage each Fund’s 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 Fund’s assets have been sold and reinvested in

 

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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.

 

Funds

Fiscal Year Ended February 29, 2008

Fiscal Year Ended February 28, 2009

Core Bond Trust

16%

13%

Equity Index Trust

15

14

Intermediate Bond Trust

17

11

 

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:

 

 

(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);

 

 

(b)

diversify its holdings so that, at the end of each quarter of the Fund’s taxable year, (i) at least 50% of the market value of the Fund’s 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 Fund’s 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 Fund’s 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 paid—generally, 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 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 Fund’s 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 Fund's 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 fund’s foreign currency gains to the extent that such income is not directly related to the fund’s 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 Fund's 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

 

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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 shareholder's 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.

 

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 shareholder’s 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

 

46

 

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 Fund’s 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 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 Fund’s 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 Fund’s 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 shareholder’s tax basis in its shares, and thereafter as capital gain. A return of capital is not taxable, but it does reduce the shareholder’s 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 Fund’s shares are generally subject to federal income tax as described herein to the extent they do not exceed the Fund’s realized income and gains, even though such dividends and distributions may economically represent a return of a particular shareholder’s investment. Such dividends and distributions are likely to occur in respect of shares purchased at a time when the Fund’s net asset value reflects gains that are either unrealized, or realized but not distributed.

 

47

 

 

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 Fund’s 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 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 shareholder’s 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 Fund’s 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 Fund’s 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 Fund’s book income and its taxable income. If a Fund’s 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 Fund’s 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 recipient’s basis in its shares, and (iii) thereafter, as gain from the sale or exchange of a capital asset. If a Fund’s 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 Fund’s 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.

 

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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 Fund's 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 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.

 

49

 

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 company’s 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 Fund's 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 Fund's 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 difference between the proceeds received by the Fund and the Fund's 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 Fund's allocable share of "unrealized receivables" (including any accrued but untaxed market discount) exceeds the shareholder's 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 Fund’s investments in REIT equity securities may at other times result in the Fund’s receipt of cash in excess of the REIT’s 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 Fund’s 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 Fund’s 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

 

50

 

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 shareholder’s distributions for the year by the amount of the tax that relates to such shareholder’s 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.

 

A Fund’s 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 company’s 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 Fund’s 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 Fund’s total return. A fund that invests in PFICs by virtue of the fund’s 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 shareholder's 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.

 

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The Fund’s 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 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 Fund’s 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 Fund’s 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 Fund’s shares of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder, the shareholder must file with the IRS a disclosure statement on Form 8886. Direct shareholders of portfolio securities are in many cases excepted from this reporting requirement, but under current guidance, shareholders of a 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 taxpayer's treatment of the loss is proper. Shareholders should consult their tax advisers to determine the applicability of these regulations in light of their individual circumstances.

 

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):

 

 

52

 

 

Fund

Capital Loss
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

 

 

 

 

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.

 

53

 

 

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 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 Board’s 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 Fund’s securities (e.g., news relating to natural disasters affecting an issuer’s 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

 

54

 

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 Fund’s 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 Fund’s 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.

 

55

 

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

 

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 COMPENSATION
FROM TRUST

TOTAL COMPENSATION
FROM FUND COMPLEX*

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 Trust’s 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.

 

56

 

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 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);

Positions With

the Portfolios (Since)

 

Principal Occupations During Past 5 Years

Number of Portfolios in Fund Complex Overseen by Trustee(1)

 

Other Directorships Held

Outside Fund Complex

Independent Trustees

 

 

 

William J. Armstrong

(1941); Trustee of Trust since 2009; Trustee of Heritage JPMorgan Funds since 1987.

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

(1947); Trustee of Trust since 2009; Trustee of heritage One Group Mutual Funds since 1998.

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

(1941); Trustee of Trust since 2009; Trustee of heritage JPMorgan Funds since 2003.

 

Chancellor, City University of New York (1999–present); 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

(1945); Trustee of Trust since 2009; Trustee of heritage JPMorgan Funds since 2002.

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.

 

 

57

 

 

Name (Year of Birth);

Positions With

the Portfolios (Since)

 

Principal Occupations During Past 5 Years

Number of Portfolios in Fund Complex Overseen by Trustee(1)

 

Other Directorships Held

Outside Fund Complex

Peter C. Marshall

(1942); Trustee of Trust since 2009; Trustee of heritage One Group Mutual Funds since 1985.

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).

Marilyn McCoy*

(1948); Trustee of Trust since 2009; Trustee of heritage One Group Mutual Funds since 1999.

 

Vice President of Administration and Planning, Northwestern University (1985-present).

132

Trustee, Carleton College (2003-present).

William G. Morton, Jr. (1937); Trustee of Trust since 2009; Trustee of heritage JPMorgan Funds since 2003.

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. (1946); Trustee of Trust since 2009; Trustee of heritage One Group Mutual Funds since 1997.

 

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

(1932); Trustee of Trust (Chairman) since 2009; Trustee (Chairman) of heritage JPMorgan Funds since 1987.

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

(1939); Trustee of Trust since 2009; Trustee of heritage One Group Mutual Funds since 1994.

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).

 

 

58

 

 

Name (Year of Birth);

Positions With

the Portfolios (Since)

 

Principal Occupations During
Past 5 Years

Number of Portfolios in Fund Complex Overseen by Trustee(1)

 

Other Directorships Held

Outside Fund Complex

James J. Schonbachler (1943); Trustee of Trust since 2009; Trustee of heritage JPMorgan Funds since 2001.

Retired; Managing Director of Bankers Trust Company (financial services) (1968-1998).

132

None.

Interested Trustees

 

 

 

Frankie D. Hughes** (1952); Trustee of Trust since 2009.

Principal and Chief Investment Officer, Hughes Capital Management, Inc. (fixed income asset management) (1993-present)

 

132

None.

Leonard M. Spalding, Jr.*** (1935); Trustee of Trust since 2009; Trustee of heritage JPMorgan Funds since 1998.

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 Trustee’s beneficial ownership as of December 31, 2008, in each fund, including the Funds, that the Trustee oversees and each Trustee’s aggregate ownership in any funds that the Trustee oversees in the J.P. Morgan Funds complex:

 

NAME OF TRUSTEE

DOLLAR RANGE OF EQUITY SECURITIES IN THE FUNDS

AGGREGATE DOLLAR RANGE OF EQUITY SECURITIES IN ALL REGISTERED INVESTMENT COMPANIES OVERSEEN BY THE TRUSTEE IN THE FAMILY OF 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

 

 

59

 

 

NAME OF TRUSTEE

DOLLAR RANGE OF EQUITY SECURITIES IN THE FUNDS

AGGREGATE DOLLAR RANGE OF EQUITY SECURITIES IN ALL REGISTERED INVESTMENT COMPANIES OVERSEEN BY THE TRUSTEE IN THE FAMILY OF INVESTMENT COMPANIES(1),(2)

Robert J. Higgins

None

Over $100,000

Peter C. Marshall

None

Over $100,000

Marilyn McCoy

None

Over $100,000

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 Trust’s 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.

 

60

 

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 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 r espect 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 person’s 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 Trust’s 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

 

 

61

 

 

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 $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:

 

NAME OF TRUSTEE

TOTAL COMPENSATION
FROM TRUST(1)

TOTAL COMPENSATION
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.

 

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NAME (YEAR OF BIRTH), POSITIONS HELD WITH THE FUNDS (SINCE)

 

PRINCIPAL OCCUPATIONS
DURING PAST 5 YEARS

 

George C.W. Gatch (1962),
President (2005)

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),

Senior Vice President (2005)*

 

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),

Vice President and Chief Administrative Officer (2005) and Principal Financial Officer (2008)

 

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),

Secretary (2009)**

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)
Chief Compliance Officer (2005)

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),

AML Compliance Officer (2005)

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), Controller (2008)

 

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 THE FUNDS (SINCE)

 

PRINCIPAL OCCUPATIONS
DURING PAST 5 YEARS

 

Jessica K. Ditullio (1962),** Assistant Secretary (2009)*

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), Assistant Secretary (2005)*

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)

Assistant Secretary (2008)

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),

Assistant Treasurer (2008)*

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)

Assistant Treasurer (2006)

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)

Assistant Treasurer (2006)*

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)

Assistant Treasurer (2007)

 

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 Fund’s 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 Fund’s 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

 

Fund

Fiscal Year Ended February 28, 2007

Fiscal Year Ended February 29, 2008

Fiscal Year Ended February 28, 2009

 

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 Companies

Other Pooled Investment Vehicles

 

Other Accounts

 

Number of Accounts

Total Assets ($millions)

Number of Accounts

Total Assets ($millions)

Number of Accounts

Total Assets ($millions)

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 Companies

Other Pooled Investment Vehicles

 

Other Accounts

 

Number of Accounts

Total Assets ($millions)

Number of Accounts

Total Assets ($millions)

Number of Accounts

Total Assets ($millions)

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 Adviser’s 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 JPMIM’s 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 JPMIM’s 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 Fund’s 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 JPMIM’s 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

 

JPMIM’s 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 JPMIM’s business as a whole.

 

Each portfolio manager’s 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 manager’s 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 Fund’s benchmark index listed in the Fund’s 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 employee’s annual performance bonus and comprise from 0% to 35% of a portfolio manager’s 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 manager’s 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 Fund’s 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

Fund

None

$1 - $10,000

$10,001- $50,000

$50,001- $100,000

$100,001-$500,000

$500,001-$1,000,000

over $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 Trust’s 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 Trust’s 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 Trust’s 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 employee’s 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 Fund’s Prospectuses or SAI and effecting or facilitating a mutual fund transaction to engage in market timing. The Adviser’s 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 Adviser’s 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 Fund’s 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 day’s 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 underwriter’s 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. In making this determination, the Adviser considers a number of factors including, but not limited to: the price per unit of the security, the broker’s execution capabilities, the commissions charged, the broker’s reliability for prompt, accurate confirmations and on-time delivery of securities, the broker-dealer firm’s financial condition, the broker’s ability to provide access to public offerings, as well as the quality of research services provided. 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 JPMIM’s 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 JPMIM’s 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 may 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 Fund’s 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

 

70

 

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 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 SEC’s 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 its customers, including the Funds. In some instances, the allocation procedure might not permit a Fund to participate in the benefits of the aggregated trade.

 

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 Fund’s Adviser based on its best judgment and in a manner deemed fair and reasonable to Shareholders and consistent with the Adviser’s obligation to obtain the best execution of purchase and sales orders. In making this determination, the Adviser considers the same factors for the best execution of purchase and sales orders listed above. Accordingly, in selecting broker-dealers to execute a particular transaction, and in evaluating the best overall terms available, a Fund’s 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 Fund’s Adviser exercises investment discretion. A Fund’s 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 Fund’s 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

 

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transaction or the overall responsibilities of a Fund’s Adviser to the Funds. 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, such brokerage and research services might consist of advice as to the value of securities, the advisability of investing in, purchasing, or selling securities, the availability of securities or purchasers or sellers of securities; analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy, and the performance of accounts, market data, stock quotes, last sale prices, and trading volumes. Shareholders of the Funds should understand that the services provided by such brokers may be useful to a Fund’s Adviser in connection with its services to other clients and not all the services may be used by JPMIM in connection with the Fund.

 

Under JPMIM’s 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 provide lawful and appropriate assistance in the performance of the investment decision-making process. These services include third party research, market data services, and proprietary broker-dealer research. The Funds 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. However, the Funds other than the Equity Index Trust do not participate in soft dollar arrangements for market data services and third-party research.

 

Beginning in October 2009, the Equity Index Trust may participate in soft dollar arrangements whereby a broker-dealer provides market data services and third-party research in addition to proprietary research. In order to obtain such research, the Adviser may utilize a Client Commission Arrangement (“CCA”). CCAs are agreements between an investment adviser and executing broker whereby the investment adviser and the broker agree to allocate a portion of commissions to a pool of credits maintained by the broker that are used to pay for eligible brokerage and research services. The Adviser will only enter into and utilize CCAs to the extent permitted by Section 28(e) of the Securities Exchange Act. As required by interpretive guidance issued by the SEC, any CCAs entered into by the Adviser with respect to commissions generated by the Equity Index Trust will provide that: (1) the broker-dealer pay the research preparer directly; and (2) the broker-dealer take steps to assure itself that the client commissions that the Adviser directs it to use to pay for such services are only for eligible research under Section 28(e).

 

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):

 

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BROKERAGE COMMISSIONS

 

Funds

Fiscal Year Ended

February 28, 2007

Fiscal Year Ended

February 29, 2008

Fiscal Year Ended
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:

 

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Fund

Name of Broker-Dealer

Value of Securities Owned $(000’s)

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 an 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.

 

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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 Fund’s 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 Trust’s 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:

 

Funds

Fiscal Year Ended February 28, 2007

Fiscal Year Ended February 29, 2008

Fiscal Year Ended February 28, 2009

 

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.

 

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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

0.0050% 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.

 

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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.

 

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 Trust’s Board of Trustees concerning the Trust’s operations.

 

Securities Lending Agent

 

To generate additional income, certain Funds may lend up to 33?% 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 agent’s fee) is included in the Statement of Operations as income from securities lending (net in the Fund’s financial statements). Information on the investment of cash collateral is shown in the Schedule of Portfolio Investments (in the Fund’s 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)

 

77

 

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 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 JPMIM’s 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 Fund’s 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

 

78

 

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.

 

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 issuer’s 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.

 

•

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.

 

•

JPMIM also considers on a case-by-case basis proposals to change an issuer’s 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 SEC’s 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:

 

 

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

 

79

 

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 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 Trust’s 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 Trust’s 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 Trust’s Shares will be fully paid

 

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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 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 Trust’s 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 Trust’s 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 SEC’s 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:

 

81

 

 

All Funds

 

 

Lipper, Inc.

Monthly

30 days after month end

JPMorgan Core Bond Trust

 

 

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 Organizations

Quarterly

30 days after month end

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 Fund’s 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 Fund’s 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 Fund’s portfolio securities as an exception to the Fund’s 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 Fund’s 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 Fund’s 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 Fund’s 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 Fund’s portfolio securities is in the best interests of the Fund’s shareholders. There can be no assurance, however that a Fund’s 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 Trust’s Form N-CSRs and Form N-Qs will be available on the SEC’s 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.

 

82

 

 

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 Trust’s 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 Trust’s 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

 

83

 

ability to vote a majority of the shares of the Funds on any matter requiring the approval of shareholders of such Funds.

 

TRUST1

NAME AND ADDRESS OF SHAREHOLDER

PERCENTAGE HELD

CORE BOND TRUST 

INSTITUTIONAL SHARES

STRAFE & CO*

BOIA-ONE GROUP OPERATIONS

1111 POLARIS PKWY

PO BOX 710027

COLUMBUS OH 43271-0001

 

54.33 %

 

JPMIM AS AGENT FBO ROCKWELL*

ATTN CLIENT SERVICES

1111 POLARIS PKWY STE 3F

COLUMBUS OH 43240-2031

 

9.40 %

 

EQUITY INDEX TRUST 

INSTITUTIONAL SHARES

STRAFE & CO*

BOIA-ONE GROUP OPERATIONS

1111 POLARIS PKWY

PO BOX 710027

COLUMBUS OH 43271-0001

 

79.98 %

 

JPMIM AS AGENT FOR FIRST ENERGY CORP NDT NON QUALIFIED EQUITIES*

ATTN CLIENT SERVICES

1111 POLARIS PKWY FL 3 # OH1-0213

COLUMBUS OH 43240-2031

13.24 %

 

INTERMEDIATE BOND TRUST 

INSTITUTIONAL SHARES 

 

STRAFE & CO*

BOIA-ONE GROUP OPERATIONS

1111 POLARIS PKWY

PO BOX 710027

COLUMBUS OH 43271-0001

 

31.78 %

 

JPMIM AS AGENT FBO BRUNSWICK*

ATTN CLIENT SERVICES

1111 POLARIS PKWY STE 3F

COLUMBUS OH 43240-2031

22.90 %

 

JPMIM AS AGENT FBO UHHS*

ATTN CLIENT SERVICES

1111 POLARIS PKWY STE 3F

COLUMBUS OH 43240-2031

12.16 %

 

JPMIM AS AGENT FBO TEXTRON*

ATTN CLIENT SERVICES

1111 POLARIS PKWY STE 3F

COLUMBUS OH 43240-2031

12.10 %

 

 

 

84

 

 

  

 

JPMIM AS AGENT FOR POLYONE*

ATTN CLIENT SERVICES

1111 POLARIS PKWY STE 3F

COLUMBUS OH 43240-2031

8.99 %

JPMIM AS AGENT FBO UHC*

ATTN CLIENT SERVICES

1111 POLARIS PKWY STE 3F

COLUMBUS OH 43240-2031

5.40 %

 

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 are “accredited 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.

* 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 A—DESCRIPTION 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 & Poor’s Rating Service (“S&P”)

 

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.

 

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.

 

A-3

Exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.

 

B

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 obligor’s inadequate capacity to meet its financial commitment on the obligation.

 

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.

 

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”)

 

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.

 

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

 

 

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.

 

B

SPECULATIVE. Minimal capacity for timely payment of financial commitments, plus vulnerability to near-term adverse changes in financial and economic conditions.

 

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.

 

RD

Indicates an entity that has defaulted on one or more of its financial commitments, although it continues to meet other obligations.

 

D

DEFAULT. Denotes actual or imminent payment default.

 

“+” or ”-”

may be appended to a rating to denote relative status within major rating categories.

 

‘PIF’

denotes a security that is paid-in-full, matured, called, or refinanced.

 

‘NR’

indicates that Fitch Ratings does not rate the issuer or issue in question.

 

‘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.

 

Moody’s Investors Service, Inc. (“Moody’s”)

 

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.

 

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.

 

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.

 

Not Prime

Does not fall within any of the Prime rating categories.

 

Dominion Bond Rating Service (“DBRS”)

 

R-1

Prime Credit Quality

 

R-2

Adequate Credit Quality

 

 

 

A-2

 

 

R-3

Speculative

 

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.

 

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.

 

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.

 

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.

 

R-2 (high);
R-2 (middle);
R-2 (low)

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.

 

R-3 (high);
R-3 (middle);
R-3 (low)

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

 

 

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

 

Moody’s

 

Moody’s Bank Financial Strength Ratings (BFSRs) represent Moody’s opinion of a bank’s intrinsic safety and soundness and, as such, exclude certain external credit risks and credit support elements that are addressed by Moody’s Bank Deposit Ratings. In addition to commercial banks, Moody’s 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.

 

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.

 

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.

 

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.

 

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.

 

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

 

AAA

Debt rated AAA has the highest rating assigned by S&P Rating Service. Capacity to pay interest and repay principal is extremely strong.

 

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.

 

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.

 

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 obligor’s 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.

 

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.

 

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.

 

 

The B rating category is also used for debt subordinated to senior debt that is assigned an actual or implied BB or BB- rating.

 

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.

 

CC

The rating CC is typically applied to debt subordinated to senior debt that is assigned an actual or implied CCC rating.

 

 

 

A-5

 

 

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.

 

C1

The rating C1 is reserved for income bonds on which no interest is being paid.

 

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 issuer’s 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 & Poor’s 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

 

Moody’s

 

Long-Term Ratings: Bonds and Preferred Stock

 

Investment Grade

 

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.

 

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.

 

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.

 

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.

 

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.

 

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.

 

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.

 

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.

 

Moody’s 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

 

Moody’s 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

 

Moody’s 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

 

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.

 

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.

 

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.

 

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

 

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.

 

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.

 

CCC,
CC,
C

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.

 

RD

Indicates an entity that has failed to make due payments (within the applicable grace period) on some but not all material financial obligations, but continues to honor other classes of obligations.

 

D

Indicates an entity or sovereign that has defaulted on all of its financial obligations.

 

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.

 

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.

 

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.

 

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

 

 

 

conditions and have greater cyclical tendencies than higher rated companies.

 

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.

 

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.

 

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.

 

CCC/
CC/C

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.

 

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

 

Moody’s

 

Insurance Financial Strength Ratings

 

Moody’s 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.

 

Moody’s 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 company’s ability to meet its senior policyholder claims and obligations.

 

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

 

 

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.

 

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.

 

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.

 

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.

 

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.

 

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.

 

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.

 

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.

 

Moody’s 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 Moody’s 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.

 

P-1

Insurers (or supporting institutions) rated Prime-1 have a superior ability for repayment of senior short-term policyholder claims and obligations.

 

P-2

Insurers (or supporting institutions) rated Prime-2 have a strong ability for repayment of senior short-term policyholder claims and obligations.

 

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

 

 

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.

 

AAA

Extremely Strong financial security characteristics. “AAA” is the highest Insurer Financial Strength Rating assigned by S&P Rating Service.

 

AA

Very Strong financial security characteristics, differing only slightly from those rated higher.

 

A

Strong financial security characteristics, but is somewhat more likely to be affected by adverse business conditions than are insurers with higher ratings.

 

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.

 

BB

Marginal financial security characteristics. Positive attributes exist, but adverse business conditions could lead to insufficient ability to meet financial commitments.

 

B

Weak financial security characteristics. Adverse business conditions will likely impair its ability to meet financial commitments.

 

CCC

Very Weak financial security characteristics, and is dependent on favorable business conditions to meet financial commitments.

 

CC

Extremely Weak financial security characteristics and is likely not to meet some of its financial commitments.

 

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.

NR

Not Rated, which implies no opinion about the insurer’s 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”.

 

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.

 

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.

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.

 

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.

 

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.

 

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.

 

CCC,
CC,
C

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

 

 

DDD,
DD,
D

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 insurer’s 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”.

 

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.

 

F2

MODERATELY STRONG. Insurers are viewed as having a moderately strong capacity to meet their near-term obligations.

 

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.

 

B

WEAK. Insurers are viewed as having a weak capacity to meet their near-term obligations.

 

C

VERY WEAK. Insurers are viewed as having a very weak capacity to meet their near-term obligations.

 

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

 

Moody’s

 

Moody’s ratings for short-term municipal obligations are designated “Moody’s Investment Grade (“MIG”) or “Variable Moody’s 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 issue’s specific structural or credit features. Those short-term obligations that are of speculative quality are designated SG.

 

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.

 

MIG2/VMIG2

Strong credit quality. Margins of protection are ample although not so large as in the preceding group.

 

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.

 

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.

 

SP-1

Strong capacity to pay principal and interest. Those issues determined to possess overwhelming safety characteristics will be given a plus (+) designation.

 

SP-2

Satisfactory capacity to pay principal and interest.

 

SP-3

Speculative capacity to pay principal and interest.

 

DESCRIPTION OF PREFERRED STOCK RATINGS

 

Moody’s

 

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.

 

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

 

 

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.

 

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.

 

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.

 

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.

 

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: Moody’s 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.

 

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 issuer’s senior debt rating.

 

 

 

A-16

 

 

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.

 

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.

 

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.

 

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.

 

“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 Registrant’s Initial Registration Statement on Form N-1A, SEC File No. 811-21638.

 

(a) (2) Declaration of Trust is incorporated by reference to Registrant’s Initial Registration Statement on Form N-1A, SEC File No. 811-21638.

 

(a) (3) Schedule A to the Declaration of Trust. Incorporated herein by reference to Amendment No. 12 to Registrant’s Registration Statement filed on June 26, 2009.

 

(b) (1) By-Laws of JPMorgan Institutional Trust, as amended and restated June 20, 2007, is incorporated by reference to Amendment No. 8 to Registrant’s Registration Statement filed on January 18, 2008.

 

(b) (2) Amendment to By-Laws of JPMorgan Institutional Trust effective August 20, 2009. Filed herewith.

 

(c) None.

 

(d) (1) Investment Advisory Agreement between the Registrant and J.P. Morgan Investment Management Inc. is incorporated by reference to Amendment No. 4 to Registrant’s Registration Statement filed on October 28, 2005.

 

(d) (2) Schedule A to the Investment Advisory Agreement (amended as of June 26, 2009). Filed herewith.

 

(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 Registrant’s 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 Registrant’s 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 Registrant’s Registration Statement filed on June 27, 2008.

 

(g) (1) (c) Amended Schedule A to the Global Custody & Fund Accounting Agreement (amended as of June 27, 2009). Filed herewith.

 

(h) (1) Form of Transfer Agency Agreement between the Registrant and Boston Data Services, Inc. dated September 1, 2009. Filed herewith.

 

(h) (2) (a) 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 Registrant’s Registration Statement filed on October 28, 2005.

 

(h) (2) (b) Schedule A to the Administration Agreement (amended as of June 26, 2009). Filed herewith.

 

(h) (3) Placement Agency Agreement between the Registrant and J.P. Morgan Institutional Investments Inc. is incorporated by reference to Amendment No. 4 to Registrant’s 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 Registrant’s 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 Registrant’s 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. Incorporated herein by reference to Amendment No. 12 to Registrant’s Registration Statement filed on June 26, 2009.



(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). Incorporated herein by reference to Amendment No. 12 to Registrant’s Registration Statement filed on June 26, 2009.

 

(2) Code of Ethics of Adviser. (Effective February 1, 2005, Revised November 18, 2008). Incorporated herein by reference to Amendment No. 12 to Registrant’s Registration Statement filed on June 26, 2009.

 

(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 Registrant’s 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 Registrant’s 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 Trust’s Declaration of Trust provides that, subject to the exceptions and limitations contained in the Trust’s 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 Trust’s 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 Trust’s 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 Registrant’s administrator, at 1111 Polaris Parkway, Columbus, Ohio 43240; JPMorgan Chase Bank, the Registrant’s custodian at 270 Park Avenue, New York, NY 10017; J.P. Morgan Investment Management Inc., the Registrant’s investment adviser, at 245 Park Avenue, New York, NY 10167; Boston Financial Data Services, Inc., the Registrant’s 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 2nd day of October, 2009.

 

JPMorgan Institutional Trust
By:  

/s/ George C. W. Gatch*

    George C. W. Gatch
    President

 

This amendment to the Registration Statement of the Registrant has been signed below by the following persons in the capacities indicated on October 2, 2009.

 

Fergus Reid, III*

 

Marilyn McCoy*

Fergus Reid, III
Trustee and Chairman

 

Marilyn McCoy
Trustee

 

 

 

William J. Armstrong*

 

William G. Morton*

William J. Armstrong
Trustee

 

William G. Morton
Trustee

 

 

 

John F. Finn*

 

Robert A. Oden, Jr.*

John F. Finn
Trustee

 

Robert A. Oden, Jr.
Trustee

 

 

 

Matthew Goldstein*

 

Frederick W. Ruebeck*

Matthew Goldstein
Trustee

 

Frederick W. Ruebeck.
Trustee

 

 

 

Robert J. Higgins*

 

James J. Schonbachler*

Robert J. Higgins
Trustee

 

James J. Schonbachler
Trustee

 

 

 

Frankie D. Hughes*

 

Leonard M. Spalding, Jr*

Frankie D. Hughes
Trustee

 

Leonard M. Spalding, Jr.
Trustee

 

 

 

Peter C. Marshall*

 

By George C. W. Gatch

Peter C. Marshall
Trustee

 

George C. W. Gatch
President

 

 

 

By Patricia A. Maleski*

 

 

Patricia A. Maleski
Treasurer and Principal Financial Officer

 

 
 

 

 

 

*By /s/ Jessica K. Ditullio

 

 

Jessica K. Ditullio
Attorney-in-fact

 

 

Exhibit Index


(b)(2)

Amendment to By-Laws of JPMorgan Institutional Trust effective August 20, 2009


(d)(2)

Schedule A to the Investment Advisory Agreement (amended as of June 26, 2009)


(g)(1)(c)

Amended Schedule A to the Global Custody and Fund Accounting Agreement (amended as of June 27, 2009)


(h)(1)

Form of Transfer Agency Agreement between the Registrant and Boston Data Services, Inc. dated September 1, 2009


(h)(2)(b)

Schedule A to the Administration Agreement (amended as of June 26, 2009)




 EX-99.(B)(2) 2 d25481-ex99b2.htm Amendment to JPMorgan Institutional Trust By-Laws

Amendment to the By-Laws of JPMorgan Institutional Trust By-Laws

As adopted by the Board of Trustees on August 20, 2009


Approved:


That Section 4 of Article 4 of the By-Laws of JPMorgan Institutional Trust be deleted and the following inserted in its place:


Section 4.  Retirement of Trustees.  A Trustee shall retire as Trustee at the end of the calendar year in which the Trustee attains the age of 75 years (78 years in the case of Fergus Reid III).



 EX-99.(D)(2) 3 d25481-ex99d2.htm SCHEDULE A

SCHEDULE A

TO THE ADVISORY AGREEMENT

FOR JPMORGAN INSTITUTIONAL TRUST

(Amended as of June 26, 2009)



Name

Advisory Fee (as a percentage of average daily net assets)

(annualized)

JPMorgan Intermediate Bond Trust

0.30%

JPMorgan Core Bond Trust

0.30%

JPMorgan Equity Index Trust

0.25%




*     *     *     *     *




 


J.P. Morgan Investment Management Inc.


 

 

By:

/s/ Patricia A. Maleski


 

 


Name:

Patricia A. Maleski


 

 


Title:

Managing Director



 

 


JPMorgan Institutional Trust


 

 

By:

/s/ Francesco Tango


 

 


Name:

Francesco Tango


 

 


Title:

Assistant Secretary







 EX-99.(G)(1)(C) 4 d25481-ex99g1c.htm _



Schedule A


List of Entities Covered by the Global Custody and Fund Accounting Agreement

Amended as of June 27, 2009


JPMorgan Institutional Trust

JPMorgan Intermediate Bond Trust

JPMorgan Core Bond Trust

JPMorgan Equity Index Trust


J.P. Morgan Fleming Mutual Fund Group, Inc

JPMorgan Mid Cap Value Fund


J.P. Morgan Mutual Fund Group

JPMorgan Short Term Bond Fund II


J.P. Morgan Mutual Fund Investment Trust

JPMorgan Growth Advantage Fund


JPMorgan Insurance Trust

JPMorgan Insurance Trust Balanced Portfolio

JPMorgan Insurance Trust Core Bond Portfolio

JPMorgan Insurance Trust U.S. Equity Portfolio

JPMorgan Insurance Trust Diversified Mid Cap Growth Portfolio

JPMorgan Insurance Trust Mid Cap Value Portfolio

JPMorgan Insurance Trust Equity Index Portfolio

JPMorgan Insurance Trust International Equity Portfolio

JPMorgan Insurance Trust Intrepid Growth Portfolio

JPMorgan Insurance Trust Intrepid Mid Cap Portfolio

JPMorgan Insurance Trust Small Cap Core Portfolio




1




JPMorgan Trust I

Highbridge Statistical Market Neutral Fund

JPMorgan 100% U.S. Treasury Securities Money Market Fund

JPMorgan Access Balanced Fund

JPMorgan Access Growth Fund

JPMorgan Asia Equity Fund

JPMorgan California Municipal Money Market Fund

JPMorgan California Tax Free Bond Fund

JPMorgan China Region Fund

JPMorgan Disciplined Equity Fund

JPMorgan Diversified Fund

JPMorgan Dynamic Growth Fund

JPMorgan Dynamic Small Cap Growth Fund

JPMorgan Emerging Economies Fund

JPMorgan Emerging Markets Debt Fund

JPMorgan Emerging Markets Equity Fund

JPMorgan Enhanced Income Fund

JPMorgan Federal Money Market Fund

JPMorgan Global Focus Fund

JPMorgan Growth and Income Fund

JPMorgan Income Builder Fund

JPMorgan India Fund

JPMorgan Intermediate Tax Free Bond Fund

JPMorgan International Currency Income Fund

JPMorgan International Equity Fund

JPMorgan International Markets Fund

JPMorgan International Opportunities Fund

JPMorgan International Opportunities Plus Fund

JPMorgan International Realty Fund

JPMorgan International Small Cap Equity Fund

JPMorgan International Value Fund

JPMorgan International Value SMA Fund

JPMorgan Intrepid America Fund

JPMorgan Intrepid European Fund

JPMorgan Intrepid Growth Fund

JPMorgan Intrepid International Fund

JPMorgan Intrepid Japan Fund

JPMorgan Intrepid Multi Cap Fund

JPMorgan Intrepid Plus Fund

JPMorgan Intrepid Value Fund





2




JPMorgan Trust I (continued)


JPMorgan Latin America Fund

JPMorgan Market Neutral Fund

JPMorgan Mid Cap Equity Fund

JPMorgan New York Municipal Money Market Fund

JPMorgan New York Tax Free Bond Fund

JPMorgan Prime Money Market Fund

JPMorgan Real Return Fund

JPMorgan Russia Fund

JPMorgan Short Term Bond Fund

JPMorgan Small Cap Core Fund

JPMorgan Small Cap Equity Fund

JPMorgan Strategic Income Opportunities Fund

JPMorgan Strategic Preservation Fund

JPMorgan Strategic Small Cap Value Fund

JPMorgan Tax Aware Disciplined Equity Fund

JPMorgan Tax Aware High Income Fund

JPMorgan Tax Aware Real Return Fund

JPMorgan Tax Aware Real Return SMA Fund

JPMorgan Tax Aware U.S. Equity Fund

JPMorgan Tax Free Money Market Fund

JPMorgan Total Return Fund

JPMorgan U.S. Equity Fund

JPMorgan U.S. Large Cap Core Plus Fund

JPMorgan U.S. Large Cap Value Plus Fund

JPMorgan U.S. Small Company Fund

JPMorgan Value Advantage Fund

JPMorgan Value Discovery Fund


JPMorgan Trust II

JPMorgan Arizona Municipal Bond Fund

JPMorgan Core Bond Fund

JPMorgan Core Plus Bond Fund

JPMorgan Equity Income Fund

JPMorgan Equity Index Fund

JPMorgan Government Bond Fund

JPMorgan High Yield Bond Fund (to be renamed JPMorgan High Yield Fund as of 9/14/09)

JPMorgan International Equity Index Fund

JPMorgan Intrepid Mid Cap Fund

JPMorgan Investor Balanced Fund

JPMorgan Investor Conservative Growth Fund






3




JPMorgan Trust II (continued)


JPMorgan Investor Growth & Income Fund

JPMorgan Investor Growth Fund

JPMorgan Large Cap Growth Fund

JPMorgan Large Cap Value Fund

JPMorgan Liquid Assets Money Market Fund

JPMorgan Market Expansion Index Fund

JPMorgan Michigan Municipal Bond Fund

JPMorgan Michigan Municipal Money Market Fund

JPMorgan Mid Cap Growth Fund

JPMorgan Mortgage-Backed Securities Fund

JPMorgan Multi-Cap Market Neutral Fund

JPMorgan Municipal Income Fund

JPMorgan Municipal Money Market Fund

JPMorgan Ohio Municipal Bond Fund

JPMorgan Ohio Municipal Money Market Fund

JPMorgan Short Duration Bond Fund

JPMorgan Short-Intermediate Municipal Bond Fund

JPMorgan Small Cap Growth Fund

JPMorgan Small Cap Value Fund

JPMorgan Tax Free Bond Fund

JPMorgan Treasury & Agency Fund

JPMorgan U.S. Government Money Market Fund

JPMorgan U.S. Real Estate Fund

JPMorgan U.S. Treasury Plus Money Market Fund

JPMorgan Ultra Short Duration Bond Fund


UM Investment Trust

Undiscovered Managers Multi-Strategy Fund


Undiscovered Managers Funds

JPMorgan Realty Income Fund

Undiscovered Managers Behavioral Growth Fund

Undiscovered Managers Behavioral Value Fund


This Schedule A supersedes and replaces any previously executed Schedule A between the parties.




4





*          *          *          *          *          *



 

JPMorgan Trust I

JPMorgan Trust II

Undiscovered Managers Funds

J.P. Morgan Mutual Fund Group

J.P. Morgan Fleming Mutual Fund Group, Inc.

J.P. Morgan Mutual Fund Investment Trust

UM Investment Trust

JPMorgan Institutional Trust

JPMorgan Insurance Trust

 

 

 

By:

/s/ Patricia A. Maleski


 

 


Name:

Patricia A. Maleski


 

 


Title:

Vice President and Treasurer


 

 


Date:

July 30, 2009

 

 

 

 

 

 

 

JPMorgan Chase Bank, N.A.

 

 

 

By:

/s/ Denis Burchell


 

 


Name:

Denis Burchell


 

 


Title:

Vice President


 

 


Date:

July 24, 2009






5


 EX-99.(H)(1) 5 d25481-ex99h1.htm Converted by EDGARwiz
















TRANSFER AGENCY AGREEMENT



Made as of the 1st day of September, 2009


by and between


EACH OF THE ENTITIES LISTED ON APPENDIX A HERETO


And


BOSTON FINANCIAL DATA SERVICES, INC.










TABLE OF CONTENTS


1. Documents to be Filed with Appointment

3

2. Certain Representations and Warranties of BOSTON FINANCIAL

4

3. Certain Representations and Warranties of the Trust

4

4. Scope of Appointment

5

5. Limit of Authority

10

6. Compensation and Expenses

10

7. Operation of the TA2000TM System

13

8. Indemnification

15

9. Certain Covenants of BOSTON FINANCIAL and the Trust

19

10. Recapitalization or Readjustment

21

11. Certificates

21

12. Death, Resignation or Removal of Signing Officer

21

13. Future Amendments of Declaration of Trust and Bylaws

22

14. Instructions, Opinion of Counsel and Signatures

22

15. Force Majeure and Disaster Recovery Plans

22

16. Certification of Documents

23

17. Records

24

18. Disposition of Books, Records and Canceled Certificates

24

19. Provisions Relating to BOSTON FINANCIAL as Transfer Agent

24

20. Provisions Relating to Dividend Disbursing Agency

26

21. Assumption of Duties By the Trust or Agents Designated By the Trust

27

22. Termination of Agreement

28

23. Confidentiality and Information Security

30

24. Changes and Modifications

33

25. Assignment and Subcontractors

33

26. Limitations on Liability

34

27. Non-Solicitation

35

28. Miscellaneous

35


Appendix A


Exhibit A - Fee Schedule

Exhibit A-1 – Simple IRA Fee Schedule

Exhibit B - Authorized Personnel


Schedule 4.H

Schedule 4.L

Schedule 6.E.(4)

Schedule 8.C

Schedule 19.K





2





TRANSFER AGENCY AGREEMENT


THIS AGREEMENT made as of the 1st day of September, 2009, by and between each of the entities listed on Appendix A hereto and each being an entity of the type set for on Appendix A and organized under the laws of the state as set forth on such Appendix, each with a principal place of business at  245 Park Ave., New York, NY 10167 and each of which is acting on its own behalf and on behalf of each of the portfolios listed under its name in Appendix A (jointly and severally, such portfolios shall be referred to hereinafter as the "Fund" or "Funds), but not jointly with any other entities listed on Appendix A and BOSTON FINANCIAL DATA SERVICES, INC., a corporation existing under the laws of the Commonwealth of Massachusetts, having its principal place of business at 2 Heritage Drive, North Quincy, Massachusetts 02171 ("BOSTON FINANCIAL"):


WITNESSETH:


WHEREAS, each Trust (as used hereinafter, the term "Trust" shall refer jointly and severally to the trust entities set forth on Appendix A hereto, and to each Fund listed in Appendix A, as the context requires) is a Massachusetts or Delaware business trust or Maryland corporation registered with the Securities and Exchange Commission as an investment company pursuant to the Investment Company Act of 1940, as amended, which currently consists of the Funds listed under its name on Appendix A; and


WHEREAS, the Trust desires to appoint BOSTON FINANCIAL as Transfer Agent and Dividend Disbursing Agent for all common shares of beneficial interest of each Fund of each Trust and, of shares of common stock of each Fund of each corporation (the "Shares"), and BOSTON FINANCIAL desires to accept such appointment;


NOW, THEREFORE, in consideration of the mutual covenants herein contained,

the parties hereto agree as follows:


1.

DOCUMENTS TO BE FILED WITH APPOINTMENT.


In connection with the appointment of BOSTON FINANCIAL as Transfer Agent and Dividend Disbursing Agent for the Trust, there have been or will be filed, upon request, with BOSTON FINANCIAL the following documents:


A.

A certified copy of the votes of the Board of Trustees of the Trust appointing BOSTON FINANCIAL as Transfer Agent and Dividend Disbursing Agent, approving the form of this Agreement, and designating certain persons to sign Shares certificates (“Certificates”), if any, and give written instructions and requests on behalf of the Trust;


B.

A certified copy of the Declaration of Trust or other organizational documents of the Trust and all amendments thereto;


C.

A certified copy of the Bylaws of the Trust;





3





D.

Copies of Registration Statements and amendments thereto, filed with the Securities and Exchange Commission;


E.

Specimens of all forms of outstanding Certificates;


F.

Specimens of the signatures of the officers of the Trust authorized to sign Certificates and individuals authorized to sign written instructions and requests;


2.

CERTAIN REPRESENTATIONS AND WARRANTIES OF BOSTON FINANCIAL.


BOSTON FINANCIAL represents and warrants to the Trust that:


A.

It is a corporation duly organized and existing and in good standing under the laws of the Commonwealth of Massachusetts


B.

It is duly qualified to carry on its business in the Commonwealth of Massachusetts.


C.

It is empowered under applicable laws and by its Articles of Organization and Bylaws to enter into and perform the services contemplated in this Agreement.


D.

It is registered as a transfer agent to the extent required under the Securities Exchange Act of 1934, as amended, (the "34 Act") and it will remain so registered for the duration of this Agreement. It will promptly notify the Trust in the event of any material change in its status as a registered transfer agent. Should BOSTON FINANCIAL fail to be registered with the appropriate federal agency as a transfer agent at any time during this Agreement, the Trust may, on written notice to BOSTON FINANCIAL, immediately terminate this Agreement.


E.

All requisite corporate proceedings have been taken to authorize it to enter into and perform this Agreement.


F.

It has and will continue to have and maintain the necessary facilities, equipment personnel, policies and procedures to effectively perform its duties and obligations under this Agreement and under the laws applicable to its business and services.


G.

It will perform its obligations in compliance with industry standards and the laws applicable to its business and services.


3.

CERTAIN REPRESENTATIONS AND WARRANTIES OF THE TRUST.


The Trust represents and warrants to BOSTON FINANCIAL that:


A.

It is a business trust or corporation duly organized and existing and in good standing under the laws of the state of its organization as set forth on Appendix A.





4





B.

The Trust and each Fund set forth on Appendix A is an investment company registered under the Investment Company Act of 940, as amended.


C.

A registration statement under the Securities Act of 1933, as amended (the “33 Act”) has been filed and will be effective with respect to all Shares offered for sale, except to the extent that the Trust notifies BOSTON FINANCIAL that such Trust is not required to be registered under the ’33 Act.


D.

All requisite steps have been and will continue to be taken to register the Shares for sale in all applicable states and such registration will be effective at all times Shares are offered for sale in such state.


E.

The Trust is empowered under applicable laws and by its Declaration of Trust (or other organizational documents if applicable) and Bylaws to enter into and perform this Agreement.


4.

SCOPE OF APPOINTMENT.


A.

Subject to the conditions and termination of provisions set forth in this Agreement, the Trust hereby appoints BOSTON FINANCIAL as Transfer Agent and Dividend Disbursing Agent for the Shares and for the Shares of future portfolios of the Trust (Appendix A shall be automatically deemed to be revised to include such future portfolio(s)).


B.

BOSTON FINANCIAL hereby accepts such appointment and agrees that it will act as the Trust's Transfer Agent and Dividend Disbursing Agent. BOSTON FINANCIAL agrees that it will also act as agent in connection with the Trust's periodic withdrawal payment accounts and other open accounts or similar plans for shareholders, if any.


C.

The Trust agrees to use its best efforts to deliver to BOSTON FINANCIAL in Quincy, Massachusetts, as soon as they are available, all of its shareholder account records for any new Fund of the Trust.


D.

BOSTON FINANCIAL, utilizing TA2000TM, a computerized data processing system for securityholder accounting (the "TA2000TM System") licensed from BOSTON FINANCIAL’s affiliate, DST Systems, Inc. (“DST”), will perform the following services as transfer and dividend disbursing agent for the Trust, and as agent of the Trust for shareholder accounts thereof, in a timely manner:

(i) issuing (including countersigning), transferring and canceling Certificates;

(ii) maintaining all shareholder accounts;

(iii) providing transaction journals;

(iv) preparing shareholder meeting lists for use in connection with the annual or special meetings of shareholders;

 (v) mailing shareholder reports and prospectuses;





5





(vi) withholding, as required by federal law, taxes on shareholder accounts, disbursing income dividends and capital gains distributions to shareholders, preparing, filing and mailing U.S. Treasury Department Forms 1099, 1042, and 1042S and performing and paying backup withholding as required for all shareholders;

(vii) preparing and mailing confirmation forms to shareholders and dealers, as instructed, for all purchases and liquidations of shares of the Trust and other transactions in shareholders' accounts requiring confirmation under applicable law;

(viii) recording reinvestment of dividends and distributions in Shares;

(ix) providing or making available on-line daily and monthly reports as both are regularly provided by the TA2000TM System and as requested by the Trust or its management company;

(x) maintaining those records necessary to carry out BOSTON FINANCIAL's duties hereunder, including all information reasonably required by the Trust to account for all transactions in the Shares,

(xi) calculating the appropriate sales charge with respect to each purchase of the Shares as set forth in the prospectus for the Trust, determining the portion of each sales charge payable to the dealer participating in a sale in accordance with schedules delivered to BOSTON FINANCIAL by the Trust's principal underwriter or distributor (hereinafter "principal underwriter") from time to time, disbursing dealer commissions collected to such dealers, determining the portion of each sales charge payable to such principal underwriter and disbursing such commissions to the principal underwriter;

(xii) receiving correspondence pertaining to any former, existing or new shareholder account, processing such correspondence for proper recordkeeping, and responding promptly to shareholder correspondence;

(xiii) mailing to dealers confirmations of wire order trades; mailing copies of shareholder statements to shareholders and dealers in accordance with the Trust's instructions;

(xiv) processing, generally on the date of receipt, purchases or redemptions or instructions to settle any mail or wire order purchases or redemptions received in proper order as set forth in the prospectus, rejecting promptly any requests not received in proper order (as defined by the Trust, the Trust's agents or prospectus, or the Procedures, as hereinafter defined), and causing exchanges of shares to be executed in accordance with the Trust's instructions and prospectus, the Procedures and the general exchange privilege applicable;

 (xv) monitoring "as of's" and advising broker-dealers of the necessity to reimburse the Trust when the as of loss from a transaction exceeds the thresholds established by the Trust;

(xvi) accepting any information, records, documents, data, certificates, transaction requests by machine readable input, facsimile, CRT data entry and electronic instructions, including e-mail communications, which have been prepared, maintained or provided by the Trust or any other person or firm on behalf of the Trust or from broker-dealers of record or third-party administrators on behalf of individual shareholders.  With respect to transaction requests received in the





6





foregoing manner, BOSTON FINANCIAL shall not be responsible for determining that the original source documentation is in good order, which includes not being responsible for compliance with Rule 22c-1 under the 1940 Act, and it will be the responsibility of the Trust to require its broker-dealers or third party administrators to retain such documentation.  E-mail exchanges on routine matters may be made directly with the Trust’s contact at BOSTON FINANCIAL.  BOSTON FINANCIAL will not act on any e-mail communications coming to it directly from shareholders requesting transactions, including, but not limited to, monetary transactions, change of ownership, or beneficiary changes; and

(xvii) accepting and effectuating the registration and maintenance of accounts through Networking and the purchase, redemption, transfer and exchange of shares in such accounts through Fund/SERV (Networking and Fund/SERV being programs operated by the NSCC on behalf of NSCC’s participants, including the Trust), in accordance with, instructions transmitted to and received by BOSTON FINANCIAL by transmission from NSCC on behalf of authorized broker-dealers on the Trust dealer file maintained by BOSTON FINANCIAL;  issuing instructions to the Trust’s banks for the settlement of transactions between the Trust and NSCC (acting on behalf of its broker-dealer and bank participants); provide account and transaction information from the Trust’s records on TA2000 System in accordance with NSCC’s Networking and Fund/SERV rules for those broker-dealers; and maintain shareholder accounts on TA2000 through Networking.


E.

When requested by the Trust and when BOSTON FINANCIAL deems it reasonably feasible, BOSTON FINANCIAL shall use reasonable efforts to provide the services set forth in Section 4.D. through means other than BOSTON FINANCIAL's usual methods and procedures, including but not limited to, performing services requiring more manual intervention by BOSTON FINANCIAL, the manual entry of data, the modification or amendment of reports, or where information is provided to BOSTON FINANCIAL after the commencement of the nightly processing cycle of the TA2000 System.  Such provision of services shall be deemed “Exception Services,” as outlined in Schedule 6.E.(4) to this Agreement.


F.

BOSTON FINANCIAL shall use reasonable efforts to provide, reasonably promptly under the circumstances, the same services with respect to any new, additional functions or features or any changes or improvements to existing functions or features as provided for in the Trust's instructions, prospectus or application as amended from time to time, for the Trust; provided (i) BOSTON FINANCIAL is advised in advance by the Trust of any changes therein and (ii) the TA2000TM System and the mode of operations utilized by BOSTON FINANCIAL, as then constituted, supports such additional functions and features. If any addition to, improvement of or change in the features and functions currently provided by the TA2000TM System or the operations as requested by the Trust requires an enhancement or modification to the TA2000TM System or to operations as presently conducted by BOSTON FINANCIAL, BOSTON FINANCIAL shall not be liable therefor until such modification or enhancement is installed on the





7





TA2000TM System or new mode of operation is instituted.  BOSTON FINANCIAL shall endeavor to add such modifications or enhancements as soon as is reasonably possible.  If any new change or improvement to existing services or modes of operation requested by the Trust (and which is not a change, enhancement or modification to the TA2000 System covered by Section 24 of this Agreement) measurably increases BOSTON FINANCIAL's cost of performing the services required hereunder at the current level of service, BOSTON FINANCIAL shall advise the Trust of the amount of such increase and if the Trust elects to utilize such change or improvement, BOSTON FINANCIAL shall be entitled to increase its fees by an amount to be mutually agreed upon by the Trust and BOSTON FINANCIAL. In no event shall BOSTON FINANCIAL be responsible for or liable to provide any additional function, feature, improvement or change in method of operation requested by the Trust until BOSTON FINANCIAL has consented thereto in writing, and such consent shall not be unreasonably withheld.


G.

The Trust shall have the right to add all new Funds of the Trust to the TA2000TM System, provided that the Trust provides BOSTON FINANCIAL with at least thirty (30) days' prior written notice and provided, further, that the requirements of the new series are generally consistent with services then being provided by BOSTON FINANCIAL under this Agreement. Rates or charges for additional Funds shall be as set forth in Exhibit A, as hereinafter defined, for the remainder of the contract term except as such Fund uses functions, features or characteristics for which BOSTON FINANCIAL has imposed an additional charge as part of its standard pricing schedule. In the latter event, rates and charges shall be mutually agreed upon by the Trust and BOSTON FINANCIAL.


H.

BOSTON FINANCIAL shall maintain a quality control process designed to provide a consistent level of quality and timeliness for its transaction processing.  BOSTON FINANCIAL’s performance of the services under this Agreement will be measured against service level standards (“SLAs”), which have been established in good faith by mutual written agreement of the parties and which are made a part of this Agreement as Schedule 4.H.  BOSTON FINANCIAL shall provide to the Trust, a monthly report with respect to BOSTON FINANCIAL’s processing against the SLAs.  In order that BOSTON FINANCIAL may reasonably estimate the staffing needed to maintain the SLAs, the Trust agrees to use its best efforts to communicate to BOSTON FINANCIAL all sales and volume projections prior to the beginning of each quarter and to provide the BOSTON FINANCIAL with advance notice of any product development, sales or marketing campaigns that the Trust determines may materially impact the volume of transactions in the Funds.  The parties agree to work together to resolve any performance issues in good faith.  The parties annually shall review and discuss the SLAs and shall make such changes therein as to which they mutually agree.  The parties agree that the SLAs shall not apply to, and shall not be calculated for, any particular day when: (i) the TA2000™ System or any computer hardware or software, which is substantially required for the performance of the services, is unavailable for more than sixty (60) minutes, provided that such unavailability is beyond BOSTON FINANCIAL’s reasonable control and BOSTON FINANCIAL notifies the Trust promptly of such unavailability; (ii) there is a failure or unavailability of communication lines outside of





8





BOSTON FINANCIAL’s facilities; (iii) there is a disaster that requires BOSTON FINANCIAL to process at its disaster recovery site, provided such disaster was not caused by BOSTON FINANCIAL’s negligence or willful misconduct, or when BOSTON FINANCIAL’s transaction processing is impeded by an event described in Section 15 hereof; or (iv) the failure to perform is caused by third parties (including the Trust) whose actions are beyond BOSTON FINANCIAL’s reasonable control.


I.

The parties agree that to the extent that BOSTON FINANCIAL provides any services under this Agreement that relate to compliance by the Trust with the Internal Revenue Code of 1986, as amended (“Code”) or any other tax law, including without limitation, withholding, as required by federal law, taxes on shareholder accounts, preparing, filing and mailing U.S. Treasury Department Forms 1099, 1042, and 1042S, and performing and paying backup withholding as required for shareholders, BOSTON FINANCIAL will not exercise any discretion and will provide only ministerial, mechanical, printing, reproducing, and other similar assistance to the Trust.  In particular, BOSTON FINANCIAL will not exercise any discretion in determining generally the actions that are required in connection with such compliance or when such compliance has been achieved.  Except to the extent of making mathematical calculations or completing forms, in each case based on the Trust’s instructions, BOSTON FINANCIAL will not exercise any discretion in (1) determining generally: (a) the amounts of taxes that should be withheld on shareholder accounts; and (b) the amounts that should be reported in or on any specific box or line of any tax form; (2) classifying the status of shareholders and shareholder accounts under applicable tax law; and (3) paying withholding and other taxes.


J.

The Trust shall identify to BOSTON FINANCIAL in writing the states and countries where the Shares of the Trust are registered or exempt, and the number of Shares registered for sale with respect to each state or country, as applicable.  BOSTON FINANCIAL shall establish the foregoing parameters on the system for the Trust’s designated Blue Sky vendor.  The Trust or its administrator shall verify that such parameters have been correctly established for each state or country on the system prior to activation and thereafter shall be responsible for monitoring the daily activity for each state or country.  The responsibility of BOSTON FINANCIAL for the Trust’s blue sky registration status is solely limited to the initial establishment of the parameters provided by the Trust or the administrator for the vendor’s system and the daily transmission of a file to such vendor in order that the vendor may provide reports to the Trust or the administrator for monitoring.


K.

If requested by the Trust (and as mutually agreed upon by the parties as to any reasonable reimbursable expenses), provide any additional related services (i.e., pertaining to escheatments, abandoned property, garnishment orders, bankruptcy and divorce proceedings, Internal Revenue Service or state tax authority tax levies and summonses and all matters relating to the foregoing).


L.

With respect to the Savings Incentive Match Plan for Employee Individual Retirement Accounts ("SIMPLE IRAs") offered by the Trust in connection with the Shares, 





9





BOSTON FINANCIAL, utilizing the DST TRAC System ("TRAC") will perform services in connection with SIMPLE IRAs as set forth in Schedule 4L, attached hereto.  In addition, the fees and expenses for such SIMPLE IRA services are set forth in Exhibit A-1, SIMPLE IRA Fees and Expenses.


5.

LIMIT OF AUTHORITY.


Unless otherwise expressly limited by the resolution of appointment or by subsequent action by the Trust, the appointment of BOSTON FINANCIAL as Transfer Agent will be construed to cover the full amount of authorized Shares of the class or classes for which BOSTON FINANCIAL is appointed as the same will, from time to time, be constituted, and any subsequent increases in such authorized amount.


In case of such increase the Trust will file with BOSTON FINANCIAL:


A.

If the appointment of BOSTON FINANCIAL was theretofore expressly limited, a certified copy of a resolution of the Board of Trustees of the Trust increasing the authority of BOSTON FINANCIAL;


B.

A certified copy of the amendment to the Declaration of Trust of the Trust authorizing the increase of stock; and


C.

A certified copy of the order or consent of each governmental or regulatory authority required by law to consent to the issuance of the increased stock, or an opinion of counsel that the order or consent of no other governmental or regulatory authority is required;


6.

COMPENSATION AND EXPENSES.


A.

In consideration for its services hereunder as Transfer Agent and Dividend Disbursing Agent, the Trust will pay to BOSTON FINANCIAL, from time to time, a reasonable compensation for all services rendered as Agent and, also, all BOSTON FINANCIAL's reasonable billable out-of-pocket expenses or disbursements ("Compensation and Expenses") incurred in connection with the agency. "Expenses" are more fully described in Section 6.B. of this Agreement. Such Compensation and Expenses are set forth in a separate schedule previously agreed to by the Trust and BOSTON FINANCIAL, a copy of which is attached hereto as Exhibit A. If the Trust has not paid such Compensation and Expenses to BOSTON FINANCIAL within a reasonable time, BOSTON FINANCIAL may charge against any monies held under this Agreement, the amount of any Compensation and Expenses for which it shall be entitled to reimbursement under this Agreement.


B.

The Trust also agrees promptly to reimburse BOSTON FINANCIAL for all reasonable billable out-of-pocket expenses or disbursements incurred by BOSTON FINANCIAL in connection with the performance of services under this Agreement





10





including, but not limited to: expenses for postage; express delivery services; freight charges; envelopes, checks, drafts, forms (continuous or otherwise); specially requested reports and statements; telephone calls; telegraphs; stationery supplies; counsel fees incurred in connection with the review of the legal sufficiency of documentation provided by a shareholder or otherwise as to the advisability of complying with the request or instruction of a shareholder or person purporting to act on behalf of a shareholder (provided that BOSTON FINANCIAL provides the Trust with reasonable advance notice of any such request and permits the Trust to elect to undertake its own review of the legal sufficiency of such documentation or as to the advisability of complying with such request or instruction); outside printing and mailing firms (including DST Output, Inc. and its affiliates ("DST Output"); magnetic tapes, reels or cartridges (if sent to the Trust or to a third party at the Trust's request) and magnetic tape handling charges; off-site record storage and media for storage of records (e.g., microfilm, microfiche, optical platters, computer tapes); computer equipment installed at the Trust's request at the Trust's or a third party's premises; telecommunications equipment and telephone/telecommunication lines between the Trust and its agents, on one hand, and BOSTON FINANCIAL on the other; proxy soliciting, processing and/or tabulating costs; transmission of statement data for remote printing or processing other than by DST Output; and National Securities Clearing Corporation ("NSCC") transaction fees to the extent any of the foregoing are paid or incurred by BOSTON FINANCIAL. The Trust agrees to pay postage expenses at least one day in advance if so requested. In addition, any other expenses incurred by BOSTON FINANCIAL at the request or with the consent of the Trust will be promptly reimbursed by the Trust.


C.

Amounts due hereunder shall be due and paid on or before the sixtieth (60th) calendar day after receipt of the invoice therefor by the Trust (the "Due Date"). The Trust is aware that its failure to pay all amounts in a timely fashion so that they will be received by BOSTON FINANCIAL on or before the Due Date will give rise to costs to BOSTON FINANCIAL not contemplated by this Agreement, including but not limited to carrying, processing and accounting charges. Accordingly, subject to Section 6.D. hereof, in the event that during any twelve (12) month period the Trust pays any four (4) or more of its invoices after their respective Due Dates, then BOSTON FINANCIAL may charge and the Trust shall pay a late charge for any future invoices paid after the applicable Due Date and such late charge shall be equal to the lesser of the maximum amount permitted by applicable law or the London Interbank Overnight Rate times the amount overdue, times the number of days from the Due Date up to and including the day on which payment is received by BOSTON FINANCIAL. The parties hereby agree that such late charge represents a fair and reasonable computation of the costs incurred by reason of late payment or payment of amounts not properly due. Acceptance of such late charge shall in no event constitute a waiver of the Trust's or BOSTON FINANCIAL's default or prevent the non-defaulting party from exercising any other rights and remedies available to it.





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D.

In the event that any charges are disputed, the Trust shall, on or before the Due Date, pay all undisputed amounts due hereunder and notify BOSTON FINANCIAL in writing of any disputed charges for billable expenses that it is disputing in good faith. Payment for such disputed charges shall be due on or before the close of the fifth (5th) business day after the day on which BOSTON FINANCIAL provides to the Trust documentation which an objective observer would agree reasonably supports the disputed charges (the "Revised Due Date"). Late charges shall not begin to accrue as to charges disputed in good faith until the first business day after the Revised Due Date.


E.

The fees and charges set forth on Exhibit A shall increase or may be increased as follows:


(1)

On the first day of each anniversary of this Agreement, subject to Note D of Exhibit A;


(2)

BOSTON FINANCIAL may increase the fees and charges set forth on Exhibit A upon at least ninety (90) days prior written notice, if changes in existing laws, rules or regulations: (i) require substantial system modifications or (ii) materially increase BOSTON FINANCIAL's cost of performance hereunder;


(3)

BOSTON FINANCIAL may charge for additional features of TA2000 used by the Trust which features are not consistent with the Trust's current processing requirements; and


(4)

In the event BOSTON FINANCIAL, at the Trust's request or direction, performs Exception Services, BOSTON FINANCIAL shall be entitled to increase the fees and charges for such Exception Services from those set forth on Exhibit A to the extent such Exception Services increase BOSTON FINANCIAL's cost of performance.  This provision shall not apply to the Exception Services, if any, being provided as of the date of this Agreement, which the parties shall mutually agree upon and set forth on Schedule 6.E.(4) to this Agreement.


If BOSTON FINANCIAL notifies the Trust of an increase in fees or charges pursuant to subparagraph (2) of this Section 6.E., the parties shall confer, diligently and in good faith and agree upon a new fee to cover the amount necessary, but not more than such amount, to reimburse BOSTON FINANCIAL for the Trust's aliquot portion of the cost of developing the new software to comply with regulatory charges and for the increased cost of operation.


If BOSTON FINANCIAL notifies the Trust of an increase in fees or charges under subparagraphs (3) or (4) of this Section 6.E., the parties shall confer, diligently and in good faith, and agree upon new fees.





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7.

OPERATION OF THE TA2000™ SYSTEM.


In connection with the performance of its services under this Agreement, BOSTON FINANCIAL is responsible for such items as:


A.

That entries in BOSTON FINANCIAL's records, and in the Trust's records on the TA2000™ System created by BOSTON FINANCIAL and BOSTON FINANCIAL's affiliates, accurately reflect the orders, instructions, and other information received by BOSTON FINANCIAL and such affiliates from the Trust, the Trust's distributor, manager or principal underwriter, or any successor of any of the foregoing (all hereinafter referred to as "JPM") and its affiliates, entities from whom JPM or the Trust have directed BOSTON FINANCIAL to accept orders, instructions or other information, the Trust's investment adviser, banks or other entities which BOSTON FINANCIAL has been advised by the Trust or JPM are affiliated with or a correspondent of JPM, or the Trust's administrator (each of the foregoing being an "Authorized Person"), broker-dealers or shareholders (existing or new). BOSTON FINANCIAL has currently been instructed, by way of example and not limitation, to accept telephone instructions from any person reasonably believed by BOSTON FINANCIAL to be a representative of an Authorized Person, to accept third party checks initiated by or received from or through a broker/dealer or a JPM-customer relationship, to accept transactions and documentation by fax in accordance with the guidelines established by an Authorized Person, to allow corporations, partnerships, trusts and other accounts not registered in the name of a single individual and individually owned accounts to have telephone or "VOICE" transaction processing privileges (the "Privileges"), to establish Privileges on all accounts unless the establishing shareholder explicitly directs that telephone exchanges and redemptions not be permitted and to accept and to effectuate transmissions and trades entered on a remote basis by JPM and banks affiliated with JPM (without verification of the contents of such transmissions and trades);


B.

That shareholder lists, shareholder account verifications, confirmations and other shareholder account information to be produced from its records or data be available and accurately reflect the data in the Trust's records on the TA2000TM System;


C.

The accurate and timely issuance of dividend and distribution checks in accordance with instructions received from the Trust and the data in the Trust's records on the TA2000TM System;


D.

That redemption transactions and payments be effected timely, to be processed under normal circumstances on the day of receipt, and accurately in accordance with redemption instructions received by BOSTON FINANCIAL from Authorized Persons, broker-dealers or shareholders and the data in the Trust's records on the TA2000TM System;





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E.

The deposit daily in the Trust's appropriate special bank account of all checks and payments received by BOSTON FINANCIAL from NSCC, broker-dealers or shareholders for investment in shares.  In the event of an overdraft with respect to the account that is caused by BOSTON FINANCIAL’s error in misdirecting or failing to make a deposit (and not as a result of check or payment that fails), then BOSTON FINANCIAL agrees to reimburse the Trust for (i) the service charge, if any charged by the bank, up to $500 per occurrence; and (ii) the overnight federal funds rate for the deposit misdirected by BOSTON FINANCIAL.  BOSTON FINANCIAL’s liability with respect to such overdraft shall be limited to the foregoing, except as may otherwise be mutually agreed, from time to time, by the parties.


F.

Notwithstanding anything herein to the contrary, with respect to "as of" adjustments, BOSTON FINANCIAL will not assume one hundred percent (100%) responsibility for losses resulting from "as of's" due to clerical errors or misinterpretations of shareholder instructions, but BOSTON FINANCIAL will discuss with the Fund BOSTON FINANCIAL's accepting liability for an "as of" on a case-by-case basis and will accept financial responsibility for a particular situation resulting in a financial loss to the Fund where such loss is "material", as hereinafter defined, and, under the particular facts at issue, BOSTON FINANCIAL's conduct was culpable and BOSTON FINANCIAL's conduct is the sole cause of the loss.  A loss is "material" for purposes of this Section 7.F. when it results in a pricing error on a particular transaction which is (i) greater than a negligible amount per shareholder, (ii) equals or exceeds one ($.01) full cent per share times the number of shares outstanding or (iii) equals or exceeds the product of one-half of one percent (1/2%) times the Fund's Net Asset Value per share times the number of shares outstanding (or, in case of (ii) or (iii), such other amounts as may be adopted by applicable accounting or regulatory authorities from time to time).  If the net effect of the “as of” transactions that are determined to be caused by BOSTON FINANCIAL is negative and exceeds the above limit, then BOSTON FINANCIAL shall promptly contact the Trust and the Fund accountants.  BOSTON FINANCIAL will work with the Trust and the Fund accountants to determine what, if any, impact the threshold break has on the Fund’s Net Asset Value and what, if any, further action is required.  These further actions may include but are not limited to, the Fund re-pricing the affected day(s), BOSTON FINANCIAL re-processing, at its expense, all affected transactions in the Fund that took place during the period or a payment to the Fund.  The Fund agrees to work in good faith with BOSTON FINANCIAL and wherever possible, absent a regulatory prohibition or other mutually agreed upon reason, the Fund agrees to re-price the affected day(s) and to allow BOSTON FINANCIAL to re-process the affected transactions.  When such re-pricing and re-processing is not possible, and when BOSTON FINANCIAL must contribute to the settlement of a loss, BOSTON FINANCIAL's responsibility will commence with that portion of the loss over $0.0049 per share calculated on the basis of the total value of all shares owned by the affected portfolio (i.e., on the basis of the value of the shares of the total portfolio, including all classes of that portfolio, not just those of the affected class) and BOSTON FINANCIAL will make such account adjustments and take such other action as is necessary to compensate shareholders for shareholder losses and reimburse the Fund for the amount of Fund losses in accordance with the foregoing





14





standards.  If BOSTON FINANCIAL contributes to the settlement of a loss, the amount paid by BOSTON FINANCIAL shall be deducted from the amount of any accumulated losses calculated in the fiscal year monitoring process described below. BOSTON FINANCIAL will monitor all portfolios across share classes to determine the accumulated gain or loss effect of “as-of trades” caused solely by the transfer agent.  At the fiscal year end of each portfolio, if the portfolio has an accumulated loss across share classes that is attributed to the transfer agent, then BOSTON FINANCIAL shall pay to the Fund the amount of such loss in excess of $.0049 per share calculated on the basis of the total value of all shares owned by the affected portfolio (i.e., on the basis of the value of the shares of the total portfolio, including all classes of that portfolio, not just those of the affected class).  If at the end of the fiscal year, a portfolio has accumulated a gain across share classes, that gain will remain with the Fund.


G.

The requiring of proper forms of instructions, signatures and signature guarantees and any necessary documents supporting the opening of shareholder accounts, transfers, redemptions and other shareholder account transactions, all in conformance with BOSTON FINANCIAL's present procedures as set forth in its Legal Manual (collectively the "Procedures") with such changes or deviations therefrom as may be from time to time required or approved by the Trust, its investment adviser or principal underwriter, or its or BOSTON FINANCIAL's counsel and the rejection of orders or instructions not in good order in accordance with the applicable prospectus or the Procedures; and


H.

The maintenance of a current, duplicate set of the Trust's essential records at a secure separate location, in a form available and usable forthwith in the event of any breakdown or disaster disrupting its main operation.


8.

INDEMNIFICATION.


A.

BOSTON FINANCIAL shall at all times use reasonable care, due diligence and act in good faith in performing its duties under this Agreement and agrees to use its best efforts within reasonable limits to insure the accuracy of all services performed under this Agreement. BOSTON FINANCIAL shall provide its services hereunder in accordance with the '34 Act, and other laws, rules and regulations of governmental authorities having jurisdiction over BOSTON FINANCIAL. In the absence of bad faith, willful misconduct, knowing or reckless violations of applicable law pertaining to the manner in which transfer agency services are to be performed by BOSTON FINANCIAL (excluding any violations arising directly or indirectly out of the actions or omissions to act of third parties unaffiliated with BOSTON FINANCIAL), reckless disregard of the performance of its duties, or negligence on its part, BOSTON FINANCIAL shall not be liable for any action taken, suffered, or omitted by it or for any error of judgment made by it in the performance of its duties under this Agreement. For those activities or actions delineated in the Procedures, BOSTON FINANCIAL shall be presumed to have used reasonable care, due diligence and acted in good faith if it has materially complied with the Procedures, copies of which have





15





been provided to the Trust and reviewed and approved by the Trust's counsel, as amended from time to time with approval of Trust’s counsel, or for any deviation therefrom approved by the Trust or BOSTON FINANCIAL counsel.


B.

BOSTON FINANCIAL shall not be responsible for, and the Trust shall indemnify and hold BOSTON FINANCIAL harmless from and against, any and all losses, damages, reasonable costs, reasonable charges, reasonable counsel fees, payments, reasonable expenses and liability (the "Adverse Consequences") which may be asserted against BOSTON FINANCIAL or for which BOSTON FINANCIAL may be held to be liable, arising out of or attributable to:


(1)  All actions of BOSTON FINANCIAL required to be taken by BOSTON FINANCIAL pursuant to this Agreement, provided that BOSTON FINANCIAL has acted in good faith and with due diligence and reasonable care and according to any instructions provided it by any authorized person;


(2)  The Trust's refusal or failure to comply with the terms of this Agreement, the Trust's negligence or willful misconduct, or the breach of any representation or warranty of the Trust hereunder;


(3)  The good faith reliance on, or the carrying out of, any written or oral instructions or requests of persons designated by the  Trust in writing (see Exhibit B) from time to time as authorized to give instructions on its behalf or representatives of an Authorized Person or BOSTON FINANCIAL's good faith reliance on, or use of, information, data, records and documents received from, or which  have been prepared and/or maintained by the Trust, its investment advisor, its sponsor or its principal underwriter.  This shall include (i) any information, records, documents, data, stock certificates or services, which are received by BOSTON FINANCIAL or its agents or subcontractors by machine readable input, facsimile, CRT data entry, electronic instructions, or other similar means authorized by the Trust, and which have been prepared, maintained or performed by the Trust or any other person or firm on behalf of the Trust including but not limited to any broker-dealer  or previous transfer agent.


(4)  Defaults by dealers or shareowners with respect to payment for share orders previously entered;


(5)  The offer or sale of Shares in violation of any requirement under federal securities laws or regulations or the securities laws or regulations of any state or in violation of any stop order or other determination or ruling by any federal agency or state with respect to the offer or sale of such shares in such state (unless such violation results from BOSTON FINANCIAL's failure to comply with written instructions of the Trust or of any officer of the Trust that no offers or sales be input into the Trust's securityholder records in or to residents of such state);


(6)  Any error or mistake of the Trust, any Authorized Person, and any agent designated by the Trust in the use of the TA2000TM  System, the data center, computer





16





and related equipment used to access the TA2000TM System (the "DST Facilities"), and control procedures relating thereto in the verification of output and in the remote input of data;


(7)  Errors, inaccuracies, and omissions in, or errors, inaccuracies or omissions of BOSTON FINANCIAL solely arising out of or resulting from such errors, inaccuracies and omissions in, the Trust's records, shareholder and other records, delivered to BOSTON FINANCIAL hereunder by the Trust or its prior agent(s);


(8)  Actions or omissions to act by the Trust or agents designated by the Trust with respect to duties assumed thereby as provided for in Section 21 hereof;


(9)  BOSTON FINANCIAL's performance of Exception Services except where BOSTON FINANCIAL acted or omitted to act in bad faith, with reckless disregard of its obligations or with negligence; and


(10)  The negotiation and processing of any checks, wires and ACH transmissions including without limitation for deposit into, or credit to, the Fund’s demand deposit accounts maintained by BOSTON FINANCIAL, subject to the provisions of Section 7.E.


C.

Except where BOSTON FINANCIAL is entitled to indemnification under Section 8.B. hereof and with respect to "as of's" set forth in Section 7.F., BOSTON FINANCIAL shall indemnify and hold the Trust harmless from and against any and all Adverse Consequences arising out of BOSTON FINANCIAL's failure to comply with the terms of this Agreement or arising out of or attributable to BOSTON FINANCIAL's negligence, willful misconduct or reckless disregard of its obligations under this Agreement or BOSTON FINANCIAL's breach of any of its representations or warranties under this Agreement.  In the event that any claim is asserted against BOSTON FINANCIAL under this Agreement for any reason other than BOSTON FINANCIAL's bad faith or willful misconduct, BOSTON FINANCIAL’S aggregate liability during any term of this Agreement with respect to, arising from or arising in connection with this Agreement, or from all services provided or omitted to be provided under this Agreement, whether in contract, or in tort, or otherwise, shall be limited and shall be determined as set forth on Schedule 8.C. attached hereto.


D.

IN NO EVENT AND UNDER NO CIRCUMSTANCES SHALL EITHER PARTY TO THIS AGREEMENT BE LIABLE TO ANYONE, INCLUDING, WITHOUT LIMITATION TO THE OTHER PARTY, FOR CONSEQUENTIAL DAMAGES FOR ANY ACT OR FAILURE TO ACT UNDER ANY PROVISION OF THIS AGREEMENT EVEN IF ADVISED OF THE POSSIBILITY THEREOF.


E.

Promptly after receipt by an indemnified person of notice of the commencement of any action, such indemnified person will, if a claim in respect thereto is to be made against an indemnifying party hereunder, notify the indemnifying party in writing of the commencement thereof; but the failure so to notify the indemnifying Party will not





17





relieve an indemnifying party from any liability that it may have to any indemnified person for contribution or otherwise under the indemnity agreement contained herein except to the extent it is prejudiced as a proximate result of such failure to timely notify. In case any such action is brought against any indemnified person and such indemnified person seeks or intends to seek indemnity from an indemnifying party, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, assume the defense thereof (in its own name or in the name and on behalf of any indemnified party or both with counsel reasonably satisfactory to such indemnified person); provided, however, if the defendants in any such action include both the indemnified person and an indemnifying party and the indemnified person shall have reasonably concluded that there may be a conflict between the positions of the indemnified person and an indemnifying party in conducting the defense of any such action or that there may be legal defenses available to it and/or other indemnified persons which are inconsistent with those available to an indemnifying party, the indemnified person or indemnified persons shall have the right to select one separate counsel (in addition to local counsel) to assume such legal defense and to otherwise participate in the defense of such action on behalf of such indemnified person or indemnified persons at such indemnified party's sole expense. Upon receipt of notice from an indemnifying party to such indemnified person of its election so to assume the defense of such action and approval by the indemnified person of counsel, which approval shall not be unreasonably withheld (and any disapproval shall be accompanied by a written statement of the reasons therefor), the indemnifying party will not be liable to such indemnified person hereunder for any legal or other expenses subsequently incurred by such indemnified person in connection with the defense thereof. An indemnifying party will not settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified persons are actual or potential parties to such claim, action, suit or proceeding) unless such settlement, compromise or consent includes an unconditional release of each indemnified person from all liability arising out of such claim, action, suit or proceeding. An indemnified party will not, without the prior written consent of the indemnifying party, settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder. If it does so, it waives its right to indemnification therefor.


F.

In any case an indemnifying person may be asked to indemnify or hold an indemnified person harmless, the indemnified person shall use reasonable care to (i) fully and promptly advise the indemnifying person of all pertinent facts concerning the situation in question, and (ii) timely advise the indemnifying person of any matter as to which the indemnified person is aware that a claim which may give rise to Adverse Consequences has been asserted or is being threatened and appears reasonably likely to be asserted.



18





9.  CERTAIN COVENANTS OF BOSTON FINANCIAL AND THE TRUST.


A.

All requisite steps will be taken by the Trust from time to time when and as necessary to register the Shares for sale in all states in which the Shares shall at the time be offered for sale and require registration. If at any time the Trust receives notice of any stop order or other proceeding in any such state affecting such registration or the sale of the Shares, or of any stop order or other proceeding under the federal securities laws affecting the sale of the Shares, the Trust will give prompt notice thereof to BOSTON FINANCIAL.


B.

BOSTON FINANCIAL hereby agrees to perform such transfer agency functions as are set forth in Section 4.D. above, to establish and to maintain facilities and procedures reasonably acceptable to the Trust for safekeeping of Certificates, check forms, and facsimile signature imprinting devices, if any, and for the preparation or use, and the keeping account of, such Certificates, forms and devices, and to carry such insurance as BOSTON FINANCIAL considers adequate and reasonably available, such consideration to be consistent with standards of commercial reasonableness.


C.

To the extent required by Section 31 of the Investment Company Act of 1940, as amended, and Rules thereunder, BOSTON FINANCIAL agrees that all records maintained by BOSTON FINANCIAL relating to the services to be performed by BOSTON FINANCIAL under this Agreement are the property of the Trust and will be preserved and will be surrendered promptly to the Trust on request.


D.

BOSTON FINANCIAL agrees to furnish the Trust, on a semi-annual basis, at no cost to the Trust, a report in accordance with Statements on Auditing Standards No. 70 (the "SAS 70 Report") as well as such other publicly available financial information about itself or its affiliates and any reports and information relating to BOSTON FINANCIAL’s policies and procedures and its compliance with such policies and procedures and with the laws applicable to its business and services as the Trust may reasonably request. BOSTON FINANCIAL further agrees that upon request by the Trust, not more than once each year, it will review with the Trust such information as is necessary to demonstrate BOSTON FINANCIAL’s current financial status.  As a continuing obligation of BOSTON FINANCIAL throughout the term of this Agreement, BOSTON FINANCIAL agrees to notify the Trust (unless legally prohibited from so doing) of any claims or legal proceedings that BOSTON FINANCIAL reasonably believes would materially adversely affect the ability of BOSTON FINANCIAL to provide the services required under this Agreement.


E.

BOSTON FINANCIAL represents and agrees that it will use its best efforts within reasonable limits to keep current on the trends of the investment company industry relating to shareholder services and will use its best efforts to continue to modernize and improve. Notwithstanding the foregoing, (i) BOSTON FINANCIAL shall not be liable for failing to make any modification or improvement as to the necessity of which the Trust has not advised BOSTON FINANCIAL in writing and (ii) for any delay in





19





the implementation of such modification or improvement where BOSTON FINANCIAL reasonably requires more time than was permitted by circumstances or such regulations. With respect to any optional change in BOSTON FINANCIAL’s operations or optional system feature, the Trust may elect not to use such change or feature.


F.

BOSTON FINANCIAL will permit the Trust and its authorized representatives, including its chief compliance officer, to make periodic inspections of its operations and its policies and procedures as such would involve the Trust at reasonable times during business hours subject to such authorized representatives' execution of a confidentiality agreement provided by BOSTON FINANCIAL.  Additionally, in order that the Trust may review the effectiveness of the AML Program as described in Schedule 19.K, BOSTON FINANCIAL will also permit the Trust and its authorized representatives to inspect records maintained by BOSTON FINANCIAL for the Fund directly related to the AML Program services performed for the Fund.


G.

BOSTON FINANCIAL shall reasonably cooperate with the Trust's independent public accountants and the Trust’s chief compliance officer and shall take all reasonable action in the performance of its obligations under this Agreement to assure that access to all readily necessary information and compliance personnel is made available to such accountants and to the Trust’s chief compliance officer, for the expression of the accountants’ opinion and the evaluation of the effectiveness of BOSTON FINANCIAL’s compliance controls, as such may be required from time to time.  Special reports or information may be charged for if the production or special programming of such reports exceeds the dedicated resource hours provided to the Trust under this Agreement. A report is "Special" if it is not regularly produced by TA2000TM or requires special programming.


H.

BOSTON FINANCIAL and DST employ intrusion detection systems, anti-virus software, and an automated security monitoring, analysis and response system to identify, manage, and counter security threats as well as monitor policy adherence.  BOSTON FINANCIAL and DST also perform annual penetration and vulnerability tests, which are conducted by an independent 3rd party, to validate the security of the networks of BOSTON FINANCIAL and DST.  BOSTON FINANCIAL and DST shall make the results of such tests available to the Trust.  If vulnerabilities are identified, then BOSTON FINANCIAL and/or DST shall also promptly provide the Trust with a copy of the system remediation plan.   In addition, BOSTON FINANCIAL and DST may use third party security reviews to support their security efforts when necessary.


I.

BOSTON FINANCIAL will provide assistance to and cooperate with the Trust during any government or Trust directed audits (including audits arranged by the Trust in connection with the implementation and administration of the Trust’s compliance policies and procedures) and regulatory examinations of the Trust’s records and accounts maintained by BOSTON FINANCIAL in accordance with reasonable procedures and at reasonable frequencies.  For purposes of such regulatory examinations or audits, at the request the Trust, BOSTON FINANCIAL will make





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available, during normal business hours, all reasonably required records, data and operating processes for review by (i) the representatives of the appropriate regulatory agencies and/or (ii) any auditors.  The Trust understands and agrees that all auditors will be required by BOSTON FINANCIAL to execute a confidentiality agreement prior to being given access to such records, data and operating processes.


J.

Upon request of the Trust, BOSTON FINANCIAL will provide to the Trust on a semi-annual or quarterly basis a Sarbanes-Oxley certification with respect to BOSTON FINANCIAL’s performance of the services and its internal controls related thereto.  In addition, upon request of the Trust, BOSTON FINANCIAL will provide to the Trust a certification under Rule 38a-1 of the federal securities rules with respect to the compliance provisions required by that Rule.


10.  RECAPITALIZATION OR READJUSTMENT.


In case of any recapitalization, readjustment or other change in the capital structure of the Trust requiring a change in the form of Certificates, if any, BOSTON FINANCIAL will issue or register Certificates in the new form in exchange for, or in transfer of, the outstanding Certificates in the old form, upon receiving:


A.   Written instructions from an officer of the Trust;


B.   Certified copy of the amendment to the Declaration of Trust or other document effecting the change;


C.   Certified copy of the order or consent of each governmental or regulatory authority, required by law to the issuance of the stock in the new form, and an opinion of counsel that the order or consent of no other government or regulatory authority is required; and


D.   Specimens of any new Certificates in the form approved by the Board of Trustees of the Trust, with a certificate of the Secretary of the Trust as to such approval;



11.  CERTIFICATES.


To the extent needed or desired by the Trust, the Trust will furnish BOSTON FINANCIAL with a sufficient supply of blank Certificates and from time to time will renew such supply upon the request of BOSTON FINANCIAL. Such Certificates will be signed manually or by facsimile signatures of the officers of the Trust authorized by law and by bylaws to sign Certificates, and if required, will bear the corporate seal or facsimile thereof.


12.  DEATH, RESIGNATION OR REMOVAL OF SIGNING OFFICER.


The Trust will file promptly with BOSTON FINANCIAL written notice of any change in the officers authorized to sign any Certificates, written instructions or requests, together with a revised Exhibit B. In case any officer of the Trust who will have signed manually or whose





21





facsimile signature will have been affixed to any blank Certificates will die, resign, or be removed prior to the issuance of such Certificates, BOSTON FINANCIAL may issue or register such Certificates as the Certificates of the Trust notwithstanding such death, resignation, or removal, until specifically directed to the contrary by the Trust in writing. In the absence of such direction, the Trust will file promptly with BOSTON FINANCIAL such approval, adoption, or ratification as may be required by law.


13.  FUTURE AMENDMENTS OF DECLARATION OF TRUST AND BYLAWS.


The Trust will promptly file with BOSTON FINANCIAL copies of all material amendments to its Declaration of Trust or Bylaws made after the date of this Agreement.


14.  INSTRUCTIONS, OPINION OF COUNSEL AND SIGNATURES.


Any time BOSTON FINANCIAL shall be in doubt as to any proposed or requested action to be taken or omitted by it, BOSTON FINANCIAL may consult with any person authorized by the Trust to give instructions to BOSTON FINANCIAL relating to the particular proposed or requested action to be taken or omitted. BOSTON FINANCIAL may with the approval of a Trust officer consult with legal counsel for the Trust, with respect to any matter involving a question of law involved in any action to be taken or omitted by BOSTON FINANCIAL in connection with the agency. BOSTON FINANCIAL will not be liable for any action taken or omitted by it in good faith in reliance upon such instructions from persons authorized by the Trust or upon the opinion of legal counsel for the Trust.  Notwithstanding the foregoing, the Trust shall reimburse BOSTON FINANCIAL for outside counsel fees incurred in connection with the review of the legal sufficiency of documentation provided by a shareholder or otherwise as to the advisability of complying with the request of a shareholder or person purporting to act on behalf of a shareholder so long as BOSTON FINANCIAL has complied with the requirements set forth in Section 6.B. BOSTON FINANCIAL will be protected in acting upon any paper or document reasonably believed by it to be genuine and to have been signed by the proper person or persons and will not be held to have notice of any change of authority of any person, until receipt of written notice thereof from the Trust. It will also be protected in recognizing Certificates which it reasonably believes to bear the proper manual or facsimile signatures of the officers of the Trust, and the proper countersignature of any former Transfer Agent or Registrar, or of a co-Transfer Agent or co-Registrar.


15.  FORCE MAJEURE AND DISASTER RECOVERY PLANS.


A.

BOSTON FINANCIAL shall not be responsible or liable for its failure or delay in performance of its obligations under this Agreement arising out of or caused, directly or indirectly, by circumstances beyond its reasonable control, including, without limitation: any interruption, loss or malfunction or any utility, transportation, computer (hardware or software) or communication service; a delay in mails; governmental or exchange action, statute, ordinance, rulings, regulations or direction; war, strike, riot, emergency, civil disturbance, terrorism, vandalism, explosions, labor disputes, freezes, floods, fires, tornadoes, acts of God or public enemy, revolutions, or insurrection; or any other cause, contingency, circumstance or delay not subject to BOSTON FINANCIAL's reasonable control which prevents or hinders BOSTON FINANCIAL's performance hereunder.





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B.

BOSTON FINANCIAL will maintain a comprehensive business continuity plan and will provide an executive summary of such plan upon reasonable request of the Trust.  BOSTON FINANCIAL will test the adequacy of its business continuity plan at least annually and upon request, the Trust may participate in such test.  Upon request by the Trust, BOSTON FINANCIAL will provide the Trust with a letter assessing the most recent business continuity test results.  In the event of a business disruption that materially impacts BOSTON FINANCIAL’s provision of services under this Agreement, BOSTON FINANCIAL will notify the Trust of the disruption and the steps being implemented under the business continuity plan.  If the Trust reasonably determines that BOSTON FINANCIAL has not or cannot put its business continuity plan in place quickly enough to meet the Trust’s needs or is otherwise unable to provide equal access to such services, BOSTON FINANCIAL shall promptly provide reasonable assistance and support to the Trust, at the Trust’s expense, in seeking such services from an alternative source.


C.

BOSTON FINANCIAL’s affiliate, DST, currently maintains a recovery facility for use in event of a disaster rendering the normal DST Facilities inoperable (the “DST Recovery Facility”).  DST has developed and is continually revising business contingency plans (the "DST Business Contingency Plan") detailing which, how, when, and by whom data maintained at DST Facilities will be installed and operated at the Recovery Facility.  BOSTON FINANCIAL will provide an executive summary of the DST Business Contingency Plan upon reasonable request of the Trust.  Provided the Trust is paying its pro rata portion of the charge therefor, BOSTON FINANCIAL would, in event of a disaster rendering the DST’s Facility inoperable, instruct DST to use reasonable efforts to convert the TA2000TM System containing the designated Trust data to the computers at the Recovery Facility in accordance with the then current DST Business Contingency Plan.  


D.

BOSTON FINANCIAL also currently maintains, separate from the area in which the operations that provides the services to the Trust hereunder are located, a Crisis Management Center consisting of phones, computers and the other equipment necessary to operate a full service transfer agency business in the event one of its operations areas is rendered inoperable. The transfer of operations to other operating areas or to the Crisis Management Center is covered in BOSTON FINANCIAL's Business Contingency Plan.


16.  CERTIFICATION OF DOCUMENTS.


The required copy of the Declaration of Trust or Articles of Incorporation of the Trust and copies of all amendments thereto will be certified by the Secretary of State (or other appropriate official) of the State of Incorporation, and if such Declaration of Trust and amendments are required by law to be also filed with a county, city or other officer of official body, a certificate of such filing will appear on the certified copy submitted to BOSTON FINANCIAL, provided, however, that if the Trust is not required to file the Declaration of Trust with the State of Incorporation, but is required to file a Certificate of Trust with such state, a copy of the Certificate of Trust and copies of all amendments thereto will be certified by the Secretary of State (or other appropriate official) of the State of Incorporation.  A copy of the order or consent





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of each governmental or regulatory authority required by law to the issuance of the stock will be certified by the Secretary or Clerk of such governmental or regulatory authority, under proper seal of such authority. The copy of the Bylaws and copies of all amendments thereto, and copies of resolutions of the Board of Trustees of the Trust, will be certified by the Secretary or an Assistant Secretary of the Trust under the Trust's seal.


17.  RECORDS.


BOSTON FINANCIAL shall keep records relating to the services to be performed hereunder, in the form, manner and for such periods, as it may deem advisable and as may be required by the laws and regulations applicable to its business as a Transfer Agent, including those set forth in 17 CFR 240.17Ad-6 and 17 CFR 240.17Ad-7, as such regulations may be amended from time to time.  BOSTON FINANCIAL shall also maintain customary records in connection with its agency for the Trust; particularly those records required to be maintained pursuant to subparagraph (2)(iv) of paragraph (b) of Rule 31a-1 under the Investment Company Act of 1940.  Records maintained by BOSTON FINANCIAL on behalf of the Trust shall be made available for reasonable examinations by the Securities and Exchange Commission upon reasonable request and shall be maintained by BOSTON FINANCIAL for such period as required by applicable law or until such time as BOSTON FINANCIAL has delivered such records into the Trust’s possession or destroyed them at the Trust’s request.


18.  DISPOSITION OF BOOKS, RECORDS AND CANCELED CERTIFICATES.


BOSTON FINANCIAL may send periodically to the Trust, or to where designated by the Secretary or an Assistant Secretary of the Trust, all books, documents, and all records no longer deemed by BOSTON FINANCIAL needed for current purposes and any Certificates which have been canceled in transfer or in exchange, upon the understanding that such books, documents, records, and Certificates will be maintained by the Trust under and in accordance with the requirements of Rule 17Ad-7 adopted under the ’34 Act. Such materials will not be destroyed by the Trust without the consent of BOSTON FINANCIAL (which consent will not be unreasonably withheld), but will be safely stored for possible future reference.


19.  PROVISIONS RELATING TO BOSTON FINANCIAL AS TRANSFER AGENT.


A.

BOSTON FINANCIAL will make original issues of Certificates, if any, upon written request of an officer of the Trust and upon being furnished with a certified copy of a resolution of the Board of Trustees authorizing such original issue, any documents required by Sections 5 or 10 of this Agreement, and necessary funds for the payment of any original issue tax.


B.

Before making any original issue of Certificates of the Trust will furnish BOSTON FINANCIAL with sufficient funds to pay all required taxes on the original issue of the stock, if any. The Trust will furnish BOSTON FINANCIAL such evidence as may be required by BOSTON FINANCIAL to show the actual value of the stock. If no taxes are payable BOSTON FINANCIAL will be furnished with a certified statement from an officer of the Trust to that effect.





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C.

Shares of stock represented by Certificates, if any, will be transferred and new Certificates issued in transfer, or Shares of stock accepted for redemption and funds remitted therefor, or book entry transfer be effected, upon surrender of the old Certificates in form or receipt by BOSTON FINANCIAL of instructions deemed by BOSTON FINANCIAL properly endorsed for transfer or redemption accompanied by such documents as BOSTON FINANCIAL may deem necessary to evidence the authority of the person making the transfer or redemption. BOSTON FINANCIAL reserves the right to refuse to transfer or redeem Shares until it is satisfied that the endorsement or signature on the Certificate or any other document is valid and genuine, and for that purpose it may require a guaranty of signature in accordance with the Procedures. BOSTON FINANCIAL will incur no liability and shall be indemnified and held harmless by the Fund for any action taken by it in accordance with an instruction bearing what purports to be a signature guarantee or medallion of an Eligible Guarantor Institution or otherwise in accordance with BOSTON FINANCIAL's Signature Guarantee Procedures adopted pursuant to Rule 17Ad-15 under the ’34 Act.  BOSTON FINANCIAL also reserves the right to refuse to transfer or redeem shares until BOSTON FINANCIAL is satisfied that the requested transfer or redemption is legally authorized, and it will incur no liability for the refusal in good faith to make transfers or redemptions which, in its reasonable judgment, are improper or unauthorized. Authority to perform a redemption shall be suspended when the Trust suspends the shareholders' right of redemption provided that the Trust delivers written notice of such suspension to BOSTON FINANCIAL. BOSTON FINANCIAL may, in effecting transfers or redemptions, rely upon Simplification Acts, Uniform Commercial Code or other statutes that protect it and the Trust in not requiring complete fiduciary documentation. In cases in which BOSTON FINANCIAL is not directed or otherwise required to maintain the consolidated records of shareholder's accounts, BOSTON FINANCIAL will not be liable for any loss that may arise by reason of not having such records.


D.

When mail is used for delivery of Certificates, BOSTON FINANCIAL will forward Certificates in "nonnegotiable" form by first class or registered mail and Certificates in "negotiable" form by registered mail, all such mail deliveries to be covered while in transit to the addressee by insurance arranged for by BOSTON FINANCIAL.


E.

BOSTON FINANCIAL will issue and mail subscription warrants, Certificates representing stock dividends, exchanges or split ups, upon receiving written instructions from any officer of the Trust and such other documents as BOSTON FINANCIAL deems necessary.


F.

BOSTON FINANCIAL will issue, transfer, and split up Certificates and will issue Certificates of stock representing full Shares upon surrender of scrip certificates aggregating one full share or more when presented to BOSTON FINANCIAL for that purpose upon receiving written instructions from an officer of the Trust and such other documents as BOSTON FINANCIAL may deem necessary.





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G.

BOSTON FINANCIAL may issue new Certificates in place of Certificates represented to have been lost, destroyed, stolen or otherwise wrongfully taken upon receiving instructions from the Trust and indemnity satisfactory to BOSTON FINANCIAL and the Trust, and may issue new Certificates in exchange for, and upon surrender of, mutilated Certificates. Such instructions from the Trust will be in such form as will be approved by the Board of Trustees of the Trust and will be in accordance with the provisions of law and the bylaws of the Trust governing such matter.


H.

BOSTON FINANCIAL will supply a shareholder's list to the Trust for any shareholder meeting upon receiving a request from an officer of the Trust. It will also, at the expense of the Trust, supply lists at such other times as may be requested by an officer of the Trust.


I.

Upon receipt of written instructions of an officer of the Trust, BOSTON FINANCIAL will, at the expense of the Trust, address and mail notices to shareholders.


J.

In case of any request or demand for the inspection of the securityholder files or stock books of the Trust or any other books or records in the possession of the Trust in BOSTON FINANCIAL's possession, BOSTON FINANCIAL will not permit such inspection, except (i) after prior notification to and approval in writing by the Trust or Advisor as appropriate, which approval shall not be unreasonably withheld and may not be withheld or delayed where BOSTON FINANCIAL may be exposed to civil or criminal contempt proceedings for failure to comply when requested to divulge such information by duly constituted authorities, or (ii) when so requested by the Trust or an Authorized Person. Nothing in the foregoing is intended to, nor does it, prohibit or deny to BOSTON FINANCIAL the right to disclose information requested by subpoena, court order, administrative order or request issued by a federal, state or local authority purporting to be issued under statutory authority or a self-regulatory organization registered under the '34 Act. BOSTON FINANCIAL shall promptly advise the Trust concerning subpoenas received for records of the Trust and, upon being so advised, the Trust shall be responsible for handling and responding thereto.


K.

If the Trust elects to delegate to BOSTON FINANCIAL certain Anti-Money Laundering and customer identification duties under this Agreement, the parties will agree to such duties and terms as stated in the attached schedule (“Schedule19 K. entitled “AML Delegation” which may be changed from time to time subject to mutual written agreement between the parties.  In consideration of the performance of the duties by BOSTON FINANCIAL pursuant to this Section 19 K., the Trust agrees to pay BOSTON FINANCIAL the fees applicable to such services as the parties may from time to time agree.


20.  PROVISIONS RELATING TO DIVIDEND DISBURSING AGENCY.


A.

BOSTON FINANCIAL will, at the expense of the Trust, provide a special form of check containing the imprint of any device or other matter desired by the Trust.  Said





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checks must, however, be of a form and size convenient for use by BOSTON FINANCIAL.



B.

If the Trust desires to include additional printed matter, financial statements, etc., with the dividend checks, the same will be furnished BOSTON FINANCIAL within a reasonable time prior to the date of mailing of the dividend checks, at the expense of the Trust.


C.

If the Trust desires its distributions mailed in any special form of envelopes, sufficient supply of the same will be furnished to BOSTON FINANCIAL but the size and form of said envelopes will be subject to the approval of BOSTON FINANCIAL.  If stamped envelopes are used, they must be furnished by the Trust; or if postage stamps are to be affixed to the envelopes, the stamps or the cash necessary for such stamps must be furnished by the Trust.


D.

BOSTON FINANCIAL shall establish and maintain, and is hereby authorized to establish and to maintain, under the usual terms and conditions prevalent in the industry and on behalf of the Trust as agent of the Trust, in BOSTON FINANCIAL's own name or under the J.P. Morgan name (or that of the Trusts as a group or of an Affiliate thereof), one or more deposit accounts, into which BOSTON FINANCIAL shall deposit the funds BOSTON FINANCIAL receives for payment of dividends, distributions, redemptions or other disbursements provided for hereunder and to draw checks against such accounts.


E.

BOSTON FINANCIAL is authorized and directed to stop payment of checks theretofore issued hereunder, but not presented for payment, when the payees thereof allege either that they have not received the checks or that such checks have been mislaid, lost, stolen, destroyed or through no fault of theirs, are otherwise beyond their control, and cannot be produced by them for presentation and collection, and, to issue and deliver duplicate checks in replacement thereof.


21.  ASSUMPTION OF DUTIES BY THE TRUST OR AGENTS DESIGNATED BY THE TRUST.


A.

The Trust or its designated agents other than BOSTON FINANCIAL may assume certain duties and responsibilities with respect to the operations of the Trust, including (with BOSTON FINANCIAL's agreement) providing all, or a portion, of those services which BOSTON FINANCIAL is obligated to provide under Section 4.D of this Agreement.


B.

To the extent the Trust or its agent or affiliate assumes BOSTON FINANCIAL's duties and responsibilities (which assumption should be embodied in writing), BOSTON FINANCIAL shall be relieved from all responsibility and liability therefore (including any Adverse Consequences directly or indirectly arising out of or resulting from the actions or omissions of the Trust or its designees, as well as from any "as of" liability or withholding reversals in connection therewith) and BOSTON FINANCIAL is hereby





27





indemnified and held harmless against any liability therefrom in the same manner and degree as provided for in Section 8 hereof.



C.

With respect to accounts serviced by JPM or banks affiliated with or a correspondent of JPM, the Trust or its designees shall be responsible for the following: (i) answering and responding to telephone inquiries from shareholders and brokers; (ii) accepting shareholder and broker instructions (either or both oral and written) and (A) transmitting to BOSTON FINANCIAL orders (transactions and maintenance) based on such instructions for input into TA2000 by BOSTON FINANCIAL or (B) themselves inputting such orders into TA2000 on a remote basis; (iii) preparing and mailing confirmations; (iv) classifying the status of shareholders and shareholder accounts under applicable tax law and in accordance with the capabilities provided on TA2000, and performing all compliance functions with respect thereto, including without limitation obtaining certified TIN's, Form W-8's and other documentation, and properly coding accounts (social codes, tax status, foreign accounts and so forth) as provided for on TA2000; (v) on a remote basis establishing shareholder accounts on the TA2000TM  System, establishing the appropriate privileges thereupon and assigning social codes and Taxpayer Identification Number codes thereof; (vi) disbursing monies of the Trust; (vii) sending redemption and dividend wires in accordance with instructions received; and (viii) following up and collecting upon unsettled trade orders and unpaid broker-dealer, institutional or shareholder "as of's."


22.  TERMINATION OF AGREEMENT.


A.

This Agreement shall be in effect from the 1st day of September, 2009, through the 31st day of August 2014 (the "Initial Term" of this Transfer Agency Agreement"). This Agreement shall thereafter automatically extend for additional, successive one (1) year terms upon the expiration of any term hereof, unless terminated as of the end of any term by either party on not less than one hundred and twenty (120) days prior written notice to the other party.  Each additional one (1) year period shall be an additional term of this Agreement.  However, notwithstanding anything in this Agreement to the contrary, the effective date of any termination shall not occur during the period from December 15 through March 30 of any year to avoid adversely impacting year end, except if pursuant to Section 22.B of this Agreement.  One hundred and twenty (120) days before the expiration of the Initial Term or a renewal term, the parties agree to negotiate in good faith and agree upon a fee schedule for the upcoming renewal term.  Notwithstanding the termination or non-renewal of this Agreement, the terms and conditions of this Agreement shall continue to apply until the completion of the deconversion.  The parties will mutually agree upon the timing and other details of the actual deconversion of the Trust’s business.


B.

Each party, in addition to any other rights and remedies, shall have the right to terminate this Agreement forthwith upon the occurrence at any time of any of the following events with respect to the other party:





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(1)

The bankruptcy of the other party or its assigns or the appointment of a receiver for the other party or its assigns;


(2)

failure by the other party or its assigns to perform its duties (including any material interruption or cessation of its operations) in accordance with the Agreement, which failure materially adversely affects the business operations of the first party and which failure continues for thirty (30) days after receipt of written notice from the first party, unless such failure is excused under Section 15 of this Agreement; or


(3)

merger, consolidation or sale of substantially all of the assets of the other party or its assigns; provided, however, that this Section 22.B.3 shall not apply to any mergers, consolidations or sales of substantially all of the assets of the Trust constituting a “shell reorganization;” or


(4)

acquisition of a controlling interest in the other party or its assigns by any third party except as may presently exist within the previous sixty (60) days.  For purposes of this Section 22.B(4), “control” shall be as defined in the Investment Company Act of 1940, as amended, except that the acquisition by a single shareholder of more than 25% of a Trust will not be considered a change in control.


In the event of a termination under this Section 22.B, the notice of termination for the reasons provided in this Section 22.B must be provided within sixty (60) days of a party’s learning of a reason permitting termination, and shall take effect within not less than ninety (90) and more than one hundred eighty (180) days from the date of receipt of the notice of termination.  Any termination by reasons set forth in Section 22.B(1) and (2) shall not be subject to any termination fees or penalties relating to or arising out of termination, including without limitation any such fees or penalties relating to or arising out of termination set forth in “NOTES TO THE FEE SCHEDULE, “ Paragraph E on Exhibit A attached to this Agreement.  In the event that (i) one or more Trusts terminate this Agreement as the result of an acquisition by or merger into another fund and the remaining Trusts wish to continue the Agreement, or (ii) the Trusts terminate this Agreement as the result of their acquisition by or merger into another fund and such other fund’s shareholder records are, at the time of such acquisition or merger, maintained by BOSTON FINANCIAL or its affiliates, or (iii) one or more Trusts wish to move its transfer agency servicing operation from BOSTON FINANCIAL to an affiliated entity or another DST TA2000 platform (i.e., become a remote user of DST’s TA2000 system) as the result of such Trusts acquisition by or merger into another fund, then the parties agree to negotiate in good faith to determine whether or to what extent the termination fees under this Agreement shall apply to such termination.


C.

BOSTON FINANCIAL may, on written notice to such Trust, immediately terminate this Agreement as to any Trust which itself or its Shares fail to be registered as provided in Section 3 of this Agreement at any time during this Agreement.





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D.

In the event of termination, the Trust will promptly pay BOSTON FINANCIAL all amounts due to BOSTON FINANCIAL hereunder, including any termination fee set forth in Exhibit A to this Agreement.


E.

In the event of termination, BOSTON FINANCIAL will use its best efforts to transfer the records of the Trust to the designated successor transfer agent, to provide reasonable assistance to the Trust and its designated successor transfer agent, and to provide other information relating to its services provided hereunder (subject to the recompense of BOSTON FINANCIAL for such assistance at its standard rates and fees for personnel then in effect at that time); provided, however, as used herein "reasonable assistance" and "other information" shall not include assisting any new service or system provider to modify, alter, enhance, or improve its system or to improve, enhance, or alter its current system, or to provide any new functionality or to require BOSTON FINANCIAL to disclose any BOSTON FINANCIAL Confidential Information, as hereinafter defined, or any information which is otherwise confidential to BOSTON FINANCIAL.


23.  CONFIDENTIALITY AND INFORMATION SECURITY.


A.

BOSTON FINANCIAL agrees on behalf of itself, its affiliates, its officers and employees, except as provided in Section 19.J. hereof, or as otherwise required by law, BOSTON FINANCIAL will keep confidential all records and data of and information in its possession relating to the Trust or its shareholders or shareholder accounts in any form disclosed to BOSTON FINANCIAL hereunder, including but not limited to any data and information in any form disclosed by the Trust, anyone acting on behalf of the Trust, or the Trust’s customers, prospective customers, or employees to BOSTON FINANCIAL, BOSTON FINANCIAL Personnel or any Subcontractor including Consumer Information (as “Consumer Information” is defined in SEC Regulation S-P) and non-public information which is learned by BOSTON FINANCIAL without the Trust’s intentional disclosure to it.  Such information includes all Trust software, specifications, documentation, product proposals, financial information, data, source or object code, documentation, manuals, studies, internally devised technology, system or network architecture or topology, security mechanisms, product or processing capacities, revenues, information relating to the business of the Trust (including internal procedures and policies, businesses plans, and products of the Trust), and all other trade secret, confidential or proprietary information and documentation of the Trust or its customers, prospective customers, employees, directors, outside directors, retirees and their respective spouses and families received in connection with this Agreement (whether or not it is designated as such) (collectively, the “Trust’s Confidential Information”).  BOSTON FINANCIAL shall not disclose the same to any person except at the instruction (standing or specific), request or with the consent of the Trust. Notwithstanding the foregoing, BOSTON FINANCIAL shall be permitted in the ordinary course of business to provide such information to third parties providing services to BOSTON FINANCIAL which BOSTON FINANCIAL utilizes in connection with the services BOSTON FINANCIAL provides to the Trust under this Agreement or in accordance with Section 19.J. of this Agreement and where such third parties have entered into confidentiality





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agreements with BOSTON FINANCIAL that contain provisions at least as restrictive as those contained herein.


(1)

BOSTON FINANCIAL acknowledges that any unauthorized use, misuse, disclosure or taking of the Trust’s Confidential Information which is confidential as provided by law, or which is a trade secret, residing or existing internal or external to a computer, computer system, or computer network, or the knowing and unauthorized accessing or causing to be accessed of any computer, computer system, or computer network, may be subject to civil liabilities and criminal penalties under applicable state law.  BOSTON FINANCIAL will advise all of its employees and agents who have access to any the Trust’s Confidential Information or to any computer equipment capable of accessing the Trust’s hardware or software of the foregoing.


(2)

BOSTON FINANCIAL acknowledges that disclosure of the Trust’s Confidential Information may give rise to an irreparable injury to the Trust inadequately compensable in damages. Accordingly, the Trust may seek (without the posting of any bond or other security) injunctive relief against the breach of the foregoing undertaking of confidentiality and nondisclosure, in addition to any other legal remedies which may be available, and BOSTON FINANCIAL consents to the obtaining of such injunctive relief.


B.

BOSTON FINANCIAL has provided the Trust with a summary of its information security standards, which are subject to change by BOSTON FINANCIAL from time to time to meet industry changes.  BOSTON FINANCIAL agrees to comply with such information security standards in the performance of its services under this Agreement.  BOSTON FINANCIAL acknowledges receipt of the Trust’s information security standards and, to the extent that BOSTON FINANCIAL does not comply with the Trust’s standards, BOSTON FINANCIAL shall inform the Trust of the standards it has adopted in lieu thereof.


C.

The Trust on behalf of itself, its affiliates, its officers and employees and all entities which it directs BOSTON FINANCIAL to provide any of the following information agrees to keep confidential all financial statements and other financial records (other than statements and records relating solely to the Trust's business dealings with BOSTON FINANCIAL) and all manuals, systems and other technical information and data, not publicly disclosed, relating to the operations and programs of BOSTON FINANCIAL and DST furnished to it by BOSTON FINANCIAL pursuant to this Agreement and will not disclose the same to any person except at the request or with the consent of BOSTON FINANCIAL.


D.

(1)

The Trust acknowledges that BOSTON FINANCIAL and/or its affiliates have proprietary rights in and to the TA2000TM System used to perform services hereunder including, but not limited to the maintenance of shareholder accounts and records, processing of related information and generation of output, including, without limitation any changes or modifications of the TA2000TM System and any other programs, data bases, supporting documentation, or procedures and all software, specifications, documentation, product proposals, financial information, data, source or object code,





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documentation, manuals, studies, internally devised technology, system or network architecture or topology, security mechanisms, product or processing capacities, revenues, information relating to the business of BOSTON FINANCIAL and/or its affiliates (including internal procedures and policies, businesses plans, and products of BOSTON FINANCIAL and/or its affiliates), and all other trade secret, confidential or proprietary information and documentation of BOSTON FINANCIAL and/or its Affiliates or its customers, prospective customers, employees, directors, outside directors, retirees and their respective spouses and families (whether or not it is designated as such) and non-public information which is learned by the Trust without BOSTON FINANCIAL’s intentional disclosure to it  (collectively "BOSTON FINANCIAL Confidential Information") which the Trust's access to the TA2000TM System or computer hardware or software may permit the Trust or its agents or the Trust’s employees, directors, outside directors, retirees, their respective spouses and families to become aware of or to access and that the BOSTON FINANCIAL Confidential Information constitutes confidential material and trade secrets of BOSTON FINANCIAL and/or its affiliates. The Trust agrees to maintain the confidentiality of the BOSTON FINANCIAL Confidential Information of which it is, or becomes, aware or to which it has access.


(2)

The Trust acknowledges that any unauthorized use, misuse, disclosure or taking of BOSTON FINANCIAL Confidential Information which is confidential as provided by law, or which is a trade secret, residing or existing internal or external to a computer, computer system, or computer network, or the knowing and unauthorized accessing or causing to be accessed of any computer, computer system, or computer network, may be subject to civil liabilities and criminal penalties under applicable state law. The Trust will advise all of its employees and agents who have access to any BOSTON FINANCIAL Confidential Information or to any computer equipment capable of accessing BOSTON FINANCIAL hardware or software of the foregoing.


(3)

The Trust acknowledges that disclosure of the BOSTON FINANCIAL Confidential Information may give rise to an irreparable injury to BOSTON FINANCIAL and/or its affiliates inadequately compensable in damages. Accordingly, BOSTON FINANCIAL may seek (without the posting of any bond or other security) injunctive relief against the breach of the foregoing undertaking of confidentiality and nondisclosure, in addition to any other legal remedies which may be available, and the Trust consents to the obtaining of such injunctive relief.


E. All of the undertakings and obligations relating to confidentiality and nondisclosure, whether contained in this Section or elsewhere in this Agreement shall survive the termination or expiration of this Agreement for a period of ten (10) years, except with respect to any non-public personal information as defined under federal and state privacy laws, for which information the undertakings and obligations relating to confidentiality and nondisclosure in this Agreement shall survive the termination or expiration of this Agreement for the period of time required by such applicable law.



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24.  CHANGES AND MODIFICATIONS.


A.

During the term of this Agreement BOSTON FINANCIAL will use on behalf of the Trust without additional cost all modifications, enhancements, or changes which BOSTON FINANCIAL or its affiliates may make to the TA2000TM System in the normal course of its business and which are applicable to functions and features offered by the Trust to its shareholders, unless those BOSTON FINANCIAL clients having substantially similar service and billing arrangements to the Trust are charged separately for such modifications, enhancements or changes, including, without limitation, substantial system revisions or modifications necessitated by changes in existing laws, rules or regulations. The Trust agrees to pay BOSTON FINANCIAL promptly for modifications and improvements to the TA2000TM System that are charged for separately at the rate provided for in BOSTON FINANCIAL's standard pricing schedule to the extent that the standard pricing schedule addresses costs not controlled by BOSTON FINANCIAL, which shall be identical for those BOSTON FINANCIAL clients which have substantially similar service and billing arrangements to the Trust, if a standard pricing schedule shall exist; provided that nothing herein shall prevent the Trust from attempting to negotiate directly with BOSTON FINANCIAL’s affiliate, DST Systems, Inc., with respect to pricing related to the TA2000 System. If there is no standard pricing schedule, the parties shall mutually agree upon the rates to be charged.  Changes, modifications, or enhancements to BOSTON FINANCIAL’s non-system related operations shall be handled in accordance with Section 4.F of this Agreement.


B.

BOSTON FINANCIAL and/or its affiliates shall have the right, at any time and from time to time, to alter and modify any systems, programs, procedures or facilities used or employed in performing its duties and obligations hereunder; provided that the Trust will be notified as promptly as possible prior to implementation of such alterations and modifications and that no such alteration or modification or deletion shall materially adversely change or affect the operations and procedures of the Trust in using or employing the TA2000TM System or BOSTON FINANCIAL Facilities hereunder or the reports to be generated by such system and facilities hereunder, unless the Trust is given thirty (30) days prior notice to allow the Trust to change its procedures and BOSTON FINANCIAL provides the Trust with revised operating procedures and controls.


C.

All enhancements, improvements, changes, modifications or new features added to the TA2000TM System however developed or paid for shall be, and shall remain, the confidential and exclusive property of, and proprietary to, BOSTON FINANCIAL and/or its affiliates.


25.  ASSIGNMENT AND SUBCONTRACTORS.


A.

Neither this Agreement nor any rights or obligations hereunder may be assigned by either party hereto without the written consent of the other party. In the event of a mutually agreed to assignment, each party shall remain liable for the performance of its assignee(s). BOSTON FINANCIAL may, however, employ agents to assist it in





33





performing its duties hereunder; provided, however, that BOSTON FINANCIAL shall be fully responsible to the Trust for the acts and omissions of any agent employed by it to the same extent as it is for its own acts and omissions and BOSTON FINANCIAL shall obtain the Trust’s prior approval for the employment of any such agent that is not an affiliate of BOSTON FINANCIAL.  The foregoing shall not be deemed to apply to any direct contracts between the Trust and any affiliate of BOSTON FINANCIAL as to which BOSTON FINANCIAL is not a party.  BOSTON FINANCIAL may provide the services hereunder from service locations within or outside of the United States; provided, however, that such services shall only be provided outside the United States if the Trust has given its prior approval and so long as such service providers comply with all applicable U.S. laws and regulations concerning the services to be performed hereunder.


B.

Notwithstanding anything in this Agreement to the contrary, nothing herein shall impose any duty upon BOSTON FINANCIAL in connection with or make BOSTON FINANCIAL liable for the actions or omissions to act of unaffiliated third parties, over which BOSTON FINANCIAL has no direct control through contract or other means, such as, by way of example and not limitation, Airborne services, the U.S. mails, the National Securities Clearing Commission and telecommunication companies, provided, if BOSTON FINANCIAL selected such company, BOSTON FINANCIAL shall have exercised due care in selecting the same.


26.  LIMITATIONS ON LIABILITY.


A.

Notwithstanding anything in this Agreement to the contrary, each Trust that executed this Agreement is and shall be regarded for all purposes hereunder as a separate party apart from each other Trust and any Fund of any such other Trust. To the extent that a Trust is comprised of more than one Fund, each Fund shall be regarded for all purposes hereunder as a separate party apart from each other Fund.  Unless the context otherwise requires, with respect to every transaction covered by this Agreement, every reference herein to the Trust shall be deemed to relate solely to the particular Fund or Trust to which such transaction relates. Under no circumstances shall the rights, obligations or remedies with respect to a particular Trust or a particular Fund constitute a right, obligation or remedy applicable to any other Trust or Fund. The use of this single document to memorialize the separate agreement of each Trust and each Fund herein is understood to be for clerical convenience only and shall not constitute any basis for joining the Trusts or Funds for any reason.


B.

Notice is hereby given that a copy of each Trust's Declaration of Trust or Certificate of Trust and all amendments thereto is on file with the Secretary of State of the state of its organization; that this Agreement has been executed on behalf of the Trust by the undersigned duly authorized representative of the Trust in his/her capacity as such and not individually; and that the obligations of this Agreement shall only be binding upon the assets and property of the Trust and shall not be binding upon any trustee, officer or shareholder of the Trust individually.




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27.  NON-SOLICITATION


Each party agrees that, during any term of this Agreement and for twelve (12) calendar months after its termination or expiration, it will not solicit for employment any employees of the other party or the other party’s affiliates without the written consent of such party.  This provision shall not apply to solicitations that are made pursuant to any general advertisement for or solicitation of employees placed on a website, or in a newspaper or similar publication where such solicitation is not targeted at the other party’s employees.



28.  MISCELLANEOUS.


A.

This Agreement shall be construed according to, and the rights and liabilities of the parties hereto shall be governed by, the laws of the Commonwealth of Massachusetts, excluding that body of law applicable to choice of law.


B.

All terms and provisions of this Agreement shall be binding upon, inure to the benefit of and be enforceable by the parties hereto and their respective successors and permitted assigns.


C.

The representations and warranties, and the indemnification extended hereunder, if any, are intended to and shall continue after and survive the execution, expiration, termination or cancellation of this Agreement or the performance of services hereunder until any statute of limitations applicable to the matter at issues shall have expired.


D.

No provisions of this Agreement may be amended or modified in any manner except by a written agreement properly authorized and executed by each party hereto.


E.

The captions in this Agreement are included for convenience of reference only, and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect.


F.

This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument.


G.

If any part, term or provision of this Agreement is by the courts held to be illegal, in conflict with any law or otherwise invalid, the remaining portion or portions shall be considered severable and not be affected, and the rights and obligations of the parties shall be construed and enforced as if the Agreement did not contain the particular part, term or provision held to be illegal or invalid.


H.

Neither the execution nor performance of this Agreement shall be deemed to create a partnership or joint venture by and between the Trust and BOSTON FINANCIAL. It is understood and agreed that all services performed hereunder by BOSTON FINANCIAL shall be as an independent contractor and not as an employee of the Trust. This Agreement is between BOSTON FINANCIAL and the Trust and neither this Agreement nor the performance of services under it shall create any rights in any third parties. There are no third party beneficiaries hereto.




35




I.

Except as specifically provided herein, this Agreement does not in any way affect any other agreements entered into among the parties hereto and any actions taken or omitted by any party hereunder shall not affect any rights or obligations of any other party hereunder.


J.

The failure of either party to insist upon the performance of any terms or conditions of this Agreement or to enforce any rights resulting from any breach of any of the terms or conditions of this Agreement, including the payment of damages, shall not be construed as a continuing or permanent waiver of any such terms, conditions, rights or privileges, but the same shall continue and remain in full force and effect as if no such forbearance or waiver had occurred.


K.

(a)

During the term of this Agreement, the Trust hereby grants to BOSTON FINANCIAL a nonexclusive, worldwide and royalty-free right and license to store, reproduce, display, perform, transmit and use the Trust intellectual property and the Trust software in connection with the services, solely for the purposes necessary for BOSTON FINANCIAL to fulfill its obligations pursuant to this Agreement (and not for the benefit of any third party).  BOSTON FINANCIAL acknowledges and agrees that its use of the Trust intellectual property solely for the purposes necessary for BOSTON FINANCIAL to fulfill its obligations pursuant to this Agreement shall not create any right, title or interest in or to such  intellectual property.  Except for the licenses expressly granted hereunder by the Trust to BOSTON FINANCIAL, neither this Agreement nor any disclosure made hereunder grants any license by the Trust to BOSTON FINANCIAL of any Trust intellectual property.


 (b)

Except as may be otherwise expressly provided in this Agreement, the Trust does not grant to BOSTON FINANCIAL any right or license, express or implied, in or to the Trust intellectual property, the Trust software or the Trust’s operating environment.  BOSTON FINANCIAL agrees that the Trust and/or the Trust’s licensors’, as the case may be, are the exclusive owners of, and hold and shall retain, all right, title and interest in and to the Trust intellectual property, the Trust software, and the trust’s operating environment, and BOSTON FINANCIAL shall have no ownership or use rights therein except as set forth herein.


L.

Without the consent of the Trust, BOSTON FINANCIAL shall not use the Trust’s trade name, trademark, service mark or logo in BOSTON FINANCIAL’s public sales, marketing, or publicity activities including, but not limited to, press releases, interviews with representatives of any written publication, television station or network, or radio station or network.


M.

This Agreement constitutes the entire agreement between the parties hereto and supersedes any prior agreement, draft or agreement or proposal with respect to the subject matter hereof, whether oral or written, and this Agreement may not be modified except by written instrument executed by both parties.


N.

All notices to be given hereunder shall be deemed properly given if delivered in person or if sent by U.S. mail, first class, postage prepaid, or if sent by facsimile and thereafter confirmed by mail as follows: If to BOSTON FINANCIAL:




36





BOSTON FINANCIAL DATA SERVICES, INC.

The Poindexter Building

333 W. 9th Street

Kansas City, Missouri 64105

Attention:  Mark Scovell

Facsimile: (816) 843-8652


With a copy of non-operational notices to:

BOSTON FINANCIAL DATA SERVICES, INC.

2 Heritage Drive – 8th Floor

North Quincy, MA 02171

Attn: Legal Department

Facsimile No.: 617 483-2490


If to the Trust:

JPMORGAN (Each of the entities listed on Appendix A hereto except JPMorgan Value Opportunities Fund, Inc.)

245 Park Avenue

New York, New York 10167

Attention:  Fund Secretary

Facsimile No.:  212-648-1978


With a copy to:

JPMORGAN FUNDS

1111 Polaris Parkway, Floor 2G

Columbus, Ohio 43240

Attention: Head of Shareholder Services

Facsimile No.: 614-213-3486


If to JPMorgan Value Opportunities Fund, Inc.:

JPMorgan Value Opportunities Fund, Inc.

c/o Washington Management Corporation

1101 Vermont Avenue, N.W. Suite 600

Washington, D.C.  20005

Attention:  Michael W. Stockton

Facsimile No.:  202-842-5672



or to such other address as shall have been specified in writing by the party to whom such notice is to be given.



37





IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their respective duly authorized officers, to be effective as of the day and year first above written.


TRUST  (Each of the entities listed on Appendix A hereto

except JPMorgan Value Opportunities Fund, Inc.)



BY: ___________________________________


Title:-----------------------------------

as an Authorized Officer on behalf of each

of the Funds indicated on Appendix A

except JPMorgan Value Opportunities Fund, Inc.



JPMORGAN VALUE OPPORTUNITIES FUND, INC.



BY: ___________________________________


Title:-----------------------------------



BOSTON FINANCIAL DATA SERVICES, INC.



By: --------------------------------------


Title:-----------------------------------




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Appendix A

List of Entities Covered by the Transfer Agency Agreement

As of September 1, 2009


JPMorgan Institutional Trust – Delaware Statutory Trust

JPMorgan Intermediate Bond Trust

JPMorgan Core Bond Trust

JPMorgan Equity Index Trust


J.P. Morgan Fleming Mutual Fund Group, Inc. – Maryland Corporation

JPMorgan Mid Cap Value Fund


J.P. Morgan Mutual Fund Group – Massachusetts Business Trust

JPMorgan Short Term Bond Fund II


J.P. Morgan Mutual Fund Investment Trust – Massachusetts Business Trust

JPMorgan Growth Advantage Fund


JPMorgan Insurance Trust – Massachusetts Business Trust

JPMorgan Insurance Trust Balanced Portfolio

JPMorgan Insurance Trust Core Bond Portfolio

JPMorgan Insurance Trust Diversified Mid Cap Growth Portfolio

JPMorgan Insurance Trust Equity Index Portfolio

JPMorgan Insurance Trust International Equity Portfolio

JPMorgan Insurance Trust Intrepid Growth Portfolio

JPMorgan Insurance Trust Intrepid Mid Cap Portfolio

JPMorgan Insurance Trust Mid Cap Value Portfolio

JPMorgan Insurance Trust Small Cap Core Portfolio

JPMorgan Insurance Trust U.S. Equity Portfolio


JPMorgan Trust I – Delaware Statutory Trust

Highbridge Statistical Market Neutral Fund

JPMorgan 100% U.S. Treasury Securities Money Market Fund

JPMorgan Access Balanced Fund

JPMorgan Access Growth Fund

JPMorgan Asia Equity Fund

JPMorgan California Municipal Money Market Fund

JPMorgan California Tax Free Bond Fund

JPMorgan China Region Fund

JPMorgan Disciplined Equity Fund

JPMorgan Diversified Fund

JPMorgan Dynamic Growth Fund

JPMorgan Dynamic Small Cap Growth Fund

JPMorgan Emerging Economies Fund

JPMorgan Emerging Markets Debt Fund

JPMorgan Emerging Markets Equity Fund




39




JPMorgan Trust I (continued)

JPMorgan Federal Money Market Fund

JPMorgan Global Focus Fund

JPMorgan Growth and Income Fund

JPMorgan Income Builder Fund

JPMorgan India Fund

JPMorgan Intermediate Tax Free Bond Fund

JPMorgan International Currency Income Fund

JPMorgan International Equity Fund

JPMorgan International Markets Fund

JPMorgan International Opportunities Fund

JPMorgan International Opportunities Plus Fund

JPMorgan International Realty Fund

JPMorgan International Small Cap Equity Fund

JPMorgan International Value Fund

JPMorgan International Value SMA Fund

JPMorgan Intrepid America Fund

JPMorgan Intrepid European Fund

JPMorgan Intrepid Growth Fund

JPMorgan Intrepid International Fund

JPMorgan Intrepid Japan Fund

JPMorgan Intrepid Multi Cap Fund

JPMorgan Intrepid Plus Fund

JPMorgan Intrepid Value Fund

JPMorgan Latin America Fund

JPMorgan Market Neutral Fund

JPMorgan Mid Cap Equity Fund

JPMorgan New York Municipal Money Market Fund

JPMorgan New York Tax Free Bond Fund

JPMorgan Prime Money Market Fund

JPMorgan Real Return Fund

JPMorgan Russia Fund

JPMorgan Small Cap Core Fund

JPMorgan Small Cap Equity Fund

JPMorgan SmartRetirement Income Fund

JPMorgan SmartRetirement 2010 Fund

JPMorgan SmartRetirement 2015 Fund

JPMorgan SmartRetirement 2020 Fund

JPMorgan SmartRetirement 2025 Fund

JPMorgan SmartRetirement 2030 Fund

JPMorgan SmartRetirement 2035 Fund

JPMorgan SmartRetirement 2040 Fund

JPMorgan SmartRetirement 2045 Fund

JPMorgan SmartRetirement 2050 Fund

JPMorgan Strategic Income Opportunities Fund

JPMorgan Strategic Preservation Fund




40




JPMorgan Trust I (continued)

JPMorgan Strategic Small Cap Value Fund

JPMorgan Tax Aware Disciplined Equity Fund

JPMorgan Tax Aware High Income Fund

JPMorgan Tax Aware Real Return Fund

JPMorgan Tax Aware Real Return SMA Fund

JPMorgan Tax Aware U.S. Equity Fund

JPMorgan Tax Free Money Market Fund

JPMorgan Total Return Fund

JPMorgan U.S. Equity Fund

JPMorgan U.S. Large Cap Core Plus Fund

JPMorgan U.S. Large Cap Value Plus Fund

JPMorgan U.S. Small Company Fund

JPMorgan Value Advantage Fund

JPMorgan Value Discovery Fund


JPMorgan Trust II – Delaware Statutory Trust

JPMorgan Arizona Municipal Bond Fund

JPMorgan Core Bond Fund

JPMorgan Core Plus Bond Fund

JPMorgan Equity Income Fund

JPMorgan Equity Index Fund

JPMorgan Government Bond Fund

JPMorgan High Yield Bond Fund (to be renamed JPMorgan High Yield Fund as of 9/14/09)

JPMorgan International Equity Index Fund

JPMorgan Intrepid Mid Cap Fund

JPMorgan Investor Balanced Fund

JPMorgan Investor Conservative Growth Fund

JPMorgan Investor Growth & Income Fund

JPMorgan Investor Growth Fund

JPMorgan Large Cap Growth Fund

JPMorgan Large Cap Value Fund

JPMorgan Liquid Assets Money Market Fund

JPMorgan Market Expansion Index Fund

JPMorgan Michigan Municipal Bond Fund

JPMorgan Michigan Municipal Money Market Fund

JPMorgan Mid Cap Growth Fund

JPMorgan Mortgage-Backed Securities Fund

JPMorgan Multi-Cap Market Neutral Fund

JPMorgan Municipal Income Fund

JPMorgan Municipal Money Market Fund

JPMorgan Ohio Municipal Bond Fund

JPMorgan Ohio Municipal Money Market Fund

JPMorgan Short Duration Bond Fund

JPMorgan Short-Intermediate Municipal Bond Fund

JPMorgan Small Cap Growth Fund




41




JPMorgan Trust II (continued)

JPMorgan Small Cap Value Fund

JPMorgan Tax Free Bond Fund

JPMorgan Treasury & Agency Fund

JPMorgan U.S. Government Money Market Fund

JPMorgan U.S. Real Estate Fund

JPMorgan U.S. Treasury Plus Money Market Fund

JPMorgan Limited Duration Bond Fund


UM Investment Trust – Massachusetts Business Trust

Undiscovered Managers Multi-Strategy Fund


Undiscovered Managers Funds – Massachusetts Business Trust

JPMorgan Realty Income Fund

Undiscovered Managers Behavioral Growth Fund

Undiscovered Managers Behavioral Value Fund


JPMorgan Value Opportunities Fund, Inc. – Maryland Corporation




42




SCHEDULE 4.L.

BOSTON FINANCIAL DATA SERVICES

JPMORGAN FUNDS



SIMPLE IRA PLAN SERVICES



Effective Date:  


The services listed in this Schedule 4L  shall pertain only to SIMPLE IRAs on the DST’s TRAC 2000 record-keeping system (“TRAC”).  All references to “Business Days” shall mean each day the New York Stock Exchange is open for business.


1.   Plan Accounts / Data Maintenance.  With respect to SIMPLE IRAs, upon receipt of participant and beneficiary information (collectively, “Participant”) and demographic data from the employer sponsoring a SIMPLE IRA Plan (“Plan Sponsor”), BOSTON FINANCIAL shall enter such data into TRAC for the Plan and provide for the operation and maintenance of Plan records on TRAC.

 

2.   Participant Accounts.  Upon receipt of all necessary Participant data, demographic and other Participant enrollment data from Plan Sponsors and Participants, BOSTON FINANCIAL shall provide recordkeeping for each Participant account as set forth under the SIMPLE IRA Plan (“Account”).  BOSTON FINANCIAL shall maintain individual Participant Accounts on its records on TRAC in the name of the custodian for the benefit of the individual Participants. The Accounts of Participants will be credited with shares of the Trust ("Shares"). BOSTON FINANCIAL will, pursuant to instructions from Participants, purchase the instructed number of Shares and hold such Shares in the appropriate Participant Account.

3.

Contributions.  BOSTON FINANCIAL shall accept contributions sent to it from Plan Sponsors. Such contribution information must include: (a) either a check for the total amount of the contribution or funds representing the total amount of the contribution sent through the Automatic Clearing House (“ACH”) system; and (b) a payroll roster in a medium and format acceptable to BOSTON FINANCIAL. If the contributions and the Account Allocation Information (defined below) do not reconcile, then BOSTON FINANCIAL shall notify the Trust and a designee of the Trust shall then notify the Plan Sponsor in accordance with the process described in paragraph 8 below (Transactions “Not in Good Order”).  If the contributions and the Account Allocation Information do reconcile, then BOSTON FINANCIAL shall promptly allocate such contribution to Participants’ Accounts in accordance with the Account Allocation Information, allocate such contribution to the investment options available under the Plan (“Investment Options”) in accordance with the Investment Allocation Information (as defined below) and transfer the contributions to the various Plan Investment Options in accordance with the Investment Allocation Information.

a)

“Account Allocation Information” is the information supplied by the Plan Sponsor regarding the various contribution sources and amounts under the SIMPLE IRA Plan; and




43




b)

“Investment Allocation Information” is the Investment Option percentages or amounts that the Participant has directed for investment in an Investment Option from time to time.

4.  Crediting Participant's Accounts.  After receipt of monies paid with respect to any sale, BOSTON FINANCIAL will credit such monies to the appropriate Account of selling Participants in accordance with its procedures.

5.

Earnings and Losses.  On each Business Day, BOSTON FINANCIAL shall allocate earnings and losses as reported to BOSTON FINANCIAL for each Fund that is an Investment Option in a Participant’s Account.


6.   Receipt of Dividends. BOSTON FINANCIAL will receive payments for dividends and distributions declared by issues of Shares of each Fund and credit each to the appropriate Participant Accounts.


7

Adjustment Processing.  The Participant Accounts will be adjusted with Shares, or Shares shall be reversed and re-entered, as instructed by the Plan Sponsor or Participant and as permitted by the Trust.  


8.

Transactions “Not in Good Order” (NIGOs).  For Plan Sponsor or Participant transaction requests (including contributions received via payroll files) that are not in good order when received by BOSTON FINANCIAL, BOSTON FINANCIAL shall notify a representative designated by the Trust who will subsequently notify the affected Plan Sponsor or Participant, as the case may be, by telephone on the day of receipt of such information in order to resolve any outstanding issues relating to the transaction.  If the outstanding issues relating to the transaction are not, for whatever reason, resolved to BOSTON Financial’s satisfaction within five (5) Business Days then BOSTON FINANCIAL shall reject the transaction and send a notice to the Plan Sponsor or Participant, as the case may be, indicating the date of rejection and why.


9.

Distribution Processing. BOSTON FINANCIAL shall process distributions to Participants in accordance with the written directions of the Participants. BOSTON FINANCIAL shall withhold and deposit federal and state income taxes as may be required by law and prepare Internal Revenue Service Form 1099-R or such other forms as may be required under the Internal Revenue Code for the reporting of distributions.  


10. Transaction Processing Resolution.  BOSTON FINANCIAL shall respond to inbound and outbound transaction processing related telephone calls from Plan Sponsors and Participants in a timely manner.


11. Tax Withholding.  BOSTON FINANCIAL shall withhold taxes on U.S. resident and non-resident alien Participant Accounts if applicable, prepare and file with the U.S. Treasury reports with respect to taxes withheld.


12. Plan Sponsor Instructions.  BOSTON FINANCIAL will receive for acceptance instructions (only via hardcopy written form) from Plan Sponsors. Plan Sponsors will be solely responsible for reimbursing impacted Participants to the extent a transaction error was caused by a




44




Participant instruction to BOSTON FINANCIAL and such error caused an investment related loss to a Participant’s Account.

13.  Annual Notices.  BOSTON FINANCIAL shall, during each year this Agreement is in effect, provide Plan Sponsors a copy of the most recent version of IRS Form 5304 SIMPLE.  In anticipation of such mailing, the Trust agrees to notify BOSTON FINANCIAL each time the IRS revises IRS Form 5304-SIMPLE.  In addition, BOSTON FINANCIAL agrees to mail a SIMPLE IRA Employee Participation Notice with a cover letter, both to be written by the Trust, to Participants.

 

14.  Telephone Call Center.  BOSTON FINANCIAL shall accept telephone calls from Plan Sponsors and Participants from 8am-5pm ET Monday through Friday. Such telephone calls will come in though an 800 number and will be handled on a recorded line.  BOSTON FINANCIAL shall respond to routine and general inquiries regarding the SIMPLE IRA services. BOSTON FINANCIAL will instruct Plan Sponsors and Participants to contact their own legal advisor if they require legal or tax advice since BOSTON FINANCIAL cannot and will not provide legal or tax advice to any Plan Sponsor or any Participant.  

15.

Internet Services.  As requested and subject to the execution and terms of a separate agreement between the Trust and DST Systems, Inc. concerning Internet services, known as “TRAC Web”, BOSTON  FINANCIAL and DST shall provide Internet services for Plan Sponsor and Participant inquires and transactions via a Trust branded website linked to BOSTON FINANCIAL.  Notwithstanding any references herein to the use of the Internet and the provision of services through, over or by means of the Internet, all Internet based services shall be provided under and pursuant to a separate agreement.  


16.  SIMPLE IRA Documents.  In connection with the SIMPLE IRA services, BOSTON FINANCAIL shall make available to Participants the State Street Bank and Trust Company SIMPLE Individual Retirement Custodial Account agreement (based on IRS Form 5305) and the accompanying Disclosure Statement (collectively the “SIMPLE IRA Documents”).  In order to receive the SIMPLE IRA services, Participants must agree to be bound by the terms and conditions specified in the SIMPLE IRA Documents.   

17.  Custodian Appointment/Acceptance.  BOSTON FINANCIAL will arrange for its affiliate, State Street Bank and Trust Company (“State Street”), to act as a custodian for Participant Accounts under the terms and conditions of the SIMPLE IRA Documents referenced above.  State Street’s agreement to act as a custodian shall be conditioned on a Participant adopting the custodial account agreement contained in the SIMPLE IRA Documents and providing all information requested by BOSTON FINANCIAL or State Street. BOSTON FINANCIAL and the Trust shall develop agreed upon acceptance procedures and the Trust will communicate such acceptance procedures to Plan Sponsors and Participants. After reviewing such information, State Street reserves the right to not accept appointment as custodian. If State Street accepts appointment as custodian then upon its appointment as custodian, State Street shall provide the duties specified in the SIMPLE IRA Documents, including but not limited to, registering the Account assets in its name for the benefit of the Participant.  




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18.  Anti-Money Laundering (“AML) Delegated Duties.  With respect to Participant Accounts associated with the Plans, BOSTON FINANCIAL shall carry out the AML Delegated Duties set forth in Schedule 19.K.  


19.

  RPO Mail Processing.  The BOSTON FINANCIAL shall handle return post office mail for Plan Sponsors and Participants in a timely manner.


For greater clarity, the Trust, and not BOSTON FINANCIAL, shall respond to any correspondence from Plan Sponsors, Participants or any other parties on behalf of the Trust.






46





SCHEDULE 6.E(4)

BOSTON FINANCIAL DATA SERVICES

JPMORGAN FUNDS

Exception Services




In accordance with Section 6.E(4)of the Agreement, the parties agree that to the best of their knowledge, the Exception Services (as defined in the Agreement) that are being provided to the Trust as of the date hereof are as follows:


1.

Hourly monitoring of redemption demand deposit (“DDA”) accounts.  Notifications sent to JPMorgan via email detailing status of outgoing money movement. (Red/Green Email)

2.

BOSTON FINANCIAL sends emails containing screen shots of Same-Day Cash Manager to JPMorgan after all fund closings.  

3.

BOSTON FINANCIAL sends emails containing screen shots of SDCM Projected Cash screens daily to JPMorgan.

·

California Municipal Money Market Fund

·

Tax Free Money Market Fund

·

Michigan Municipal Money Market Fund

·

Municipal  Money Market Fund

·

Ohio Municipal Money Market Fund

·

New York Municipal Money Market Fund

4.

BOSTON FINANCIAL provides monthly dividend information to specified intermediaries via fax. This information is also provided systematically via refresher files.

·

Chaselink – we convert the report to Excel

·

Suisse – Adhoc dividend reports as requested

·

BPI Div email

5.

Monthly TA Billing for JPMorgan

·

Daily tracking/reconciliation of fund breakage and compensation owed from shareholders and intermediaries.

·

BOSTON FINANCIAL holds compensation open items 2-months in arrears in the JPMorgan DDAs.

·

Balancing/Reconciliation of previous months sweep earnings and overdraft compensation

6.

BOSTON FINANCIAL provides blind wire communication to JPMorgan at every fund cut-off

7.

End-of-Day Unfunded and Blind wire notification process

·

Tracking of compensation or adjusting accrual buckets to pay for compensation

·

Unfunded transactions – BOSTON FINANCIAL applies a stop transfer on the account until funding is received.  If there is a pending redemption, the stop transfer is applied the following morning.

8.

BOSTON FINANCIAL provides Deutsche Bank daily confirmation via email for daily/monthly dividend rates provided systematically.




47




9.

JPMorgan Distribution Services Audit

·

Quarterly audit specific to the JPMorgan Distribution Services, Inc. dealer.

10.

Periodically, JPMorgan requests BOSTON FINANCIAL to manually circumvent the systematic wire redemption process to redeem funds from the one hour DDA vs. the wire redemption DDA.

11.

BOSTON FINANCIAL sends a daily email of Short Term Trader fees to JPMorgan Fund Accounting. This data is also provided systematically via TA2000 supersheets.

12.

BOSTON FINANCIAL sends a daily email to Deutsche Bank detailing previous day’s transactions.  This data is also systematically confirmed to Deutsche Bank via nightly refreshers.

13.

BOSTON FINANCIAL provides daily notification via email of 2:00 PM CT cash totals to the JPMorgan New York Cash Desk.

·

US Government Money Market Fund

·

Prime Money Market Fund

·

US Treasury Plus Money Market Fund

·

Liquid Assets Money Market Fund

·

Municipal Money Market Fund

14.

JPMorgan Global Liquidity sends next day transactions or future dated transactions to BOSTON FINANCIAL to suspend in AWD for processing the following day.  

15.

Transactions received by JPMorgan Global Liquidity prior to the fund cut-off but not processed are sent to BOSTON FINANCIAL for processing as current day trades.









48




SCHEDULE 8.C

BOSTON FINANCIAL DATA SERVICES

JPMORGAN FUNDS


Indemnification -- Limit of Liability


A.

In accordance with the provisions of Section 8.C, in the event that any claim is asserted against BOSTON FINANCIAL under this Agreement for any reason other than BOSTON FINANCIAL’s bad faith or willful misconduct, BOSTON FINANCIAL's aggregate liability during any term of this Agreement with respect to, arising from or arising in connection with this Agreement, or from all services provided or omitted to be provided under this Agreement, whether in contract, or in tort, or otherwise, is limited to, and shall not exceed, the amounts paid hereunder by the Trust to BOSTON FINANCIAL as fees and charges, but not including reimbursable expenses, during the previous sixteen (16) months under this Agreement or the preceding agreement (the "Liability Limitation Amount").


B.

The Liability Limitation Amount set forth above shall not apply to Adverse Consequences resulting from any fraud committed by BOSTON FINANCIAL’s employees or any intentional malevolent violations by BOSTON FINANCIAL’s employees.   For purposes of this Schedule 8.C., “intentional malevolent violations” shall mean those acts undertaken purposefully under circumstances in which the person acting knows or has reason to believe that such act violates such person’s obligations under this Agreement and is likely to cause danger or harm to the other party or its shareholders.




49




SCHEDULE 19.K

BOSTON FINANCIAL DATA SERVICES

JPMORGAN FUNDS


AML DELEGATION


Dated: September 1, 2009


1.

Delegation.  


1.1

Subject to the terms and conditions set forth in this Agreement, the Trust hereby delegates to BOSTON FINANCIAL those aspects of the Trust’s AML program (the “AML Program”) that are set forth in Section 4 below (the “Delegated Duties”). The Delegated Duties set forth in Section 4 may be amended, from time to time, by mutual agreement of the Trust and BOSTON FINANCIAL upon the execution by such parties of a revised Schedule 19.K bearing a later date than the date hereof.


1.2

BOSTON FINANCIAL agrees to perform such Delegated Duties, with respect to the ownership of Shares in the Trust for which BOSTON FINANCIAL maintains the applicable shareholder information, subject to and in accordance with the terms and conditions of this Agreement.


2.

Consent to Examination.  In connection with the performance by BOSTON FINANCIAL of the Delegated Duties, BOSTON FINANCIAL understands and acknowledges that the Trust remains responsible for assuring compliance with the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“USA PATRIOT Act”) and that the records BOSTON FINANCIAL maintains for the Trust relating to the AML Program may be subject, from time to time, to examination and/or inspection by federal regulators in order that the regulators may evaluate such compliance.  BOSTON FINANCIAL hereby consents to such examination and/or inspection and agrees to cooperate with such federal examiners in connection with their review.  For purposes of such examination and/or inspection, BOSTON FINANCIAL will use its best efforts to make available, during normal business hours and on reasonable notice all required records and information for review by such examiners.


3.

Limitation on Delegation.  The Trust acknowledges and agrees that in accepting the delegation hereunder, BOSTON FINANCIAL is agreeing to perform only the Delegated Duties, as may be amended from time to time, and is not undertaking and shall not be responsible for any other aspect of the AML Program or for the overall compliance by the Trust with the USA PATRIOT Act or for any other matters that have not been delegated hereunder. Additionally, the parties acknowledge and agree that BOSTON FINANCIAL shall only be responsible for performing the Delegated Duties with respect to the ownership of, and transactions in, Shares in the Trust for which BOSTON FINANCIAL maintains the applicable Shareholder information.




50




4.

Delegated Duties  


Consistent with the services provided by BOSTON FINANCIAL and with respect to the ownership of Shares in the Trust for which BOSTON FINANCIAL maintains the applicable Shareholder information, BOSTON FINANCIAL shall:


(a)

Submit all new account registrations and registration changes through the Office of Foreign Assets Control (“OFAC”) database and such other lists or databases as may be required from time to time by applicable regulatory authorities on a daily basis;


(b)

Submit all account registrations through OFAC databases and such other lists or databases as may be required from time to time by applicable regulatory authorities;


(c)

Submit special payee information from checks, outgoing wires and systematic withdrawal files through the OFAC database on a daily basis;


(d)

Review redemption transactions that occur within thirty (30) days of an account establishment or registration change or banking information change;


(e)

Review wires sent pursuant to banking instructions other than those on file with BOSTON FINANCIAL;


(f)

Review accounts with small balances followed by large purchases;


(g)

Review accounts with frequent activity within a specified date range followed by a large redemption;


(h)

Review purchase and redemption activity per tax identification number (“TIN”) within the Trust to determine if activity for that TIN exceeded the $100,000 threshold on any given day;


(i)

Monitor and track cash equivalents under $10,000 for a rolling twelve-month period; if the threshold is exceeded, file IRS Form 8300 and issue the Shareholder notices as required by the IRS;


(j)

Determine when a suspicious activity report (“SAR”) should be filed as required by regulations applicable to mutual funds; prepare and file the SAR; provide the Trust with a copy of the SAR within a reasonable time after filing; and notify the Trust if any further communication is received from the U.S. Department of the Treasury or other law enforcement agencies regarding such filing;


(k)

Compare account information to any FinCEN request received by the Trust and provided to BOSTON FINANCIAL pursuant to USA PATRIOT Act Sec. 314(a).  




51




Provide the Trust with the necessary information for it to respond to such request within required time frame;


(l)

(i) Verify the identity of any person seeking to open an account with the Trust, (ii) Maintain records of the information used to verify the person’s identity, as required, and (iii) Determine whether the person appears on any lists of known or suspected terrorists or terrorist organizations provided to the Trust by any government agency;


(m)

Conduct due diligence and if required, enhanced due diligence in accordance with 31 C.F.R. 103.176(b) for new and existing correspondent accounts for foreign financial institutions (as defined in 31 C.F.R. 103.175).  BOSTON FINANCIAL will perform an assessment of the money laundering risk presented by the account based on a consideration of relevant factors in accordance with applicable law and information provided by the foreign financial institution in a financial institution questionnaire.  If an account is determined to have a medium or above risk-ranking, BOSTON FINANCIAL will monitor the account on a monthly basis for unusual activity.  In the situation where due diligence cannot be completed with respect to an account, BOSTON FINANCIAL will contact the Trust’s AML Officer for further instruction.


(n)

Upon the request by the Trust, conduct due diligence to determine if the Trust is involved with any foreign jurisdiction, institution, class of transactions and a type of account designated, from time to time, by the U.S. Department of Justice in order to identify and take certain “special measures” against such entities as required under Section 311 of the USA PATRIOT Act (31 C.F.R. 103.193).


4.1

In the event that BOSTON FINANCIAL detects activity as a result of the foregoing procedures, which necessitates the filing by BOSTON FINANCIAL of a SAR, a Form 8300 or other similar report or notice to OFAC, then BOSTON FINANCIAL shall also immediately notify the Trust, unless prohibited by applicable law.





52


 EX-99.(H)(2)(B) 6 d25481-ex99h2b.htm SCHEDULE A

SCHEDULE A

TO THE ADMINISTRATION AGREEMENT

FOR JPMORGAN INSTITUTIONAL TRUST

(Amended as of June 26, 2009)



JPMorgan Intermediate Bond Trust

JPMorgan Core Bond Trust

JPMorgan Equity Index Trust




*     *     *     *     *




 


JPMorgan Funds Management, Inc.


 

 

By:

/s/ Patricia A. Maleski


 

 


Name:

Patricia A. Maleski


 

 


Title:

Managing Director



 

 


JPMorgan Institutional Trust


 

 

By:

/s/ Francesco Tango


 

 


Name:

Francesco Tango


 

 


Title:

Assistant Treasurer







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