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AS FILED ELECTRONICALLY WITH THE SECURITIES AND EXCHANGE COMMISSION ON
NOVEMBER 5, 2010
SECURITIES ACT FILE NO. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-14
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 | x | |
Pre-Effective Amendment No. | ¨ | |
Post-Effective Amendment No. | ¨ |
COLUMBIA FUNDS VARIABLE INSURANCE TRUST
(Exact Name of Registrant as Specified in Charter)
One Financial Center
Boston, Massachusetts 02111
(Address of Principal Executive Offices) (Zip Code)
617-426-3750
(Registrant’s Area Code and Telephone Number)
Scott R. Plummer, Esq.
5228 Ameriprise Financial Center
Minneapolis, MN 55474
(Name and Address of Agent for Service)
With a copy to:
Brian D. McCabe, Esq.
Ropes & Gray LLP
Prudential Tower
800 Boylston Street
Boston, Massachusetts 02199
TITLE OF SECURITIES BEING REGISTERED:
Class A and Class B shares of the Columbia Strategic Income Fund, Variable Series series of the Registrant.
Approximate Date of Proposed Public Offering: As soon as practicable after the effective date of this Registration Statement.
No filing fee is required because an indefinite number of shares have previously been registered pursuant to Rule 24f-2 under the Investment Company Act of 1940.
It is proposed that this filing will become effective on December 6, 2010 pursuant to Rule 488 under the Securities Act of 1933.
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RiverSource Variable Portfolio – Strategic Income Fund
Disciplined Asset Allocation Portfolios – Conservative
Disciplined Asset Allocation Portfolios – Moderately Conservative
Disciplined Asset Allocation Portfolios – Moderate
Disciplined Asset Allocation Portfolios – Moderately Aggressive
Disciplined Asset Allocation Portfolios – Aggressive
COMBINED PROXY STATEMENT/PROSPECTUS
[—], 2010
This is a brief overview of the reorganization and certain other actions proposed for your fund. We encourage you to read the full text of the enclosed combined proxy statement/prospectus.
Q: Why am I being asked to vote?
Funds are required to obtain shareholder approval for certain kinds of changes, like the reorganizations proposed in the enclosed combined proxy statement/prospectus. As a shareholder of one of the above-listed funds, you are being asked to vote on a reorganization involving your fund. In addition, the trustees of each of the funds listed above have nominated candidates for election or re-election as trustees. Shareholders of those funds are entitled to vote in these elections.
Q: What is a fund reorganization?
A fund reorganization involves one fund transferring all of its assets and liabilities to another fund in exchange for shares of such fund. Once completed, shareholders of the selling fund will hold shares of the buying fund.
Q: Is my vote important?
Absolutely! While the Board of Trustees (the “Board”) of each fund listed above has reviewed the proposed reorganizations and recommends that you approve them, these proposals generally cannot go forward without the approval of shareholders. Similarly, while the Board has nominated candidates for trustee, you have the right to vote to elect the trustees that oversee your fund. Until a fund is sure that a quorum has been reached, it will continue to contact shareholders asking them to vote.
Q: On what am I being asked to vote?
Shareholders are being asked to vote on the reorganization (a “Reorganization”) of one or more funds (each a “Selling Fund” and together, the “Selling Funds”) into another corresponding fund (each a “Buying Fund” and together, the “Buying Funds”), as noted in the table below:
Selling Fund | Buying Fund | |
RiverSource Variable Portfolio – Strategic Income Fund | Columbia Strategic Income Fund, Variable Series | |
Disciplined Asset Allocation Portfolios – Conservative | Variable Portfolio – Conservative Portfolio | |
Disciplined Asset Allocation Portfolios – Moderately Conservative | Variable Portfolio – Moderately Conservative Portfolio | |
Disciplined Asset Allocation Portfolios – Moderate | Variable Portfolio, Moderate Portfolio | |
Disciplined Asset Allocation Portfolios – Moderately Aggressive | Variable Portfolio – Moderately Aggressive Portfolio | |
Disciplined Asset Allocation Portfolios – Aggressive | Variable Portfolio – Aggressive Portfolio |
If the Reorganization of your Selling Fund is approved by shareholders and the other closing conditions are met, your shares of the Selling Fund will, in effect, be converted into shares of a corresponding class of the corresponding Buying Fund with the same aggregate net asset value as that of your Selling Fund shares at the time of the Reorganization. (Selling Funds and Buying Funds are referred to individually or collectively as a “Fund” or the “Funds.”) While the aggregate net asset value of your shares will not change as a result of the Reorganization, the number of shares you hold may differ based on each Fund’s net asset value.
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In addition, shareholders of each Selling Fund are being asked to vote for the election or re–election of sixteen nominees as trustees of the Funds.
All shares of the Selling Funds are owned of record by sub–accounts of separate accounts of insurance companies (the “Participating Insurance Companies”) established to fund benefits under variable annuity contracts and variable life insurance policies (each a “Contract”) issued by the Participating Insurance Companies. Persons holding Contracts are referred to herein and in the proxy statement/prospectus as “Contract Owners.” References to “shareholder” refer to a separate account of a Participating Insurance Company. Depending on the context, references to “you” or “your” herein and in the proxy statement/prospectus refer to the Contract Owner and/or to the Participating Insurance Company separate account.
The Participating Insurance Company that issued your Contract is the legal owner of your Selling Fund’s shares and will vote those shares at a joint special meeting of shareholders of the Selling Fund. However, as a Contract Owner, you are entitled to instruct the Participating Insurance Company how to vote the shares attributable to your Contract.
If the Reorganization of your Selling Fund is approved by the Participating Insurance Companies and the other closing conditions are met, interests in your Selling Fund attributable to your Contract will, in effect, be converted into interests of the corresponding Buying Fund with the same aggregate net asset value as that of your Selling Fund interests at the time of the Reorganization. Selling Funds and Buying Funds are referred to individually or collectively as a “Fund” or the “Funds,” respectively, in the attached documents. While the aggregate net asset value of your shares will not change as a result of the Reorganization, the number of shares attributable to your Contract may differ based on each Fund’s net asset value.
We encourage you to read the full text of the enclosed combined proxy statement/prospectus to obtain a more detailed understanding of the issues relating to each proposed Reorganization and the election or re-election of nominees as trustees to the Board.
Q: Why are the Reorganizations being proposed?
On May 1, 2010, Ameriprise Financial, Inc., the parent company of Columbia Management Investment Advisers, LLC (formerly known as RiverSource Investments, LLC), the Funds’ investment manager (“Columbia Management”), closed its acquisition of the long–term asset management business of Columbia Management Group, LLC and certain of its affiliated companies from Bank of America, N.A. (the “Transaction”). In connection with the Transaction, Columbia Management became the investment manager of the Columbia–branded funds, in addition to the RiverSource–, Seligman– and Threadneedle–branded funds.
The proposed Reorganizations are among the reorganizations recommended by Columbia Management following the Transaction. Columbia Management’s overall goal in proposing the Reorganizations is twofold. First, by combining Columbia–, RiverSource–, Seligman– and Threadneedle–branded funds with generally similar investment objectives, strategies and policies, each combined investment portfolio will be larger, which tends to lead to greater efficiency. Second, by streamlining the product offering of the combined fund complex (the “Combined Fund Complex”), management, administration, distribution and other resources can be focused more effectively on a smaller group of funds. The Reorganization of each Selling Fund into the corresponding Buying Fund will enable you to invest in a larger, potentially more efficient portfolio while continuing to pursue a similar investment strategy.
Q: Are there costs or tax consequences of the Reorganizations?
Reorganization costs will be allocated to each Fund only to the extent they are expected to be offset by the anticipated reduction in expenses borne by the Fund’s shareholders during the first year following the Reorganization. Provided that the Contracts qualify to be treated as life insurance contracts under Section 7702(a) of the Internal Revenue Code of 1986, as amended (the “Code”) or annuity contracts under Section 72 of the Code, the Reorganization will not be a taxable event for Contract Owners regardless of the tax status of the Reorganization, or whether the Selling Funds and corresponding Buying Funds are treated for U.S. federal income tax purposes as partnerships or regulated investment companies (“RICs”). A portion, which may be substantial, of the portfolio assets of a Selling Fund may be sold in connection with its Reorganization. Such sales will cause a Selling Fund to incur transaction costs.
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Q: If approved, when will the Reorganizations happen?
The Reorganizations will take place as soon as practicable following shareholder approval, and are expected to close before the end of the second quarter of 2011.
Q: Why has the Board nominated candidates for election to the Board?
Currently, certain of the legacy Columbia–branded Funds are overseen by one board of trustees and all of the legacy RiverSource–branded funds (including the Seligman– and Threadneedle–branded funds) are overseen by another board of directors/trustees. In light of the Transaction, the directors/trustees of those Funds believe that the combination of the two legacy boards of directors/trustees into one combined board of directors/trustees will result in cost efficiencies for fund shareholders and enhance the oversight of a larger, combined fund family.
Q: How does the Board recommend that I vote?
After careful consideration, the Board recommends that you vote FOR the Reorganization of your Selling Fund and FOR each nominee for election as trustee of your Fund.
Q: How can I vote?
You can instruct your Participating Insurance Company how to vote the shares attributable to your Contract in one of three ways:
• | By telephone ([[phone number]]) |
• | By internet ([[internet url]]) |
• | By mail (using the enclosed postage prepaid envelope) |
We encourage you to provide voting instructions as soon as possible. Please refer to the enclosed voting instruction card for instructions for providing voting instructions by telephone, internet or mail.
Q: Will I be notified of the results of the vote?
Please check www.columbiamanagement.com for updated information on the proposals described in the enclosed proxy statement/prospectus, including voting results.
Q: Whom should I call if I have questions?
If you have questions about any of the proposals described in the combined proxy statement/prospectus or about voting procedures, please call the Participating Insurance Company that issued your Contract. Computershare Fund Services has been engaged to provide mailing and tabulation services. [[It is not expected that the Funds will require active solicitation services for any proposal or that Computershare Fund Services will receive any amount for solicitation services.]].
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NOTICE OF A JOINT SPECIAL MEETING OF SHAREHOLDERS
RiverSource Variable Series Trust
RiverSource Variable Portfolio – Strategic Income Fund
Disciplined Asset Allocation Portfolios – Conservative
Disciplined Asset Allocation Portfolios – Moderately Conservative
Disciplined Asset Allocation Portfolios – Moderate
Disciplined Asset Allocation Portfolios – Moderately Aggressive
Disciplined Asset Allocation Portfolios – Aggressive
To be held [—], 2011
A Joint Special Meeting of Shareholders (the “Meeting”) of each of the Funds listed above (each a “Selling Fund”) will be held at [—] [a.m./p.m.] on [—] 2011, at [—] in the [—] room on the [—] floor. At the Meeting, shareholders will consider the following proposals with respect to their Selling Fund:
1. | To approve the Agreement and Plan of Reorganization (the “Agreement”) by and among RiverSource Variable Series Trust, on behalf of its RiverSource Variable Portfolio – Strategic Income Fund, Disciplined Asset Allocation Portfolios – Conservative, Disciplined Asset Allocation Portfolios – Moderately Conservative, Disciplined Asset Allocation Portfolios – Moderate, Disciplined Asset Allocation Portfolios – Moderately Aggressive, Disciplined Asset Allocation Portfolios – Aggressive, Variable Portfolio – Conservative, Variable Portfolio – Moderately Conservative, Variable Portfolio – Moderate, Variable Portfolio – Moderately Aggressive, and Variable Portfolio – Aggressive series, Columbia Funds Variable Insurance Trust, on behalf of its Columbia Strategic Income Fund, Variable Series series, certain other registered investment companies and Columbia Management Investment Advisers, LLC, pursuant to which each selling fund, as indicated below (each a “Selling Fund”), will transfer that portion of its assets attributable to each class of its shares (in aggregate, all of its assets) to the corresponding buying fund, as indicated below (each a “Buying Fund”), in exchange for shares of a corresponding class of the Buying Fund and the assumption by the Buying Fund of all of the liabilities of the Selling Fund. Shares of each class of the Buying Fund will be distributed proportionately to shareholders of the relevant class of the Selling Fund. |
Shareholders of each Selling Fund will vote separately on the relevant proposal, as shown below.
Selling Fund | Buying Fund | Proposal # | ||
RiverSource Variable Portfolio – Strategic Income Fund | Columbia Strategic Income Fund, Variable Series | 1 | ||
Disciplined Asset Allocation Portfolios – Conservative | Variable Portfolio – Conservative Portfolio | 2 | ||
Disciplined Asset Allocation Portfolios – Moderately Conservative | Variable Portfolio – Moderately Conservative Portfolio | 3 | ||
Disciplined Asset Allocation Portfolios – Moderate | Variable Portfolio – Moderate Portfolio | 4 | ||
Disciplined Asset Allocation Portfolios – Moderately Aggressive | Variable Portfolio – Moderately Aggressive Portfolio | 5 | ||
Disciplined Asset Allocation Portfolios – Aggressive | Variable Portfolio – Aggressive Portfolio | 6 |
2. | To elect nominees as trustees (Proposal 7). |
Shareholders of each of the Selling Funds will vote on Proposal 7 together as a single class with shareholders of each other series of RiverSource Variable Series Trust.
Please take some time to read the enclosed combined proxy statement/prospectus. It discusses these proposals in more detail. If you were a Contract Owner on December 17, 2010, you may instruct your Participating Insurance Company how to vote the shares attributable to your contract at the Meeting or at any adjournment or postponement of the Meeting. You are welcome to attend the
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Meeting in person. If you cannot attend in person, please instruct your Participating Insurance Company how to vote by mail, telephone or internet. Just follow the instructions on the enclosed voting instruction card. If you have questions, please call the Participating Insurance Company that issued your Contract. It is important that you instruct your Participating Insurance Company how to vote the shares attributable to your Contract. The Board of Trustees of each Selling Fund recommends that you instruct your Participating Insurance Company to vote FOR the Reorganization of the Selling Fund, and FOR each nominee for trustee.
By order of the Board of Trustees
Scott R. Plummer, Secretary
[—], 2010
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RiverSource Variable Portfolio – Strategic Income Fund
Disciplined Asset Allocation Portfolios – Conservative
Disciplined Asset Allocation Portfolios – Moderately Conservative
Disciplined Asset Allocation Portfolios – Moderate
Disciplined Asset Allocation Portfolios – Moderately Aggressive
Disciplined Asset Allocation Portfolios – Aggressive
COMBINED PROXY STATEMENT/PROSPECTUS
Dated [—], 2010
This document is a proxy statement for each Selling Fund (as defined below) and a prospectus for each Buying Fund (as defined below). The address and telephone number of each Selling Fund and each Buying Fund is c/o Columbia Management Investment Services Corp., P.O. Box 8081, Boston, MA 02266–8081, and 800.345.6611. This combined proxy statement/prospectus and the enclosed proxy card were first mailed to shareholders of each Selling Fund beginning on or about January [—], 2011. This combined proxy statement/prospectus contains information you should know before providing voting instructions on the following proposals with respect to your Selling Fund, as indicated below:
Proposal | To be voted on by | |||||||||||||||||
1. | To approve an Agreement and Plan of Reorganization by and among RiverSource Variable Series Trust, on behalf of its RiverSource Variable Portfolio – Strategic Income Fund series (a “Selling Fund”), Columbia Funds Variable Insurance Trust, on behalf of its Columbia Strategic Income Fund, Variable Series series (a “Buying Fund”), certain other registered investment companies and Columbia Management Investment Advisers, LLC (“Columbia Management”). Under the agreement, the Selling Fund will transfer that portion of its assets attributable to each class of its shares (in aggregate, all of its assets) to the Buying Fund in exchange for shares of the corresponding class of the Buying Fund (as indicated below) and the assumption by the Buying Fund of all of the liabilities of the Selling Fund. Shares of each class of the Buying Fund will be distributed proportionately to shareholders of the relevant class of the Selling Fund. | RiverSource Variable Portfolio – Strategic Income Fund | ||||||||||||||||
Selling Fund | Buying Fund | |||||||||||||||||
Class 1 | g | Class A | ||||||||||||||||
Class 2 | g | Class B | ||||||||||||||||
2. | To approve an Agreement and Plan of Reorganization by and among RiverSource Variable Series Trust, on behalf of its Disciplined Asset Allocation Portfolios – Conservative series (a “Selling Fund”), RiverSource Variable Series Trust, on behalf of its Variable Portfolio – Conservative Portfolio series (a “Buying Fund”), certain other registered investment companies and Columbia Management Investment Advisers, LLC. Under the agreement, the Selling Fund will transfer that portion of its assets attributable to each class of its shares (in aggregate, all of its assets) to the Buying Fund in exchange for shares of the corresponding class of the Buying Fund (as indicated below) and the assumption by the Buying Fund of all of the liabilities of the Selling Fund. The Buying Fund shares will be distributed proportionately to shareholders of the relevant class of the Selling Fund. | Disciplined Asset Allocation Portfolios – Conservative | ||||||||||||||||
Selling Fund | Buying Fund | |||||||||||||||||
Class 2 | g | Class 2 | ||||||||||||||||
3. | To approve an Agreement and Plan of Reorganization by and among RiverSource Variable Series Trust, on behalf of its Disciplined Asset Allocation Portfolios – Moderately Conservative series (a “Selling Fund”), RiverSource Variable Series Trust, on behalf of its Variable Portfolio – Moderately Conservative Portfolio series (a “Buying Fund”), certain other registered investment companies and Columbia Management Investment Advisers, LLC. Under the agreement, the Selling Fund will transfer that portion of its assets attributable to each class of its shares (in aggregate, all of its assets) to the Buying Fund in exchange for shares of the corresponding class of the Buying Fund (as indicated below) and the assumption by the Buying Fund of all of the liabilities of the Selling Fund. The Buying Fund shares will be distributed proportionately to shareholders of the relevant class of the Selling Fund. | Disciplined Asset Allocation Portfolios – Moderately Conservative | ||||||||||||||||
Selling Fund | Buying Fund | |||||||||||||||||
Class 2 | g | Class 2 |
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Proposal | To be voted on by | |||||||||||||||||
4. | To approve an Agreement and Plan of Reorganization by and among RiverSource Variable Series Trust, on behalf of its Disciplined Asset Allocation Portfolios – Moderate series (a “Selling Fund”), RiverSource Variable Series Trust, on behalf of its Variable Portfolio – Moderate Portfolio series (a “Buying Fund”), certain other registered investment companies and Columbia Management Investment Advisers, LLC. Under the agreement, the Selling Fund will transfer that portion of its assets attributable to each class of its shares (in aggregate, all of its assets) to the Buying Fund in exchange for shares of the corresponding class of the Buying Fund (as indicated below) and the assumption by the Buying Fund of all of the liabilities of the Selling Fund. The Buying Fund shares will be distributed proportionately to shareholders of the relevant class of the Selling Fund. | Disciplined Asset Allocation Portfolios – Moderate | ||||||||||||||||
Selling Fund | Buying Fund | |||||||||||||||||
Class 2 | g | Class 2 | ||||||||||||||||
5. | To approve an Agreement and Plan of Reorganization by and among RiverSource Variable Series Trust, on behalf of its Disciplined Asset Allocation Portfolios – Moderately Aggressive series (a “Selling Fund”), RiverSource Variable Series Trust, on behalf of its Variable Portfolio – Moderately Aggressive Portfolio series (a “Buying Fund”), certain other registered investment companies and Columbia Management Investment Advisers, LLC. Under the agreement, the Selling Fund will transfer that portion of its assets attributable to each class of its shares (in aggregate, all of its assets) to the Buying Fund in exchange for shares of the corresponding class of the Buying Fund (as indicated below) and the assumption by the Buying Fund of all of the liabilities of the Selling Fund. The Buying Fund shares will be distributed proportionately to shareholders of the relevant class of the Selling Fund. | Disciplined Asset Allocation Portfolios – Moderately Aggressive | ||||||||||||||||
Selling Fund | Buying Fund | |||||||||||||||||
Class 2 | g | Class 2 | ||||||||||||||||
6. | To approve an Agreement and Plan of Reorganization by and among RiverSource Variable Series Trust, on behalf of its Disciplined Asset Allocation Portfolios – Aggressive series (a “Selling Fund”), RiverSource Variable Series Trust, on behalf of its Variable Portfolio – Aggressive Portfolio series (a “Buying Fund”), certain other registered investment companies and Columbia Management Investment Advisers, LLC. Under the agreement, the Selling Fund will transfer that portion of its assets attributable to each class of its shares (in aggregate, all of its assets) to the Buying Fund in exchange for shares of the corresponding class of the Buying Fund (as indicated below) and the assumption by the Buying Fund of all of the liabilities of the Selling Fund. The Buying Fund shares will be distributed proportionately to shareholders of the relevant class of the Selling Fund. | Disciplined Asset Allocation Portfolios – Aggressive | ||||||||||||||||
Selling Fund | Buying Fund | |||||||||||||||||
Class 2 | g | Class 2 | ||||||||||||||||
7. | To elect nominees as trustees. | RiverSource Variable Portfolio – Strategic Income Fund, Disciplined Asset Allocation Portfolios – Conservative, Disciplined Asset Allocation Portfolios – Moderately Conservative, Disciplined Asset Allocation Portfolios – Moderate, Disciplined Asset Allocation Portfolios – Moderately Aggressive, and Disciplined Asset Allocation Portfolios – Aggressive (each a “Board Election Fund”) |
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The proposals will be considered by shareholders who owned shares of the Selling Funds on December 17, 2010 at a joint special meeting of shareholders (the “Meeting”) that will be held at [•] [[a.m./p.m.]] on [•], 2011, at [•] in the [•] room on the [•] floor. Each of the Selling Funds and the Buying Funds (each a “Fund” and collectively, the “Funds”) is a registered open–end management investment company (or a series thereof). Please read this combined proxy statement/prospectus and keep it for future reference.
All shares of the Selling Funds are owned of record by sub–accounts of separate accounts of insurance companies (the “Participating Insurance Companies”) established to fund benefits under variable annuity contracts and variable life insurance policies (each a “Contract”) issued by the Participating Insurance Companies. The Participating Insurance Company that issued your Contract is the legal owner of your Selling Fund’s shares and therefore holds all voting rights with respect to those shares. Each Participating Insurance Company sponsors a separate account that funds your Contract. This separate account, along with any other separate accounts sponsored by a Participating Insurance Company, is the shareholder of your Selling Fund. The separate account is composed of subaccounts. Because you allocated Contract values to a subaccount that invests in your Selling Fund, you are entitled to instruct the Participating Insurance Company how to vote the shares attributable to your Contract.
Although the Board of Trustees (the “Board”) of each Selling Fund* recommends that shareholders approve the reorganization of the Selling Fund into the corresponding Buying Fund (each a “Reorganization”), the Reorganization of each Selling Fund is not conditioned upon the Reorganization of any other Selling Fund. Accordingly, if shareholders of one Selling Fund approve its Reorganization, but shareholders of a second Selling Fund do not approve the second Selling Fund’s Reorganization, it is expected that the Reorganization of the first Selling Fund will take place as described in this combined proxy statement/prospectus. If shareholders of any Selling Fund fail to approve its Reorganization, the Board of such Selling Fund will consider what other actions, if any, may be appropriate.
With respect to Proposal 7, shareholders of each Selling Fund will vote together as a single class with the shareholders of the other series of RiverSource Variable Series Trust. Thus, the outcome of Proposal 7 will depend in part on the votes of shareholders of those other series, which are being solicited separately.
*References to the Board of a Selling Fund refer to the Board of RiverSource Variable Series Trust, of which each Selling Fund is a series.
How Each Reorganization Will Work
• | Each Selling Fund will transfer all of its assets to the corresponding Buying Fund in exchange for shares of such Buying Fund (“Reorganization Shares”) and the assumption by the Buying Fund of all of the Selling Fund’s liabilities. |
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• | Each Buying Fund will issue Reorganization Shares with an aggregate net asset value equal to the aggregate value of the assets that it receives from the corresponding Selling Fund, less the liabilities it assumes from the corresponding Selling Fund. Each class of Reorganization Shares will be distributed to the shareholders of the corresponding class of the Selling Fund in liquidation of the Selling Fund in proportion to their holdings in such class of the Selling Fund. For example, holders of Class 2 shares of a Selling Fund will receive Class 2 shares of the corresponding Buying Fund with the same aggregate net asset value as their Selling Fund Class 2 shares at the time of the Reorganization. |
• | Reorganization costs will be allocated to each Fund only to the extent they are expected to be offset by the anticipated reduction in expenses borne by the Fund’s shareholders during the first year following the Reorganization. Each Reorganization is expected to be tax-free for U.S. federal income tax purposes. Accordingly, no gain or loss is expected to be recognized by the Selling Fund or its shareholders as a direct result of a Reorganization. A portion, which may be substantial, of the portfolio assets of a Buying Fund or Selling Fund may be sold before or after the Reorganization in connection with its Reorganization. Such sales will result in such Fund incurring transaction costs and may result in a |
Where to Get More Information
The following documents have been filed with the Securities and Exchange Commission (the “SEC”) and are incorporated into this combined proxy statement/prospectus by reference:
• | The Statement of Additional Information of the Buying Funds relating to the Reorganizations (the “Merger SAI”), dated [•], 2010; |
RiverSource Variable Portfolio – Strategic Income Fund
• | the prospectus of RiverSource Variable Portfolio– Strategic Income Fund, dated April 14, 2010, as supplemented to date; |
• | the Statement of Additional Information of RiverSource Variable Portfolio– Strategic Income Fund, dated April 14, 2010, amended and restated May 1, 2010, as supplemented to date; |
• | the Report of the Independent Registered Public Accounting Firm and the audited financial statements included in the Annual Report to Shareholders of RiverSource Variable Portfolio– Strategic Income Fund for the year ended December 31, 2009, and the unaudited financial statements included in the Semiannual Report to Shareholders of RiverSource Variable Portfolio– Strategic Income Fund for the period ended June 30, 2010; |
Disciplined Asset Allocation Portfolios – Conservative
• | the prospectus of Disciplined Asset Allocation Portfolios – Conservative, dated April 30, 2010, as supplemented to date; |
• | the Statement of Additional Information of Disciplined Asset Allocation Portfolios – Conservative, dated April 30, 2010, amended and restated May 1, 2010, as supplemented to date; |
• | the Report of the Independent Registered Public Accounting Firm and the audited financial statements included in the Annual Report to Shareholders of Disciplined Asset Allocation Portfolios – Conservative for the year ended December 31, 2009, and the unaudited financial statements included in the Semiannual Report to Shareholders of Disciplined Asset Allocation Portfolios – Conservative for the period ended June 30, 2010; |
Disciplined Asset Allocation Portfolios – Moderately Conservative
• | the prospectus of Disciplined Asset Allocation Portfolios – Moderately Conservative, dated April 30, 2010, as supplemented to date; |
• | the Statement of Additional Information of Disciplined Asset Allocation Portfolios – Moderately Conservative, dated April 30, 2010, amended and restated May 1, 2010, as supplemented to date; |
• | the Report of the Independent Registered Public Accounting Firm and the audited financial statements included in the Annual Report to Shareholders of Disciplined Asset Allocation Portfolios – Moderately Conservative for the year ended December 31, 2009, and the unaudited financial statements included in the Semiannual Report to Shareholders of Disciplined Asset Allocation Portfolios – Moderately Conservative for the period ended June 30, 2010; |
Disciplined Asset Allocation Portfolios – Moderate
• | the prospectus of Disciplined Asset Allocation Portfolios – Moderate, dated April 30, 2010, as supplemented to date; |
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• | the Statement of Additional Information of Disciplined Asset Allocation Portfolios – Moderate, dated April 30, 2010, amended and restated May 1, 2010, as supplemented to date; |
• | the Report of the Independent Registered Public Accounting Firm and the audited financial statements included in the Annual Report to Shareholders of Disciplined Asset Allocation Portfolios – Moderate for the year ended December 31, 2009, and the unaudited financial statements included in the Semiannual Report to Shareholders of Disciplined Asset Allocation Portfolios – Moderate for the period ended June 30, 2010; |
Disciplined Asset Allocation Portfolios – Moderately Aggressive
• | the prospectus of Disciplined Asset Allocation Portfolios – Moderately Aggressive, dated April 30, 2010, as supplemented to date; |
• | the Statement of Additional Information of Disciplined Asset Allocation Portfolios – Moderately Aggressive, dated April 30, 2010, amended and restated May 1, 2010, as supplemented to date; |
• | the Report of the Independent Registered Public Accounting Firm and the audited financial statements included in the Annual Report to Shareholders of Disciplined Asset Allocation Portfolios – Moderately Aggressive for the year ended December 31, 2009, and the unaudited financial statements included in the Semiannual Report to Shareholders of Disciplined Asset Allocation Portfolios – Moderately Aggressive for the period ended June 30, 2010; |
Disciplined Asset Allocation Portfolios – Aggressive
• | the prospectus of Disciplined Asset Allocation Portfolios – Aggressive, dated April 30, 2010, as supplemented to date; |
• | the Statement of Additional Information of Disciplined Asset Allocation Portfolios – Aggressive, dated April 30, 2010, amended and restated May 1, 2010, as supplemented to date; |
• | the Report of the Independent Registered Public Accounting Firm and the audited financial statements included in the Annual Report to Shareholders of Disciplined Asset Allocation Portfolios – Aggressive for the year ended December 31, 2009, and the unaudited financial statements included in the Semiannual Report to Shareholders of Disciplined Asset Allocation Portfolios – Aggressive for the period ended June 30, 2010; |
For a free copy of any of the documents listed above and/or to ask questions about this combined proxy statement/prospectus, please call the Participating Insurance Company that issued your Contract.
Each of the Funds is subject to the information requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, as amended (the “1940 Act”) and files reports, proxy materials and other information with the SEC. These reports, proxy materials and other information can be inspected and copied at the Public Reference Room maintained by the SEC. Copies may be obtained, after paying a duplicating fee, by electronic request at publicinfo@sec.gov, or by writing to the Public Reference Branch of the SEC, Office of Consumer Affairs and Information Services, 100 F Street, N.E., Washington, D.C. 20549–0102. In addition, copies of these documents may be viewed online or downloaded from the SEC’s website at www.sec.gov.
Please note that investments in the Funds are not bank deposits, are not federally insured, are not guaranteed by any bank or government agency and may lose value. There is no assurance that any Fund will achieve its investment objectives.
As with all open–end mutual funds, the SEC has not approved or disapproved these securities or passed on the adequacy of this combined proxy statement/prospectus. Any representation to the contrary is a criminal offense.
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46 | ||||
48 | ||||
48 | ||||
48 | ||||
48 | ||||
50 | ||||
51 | ||||
51 | ||||
54 |
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56 | ||||
56 | ||||
56 | ||||
56 | ||||
58 | ||||
59 | ||||
59 | ||||
62 | ||||
64 | ||||
64 | ||||
64 | ||||
64 | ||||
66 | ||||
67 | ||||
67 | ||||
70 | ||||
72 | ||||
72 | ||||
72 | ||||
73 | ||||
73 | ||||
Reasons for the Proposed Reorganizations and Board Deliberations | 75 | |||
78 | ||||
79 | ||||
80 | ||||
80 | ||||
Responsibilities of the Board with respect to Fund Management | ||||
85 | ||||
89 | ||||
89 | ||||
89 | ||||
90 | ||||
Section C – Proxy Voting and Shareholder Meeting Information | 91 | |||
Section D – Capitalization, Ownership of Fund Shares and Financial Highlights | 93 | |||
93 | ||||
95 | ||||
97 | ||||
104 | ||||
A–1 | ||||
B–1 | ||||
C–1 | ||||
D–1 | ||||
E–1 | ||||
F–1 | ||||
G. RiverSource Funds Boards – Board Governance Committee Charter | G–1 | |||
H–1 | ||||
I–1 |
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SECTION A — REORGANIZATION PROPOSALS
The following information describes each proposed Reorganization.
This combined proxy statement/prospectus is being used by each Selling Fund to solicit proxies to vote at a joint special meeting of shareholders. Shareholders of each Selling Fund will consider a proposal to approve the Agreement and Plan of Reorganization (the “Agreement”) providing for the Reorganization of their Selling Fund into the corresponding Buying Fund.
The following is a summary. More complete information appears later in this proxy statement/prospectus. You should read the entire proxy statement/prospectus and the exhibits because they contain details that are not included in this summary.
How Each Reorganization Will Work
• | Each Selling Fund will transfer all of its assets to the corresponding Buying Fund in exchange for Reorganization Shares and the assumption by the corresponding Buying Fund of all of the Selling Fund’s liabilities. |
• | Each Buying Fund will issue Reorganization Shares with an aggregate net asset value equal to the aggregate value of the assets that it receives from the corresponding Selling Fund, less the liabilities it assumes from the corresponding Selling Fund. Reorganization Shares of each class of each Buying Fund will be distributed to the shareholders of the corresponding class of the corresponding Selling Fund in proportion to their holdings of such class of such Selling Fund. For example, holders of Class 1 shares of most Selling Funds will receive Class 1 shares of the corresponding Buying Fund with the same aggregate net asset value as the aggregate net asset value of their Selling Fund Class 1 shares at the time of the Reorganization. |
• | [[As part of the Reorganization of your Selling Fund, systematic transactions (such as bank authorizations and systematic payouts) currently set up for your Selling Fund account may be transferred to your new Buying Fund account. Please contact your financial intermediary for additional details.]] |
• | After a Reorganization is completed, Selling Fund shareholders will be shareholders of the corresponding Buying Fund, and the Selling Fund will be dissolved. |
The tax consequences of the Reorganizations differ depending on whether each of the Selling Funds and corresponding Buying Funds is treated as a partnership or as a “regulated investment company” (“RIC”) for U.S. federal income tax purposes. However, as described below, none of the Reorganizations is expected to be a taxable event for Contract Owners.
The Reorganization in which the Selling Fund and Buying Fund are treated as RICs is expected to be tax-free to separate accounts of the Participating Insurance Companies (“Separate Accounts”) as shareholders for U.S. federal income tax purposes and will not take place unless the Selling Fund and the corresponding Buying Fund receive a satisfactory opinion of tax counsel substantially to the effect that the Reorganization will be tax-free, as described in more detail in the section entitled “Tax Status of the Reorganizations – RIC Reorganization.” Accordingly, no gain or loss is expected to be recognized by the Selling Fund, Separate Accounts or Contract Owners as a direct result of such Reorganization. For Separate Accounts as shareholders in such a Reorganization, the aggregate tax basis in the Reorganization Shares is expected to carry over from the shareholders’ Selling Fund shares, and the holding period in the Reorganization Shares is expected to include the shareholders’ holding period in the Selling Fund shares.
Each Reorganization in which the Selling Fund and its corresponding Buying Fund are treated as partnerships for U.S. federal income tax purposes is expected to be treated as a contribution of the Selling Fund’s assets to the Buying Fund in exchange for Reorganization Shares. Each of these Reorganizations will not take place unless the Selling Fund and the corresponding Buying Fund receive a satisfactory opinion of tax counsel substantially to the effect that the Selling Fund’s tax basis in its assets will carry over to the Buying Fund and the Buying Fund’s holding period in those assets will include the Selling Fund’s holding period therein, as described in more detail in the section entitled “Tax Status of the Reorganizations – Partnership-to-Partnership Reorganizations.”
Provided that the Contracts qualify to be treated as life insurance contracts under Section 7702(a) of the Internal Revenue Code of 1986, as amended (the “Code”) or annuity contracts under Section 72 of the Code, the Reorganization will not be a taxable event for Contract Owners regardless of the tax status of the Reorganization, or whether the Selling Funds and corresponding Buying Funds are treated as partnerships or RICs. For more information about the U.S. federal income tax consequences of the Reorganizations, see the section entitled “Tax Status of the Reorganizations.”
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The following tables describe the fees and expenses that you may pay if you buy and hold shares of a Fund. The tables do not reflect fees or expenses imposed under your Contract, if any. The total fees and expenses you bear may therefore be higher than those shown in the tables.
Annual fund operating expenses are based on expense ratios incurred during each Fund’s most recently completed fiscal year (adjusted to reflect any anticipated fee changes), and are expressed as a percentage (expense ratio) of the Fund’s average net assets during the period. Pro forma expense ratios shown are based on each Fund’s average net assets over the applicable Buying Fund’s most recently completed fiscal year (adjusted to reflect any anticipated fee changes). As of the date of this combined proxy statement/prospectus, each Fund’s net assets may be lower or higher than the Fund’s average net assets over such period. In general, a Fund’s annual operating expense ratios will increase as the Fund’s assets decrease and will decrease as the Fund’s assets increase. Accordingly, each Fund’s annual operating expense ratios, if adjusted based on net assets as of the date of this combined proxy statement/prospectus, could be higher or lower than those shown in the tables below. The commitment by Columbia Management Investment Advisers, LLC (“Columbia Management”) and its affiliates to waive fees and/or to reimburse expenses for the Buying Funds noted below may limit the effect that any decrease in such a Buying Fund’s net assets will have on its annual net operating expense ratios in the current fiscal year.
The fees and expenses below exclude one–time costs of the Reorganization. The costs of each Reorganization expected to be borne by each Fund are set forth in Exhibit A.
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Proposal 1 Fees and Expenses. Reorganization of RiverSource Variable Portfolio – Strategic Income Fund into Columbia Strategic Income Fund, Variable Series
If the Reorganization occurs, certain Reorganization expenses, as described in Exhibit A, will be allocated to the Selling Fund, which will reduce the Selling Fund’s net asset value prior to the closing of the Reorganization (by less than $0.01 per share based on the Selling Fund’s shares outstanding as of September 30, 2010).
Current and Pro Forma Fees and Expenses for the Most Recent Fiscal Year
The following tables do not reflect fees and expenses imposed under your Contract, if any. The total fees and expenses you bear may therefore be higher than those shown in the table.
Shareholder Fees (fees paid directly from your investment)
RiverSource Variable Portfolio – Strategic Income Fund (Current) (Selling Fund) | Class 1 | Class 2 | ||||||
Maximum sales charge (load) imposed on purchases (as a percentage of offering price) | N/A | N/A | ||||||
Maximum deferred sales charge (load) imposed on sales (as a percentage of net asset value at the time of your purchase or sale, whichever is lower) | N/A | N/A | ||||||
Columbia Strategic Income Fund, Variable Series (Current and Pro Forma) (Buying Fund)(1) | Class A | Class B | ||||||
Maximum sales charge (load) imposed on purchases (as a percentage of offering price) | N/A | N/A | ||||||
Maximum deferred sales charge (load) imposed on sales (as a percentage of net asset value at the time of your purchase or sale, whichever is lower). | N/A | N/A |
(1) | Share classes shown reflect expected share classes immediately following the Reorganization. |
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Annual Fund Operating Expenses (expenses that you pay each year as a percentage of the value of your investment):
RiverSource Variable Portfolio – Strategic Income Fund (Current) (Selling Fund) | Class 1 | Class 2 | ||||||
Management fees(1) | 0.64 | % | 0.64 | % | ||||
Distribution and/or service (12b–1) fees | 0.00 | % | 0.25 | % | ||||
Other expenses | 0.10 | % | 0.10 | % | ||||
Total annual Fund operating expenses | 0.74 | % | 0.99 | % | ||||
Fee waiver/expense reimbursement(2) | (0.16 | %) | (0.16 | %) | ||||
Net annual Fund operating expenses | 0.58 | % | 0.83 | % | ||||
Columbia Strategic Income Fund, Variable Series (Current) (Buying Fund) | Class A | Class B | ||||||
Management fees(3) | 0.60 | % | 0.60 | % | ||||
Distribution and/or service (12b–1) fees | 0.00 | % | 0.25 | % | ||||
Other expenses(4) | 0.22 | % | 0.22 | % | ||||
Total annual Fund operating expenses | 0.82 | % | 1.07 | % | ||||
Fee waiver/expense reimbursement(5) | (0.17 | %) | (0.17 | %) | ||||
Net annual Fund operating expenses | 0.65 | % | 0.90 | % | ||||
Columbia Strategic Income, Variable Series (Pro Forma) (Buying Fund) | Class A | Class B | ||||||
Management fees(6) | 0.60 | % | 0.60 | % | ||||
Distribution and/or service (12b–1) fees | 0.00 | % | 0.25 | % | ||||
Other expenses(4) | 0.13 | % | 0.13 | % | ||||
Total annual Fund operating expenses | 0.73 | % | 0.98 | % | ||||
Fee waiver/expense reimbursement(7) | (0.15 | %) | (0.15 | %) | ||||
Net annual Fund operating expenses | 0.58 | % | 0.83 | % |
(1) | Management fees are composed of an investment management services fees of 0.57% and an administration fee of 0.07%. |
(2) | Columbia Management and its affiliates have contractually agreed to waiver certain fees and to reimburse certain expenses (other than acquired fund fees and expenses, if any) until April 30, 2011, unless sooner terminated at the sole discretion of the Fund’s Board. Any amounts waived will not be reimbursed by the Fund. Under this agreement, net fund expenses (excluding acquired fund fees and expenses, if any) will not exceed 0.58% for Class 1 and 0.83% for Class 2. |
(3) | Management fees are composed of an investment management services fee of 0.53% and an administration fee of 0.07%. Management fees have been adjusted to reflect changes in contractual investment management fee rates expected to be effective in the second quarter of 2011, subject to shareholder approval. If the proposed changes were not reflected, Management fees shown would have been 0.60% (composed solely of an investment management services fee). |
(4) | Other expenses have been adjusted to reflect changes in contractual transfer agency fee rates, effective September 4, 2010, and other changes to contractual fee rates expected to be effective in the second quarter of 2011. |
(5) | Columbia Management has contractually agreed to reimburse a portion of the Buying Fund’s expenses so that Total annual Fund operating expenses (excluding fees and expenses of acquired funds, any brokerage commissions, interest, taxes and extraordinary expenses, but including custodian charges relating to overdrafts, if any), after giving effect to any balance credits from the Buying Fund’s custodian, do not exceed the following percentages of average daily net assets, on an annualized basis: 0.65% for Class A shares and 0.90% for Class B shares. The reimbursement arrangement shall continue in effect until April 30, 2012. These fee and expense arrangements may only be modified or amended with approval from all parties to such arrangements, including the Fund and Columbia Management. |
(6) | Management fees are composed of an investment management services fee of 0.53% and an administration fee of 0.07%. Management fees have been adjusted to reflect changes in contractual investment management fee rates expected to be effective in the second quarter of 2011, subject to shareholder approval. If the proposed changes were not reflected, Management fees shown would have been 0.60% (composed solely of an investment management services fee), and Total annual Fund operating expenses would have been 0.73% for Class A shares and 0.98% for Class B shares. |
(7) | Columbia Management has contractually agreed to reimburse a portion of the Buying Fund’s expenses so that Total annual Fund operating expenses (excluding fees and expenses of acquired funds, any brokerage commissions, interest, taxes and extraordinary expenses, but including custodian charges relating to overdrafts, if any), after giving effect to any balance credits from the Buying Fund’s custodian, do not exceed the following percentages of average daily net assets, on an annualized basis: 0.58% for Class A shares and 0.83% for Class B shares. The reimbursement arrangement shall continue in effect until April 30, 2012. |
Expense examples: These examples are intended to help you compare the cost of investing in each Fund with the cost of investing in other mutual funds. These examples assume that you invest $10,000 in the applicable Fund for the time periods indicated and then redeem all of your shares at the end of those periods, both under the current arrangements and, for the Buying Fund, assuming completion of the proposed Reorganization. These examples also assume that your investment has a 5% return each year and that each Fund’s operating expenses remain the same. The example includes any contractual fee waiver/expense reimbursement arrangement only for the period indicated in the Fund’s annual Fund operating expenses table. Although your actual costs may be higher or lower, based on those assumptions, your costs would be:
RiverSource Variable Portfolio – Strategic Income Fund (Current) (Selling Fund) | 1 year | 3 years | 5 years | 10 years | ||||||||||||
Class 1 | $ | 59 | $ | 221 | $ | 396 | $ | 907 | ||||||||
Class 2 | $ | 85 | $ | 300 | $ | 532 | $ | 1,203 | ||||||||
Columbia Strategic Income Fund, Variable Series (Current) (Buying Fund) | ||||||||||||||||
Class A | $ | 66 | $ | 245 | $ | 438 | $ | 998 | ||||||||
Class B | $ | 92 | $ | 323 | $ | 574 | $ | 1,290 | ||||||||
Columbia Strategic Income Fund, Variable Series (Pro Forma) (Buying Fund) | ||||||||||||||||
Class A | $ | 59 | $ | 218 | $ | 391 | $ | 892 | ||||||||
Class B | $ | 85 | $ | 297 | $ | 527 | $ | 1,188 |
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Because none of the share classes have deferred sales charges, you would pay the same costs shown in the tables above if you did not redeem your shares at the end of the periods indicated.
Portfolio Turnover. The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs. Those costs, which are not reflected in annual fund operating expenses or in the example expenses, affect a Fund’s performance. During the most recent fiscal year, the Columbia Strategic Income Fund, Variable Series’ portfolio turnover rate was 50% of the average value of the Fund’s portfolio. RiverSource Variable Portfolio – Strategic Income Fund is new as of April 14, 2010 and therefore its portfolio turnover rate is not available.
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Proposal 2 Fees and Expenses. Reorganization of Disciplined Asset Allocation Portfolios – Conservative into Variable Portfolio – Conservative Portfolio
If the Reorganization occurs, certain Reorganization expenses, as described in Exhibit A, will be allocated to the Selling Fund, which will reduce the Selling Fund’s net asset value prior to the closing of the Reorganization (by less than $0.01 per share based on each Selling Fund’s shares outstanding as of September 30, 2010).
Current and Pro Forma Fees and Expenses for the Most Recent Fiscal Year
The following tables do not reflect fees and expenses imposed under your Contract, if any. The total fees and expenses you bear may therefore be higher than those shown in the table.
Shareholder Fees (fees paid directly from your investment)
Disciplined Asset Allocation Portfolios – Conservative (Current) (Selling Fund) | Class 2 | |||
Maximum sales charge (load) imposed on purchases (as a percentage of offering price) | N/A | |||
Maximum deferred sales charge (load) imposed on sales (as a percentage of net asset value at time of your purchase or sale, whichever is lower) | N/A | |||
Variable Portfolio – Conservative Portfolio (Current and Pro Forma) (Buying Fund) | Class 2 | |||
Maximum sales charge (load) imposed on purchases (as a percentage of offering price) | N/A | |||
Maximum deferred sales charge (load) imposed on sales (as a percentage of net asset value at time of your purchase or sale, whichever is lower) | N/A |
Annual Fund Operating Expenses (expenses that you pay each year as a percentage of the value of your investment):
Disciplined Asset Allocation Portfolios – Conservative (Current) (Selling Fund) | Class 2 | |||
Management fees(1) | 0.02 | % | ||
Distribution and/or service (12b–1) fees | 0.25 | % | ||
Other expenses | 0.19 | % | ||
Acquired Fund fees and expenses (underlying Funds)(2) | 0.63 | % | ||
Total annual Fund operating expenses | 1.09 | % | ||
Fee waiver/expense reimbursement(3) | (0.05 | )% | ||
Net annual Fund operating expenses | 1.04 | % | ||
Variable Portfolio – Conservative Portfolio (Current) (Buying Fund) | Class 2 | |||
Management fees(1) | 0.02 | % | ||
Distribution and/or service (12b–1) fees | 0.25 | % | ||
Other expenses | 0.02 | % | ||
Acquired Fund fees and expenses (underlying Funds)(2) | 0.62 | % | ||
Total annual Fund operating expenses | 0.91 | % | ||
Variable Portfolio – Conservative Portfolio (Pro Forma) (Buying Fund) | Class 2 | |||
Management fees(1) | 0.02 | % | ||
Distribution and/or service (12b–1) fees | 0.25 | % | ||
Other expenses | 0.02 | % | ||
Acquired Fund fees and expenses (underlying Funds)(2) | 0.62 | % | ||
Total annual Fund operating expenses | 0.91 | % |
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(1) | Management fees are composed solely of an administration fee of 0.02%. |
(2) | Acquired fund fees and expenses include fees and expenses associated with the Fund’s investments in other investment companies and/or pooled investment vehicles. |
(3) | Columbia Management and its affiliates have contractually agreed to waive certain fees and to reimburse certain expenses until April 30, 2011, unless sooner terminated at the sole discretion of the Fund’s Board. These fee and expense arrangements may only be modified or amended with approval from all parties to such arrangements, including the Fund and Columbia Management. Any amounts waived under this agreement will not be reimbursed by the Fund. Under this agreement, net Fund expenses (excluding fees and expenses of acquired funds) will not exceed 0.41%. |
Expense examples: These examples are intended to help you compare the cost of investing in the Funds with the cost of investing in other mutual funds. The examples do not reflect fees and expenses imposed under your variable annuity contract and/or variable life insurance policy, if any. If the example reflected these fees and expenses, the figures shown below would be higher. These examples assume that you invest $10,000 in the applicable Fund for the time periods indicated and then redeem all of your shares at the end of those periods, both under the current arrangements and, for the Buying Fund, assuming the proposed Reorganization had been in effect. These examples also assume that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. The example includes any contractual fee waiver/expense reimbursement arrangement only for the period indicated in the Fund’s annual Fund operating expenses table. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
Disciplined Asset Allocation Portfolios – Conservative (Current) (Selling Fund) | 1 year | 3 years | 5 years | 10 years | ||||||||||||
Class 2 | $ | 106 | $ | 342 | $ | 597 | $ | 1,329 | ||||||||
Variable Portfolio – Conservative Portfolio (Current) (Buying Fund) | ||||||||||||||||
Class 2 | $ | 93 | $ | 290 | $ | 505 | $ | 1,124 | ||||||||
Variable Portfolio – Conservative Portfolio (Pro Forma) (Buying Fund) | ||||||||||||||||
Class 2 | $ | 93 | $ | 290 | $ | 505 | $ | 1,124 |
Because none of the share classes have deferred sales charges, you would pay the same costs shown in the tables above if you did not redeem your shares at the end of the periods indicated.
Portfolio Turnover. Each Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs. Those costs, which are not reflected in annual Fund operating expenses or in the example expenses, affect a Fund’s performance. During the most recent fiscal year, Disciplined Asset Allocation Portfolios – Conservative’s portfolio turnover rate was 63% of the average value of the Fund’s portfolio. The Buying Fund is new as of April 14, 2010, therefore its portfolio turnover rate is not available.
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Proposal 3 Fees and Expenses. Reorganization of Disciplined Asset Allocation Portfolios – Moderately Conservative into Variable Portfolio – Moderately Conservative Portfolio
If the Reorganization occurs, certain Reorganization expenses, as described in Exhibit A, will be allocated to the Selling Fund, which will reduce the Selling Fund’s net asset value prior to the closing of the Reorganization (by less than $0.01 per share based on the Selling Fund’s shares outstanding as of September 30, 2010).
Current and Pro Forma Fees and Expenses for the Most Recent Fiscal Year
The following tables do not reflect fees and expenses imposed under your Contract, if any, and would be lower if they did. The total fees and expenses you bear may therefore be higher than those shown in the table.
Shareholder Fees (fees paid directly from your investment)
Disciplined Asset Allocation Portfolios – Moderately Conservative (Current) (Selling Fund) | Class 2 | |||
Maximum sales charge (load) imposed on purchases (as a percentage of offering price) | N/A | |||
Maximum deferred sales charge (load) imposed on sales (as a percentage of net asset value at the time of your purchase or sale, whichever is lower) | N/A | |||
Variable Portfolio – Moderately Conservative Portfolio (Current and Pro forma) (Buying Fund) | Class 2 | |||
Maximum sales charge (load) imposed on purchases (as a percentage of offering price) | N/A | |||
Maximum deferred sales charge (load) imposed on sales (as a percentage of net asset value at the time of your purchase or sale, whichever is lower) | N/A |
Annual Fund Operating Expenses (expenses that you pay each year as a percentage of the value of your investment):
Disciplined Asset Allocation Portfolios – Moderately Conservative (Current) (Selling Fund) | Class 2 | |||
Management fees(1) | 0.02 | % | ||
Distribution and/or service (12b–1) fees | 0.25 | % | ||
Other expenses | 0.17 | % | ||
Acquired Fund fees and expenses (underlying Funds)(2) | 0.64 | % | ||
Total annual Fund operating expenses | 1.08 | % | ||
Fee waiver/expense reimbursement(3) | (0.03 | %) | ||
Net annual Fund operating expenses | 1.05 | % | ||
Variable Portfolio – Moderately Conservative Portfolio (Current) (Buying Fund) | Class 2 | |||
Management fees(1) | 0.02 | % | ||
Distribution and/or service (12b–1) fees | 0.25 | % | ||
Other expenses | 0.02 | % | ||
Acquired Fund fees and expenses (underlying Funds)(2) | 0.66 | % | ||
Total annual Fund operating expenses | 0.95 | % | ||
Variable Portfolio – Moderately Conservative Portfolio (Pro Forma – All Reorganizations) | Class 2 | |||
Management fees(1) | 0.02 | % | ||
Distribution and/or service (12b–1) fees | 0.25 | % | ||
Other expenses | 0.00 | % | ||
Acquired Fund fees and expenses (underlying Funds)(2) | 0.66 | % | ||
Total annual Fund operating expenses | 0.93 | % |
(1) | Management fees are composed solely of an administration fee of 0.02%. |
(2) | Acquired fund fees and expenses include fees and expenses associated with the Fund’s investments in other investment companies and/or pooled investment vehicles. |
(3) | Columbia Management and its affiliates have contractually agreed to waive certain fees and to reimburse certain expenses until April 30, 2011, unless sooner terminated at the sole discretion of the Fund’s Board. These fee and expense arrangements may only be modified or amended with approval from all parties to such arrangements, including the Fund and Columbia Management. Any amounts waived under this agreement will not be reimbursed by the Fund. Under this agreement, net Fund expenses (excluding fees and expenses of acquired funds) will not exceed 0.41%. |
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Expense Examples: These examples are intended to help you compare the cost of investing in the Funds with the cost of investing in other mutual funds. The examples do not reflect fees and expenses imposed under your variable annuity contract and/or variable life insurance policy, if any. If the example reflected these fees and expenses, the figures shown below would be higher. These examples assume that you invest $10,000 in the applicable Fund for the time periods indicated and then redeem all of your shares at the end of those periods, both under the current arrangements and, for the Buying Fund, assuming the proposed Reorganization had been in effect. These examples also assume that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. The example includes any contractual fee waiver/expense reimbursement arrangement only for the period indicated in the Fund’s annual Fund operating expenses table. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
Disciplined Asset Allocation Portfolios – Moderately Conservative (Current) (Selling Fund) | 1 year | 3 years | 5 years | 10 years | ||||||||||||
Class 2 | $ | 107 | $ | 341 | $ | 593 | $ | 1,319 | ||||||||
Variable Portfolio – Moderately Conservative Portfolio (Current) (Buying Fund) | ||||||||||||||||
Class 2 | $ | 97 | $ | 303 | $ | 526 | $ | 1,171 | ||||||||
Variable Portfolio – Moderately Conservative Portfolio (Pro Forma Combined) | ||||||||||||||||
Class 2 | $ | 95 | $ | 297 | $ | 516 | $ | 1,147 |
Because none of the share classes have deferred sales charges, you would pay the same costs shown in the tables above if you did not redeem your shares at the end of the periods indicated.
Portfolio Turnover. Each Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs. Those costs, which are not reflected in annual fund operating expenses or in the example expenses, affect a Fund’s performance. During the most recent fiscal year, Disciplined Asset Allocation Portfolio – Moderately Conservative’s portfolio turnover rate was 39% of the average value of the Fund’s portfolio. The Buying Fund is new as of April 14, 2010, therefore its portfolio turnover rate is not available.
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Proposal 4 Fees and Expenses. Reorganization of Disciplined Asset Allocation Portfolios – Moderate into Variable Portfolio – Moderate Portfolio
If the Reorganization occurs, certain Reorganization expenses, as described in Exhibit A, will be allocated to the Selling Fund, which will reduce the Selling Fund’s net asset value prior to the closing of the Reorganization (by less than $0.01 per share based on the Selling Fund’s shares outstanding as of September 30, 2010).
Current and Pro Forma Fees and Expenses for the Most Recent Fiscal Year
The following tables do not reflect fees and expenses imposed under your Contract, if any. The total fees and expenses you bear may therefore be higher than those shown in the table.
Shareholder Fees (fees paid directly from your investment)
Disciplined Asset Allocation Portfolios – Moderate (Current) (Selling Fund) | Class 2 | |||
Maximum sales charge (load) imposed on purchases (as a percentage of offering price) | N/A | |||
Maximum deferred sales charge (load) imposed on sales (as a percentage of net asset value at the time of your purchase or sale, whichever is lower) | N/A | |||
Variable Portfolio – Moderate Portfolio (Current and Pro Forma) (Buying Fund) | Class 2 | |||
Maximum sales charge (load) imposed on purchases (as a percentage of offering price) | N/A | |||
Maximum deferred sales charge (load) imposed on sales (as a percentage of net asset value at the time of your purchase or sale, whichever is lower) | N/A |
Annual Fund Operating Expenses (expenses that you pay each year as a percentage of the value of your investment):
Disciplined Asset Allocation Portfolios – Moderate (Current) (Selling Fund) | Class 2 | |||
Management fees(1) | 0.02 | % | ||
Distribution and/or service (12b–1) fees | 0.25 | % | ||
Other expenses | 0.12 | % | ||
Acquired Fund fees and expenses (underlying Funds)(2) | 0.66 | % | ||
Total annual Fund operating expenses | 1.05 | % | ||
Variable Portfolio – Moderate Portfolio (Current) (Buying Fund) | Class 2 | |||
Management fees(1) | 0.02 | % | ||
Distribution and/or service (12b–1) fees | 0.25 | % | ||
Other expenses | 0.02 | % | ||
Acquired Fund fees and expenses (underlying Funds)(2) | 0.70 | % | ||
Total annual Fund operating expenses | 0.99 | % | ||
Variable Portfolio – Moderate Portfolio (Pro Forma) (Buying Fund) | Class 2 | |||
Management fees(1) | 0.02 | % | ||
Distribution and/or service (12b–1) fees | 0.25 | % | ||
Other expenses | 0.00 | % | ||
Acquired Fund fees and expenses (underlying Funds)(2) | 0.70 | % | ||
Total annual Fund operating expenses | 0.97 | % |
(1) | Management fees are composed solely of an administration fee of 0.02%. |
(2) | Acquired fund fees and expenses include fees and expenses associated with the Fund’s investments in other investment companies and/or pooled investment vehicles. |
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Expense examples: These examples are intended to help you compare the cost of investing in the Funds with the cost of investing in other mutual funds. The examples do not reflect fees and expenses imposed under your variable annuity contract and/or variable life insurance policy, if any. If the example reflected these fees and expenses, the figures shown below would be higher. These examples assume that you invest $10,000 in the applicable Fund for the time periods indicated and then redeem all of your shares at the end of those periods, both under the current arrangements and, for the Buying Fund, assuming the proposed Reorganization had been in effect. These examples also assume that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. The example includes any contractual fee waiver/expense reimbursement arrangement only for the period indicated in the Fund’s annual Fund operating expenses table. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
Disciplined Asset Allocation Portfolios – Moderate (Current) (Selling Fund) | 1 year | 3 years | 5 years | 10 years | ||||||||||||
Class 2 | $ | 107 | $ | 341 | $ | 593 | $ | 1,319 | ||||||||
Variable Portfolio – Moderate Portfolio (Current) (Buying Fund) | ||||||||||||||||
Class 2 | $ | 101 | $ | 316 | $ | 548 | $ | 1,218 | ||||||||
Variable Portfolio – Moderate Portfolio (Pro Forma) (Buying Fund) | ||||||||||||||||
Class 2 | $ | 99 | $ | 309 | $ | 537 | $ | 1,194 |
Because none of the share classes have deferred sales charges, you would pay the same costs shown in the tables above if you did not redeem your shares at the end of the periods indicated.
Portfolio Turnover. Each Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs. Those costs, which are not reflected in annual Fund operating expenses or in the example expenses, affect a Fund’s performance. During the most recent fiscal year, Disciplined Asset Allocation Portfolios—Moderate’s portfolio turnover rate was 39% of the average value of the Fund’s portfolio. The Buying Fund is new as of April 14, 2010, therefore its portfolio turnover rate is not available.
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Proposal 5 Fees and Expenses. Reorganization of Disciplined Asset Allocation Portfolios – Moderately Aggressive into Variable Portfolio – Moderately Aggressive Portfolio
If the Reorganization occurs, certain Reorganization expenses, as described in Exhibit A, will be allocated to the Selling Fund, which will reduce the Selling Fund’s net asset value prior to the closing of the Reorganization (by less than $0.01 per share based on the Selling Fund’s shares outstanding as of September 30, 2010).
Current and Pro Forma Fees and Expenses for the Most Recent Fiscal Year
The following tables do not reflect fees and expenses imposed under your Contract, if any. The total fees and expenses you bear may therefore be higher than those shown in the table.
Shareholder Fees (fees paid directly from your investment)
Disciplined Asset Allocation Portfolios – Moderately Aggressive (Current) (Selling Fund) | Class 2 | |||
Maximum sales charge (load) imposed on purchases (as a percentage of offering price) | N/A | |||
Maximum deferred sales charge (load) imposed on sales (as a percentage of net asset value at the time of your purchase or sale, whichever is lower) | N/A | |||
Variable Portfolio – Moderately Aggressive Portfolio (Current and Pro forma) (Buying Fund) | Class 2 | |||
Maximum sales charge (load) imposed on purchases (as a percentage of offering price) | N/A | |||
Maximum deferred sales charge (load) imposed on sales (as a percentage of net asset value at the time of your purchase or sale, whichever is lower) | N/A |
Annual Fund Operating Expenses (expenses that expenses that you pay each year as a percentage of the value of your investment):
Disciplined Asset Allocation Portfolios – Moderately Aggressive (Current) (Selling Fund) | Class 2 | |||
Management fees(1) | 0.02 | % | ||
Distribution and/or service (12b–1) fees | 0.25 | % | ||
Other expenses | 0.15 | % | ||
Acquired Fund fees and expenses (underlying Funds)(2) | 0.67 | % | ||
Total annual Fund operating expenses | 1.09 | % | ||
Fee waiver/expense reimbursement(3) | (0.01 | %) | ||
Net annual Fund operating expenses | 1.08 | % | ||
Variable Portfolio – Moderately Aggressive Portfolio (Current) (Buying Fund) | Class 2 | |||
Management fees(1) | 0.02 | % | ||
Distribution and/or service (12b–1) fees | 0.25 | % | ||
Other expenses | 0.02 | % | ||
Acquired Fund fees and expenses (underlying Funds)(2) | 0.74 | % | ||
Total annual Fund operating expenses(4) | 1.03 | % | ||
Variable Portfolio – Moderately Aggressive Portfolio (Pro Forma) (Buying Fund) | Class 2 | |||
Management fees(1) | 0.02 | % | ||
Distribution and/or service (12b–1) fees | 0.25 | % | ||
Other expenses | 0.00 | % | ||
Acquired Fund fees and expenses (underlying Funds)(2) | 0.74 | % | ||
Total annual Fund operating expenses(4) | 1.01 | % |
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(1) | Management fees are composed solely of an administration fee of 0.02%. |
(2) | Acquired fund fees and expenses include fees and expenses associated with the Fund’s investments in other investment companies and/or pooled investment vehicles. |
(3) | Columbia Management and its affiliates have contractually agreed to waive certain fees and to reimburse certain expenses until June 30, 2011, unless sooner terminated at the sole discretion of the Fund’s Board. These fee and expense arrangements may only be modified or amended with approval from all parties to such arrangements, including the Fund and Columbia Management. Any amounts waived under this agreement will not be reimbursed by the Fund. Under this agreement, net expenses (excluding fees and expenses of acquired funds) will not exceed 0.41%. |
(4) | Columbia Management has contractually agreed to reimburse a portion of the Buying Fund’s expenses so that Total annual Fund operating expenses (excluding fees and expenses of acquired funds, any brokerage commissions, interest, taxes, extraordinary expenses and any acquired fund fees and expenses, but including custodian charges relating to overdrafts, if any), after giving effect to any balance credits from the Buying Fund’s custodian, do not exceed 0.32% for Class 2 shares on an annualized basis. The reimbursement arrangement shall continue in effect until February 29, 2012. These fee and expense arrangements may only be modified or amended with approval from all parties to such arrangements, including the Fund and Columbia Management. |
Expense examples: These examples are intended to help you compare the cost of investing in the Funds with the cost of investing in other mutual funds. The examples do not reflect fees and expenses imposed under your variable annuity contract and/or variable life insurance policy, if any. If the example reflected these fees and expenses, the figures shown below would be higher. These examples assume that you invest $10,000 in the applicable Fund for the time periods indicated and then redeem all of your shares at the end of those periods, both under the current arrangements and, for the Buying Fund, assuming the proposed Reorganization had been in effect. These examples also assume that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. The example includes any contractual fee waiver/expense reimbursement arrangement only for the period indicated in the Fund’s annual Fund operating expenses table. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
Disciplined Asset Allocation Portfolios – Moderately Aggressive (Current) (Selling Fund) | 1 year | 3 years | 5 years | 10 years | ||||||||||||
Class 2 | $ | 110 | $ | 346 | $ | 601 | $ | 1,333 | ||||||||
Variable Portfolio – Moderately Aggressive Portfolio (Current) (Buying Fund) | ||||||||||||||||
Class 2 | $ | 105 | $ | 328 | $ | 570 | $ | 1,264 | ||||||||
Variable Portfolio – Moderately Aggressive Portfolio (Pro Forma) (Buying Fund) | ||||||||||||||||
Class 2 | $ | 103 | $ | 322 | $ | 559 | $ | 1,241 |
Because none of the share classes have deferred sales charges, you would pay the same costs shown in the tables above if you did not redeem your shares at the end of the periods indicated.
Portfolio Turnover. Each Fund will indirectly bear the expenses associated with portfolio turnover of the underlying funds. The underlying funds pay transaction costs, such as commissions, when they buy and sell securities (or “turn over” their portfolio). An underlying fund’s higher portfolio turnover rate may indicate higher transaction costs. Those costs, which are not reflected in annual Fund operating expenses or in the example expenses, affect a Fund’s performance. During Disciplined Asset Allocation Portfolios – Moderately Aggressive’s most recent fiscal year, each Fund’s portfolio turnover rate was 50% of the average value of the Fund’s portfolio. The Buying Fund is new as of April 14, 2010, therefore its portfolio turnover rate is not available.
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Proposal 6 Fees and Expenses. Disciplined Asset Allocation Portfolios – Aggressive into Variable Portfolio – Aggressive Portfolio
If the Reorganization occurs, certain Reorganization expenses, as described in Exhibit A, will be allocated to the Selling Fund, which will reduce the Selling Fund’s net asset value prior to the closing of the Reorganization (by less than $0.01 per share based on the Selling Fund’s shares outstanding as of September 30, 2010).
Current and Pro Forma Fees and Expenses for the Most Recent Fiscal Year
The following tables do not reflect fees and expenses imposed under your Contract, if any. The total fees and expenses you bear may therefore be higher than those shown in the table.
Shareholder Fees (fees paid directly from your investment)
Disciplined Asset Allocation Portfolios – Aggressive (Current) (Selling Fund) | Class 2 | |||
Maximum sales charge (load) imposed on purchases (as a percentage of offering price) | N/A | |||
Maximum deferred sales charge (load) imposed on sales (as a percentage of net asset value at the time of your purchase or sale, whichever is lower) | N/A | |||
Variable Portfolio – Aggressive Portfolio (Current and Pro forma) (Buying Fund) | Class 2 | |||
Maximum sales charge (load) imposed on purchases (as a percentage of offering price) | N/A | |||
Maximum deferred sales charge (load) imposed on sales (as a percentage of net asset value at the time of your purchase or sale, whichever is lower) | N/A |
Annual Fund Operating Expenses (expenses that you pay each year as a percentage of the value of your investment):
Disciplined Asset Allocation Portfolios – Aggressive (Current) (Selling Fund) | Class 2 | |||
Management fees(1) | 0.02 | % | ||
Distribution and/or service (12b–1) fees | 0.25 | % | ||
Other expenses | 0.30 | % | ||
Acquired Fund fees and expenses (underlying Funds)(2) | 0.69 | % | ||
Total annual Fund operating expenses | 1.26 | % | ||
Fee waiver/expense reimbursement(3) | (0.16 | %) | ||
Net annual Fund operating expenses | 1.10 | % | ||
Variable Portfolio – Aggressive Portfolio (Pro Forma) (Buying Fund) | Class 2 | |||
Management fees(1) | 0.02 | % | ||
Distribution and/or service (12b–1) fees | 0.25 | % | ||
Other expenses | 0.02 | % | ||
Acquired Fund fees and expenses (underlying Funds)(2) | 0.77 | % | ||
Total annual Fund operating expenses(4) | 1.06 | % | ||
Variable Portfolio – Aggressive Portfolio (Pro Forma) (Buying Fund) | Class 2 | |||
Management fees(1) | 0.02 | % | ||
Distribution and/or service (12b–1) fees | 0.25 | % | ||
Other expenses | 0.01 | % | ||
Acquired Fund fees and expenses (underlying Funds)(2) | 0.77 | % | ||
Total annual Fund operating expenses(4) | 1.05 | % |
(1) | Management fees are composed solely of an administration fee of 0.02%. |
(2) | Acquired fund fees and expenses include fees and expenses associated with the Fund’s investments in other investment companies and/or pooled investment vehicles. |
(3) | Columbia Management and its affiliates have contractually agreed to waive certain fees and to reimburse certain expenses until April 30, 2011, unless sooner terminated at the sole discretion of the Fund’s Board. These fee and expense arrangements may only be modified or amended with approval from all parties to such arrangements, including the Fund and Columbia Management. Any amounts waived under this agreement will not be reimbursed by the Fund. Under this agreement, net expenses (excluding fees and expenses of acquired funds) will not exceed 0.41%. |
(4) | Columbia Management has contractually agreed to reimburse a portion of the Buying Fund’s expenses so that Total annual Fund operating expenses (excluding fees and expenses of acquired funds, any brokerage commissions, interest, taxes, extraordinary expenses and any acquired fund fees and expenses, but including custodian charges relating to overdrafts, if any), after giving effect to any balance credits from the Buying Fund’s custodian, do not exceed 0.32% for Class 2 shares on an annualized basis. The reimbursement arrangement shall continue in effect until February 29, 2012. These fee and expense arrangements may only be modified or amended with approval from all parties to such arrangements, including the Fund and Columbia Management. |
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Expense Examples: These examples are intended to help you compare the cost of investing in the Funds with the cost of investing in other mutual funds. The examples do not reflect fees and expenses imposed under your variable annuity contract and/or variable life insurance policy, if any. If the example reflected these fees and expenses, the figures shown below would be higher. These examples assume that you invest $10,000 in the applicable Fund for the time periods indicated and then redeem all of your shares at the end of those periods, both under the current arrangements and, for the Buying Fund, assuming the proposed Reorganization had been in effect. These examples also assume that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. The example includes any contractual fee waiver/expense reimbursement arrangement only for the period indicated in the Fund’s annual Fund operating expenses table. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 year | 3 years | 5 years | 10 years | |||||||||||||
Disciplined Asset Allocation Portfolios – Aggressive | ||||||||||||||||
Class 2 | $ | 112 | $ | 384 | $ | 677 | $ | 1,514 | ||||||||
Variable Portfolio – Aggressive Portfolio (Current) | ||||||||||||||||
Class 2 | $ | 108 | $ | 337 | $ | 586 | $ | 1,299 | ||||||||
Variable Portfolio – Aggressive Portfolio (Pro Forma) | ||||||||||||||||
Class 2 | $ | 107 | $ | 334 | $ | 580 | $ | 1,287 |
Because none of the share classes have deferred sales charges, you would pay the same costs shown in the tables above if you did not redeem your shares at the end of the periods indicated.
Portfolio Turnover. The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs. Those costs, which are not reflected in annual fund operating expenses or in the example expenses, affect a Fund’s performance. During the most recent fiscal year, Disciplined Asset Allocation Portfolio – Aggressive’s portfolio turnover rate 53% of the average value of the Fund’s portfolio. The Buying Fund is new as of April 14, 2010, therefore its portfolio turnover rate is not available.
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Proposal 1 Comparison of Objectives, Strategies and Risks. Reorganization of RiverSource Variable Portfolio – Strategic Income Fund into Columbia Strategic Income Fund, Variable Series
Comparison of the Selling Fund and the Buying Fund
Both the Selling Fund and the Buying Fund:
• | Have Columbia Management as investment manager. |
• | Have the same policies for buying and selling shares and the same exchange rights. Please see Exhibit C for a description of these policies for the Buying Funds. |
• | Are structured as series of an open–end management investment company. Each of the Selling Fund and the Buying Fund are organized as a series of a Massachusetts business trust. Please see Exhibit B to this proxy statement/prospectus for more information regarding the differences between the rights of shareholders of the Buying Fund and shareholders of the Selling Fund. |
Comparison of Investment Objectives
The investment objectives for the Funds are as follows:
Selling Fund: RiverSource Variable Portfolio – Strategic Income Fund seeks to provide shareholders with a high level of current income and capital growth as a secondary objective.
Buying Fund: Columbia Strategic Income Fund, Variable Series seeks total return, consisting of current income and capital appreciation.
Because any investment involves risk, there can be no assurance that a Fund’s objective will be achieved. The investment objective of each Fund may be changed without shareholder approval.
Comparison of Principal Investment Strategies
The Selling Fund and the Buying Fund have similar principal investment strategies. Both the Selling Fund and the Buying Fund invest primarily in debt securities. The Selling Fund may invest up to 75% of its total assets in below investment grade debt securities, while the Buying Fund is not similarly constrained. The Selling Fund may invest up to 75% in floating rate loans as part of its principal investment strategies. The Buying Fund has no similar principal investment strategy, but may invest in floating rate loans.
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Additional information regarding the principal investment strategies of each Fund is set forth below:
RiverSource Variable Portfolio – Strategic Income Fund (Selling Fund) | Columbia Strategic Income, Variable Series (Buying Fund) | |
The Fund’s assets are primarily allocated among various fixed income investment categories including: high yield bonds, emerging markets bonds, floating rate loans, government and corporate bonds, mortgage– and asset–backed securities, Treasury inflation protected securities, international bonds and cash or cash equivalents. A smaller portion of the Fund may be allocated to real estate investment trusts (REITs) and U.S. and international equity securities. The Fund may invest up to 100% of its total assets in foreign investments, which may include emerging markets. | Under normal market conditions, the Fund invests primarily in debt securities in the following three segments of the debt securities market: (i) securities issued by the U.S. government and its agencies, including mortgage– and other asset–backed securities; (ii) securities issued by foreign governments, companies or other entities, including in emerging market countries and non–dollar denominated securities; and (iii) below investment grade corporate debt securities or unrated corporate debt securities determined by Columbia Management to be of comparable quality, which are commonly referred to as “junk bonds.” The Fund may participate in mortgage dollar rolls up to the Fund’s current position in mortgage–backed securities. | |
The Fund may invest up to 75% of its total assets in below investment–grade debt securities (junk bonds) and floating rate loans. Floating rate loans are debt obligations of companies and other similar entities that have interest rates that adjust or “float” periodically (normally on a daily, monthly, quarterly or semiannual basis by reference to a base lending rate, such as LIBOR, plus a premium). Floating rate loans are typically structured and administered by a financial institution that acts as the agent of the lenders participating in the floating rate loan. The loans in which the Fund will invest are typically senior secured floating rate loans. Senior secured floating rate loans ordinarily are secured by specific collateral or assets of the borrower so the holder of the loan will have a claim on those assets senior to the claim of certain other parties in the event of default or bankruptcy by the borrower. These loans usually are senior in rank to other securities issued by the borrower (such as common stock or other debt instruments). | ||
The Fund may use derivatives such as futures, options, swaps, forward contracts and structured notes, to produce incremental earnings, to hedge existing positions, to maintain investment efficiency or to increase flexibility. | The Fund may invest in derivatives, including futures, forwards, options, swap contracts and other derivative instruments. The Fund may invest in derivatives for both hedging and non–hedging purposes, including, for example, to seek to enhance returns or as a substitute for a position in an underlying asset. The Fund may also invest in private placements. | |
Columbia Management may also use exchange traded funds (ETFs) to gain exposure to the various equity investment categories. |
Buying Fund Investment Style
The investment style of the Buying Fund is set forth below.
Columbia Management evaluates a number of factors in identifying investment opportunities and constructing the Fund’s portfolio. Columbia Management considers local, national and global economic conditions, market conditions, interest rate movements, and other relevant factors to determine the allocation of the Fund’s assets among different issuers, industry sectors and maturities.
Columbia Management, in connection with selecting individual investments for the Fund, evaluates a security based on its potential to generate income and/or capital appreciation. Columbia Management considers, among other factors, the creditworthiness of the issuer of the security and the various features of the security, such as its interest rate, yield, maturity, any call features and value relative to other securities.
Columbia Management may sell a security if it believes that there is deterioration in the issuer’s financial circumstances, or that other investments are more attractive; if there is deterioration in a security’s credit rating; or for other reasons.
Differences between the Selling Fund’s principal investment strategies, fundamental and non–fundamental investment policies and holdings and those of the Buying Fund may expose the Selling Fund’s shareholders to new or increased risks. A comparison of the principal risks of investing in the Selling Fund and the Buying Fund is provided under “Comparison of Principal Risks” beginning on page [—].
Comparison of Fundamental Investment Policies
If the Reorganization occurs, the combined Fund will be subject to the fundamental investment policies of the Buying Fund. [[Columbia Management does not believe that the differences between the fundamental investment policies of the Selling Fund and the Buying Fund result in any material difference in the way the Funds have been managed or in the way the combined Fund will be managed.]] For purposes of this discussion, a “fundamental” investment policy is one that may not be changed without a shareholder vote.
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The Funds’ fundamental investment policies are set forth below:
Policy | RiverSource Variable Portfolio �� Strategic Income | Columbia Strategic Income Fund, | ||
Borrowing/Issuing Senior Securities | The Fund will not borrow money, except for temporary purposes (not for leveraging or investment) in an amount not exceeding 33 1/3% of its total assets (including the amount borrowed) less liabilities (other than borrowings) immediately after the borrowings.
The Fund will not issue senior securities, except as permitted under the 1940 Act, the rules and regulations thereunder and any applicable exemptive relief. | The Fund will not borrow money or issue senior securities except to the extent permitted by the 1940 Act, the rules and regulations thereunder and any applicable exemptive relief. | ||
Commodities | The Fund will not buy or sell physical commodities unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from buying or selling options, futures contracts and foreign currency or from entering into forward currency contracts or from investing in securities or other instruments backed by, or whose value is derived from, physical commodities. | The Fund will not purchase or sell commodities, except that the Fund may to the extent consistent with its investment objective: (i) invest in securities of companies that purchase or sell commodities or which invest in such programs, (ii) purchase and sell options, forward contracts, futures contracts, and options on futures contracts and (iii) enter into swap contracts and other financial transactions relating to commodities. This limitation does not apply to foreign currency transactions including without limitation forward currency contracts. | ||
Diversification | The Fund will not purchase securities (except securities issued or guaranteed by the U.S. government, its agencies or instrumentalities) of any one issuer if, as a result, more than 5% of its total assets will be invested in the securities of such issuer or it would own more than 10% of the voting securities of such issuer, except that: (i) up to 25% of its total assets may be invested without regard to these limitations and (ii) a Fund’s assets may be invested in the securities of one or more management investment companies to the extent permitted by the 1940 Act, the rules and regulations thereunder, and any applicable exemptive relief. | |||
Industry Concentration | The Fund will not concentrate in any one industry. According to the present interpretation by the SEC, this means that up to 25% of the Fund’s total assets, based on current market value at time of purchase, can be invested in any one industry. | The Fund will not purchase any securities which would cause 25% or more of the value of its total assets at the time of purchase to be invested in the securities of one or more issuers conducting their principal business activities in the same industry, provided that: (i) there is no limitation with respect to obligations issued or guaranteed by the U.S. government, any state or territory of the United States or any of their agencies, instrumentalities or political subdivisions; and (ii) notwithstanding this limitation or any other fundamental investment limitation, assets may be invested in the securities of one or more management investment companies to the extent permitted by the 1940 Act, the rules and regulations thereunder and any applicable exemptive relief. |
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Policy | RiverSource Variable Portfolio – Strategic Income | Columbia Strategic Income Fund, | ||
Lending | The Fund will not lend securities or participate in an interfund lending program if the total of all such loans would exceed 33 1/3% of the Fund’s total assets except this fundamental investment policy shall not prohibit the Fund from purchasing money market securities, loans, loan participation or other debt securities, or from entering into repurchase agreements. | The Fund will not make loans, except to the extent permitted by the 1940 Act, the rules and regulations thereunder and any applicable exemptive relief. | ||
Real Estate | The Fund will not buy or sell real estate, unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the fund from investing in securities or other instruments backed by real estate or securities of companies engaged in the real estate business or real estate investment trusts. For purposes of this policy, real estate includes real estate limited partnerships. | The Fund will not purchase or sell real estate, except the Fund may: (i) purchase securities of issuers which deal or invest in real estate, (ii) purchase securities which are secured by real estate or interests in real estate and (iii) hold and dispose of real estate or interests in real estate acquired through the exercise of its rights as a holder of securities which are secured by real estate or interests therein. | ||
Underwriting | The Fund will not act as an underwriter (sell securities for others). However, under the securities laws, the Fund may be deemed to be an underwriter when it purchases securities directly from the issuer and later resells them. | The Fund will not underwrite any issue of securities issued by other persons within the meaning of the Securities Act of 1933 except when it might be deemed to be an underwriter either: (i) in connection with the disposition of a portfolio security; or (ii) in connection with the purchase of securities directly from the issuer thereof in accordance with the Fund’s investment objective. This restriction shall not limit the Fund’s ability to invest in securities issued by other registered investment companies. |
Differences between the Selling Fund’s principal investment strategies, fundamental and non–fundamental investment policies and holdings and those of the Buying Fund may expose the Selling Fund’s shareholders to new or increased risks. A comparison of the principal risks of investing in the Selling Fund and the Buying Fund is provided under “Comparison of Principal Risks” beginning on page [—].
Comparison of Non-Fundamental Investment Policies
If the Reorganization occurs, the combined Fund will be subject to the non–fundamental investment policies (policies that may be changed without a shareholder vote) of the Buying Fund. [[Columbia Management does not believe that the differences between the non-fundamental policies of the Funds result in any material differences in the way the Funds have been managed or in the way the combined Fund will be managed.]]
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The Funds’ non–fundamental investment policies are set forth below:
Policy | RiverSource Variable Portfolio – Strategic Income | Columbia Strategic Income Fund, | ||
Illiquid Securities | The Fund will not invest more than 15% of its net assets in illiquid assets. | |||
Limiting Investments in Foreign Securities | Up to 25% of the Fund’s net assets may be invested in foreign investments. | No stated policy. | ||
Purchasing Securities on Margin | No stated policy. | The Fund may not purchase securities on margin, but it may receive short–term credit to clear securities transactions and may make initial or maintenance margin deposits in connection with futures transactions. | ||
Purchasing/Selling Commodities Contracts | No stated policy. | The Fund may not purchase or sell commodities contracts if the total initial margin and premiums on the contracts would exceed 5% of its total assets. | ||
Short Sales | The Fund is not prohibited from engaging in short sales, however, the Fund will seek Board approval prior to utilizing short sales as an active part of its investment strategy. | The Fund may not have a short securities position, unless the Fund owns, or owns rights (exercisable without payment) to acquire, an equal amount of such securities. |
Differences between the Selling Fund’s principal investment strategies, fundamental and non–fundamental investment policies and holdings and those of the Buying Fund may expose the Selling Fund’s shareholders to new or increased risks. A comparison of the principal risks of investing in the Selling Fund and the Buying Fund is provided under “Comparison of Principal Risks” below.
Although the Funds describe them somewhat differently, the principal risks associated with investments in the Buying Fund and the Selling Fund are generally similar because the Funds have similar investment objectives, principal investment strategies and investment policies. The actual risks of investing in each Fund depend on the securities held in each Fund’s portfolio and on market conditions, both of which change over time. The Buying Fund is subject to the principal risks described below. Similarities and material differences between the Buying Fund’s principal risks and those of the Selling Fund are also described below.
• | Investment Strategy Risk. Columbia Management uses the principal investment strategies and other investment strategies to seek to achieve the Buying Fund’s investment objective. There is no assurance that the Buying Fund will achieve its investment objective. Investment decisions made by Columbia Management in using these strategies may not produce the returns expected by Columbia Management, may cause the Buying Fund’s shares to lose value or may cause the Buying Fund to underperform other funds with similar investment objectives. The Selling Fund is also subject to this principal risk. |
• | Market Risk. Market risk refers to the possibility that the market value of securities may fall, fail to rise or fluctuate, sometimes rapidly and unpredictably. Security values may fall because of factors affecting individual companies, industries or sectors, or the market as a whole, reducing the value of the investment in the Buying Fund. Accordingly, an investment in the Buying Fund could lose money over short or even long periods. The market values of the securities the Buying Fund holes also can be affected by changes or perceived changes in U.S. or foreign economies and financial market, and the liquidity of these securities, among other factors. In general, equity securities tend to have greater price volatility than debt securities. The Selling Fund is also subject to this principal risk. |
• | Low and Below Investment Grade Securities Risk. Debt securities with the lower investment grade rating (e.g. BBB by Standard & Poor’s or Fitch) or that are below investment grade (which are commonly referred to as “junk bonds”) (e.g. BB or below by Standard & Poor’s or Fitch) are more speculative than securities with higher ratings, and tend to be more sensitive to credit risk, particularly during a downturn in the economy, which is more likely to weaken the ability of the issuer to make principal and interest payments on these securities than is the case for higher–rated securities. These securities typically pay a premium – a higher interest rate or yield – because of the increased risk of loss, including default. These securities also are generally less liquid than higher rated securities. The securities rating provided by Moody’s, Standard & |
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Poor’s and Fitch are based on analyses by these ratings agencies of the credit quality of the securities and may not take into account every risk related to whether interests or principal will be timely repaid. The Selling Fund is also subject to this principal risk. |
• | Interest Rate Risk. Debt securities are subject to interest rate risk. In general, if prevailing interest rates rise, the values of debt securities will tend to fall, and if interest rates fall, the values of debt securities will tend to rise. Changes in the value of a debt security usually will not affect the amount of income the Buying Fund receives from it but may affect the value of the Buying Fund’s shares. Interest rate risk is generally greater for debt securities with longer maturities/durations. The Selling Fund is also subject to this principal risk. |
• | Credit Risk. Credit risk applies to most debt securities, but is generally not a factor for obligations backed by the “full faith and credit” of the U.S. government. The Buying Fund could lose money if the issuer of a debt security is unable or perceived to be unable to pay interest or repay principal when it becomes due. Various factors could affect the issuer’s actual or perceived willingness or ability to make timely interest or principal payments, including changes in the issuer’s financial condition or in general economic conditions. Debt securities backed by an issuer’s taxing authority may be subject to legal limits on the issuer’s power to increase taxes or otherwise to raise revenue, or may be dependant on legislative appropriation or government aid. Certain debt securities are backed only by revenues derived from a particular project or source, rather than by an issuer’s taxing authority, and thus may have a greater risk of default. The Selling Fund is also subject to this principal risk. |
• | Foreign Securities Risk. Foreign securities are subject to special risks as compared to securities of U.S. issuers. For example, foreign markets can be extremely volatile. Fluctuations in currency exchange rats may impact the value of foreign securities denominated in foreign currencies, or in U.S. dollars, without a change in the intrinsic value of those securities. Foreign securities may be less liquid than domestic securities so that the Buying Fund may, at times, be unable to sell foreign securities at desirable times or prices. Brokerage commissions, custodial fees and other fees are also generally higher for foreign securities. The Buying Fund may have limited or no legal recourse in the event of default with respect to certain foreign securities, including those issued by foreign governments. In addition, foreign governments may impose potentially confiscatory withholding or other taxes, which could reduce the amount of income and capital gains available to distribute to shareholders. Other risks include possible delays in the settlement of transactions or in the payment of income; generally less publicly available information about companies; the impact of political, special or diplomatic events; possible seizure, expropriation or nationalization of a company or its assets; possible imposition of currency exchange controls; and accounting, auditing and financial reporting standards that may be less comprehensive and stringent than those applicable to domestic companies. The Selling Fund is also subject to this principal risk. |
• | Currency Risk. Securities denominated in different currencies are subject to the risk that, for example, if the value of a foreign currency were to decline against the U.S. dollar, such decline would reduce the U.S. dollar value of any securities held by the Buying Fund denominated in that currency. The Selling Fund is also subject to this principal risk. |
• | Emerging Market Securities Risk. Securities issued by foreign governments or companies in emerging market countries, like those in Eastern Europe, the Middle East, Asia, Latin America or Africa, are more likely to have greater exposure to the risks of investing in foreign securities that are described in Foreign Securities Risk. In addition, emerging market countries are more likely to experience instability resulting, for example, from rapid social, political and economic development. Their economies are usually less mature and their securities markets are typically less developed with more limited trading activity than more developed countries. Emerging market securities tend to be more volatile than securities in more developed markets. Many emerging market countries are heavily dependent on international trade, which makes them more sensitive to world commodity prices and economic downturns in other countries. Some emerging market countries have a higher risk of currency devaluations, and some of these countries may experience periods of high inflation or rapid changes in inflation rates. The Selling Fund is also subject to this principal risk. |
• | U.S. Government Obligations Risk. U.S. Treasury obligations are backed by the “full faith and credit” of the U.S. government and generally have negligible credit risk. Securities issued or guaranteed by federal agencies or authorities and U.S. government–sponsored instrumentalities or enterprises may or may not be backed by the full faith and credit of the U.S. government. For example, securities issued by the Federal Home Loan Mortgage Corporation (FHLMC), the Federal National Mortgage Association (“FNMA”) and the Federal Home Loan Banks are neither insured nor guaranteed by the U.S. government. These securities may be supported by the ability to borrow from the U.S. Treasury or only by the credit of the issuing agency, authority, instrumentality or enterprise and, as a result, are subject to greater credit risk than securities issued or guaranteed by the U.S. Treasury. The Selling Fund is not subject to U.S. government obligations risk as a principal risk, but may be subject to such risk to the extent it invests in U.S. Treasury obligations or securities issued or guaranteed by federal agencies or authorities and U.S. government-sponsored instrumentalities or enterprises. |
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• | Mortgage-Backed Securities Risk. The value of the Buying Fund’s mortgage–backed securities may be affected by, among other things, changes or perceived changes in: interest rates, factors concerning the interests in and structure of the issuer or the originator of the mortgages, the creditworthiness of the entities that provide any supporting letters of credit, surety bonds or other credit enhancements, or the market’s assessment of the quality of underlying assets. Mortgage–backed securities represent interest in, or are backed by, pools of mortgages from which payments of interest and principal (net of fees paid to the issuer or guarantor of the securities are distributed to the holders of the mortgage–backed securities. Mortgage–backed securities can have a fixed or an adjustable rate. Payment of principal and interest on some mortgage–backed securities (but not the market value of the securities themselves) may be guaranteed (i) by the full faith and credit of the U.S. government (in the case of securities guaranteed by the Government National Mortgage Association) or (iii) by its agencies, authorities, enterprise or instrumentalities (in the case of securities guaranteed by FNMA or FHLMC), which are not insured or guaranteed by the U.S. government (although FNMA and FHLMC may be able to access capital from the U.S. Treasury to meet their obligations under such securities). Mortgage–backed securities issued by non–governmental issuers (such as commercial banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary market issuers) may be supported by various credit enhancements, such as pool insurance, guarantees issued by governmental entities, letters of credit from a bank or senior/subordinated structures, and may entail greater risk than obligations guaranteed by the U.S. government, whether or not such obligations are guaranteed by the private issuer. Mortgage–backed securities are subject to prepayment risk, which is the possibility that the underlying mortgage may be refinanced or prepaid prior to maturity during periods of declining or low interest rates, causing the Buying Fund to have to reinvest the money received in securities that have lower yields. In addition, the impact of prepayments on the value of mortgage–backed securities may be difficult to predict and may result in greater volatility. Rising or high interest rates tend to extend the duration of mortgage–backed securities, making them more volatile and more sensitive to changes in interest rates. The Selling Fund is not subject to mortgage-backed securities risk as a principal risk, but may be subject to such risk to the extent it invests in mortgage-backed securities. |
• | Asset-Backed Securities Risk. The value of the Buying Fund’s asset–backed securities may be affected by, among other things, changes in: interest rates, factors concerning the interests in and structure of the issuer of the originator of the receivables, the creditworthiness of the entities that provide any supporting letters of credit, surety bonds or other credit enhancements, or the market’s assessment of the quality of the underlying assets. Asset–backed securities represent interests in, or are backed by, pools of receivable such as credit card, auto, student and home equity loans. They may also be backed, in turn, by securities backed by these types of loans and others, such as mortgage loans. Asset–backed securities can have a fixed or an adjustable rate. Most asset–backed securities are subject to prepayment risk, which is the possibility that the underlying debt may be refinanced or prepaid prior to maturity during periods of declining or low interest rates, causing the Buying Fund to have to reinvest the money received in securities that have lower yields. In addition, the impact of prepayments on the value of asset–backed securities may be difficult to predict and may result in greater volatility. Rising or high interest rates tend to extend the duration of asset–backed securities, making them more volatile and more sensitive to changes in interest rates. The Selling Fund is not subject to asset-backed securities risk as a principal risk, but may be subject to such risk to the extent it invests in asset-backed securities. |
• | Reinvestment Risk. Income from the Buying Fund’s debt securities portfolio will decline if and when the Buying Fund invests the proceeds from matured, traded or called securities in securities with market interest rates that are below the current earnings rate of the Fund’s portfolio. The Selling Fund is not subject to reinvestment risk as a principal risk, but may be subject to such risk to the extent it reinvests proceeds from matured, traded or called securities. |
• | Dollar Rolls Risk. Dollar rolls are transactions in which the Buying Fund sells securities to a counterparty and simultaneously agrees to purchase those or similar securities in the future at a predetermined price. Dollar rolls involve the risk that the market values of the securities the Buying Fund is obligated to repurchase may decline below the repurchase price, or that the counterparty may default on its obligations. These transactions may also increase the Buying Fund’s portfolio turnover rate. If the Buying Fund reinvests the proceeds of the security sold, the Buying Fund will also be subject to the risk that the investments purchased with such proceeds will decline in value (a form of leverage risk). The Selling Fund is not subject to dollar rolls risk as a principal risk, but may be subject to such risk to the extent it participates in dollar rolls. |
• | Derivatives Risk. Derivatives are financial contracts whose values are, for example, based on “or “derived” from) traditional securities (such as a stock or bond), assets (such as a commodity like gold or a foreign currency), reference rates (such as LIBOR) or market indices (such as the S&P500* Index). Derivatives involve special risks and may result in losses or may limit the Buying Fund’s potential gain from favorable market movements. Derivative strategies often involve |
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leverage, which may exaggerate a loss, potentially causing the Buying Fund to lose more money than it would have lost had it invested in the underlying security. The values of derivatives may move in unexpected ways, especially in unusual market conditions, and may result in increased volatility, among other consequences. The use of derivatives may also increase the amounts of taxes payable by shareholders. Other risks arise from the Buying Fund’s potential inability to terminate or sell derivative positions. A liquid secondary market may not always exist for the Buying Fund’s derivative positions at times when the Buying Fund might wish to terminate or sell such positions. Over–the–counter instruments (investments not trade on an exchange) may be illiquid, and transactions in derivatives traded in the over–the–counter markets are subject to the risk that the other party will not meet its obligations. The use of derivatives also involves the risks of mispricing or improper valuation and that changes in the value of the derivatives may not correlate perfectly with the underlying security, asset, reference rate or index. The Buying Fund also may not be able to find a suitable derivative transaction counterparty, and thus may be unable to engage in derivative transactions when it is deemed favorable to do so, or at all. The Selling Fund is also subject to this principal risk. |
• | Liquidity Risk. Illiquid securities are securities that cannot be readily disposed of in the normal course of business. There is a risk that The Buying Fund might not be able to sell such securities at the time it desires, or that it cannot sell such securities without adversely affecting price. The Selling Fund is also subject to this principal risk. |
The following bar charts and tables provide some illustration of the risks of investing in the Funds by showing, respectively:
• | how each Fund’s performance has varied for each full calendar year shown in the bar chart; and |
• | how each Fund’s average annual total returns compare to certain measures of market performance shown in the table. |
Both the bar chart and the table assume that all distributions have been reinvested. The performance of different classes varies because of differences in sales charges and other fees and expenses. How a Fund has performed in the past (before and after taxes) does not indicate how the Fund will perform in the future. The performance shown reflects any fee waiver or expense reimbursement arrangements in effect for the periods reported. In the absence of such fee waiver or expense reimbursement arrangements, the performance shown would have been lower.
Bar Charts. Class A share information is shown in the bar charts.
Tables. The tables below show total returns from hypothetical investments in the indicated classes of shares of each Fund. The returns shown are compared to measures of market performance shown for the same periods. The performance calculations in the tables assume no adjustments for taxes paid by an investor on reinvested income and capital gains.
RiverSource Variable Portfolio – Strategic Income Fund (Selling Fund)
CLASS 1 SHARE PERFORMANCE
(based on calendar years)
The Fund is new as of April 14, 2010 and therefore calendar year performance information is not available.
The Fund’s Class 1 since inception return at September 30, 2010 was +5.80%.
Columbia Strategic Income Fund, Variable Series (Buying Fund)
CLASS A SHARE PERFORMANCE
(based on calendar years)
+0.16 | % | +3.68 | % | +8.41 | % | +18.54 | % | +10.16 | % | +1.61 | % | +7.07 | % | +6.07 | % | –7.81 | % | +20.40 | % | |||||||||||||||||||
2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 |
During the periods shown in the bar chart, the highest return for a calendar quarter was +7.87% (2nd quarter 2009) and the lowest return for a calendar quarter was –4.98% (4th quarter 2008).
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The returns shown do not reflect fees and expenses imposed under your Contract, if any, and would be lower if they did. The performance of other share classes may vary from that shown because of differences in expenses.
The Fund’s Class A shares year–to–date return at September 30, 2010 was +10.18%.
Average Annual Total Returns
RiverSource Variable Portfolio – Strategic Income Fund (Selling Fund)
The Fund is new as of April 14, 2010 and therefore performance information is not available.
When available, the Fund intends to compare its performance to the performance of Barclays Capital U.S. Aggregate Bond Index. The Fund also intends to compare its performance to the performance of the Lipper Multi–Sector Income Funds Index.
Average Annual Total Returns (for periods ended December 31, 2009)(1)
Columbia Strategic Income Fund, Variable Series (Buying Fund) | 1 year | 5 years | 10 years | |||||||||
Class A | ||||||||||||
Return before taxes | +20.40 | % | +5.07 | % | +6.53 | % | ||||||
Class B | ||||||||||||
Return before taxes | +20.14 | % | +4.86 | % | +6.33 | % | ||||||
Barclays Capital Government/Credit Bond Index (reflects no deductions for fees or expenses) | +4.52 | % | +4.71 | % | +6.34 | % | ||||||
Blended Benchmark (consists of a 35% Barclays Capital Aggregate Bond Index, 35% JP Morgan Global High Yield Index, 15% Citigroup Non–U.S. World Government Bond Index and 15% JP Morgan EMBI Global Diversified Index) (reflects no deductions for fees or expenses) | +25.98 | % | +6.12 | % | +7.49 | % |
(1) | The returns shown do not reflect fees and expenses imposed under your Contract, if any, and would be lower if they did. |
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Proposal 2 Comparison of Objectives, Strategies and Risks. Reorganization of Disciplined Asset Allocation Portfolios – Conservative into Variable Portfolio – Conservative Portfolio
Comparison of the Selling Fund and the Buying Fund
Both the Selling Fund and the Buying Fund:
• | Have Columbia Management as investment manager. |
• | Have the same policies for buying and selling shares and the same exchange rights. Please see Exhibit C for a description of these policies for the Buying Funds. |
• | Are structured as series of an open-end management investment company. The Selling Fund and the Buying Fund are organized as series of the same Massachusetts business trust. |
Comparison of Investment Objectives
The investment objectives of the Funds are as follows:
Selling Fund: Disciplined Asset Allocation Portfolios – Conservative seeks to provide shareholders with a high level of total return that is consistent with an acceptable level of risk.
Buying Fund: Variable Portfolio – Conservative Portfolio seeks to provide a high level of total return that is consistent with a conservative level of risk.
Because any investment involves risk, there can be no assurance that a Fund’s objective will be achieved. The investment objective of the Selling Fund may be changed only with shareholder approval, while the investment objective of the Buying Fund may be changed without shareholder approval.
Comparison of Principal Investment Strategies
The Selling Fund and the Buying Fund have similar principal investment strategies. Both the Selling Fund and the Buying Fund seek to achieve their investment objective by investing in a combination of underlying funds for which Columbia Management or an affiliate acts as investment manager or principal underwriter. See Exhibit D for a description of the investment objectives and strategies of the underlying funds of the Buying Fund. Each Fund allocates its assets across different asset classes. Under normal market conditions, the Buying Fund’s target ranges are 15–25% equity, 65–75% fixed income and 5–15% cash, while the Selling Fund’s target ranges are 0–40% equity, 20–99% fixed income, 0–40% cash and 0–20% alternative investments. The Buying Fund may invest directly in derivatives as a principal investment strategy; the Selling Fund does not have a similar principal investment strategy.
Additional information regarding the principal investment strategies of each Fund is set forth below:
Disciplined Asset Allocation Portfolios – Conservative | Variable Portfolio – Conservative Portfolio (Buying Fund) | |
The Fund is a “fund of funds” and seeks to achieve its objective by investing in a combination of underlying funds for which Columbia Management or an affiliate acts as investment manager or principal underwriter. By investing in a combination of underlying funds, the Fund seeks to minimize the risks associated with investing in a single fund. | ||
Columbia Management will allocate the Fund’s assets within and across different asset classes, potentially including an allocation to alternative investment strategies, in an effort to achieve the Fund’s objective of providing a high level of total return that is consistent with an acceptable level of risk. The Fund’s assets will be reallocated monthly subject to constraints that set minimum or maximum exposure between asset classes and within asset classes. | The Fund seeks to achieve its objective by investing in a combination of underlying funds representing three primary asset classes: equity, fixed income and cash. |
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Disciplined Asset Allocation Portfolios – Conservative | Variable Portfolio – Conservative Portfolio (Buying Fund) | |
Asset Class Allocation. Columbia Management will manage the Fund’s overall asset class mix: fixed income, equity, cash, and alternative investments. The target allocation range constraints set forth below are intended to promote diversification between the asset classes in an effort to achieve the Fund’s objective of providing a high level of total return that is consistent with an acceptable level of risk.
Under normal market conditions, the Fund intends to invest in each asset class within the following target asset allocation ranges:
Equity: 0–40%
Fixed Income: 20–99%
Cash: 0–40%
Alternative Investment Strategy: 0–20%
Market appreciation or depreciation may cause the Fund to be temporarily outside the ranges identified above. Columbia Management may modify the target allocation ranges only upon approval of the Board.
Investment Category Allocation. Within the equity and fixed income asset classes, Columbia Management establishes allocations for the Fund, seeking to achieve the Fund’s objective by investing in defined investment categories. Fixed income investment categories include: treasury inflation protected securities (TIPS), U.S. investment grade bonds, high yield bonds, international bonds and emerging markets bonds. Columbia Management also may allocate assets to money market (cash) or alternative investment strategy funds. Equity investment categories include: U.S. large cap value/growth, U.S. small and mid cap equities and international equities, including emerging market securities.
The Fund’s target allocation range constraints within each investment category are intended to promote diversification within the asset classes. The quantitative model takes into account factors such as style, sector, market capitalization, geographic location, credit quality, interest rate risk, and yield potential. Proposed allocation shifts are reviewed and approved by Columbia Management as part of its qualitative review if necessary. | Under normal market conditions, the Fund intends to invest in each asset class within the following target asset allocation ranges: Asset Class:
Equity: 15–25%
Fixed Income: 65–75%
Cash: 5–15%
Market appreciation or depreciation may cause the Fund to be temporarily outside the ranges identified above. Columbia Management may modify the target allocation ranges only upon approval of the Board. Allocation ranges include the Fund’s exposure to derivatives. | |
The Fund may invest directly in derivatives to produce incremental earnings, to hedge existing positions, to increase market exposure and investment flexibility, or to obtain or reduce credit exposure. Derivatives that the Fund may invest in include index futures, Treasury futures, currency forwards, index–based total return swaps and indexed–based credit default swaps. |
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Buying Fund Investment Styles
The investment style of the Buying Fund is set forth below:
In selecting the proportion of the Buying Fund’s assets to be invested within and across each of the three primary asset classes, Columbia Management considers the independent analysis of Morningstar Associates, an independent investment consultant, on a broad range of aspects related to the management of the Buying Fund including, but not limited to, the Buying Fund’s asset allocation targets, the performance of the underlying funds, the types of investment categories represented by the underlying funds, and the consideration of additional underlying funds. Columbia Management retains full discretion over the Buying Fund’s investment activities.
Columbia Management monitors underlying fund selections, allocations and investment performance, and will take actions it deems appropriate to position the Buying Fund to achieve its investment objective, including investing in any underlying fund, adding new underlying funds, and altering target allocations as necessary. Columbia Management will implement the Buying Fund’s asset allocation process by directing net cash inflows (outflows) to purchase (redeem) shares of the underlying funds which are underweight (overweight) the then–current target allocation, purchasing or redeeming shares of the underlying funds to maintain or change the percentage of the Buying Fund’s assets invested in the underlying funds, or investing directly in derivatives to seek targeted asset class levels.
Differences between the Selling Fund’s principal investment strategies, fundamental and non–fundamental investment policies and holdings and those of the Buying Fund may expose the Selling Fund’s shareholders to new or increased risks. A comparison of the principal risks of investing in each Selling Fund and the Buying Fund is provided under “Comparison of Principal Risks” beginning on page [•].
Comparison of Fundamental Investment Policies
If the Reorganization occurs, the combined Fund will be subject to the fundamental investment policies of the Buying Fund, which are substantially the same as those of the Selling Fund. For purposes of this discussion, a “fundamental” investment policy is one that may not be changed without a shareholder vote.
The Funds’ fundamental investment policies are set forth below:
Policy | Disciplined Asset Allocation Portfolios – | Variable Portfolio –Conservative Portfolio | ||
Borrowing/Issuing Senior Securities/ Buying on Margin/ Selling Short | The Fund will not borrow money, except for temporary purposes (not for leveraging or investment) in an amount not exceeding 33 1/3% of its total assets (including the amount borrowed) less liabilities (other than borrowings) immediately after the borrowings.
The Fund will not issue senior securities, except as permitted under the 1940 Act, the rules and regulations thereunder and any applicable exemptive relief. | |||
Commodities | The Fund will not buy or sell physical commodities unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the fund from buying or selling options, futures contracts and foreign currency or from entering into forward currency contracts or from investing in securities or other instruments backed by, or whose value is derived from, physical commodities. | |||
Diversification | The Fund will not purchase securities (except securities issued or guaranteed by the U.S. government, its agencies or instrumentalities) of any one issuer if, as a result, more than 5% of its total assets will be invested in the securities of such issuer or it would own more than 10% of the voting securities of such issuer, except that: (a) up to 25% of its total assets may be invested without regard to these limitations and (b) a Fund’s assets may be invested in the securities of one or more management investment companies to the extent permitted by the 1940 Act, the rules and regulations thereunder, or any applicable exemptive relief. | |||
Industry | The Fund will not concentrate in any one industry. | The Fund will not concentrate in any one industry. |
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Concentration | According to the present interpretation by the Securities and Exchange Commission (SEC), this means that up to 25% of the Fund’s total assets, based on current market value at time of purchase, can be invested in any one industry. The Fund itself does not intend to concentrate, however, the aggregation of holdings of the underlying funds may result in the Fund indirectly investing more than 25% of its assets in a particular industry. The Fund does not control the investments of the underlying funds and any indirect concentration will occur only as a result of the Fund following its investment objectives by investing in the underlying funds. | According to the present interpretation by the SEC, this means that up to 25% of the fund’s total assets, based on current market value at time of purchase, can be invested in any one industry. | ||
Lending | The Fund will not lend securities or participate in an interfund lending program if the total of all such loans would exceed 33 1/3% of the fund’s total assets except this fundamental investment policy shall not prohibit the fund from purchasing money market securities, loans, loan participation or other debt securities, or from entering into repurchase agreements. Under current Board policy, the fund has no current intention to lend to a material extent. | |||
Real Estate | The Fund will not buy or sell real estate, unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the fund from investing in securities or other instruments backed by real estate or securities of companies engaged in the real estate business or real estate investment trusts. For purposes of this policy, real estate includes real estate limited partnerships. | |||
Underwriting | The Fund will not act as an underwriter (sell securities for others). However, under the securities laws, the fund may be deemed to be an underwriter when it purchases securities directly from the issuer and later resells them. |
Differences between the Selling Fund’s principal investment strategies, fundamental and non–fundamental investment policies and holdings and those of the Buying Fund may expose the Selling Fund’s shareholders to new or increased risks. A comparison of the principal risks of investing in the Selling Fund and the Buying Fund is provided under “Comparison of Principal Risks” beginning on page [—].
Comparison of Non–Fundamental Investment Policies:
If the Reorganization occurs, the combined Fund will be subject to the non–fundamental investment policies (policies that may be changed without a shareholder vote) of the Buying Fund, which are the same as those of the Selling Fund.
The Funds’ non–fundamental investment policies are set forth below:
Policy | Disciplined Asset Allocation Portfolios – Conservative | Variable Portfolio – Conservative Portfolio (Buying Fund) | ||
Illiquid Securities | No more than 15% of the Fund’s net assets will be held in securities and other instruments that are illiquid. |
Differences between the Selling Fund’s principal investment strategies, fundamental and non–fundamental investment policies and holdings and those of the Buying Fund may expose the Selling Fund’s shareholders to new or increased risks. A comparison of the principal risks of investing in the Selling Fund and the Buying Fund is provided under “Comparison of Principal Risks” below.
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Although the Funds describe them somewhat differently, the principal risks associated with investments in the Buying Fund and the Selling Fund are generally similar because the Funds have similar investment objectives, principal investment strategies and investment policies. The actual risks of investing in each Fund depend on the securities held in each Fund’s portfolio and on market conditions, both of which change over time. The Buying Fund is subject to the principal risks described below. Similarities and material differences between the Buying Fund’s risks and those of each Selling Fund are also described below.
• | Affiliated Fund Risk. The risk that Columbia Management may have potential conflicts of interest in selecting underlying funds because the fees paid to it by some underlying funds are higher than the fees paid by other underlying funds. However, Columbia Management is a fiduciary to the Buying Fund and is legally obligated to act in the Buying Fund’s best interests when selecting underlying funds, without taking fees into consideration. The Selling Fund is also subject to this principal risk. |
• | Active Management/Allocation Risk. The risk that Columbia Management’s evaluations regarding asset classes or underlying funds and the Buying Fund’s allocations thereto may be incorrect. Because the assets of the Buying Fund will be invested in underlying funds, the Buying Fund’s investment performance is directly related to the investment performance of the underlying funds in which it invests. The ability of the Buying Fund to realize its investment objective(s) will depend, in part, on the extent to which the underlying funds realize their investment objectives. There is no guarantee that the underlying funds will achieve their investment objectives. There is also a risk that the selected underlying funds’ performance may be lower than the performance of the asset class they were selected to represent or may be lower than the performance of alternative underlying funds that could have been selected to represent the asset class. Also, the Buying Fund is exposed to the same risks as the underlying funds in direct proportion to the allocation of its assets among the underlying funds. The Selling Fund is also subject to this principal risk. |
• | Derivatives Risk. Derivatives are financial instruments that have a value which depends upon, or is derived from, the value of something else, such as one or more underlying securities, pools of securities, options, futures, indexes or currencies. Losses involving derivative instruments may be substantial, because a relatively small price movement in the underlying security(ies), instrument, currency or index may result in a substantial loss for the Buying Fund. In addition to the potential for increased losses, the use of derivative instruments may lead to increased volatility within the Buying Fund. Derivative instruments in which the Buying Fund invests will typically increase the Buying Fund’s exposure to principal risks to which it is otherwise exposed, and may expose the Buying Fund to additional risks, including leverage risk, hedging risk, correlation risk, and liquidity risk. |
¡ | Leverage risk is the risk that losses from the derivative instrument may be greater than the amount invested in the derivative instrument. |
¡ | Hedging risk is the risk that derivative instruments used to hedge against an opposite position may offset losses, but they may also offset gains. There is no guarantee that a hedging strategy will eliminate the risk which the hedging strategy is intended to offset, which may lead to losses within the Buying Fund. |
¡ | Correlation risk is related to hedging risk and is the risk that there may be an incomplete correlation between the hedge and the opposite position, which may result in increased or unanticipated losses. |
¡ | Liquidity risk is the risk that the derivative instrument may be difficult or impossible to sell or terminate, which may cause the Buying Fund to be in a position to do something Columbia Management would not otherwise choose, including accepting a lower price for the derivative instrument, selling other investments or foregoing another, more appealing investment opportunity. Derivative instruments which are not traded on an exchange, including, but not limited to, forward contracts, swaps and over–the–counter options, may have increased liquidity risk. |
¡ | Certain derivatives have the potential for unlimited losses, regardless of the size of the initial investment. See the SAI for more information on derivative instruments and related risks. |
The Selling Fund is not subject to derivatives risk as a principal risk, but may be subject to such risk to the extent of its investments, if any, in derivatives.
• | Risks Of Underlying Funds – By investing in a combination of underlying funds, the Buying Fund has exposure to the risks associated with many areas of the market. Since Conservative Portfolio intends to invest a significant portion of its assets in fixed income asset classes, the Buying Fund may have higher exposure to the following principal risks of the underlying funds: Counterparty Risk, Credit Risk, Derivatives Risk, Interest Rate Risk, Issuer Risk and Prepayment and Extension Risk. Also, in addition to the Fund’s operating expenses, you will indirectly bear the operating expenses of the underlying funds. Thus, the expenses you bear as an investor in the Fund will be higher than if you invested directly in the underlying funds. A description of |
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the more common principal risks to which the underlying funds (and thus, the Fund) are subject to are identified below. A more complete list of principal risks associated with direct investment in the underlying funds is set forth in Exhibit E. Additional risks of the underlying funds are set forth in the Merger SAI. The Selling Fund is also subject to this principal risk. |
Certain Principal Risks Of The Buying Fund’s Underlying Funds:
• | Active Management Risk – Each underlying fund is actively managed and its performance therefore will reflect in part the ability of the portfolio managers to select securities and to make investment decisions that are suited to achieving the underlying fund’s investment objectives. Due to their active management, the underlying funds could underperform other mutual funds with similar investment objectives. |
• | Credit Risk – The risk that the issuer of a security, or the counterparty to a contract, will default or otherwise become unable or unwilling to honor a financial obligation, such as payments due on a bond or a note. If the underlying fund purchases unrated securities, or if the rating of a security is reduced after purchase, the underlying fund will depend on Columbia Management’s analysis of credit risk more heavily than usual. Non–investment grade securities, commonly called “high–yield” or “junk” bonds, may react more to perceived changes in the ability of the issuing entity or obligor to pay interest and principal when due than to changes in interest rates. Non–investment grade securities may have greater price fluctuations and are more likely to experience a default than investment grade bonds. |
• | Derivatives Risk – Derivatives are financial instruments that have a value which depends upon, or is derived from, the value of something else, such as one or more underlying securities, pools of securities, options, futures, indexes or currencies. Losses involving derivative instruments may be substantial, because a relatively small price movement in the underlying security(ies), instrument, currency or index may result in a substantial loss for the underlying fund. In addition to the potential for increased losses, the use of derivative instruments may lead to increased volatility within the underlying fund. Derivative instruments in which the underlying funds invest will typically increase each such fund’s exposure to principal risks to which they are otherwise exposed, and may expose the fund to additional risks, including leverage risk, hedging risk, correlation risk, and liquidity risk. |
• | Leverage risk is the risk that losses from the derivative instrument may be greater than the amount invested in the derivative instrument. |
• | Hedging risk is the risk that derivative instruments used to hedge against an opposite position may offset losses, but they may also offset gains. There is no guarantee that a hedging strategy will eliminate the risk which the hedging strategy is intended to offset, which may lead to losses within the underlying fund. |
• | Correlation risk is related to hedging risk and is the risk that there may be an incomplete correlation between the hedge and the opposite position, which may result in increased or unanticipated losses. |
• | Liquidity risk is the risk that the derivative instrument may be difficult or impossible to sell or terminate, which may cause the underlying fund to be in a position to do something the investment manager would not otherwise choose, including accepting a lower price for the derivative instrument, selling other investments or foregoing another, more appealing investment opportunity. Derivative instruments which are not traded on an exchange, including, but not limited to, forward contracts, swaps and over–the–counter options, may have increased liquidity risk. |
Certain derivatives have the potential for unlimited losses, regardless of the size of the initial investment. See the Merger SAI for more information on derivative instruments and related risks.
• | Issuer Risk – An issuer may perform poorly, and therefore, the value of its stocks and bonds may decline. Poor performance may be caused by poor management decisions, competitive pressures, breakthroughs in technology, reliance on suppliers, labor problems or shortages, corporate restructurings, fraudulent disclosures, or other factors. |
• | Market Risk – The market value of securities may fall or fail to rise. Market risk may affect a single issuer, sector of the economy, industry, or the market as a whole. The market value of securities may fluctuate, sometimes rapidly and unpredictably. This risk is generally greater for small companies and for certain specialized instruments such as floating rate loans, which tend to be more vulnerable to adverse developments. In addition, focus on a particular style, for example, investment in value securities, may cause a fund to underperform other mutual funds if that style falls out of favor with the market. |
• | Non–Diversification Risk – Although the Funds are diversified funds, certain of the underlying funds are non–diversified funds. A non–diversified fund may invest more of its assets in fewer companies than if it were a diversified fund. Because each investment may therefore have a greater effect on the underlying fund’s performance, non–diversified underlying funds may be more exposed to the risks of loss and volatility than a fund that invests more broadly. |
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• | Risks Of Foreign Investing – Foreign securities are securities of issuers based outside the United States. An issuer is deemed to be based outside the United States if it is organized under the laws of another country. Foreign securities are primarily denominated in foreign currencies. In addition to the risks normally associated with domestic securities of the same type, foreign securities are subject to the following foreign risks: |
• | Country risk includes the political, economic, and other conditions of the country. These conditions include lack of publicly available information, less government oversight (including lack of accounting, auditing, and financial reporting standards), the possibility of government–imposed restrictions, and even the nationalization of assets. The liquidity of foreign investments may be more limited than for most U.S. investments, which means that, at times it may be difficult to sell foreign securities at desirable prices. |
• | Currency risk results from the constantly changing exchange rate between local currency and the U.S. dollar. Whenever an underlying fund holds securities valued in a foreign currency or holds the currency, changes in the exchange rate add to or subtract from the value of the investment. |
• | Custody risk refers to the process of clearing and settling trades. It also covers holding securities with local agents and depositories. Low trading volumes and volatile prices in less developed markets make trades harder to complete and settle. Local agents are held only to the standard of care of the local market. Governments or trade groups may compel local agents to hold securities in designated depositories that are not subject to independent evaluation. The less developed a country’s securities market is, the greater the likelihood of problems occurring. |
• | Emerging markets risk includes the dramatic pace of change (economic, social and political) in these countries as well as the other considerations listed above. These markets are in early stages of development and are extremely volatile. They can be marked by extreme inflation, devaluation of currencies, dependence on trade partners, and hostile relations with neighboring countries. |
The following bar charts and tables provide some illustration of the risks of investing in the Funds by showing, respectively:
• | how each Fund’s performance has varied for each full calendar year shown in the bar chart; and |
• | how each Fund’s average annual total returns compare to certain measures of market performance shown in the table. |
Both the bar chart and the table assume that all distributions have been reinvested. The returns shown do not reflect fees and expenses imposed under your variable annuity contract and/or variable life insurance policy, if any, and would be lower if they did. How a Fund has performed in the past (before and after taxes) does not indicate how the Fund will perform in the future. The performance shown reflects any fee waiver or expense reimbursement arrangements in effect for the periods reported. In the absence of such fee waiver or expense reimbursement arrangements, the performance shown would have been lower.
Bar Chart. Class 2 share information is shown in the bar chart for the Selling Fund. Class 2 shares of the Buying Fund are new; accordingly, performance information for this class is not shown.
Table. The table below shows total returns from hypothetical investments in the indicated classes of shares of the Selling Fund. Class 2 shares of the Buying Fund are new; accordingly, performance information for this class is not shown. The returns shown are compared to measures of market performance shown for the same periods.
Disciplined Asset Allocation Portfolios – Conservative (Selling Fund)
Class 2 SHARE PERFORMANCE
(based on calendar years)
+16.85% |
2009 |
During the period shown in the bar chart, the highest return for a calendar quarter was +8.33% (quarter ended September 30, 2009) and the lowest return for a calendar quarter was –1.97% (quarter ended March 31, 2009).
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The returns shown do not reflect fees and expenses imposed under your Contract, if any, and would be lower if they did.
The Fund’s Class 2 year–to–date return at September 30, 2010 was +6.24%.
Variable Portfolio – Conservative Portfolio (Buying Fund)
Class 2 SHARE PERFORMANCE
The Fund is new as of April 14, 2010 and therefore calendar year performance information is not available.
The Fund’s Class 2 since inception return at September 30, 2010 was +4.13%.
Average Annual Total Returns (for periods ended December 31, 2009)(1) | ||||||||
1 year | Since Inception (May 1, 2008) | |||||||
Disciplined Asset Allocation Portfolios – Conservative (Selling Fund): | ||||||||
Class 2 returns before taxes | +16.85 | % | +1.06 | % | ||||
Barclays Capital U.S. Aggregate Bond Index (reflects no deductions for fees, expenses or taxes) | +5.93 | % | +5.42 | % | ||||
Blended Index (consists of 74% Barclays Capital U.S. Aggregate Bond Index, 14% Russell 3000 Index, 6% MSCI EAFE Index (Gross) and 6% Citigroup 3–month U.S. Treasury Bill Index) (reflects no deductions for fees, expenses or taxes) | +10.34 | % | +2.12 | % | ||||
Russell 3000 Index (reflects no deductions for fees, expenses or taxes) | +28.34 | % | –10.39 | % | ||||
MSCI EAFE Index (Gross) (reflects no deductions for fees, expenses or taxes) | +32.46 | % | –13.31 | % | ||||
Citigroup 3–Month U.S. Treasury Bill Index (reflects no deductions for fees, expenses or taxes) | +0.16 | % | +0.66 | % |
(1) | The returns shown do not reflect fees and expenses imposed under your Contract, if any, and would be lower if they did. |
Average Annual Total Returns
Variable Portfolio – Conservative Portfolio (Buying Fund)
The Buying Fund is new as of the date of this prospectus and therefore performance information is not available. When available, the Buying Fund intends to compare its performance to Barclays Capital U.S. Aggregate Bond Index and a Blended Index, consisting of 70% Barclays Capital U.S. Aggregate Bond Index, 14% Russell 3000 Index, 6% MSCI All Country World Index (ACWI) ex–US and 10% Citigroup 3–month U.S. Treasury Bill Index.
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Proposal 3 Comparison of Objectives, Strategies and Risks. Reorganization of Disciplined Asset Allocation Portfolios – Moderately Conservative into Variable Portfolio – Moderately Conservative Portfolio
Comparison of the Selling Fund and the Buying Fund
Both the Selling Fund and the Buying Fund:
• | Have Columbia Management as investment manager. |
• | Have the same policies for buying and selling shares and the same exchange rights. Please see Exhibit C for a description of these policies for the Buying Funds. |
• | Are structured as series of an open–end management investment company. The Selling Fund and the Buying Fund are organized as series of the same Massachusetts business trust. |
Comparison of Investment Objectives
The investment objectives of the Funds are as follows:
Selling Fund: Disciplined Asset Allocation Portfolios – Moderately Conservative seeks a high level of total return that is consistent with an acceptable level of risk.
Buying Fund: Variable Portfolio – Moderately Conservative Portfolio seeks to provide a high level of total return that is consistent with a moderately conservative level of risk.
Because any investment involves risk, there can be no assurance that a Fund’s objective will be achieved. The investment objective of the Selling Fund may be changed only with shareholder approval, while the investment objective of the Buying Fund may be changed without shareholder approval.
Comparison of Principal Investment Strategies
The Selling Fund and the Buying Fund have similar principal investment strategies. Both the Selling Fund and the Buying Fund seek to achieve their investment objective by investing in a combination of underlying funds for which Columbia Management or an affiliate acts as investment manager or principal underwriter. See Exhibit D for a description of the investment objectives and strategies of the underlying funds of the Buying Fund. Each Fund allocates its assets across different asset classes. Under normal market conditions, the Buying Fund’s target ranges are 30–40% equity, 55–65% fixed income and 0–10% cash, while the Selling Fund’s target ranges are 15–55% equity, 15–85% fixed income, 0–30% cash and 0–20% alternative investments. The Buying Fund may invest directly in derivatives as a principal investment strategy; the Selling Fund does not have a similar principal investment strategy.
Additional information regarding the principal investment strategies of each Fund is set forth below:
Disciplined Asset Allocation Portfolios – Moderately Conservative | Variable Portfolio – Moderately Conservative Portfolio | |
The Fund is a “fund of funds” and seeks to achieve its objective by investing in a combination of underlying funds for which Columbia Management or an affiliate acts as investment manager or principal underwriter. By investing in a combination of underlying funds, the Fund seeks to minimize the risks associated with investing in a single fund. | ||
Columbia Management will allocate the Fund’s assets within and across different asset classes, potentially including an allocation to alternative investment strategies, in an effort to achieve the Fund’s objective of providing a high level of total return that is consistent with an acceptable level of risk. The Fund’s assets will be reallocated monthly subject to constraints that set minimum or maximum exposure between asset classes and within asset classes. | The Fund seeks to achieve its objective by investing in a combination of underlying funds representing three primary asset classes: equity, fixed income and cash. |
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Disciplined Asset Allocation Portfolios – Moderately Conservative | Variable Portfolio – Moderately Conservative Portfolio | |
Asset Class Allocation. Columbia Management will manage the Fund’s overall asset class mix: fixed income, equity, cash, and alternative investments. The target allocation range constraints set forth below are intended to promote diversification between the asset classes in an effort to achieve the Fund’s objective of providing a high level of total return that is consistent with an acceptable level of risk.
Under normal market conditions, the Fund intends to invest in each asset class within the following target asset allocation ranges:
Equity: 15–55%
Fixed Income: 15–85%
Cash: 0–30%
Alternative Investment Strategy: 0–20%
Market appreciation or depreciation may cause the Fund to be temporarily outside the ranges identified above. Columbia Management may modify the target allocation ranges only upon approval of the Board.
Investment Category Allocation. Within the equity and fixed income asset classes, Columbia Management establishes allocations for the Fund, seeking to achieve the Fund’s objective by investing in defined investment categories. Fixed income investment categories include: treasury inflation protected securities (TIPS), U.S. investment grade bonds, high yield bonds, international bonds and emerging markets bonds. Columbia Management also may allocate assets to money market (cash) or alternative investment strategy funds. Equity investment categories include: U.S. large cap value/growth, U.S. small and mid cap equities and international equities, including emerging market securities.
The Fund’s target allocation range constraints within each investment category are intended to promote diversification within the asset classes. The quantitative model takes into account factors such as style, sector, market capitalization, geographic location, credit quality, interest rate risk, and yield potential. Proposed allocation shifts are reviewed and approved by Columbia Management as part of its qualitative review if necessary. | Under normal market conditions, the Fund intends to invest in each asset class within the following target asset allocation ranges:
Asset Class:
Equity: 30–40%
Fixed Income: 55–65%
Cash: 0–10%
Market appreciation or depreciation may cause the Fund to be temporarily outside the ranges identified above. Columbia Management may modify the target allocation ranges only upon approval of the Board. Allocation ranges include the Fund’s exposure to derivatives. | |
The Fund may invest directly in derivatives to produce incremental earnings, to hedge existing positions, to increase market exposure and investment flexibility, or to obtain or reduce credit exposure. Derivatives that the Fund may invest in include index futures, Treasury futures, currency forwards, index-based total return swaps and indexed-based credit default swaps. |
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Buying Fund Investment Styles
The investment style of the Buying Fund is set forth below:
In selecting the proportion of the Buying Fund’s assets to be invested within and across each of the three primary asset classes, Columbia Management considers the independent analysis of Morningstar Associates, an independent investment consultant, on a broad range of aspects related to the management of the Buying Fund including, but not limited to, the Buying Fund’s asset allocation targets, the performance of the underlying funds, the types of investment categories represented by the underlying funds, and the consideration of additional underlying funds. Columbia Management retains full discretion over the Buying Fund’s investment activities.
Columbia Management monitors underlying fund selections, allocations and investment performance, and will take actions it deems appropriate to position the Buying Fund to achieve its investment objective, including investing in any underlying fund, adding new underlying funds, and altering target allocations as necessary. Columbia Management will implement the Buying Fund’s asset allocation process by directing net cash inflows (outflows) to purchase (redeem) shares of the underlying funds which are underweight (overweight) the then–current target allocation, purchasing or redeeming shares of the underlying funds to maintain or change the percentage of the Buying Fund’s assets invested in the underlying funds, or investing directly in derivatives to seek targeted asset class levels.
Differences between the Selling Fund’s principal investment strategies, fundamental and non–fundamental investment policies and holdings and those of the Buying Fund may expose the Selling Fund’s shareholders to new or increased risks. A comparison of the principal risks of investing in the Selling Fund and the Buying Fund is provided under “Comparison of Principal Risks” beginning on page [—].
Comparison of Fundamental Investment Policies
If the Reorganization occurs, the combined Fund will be subject to the fundamental investment policies of the Buying Fund, which are substantially the same as those of the Selling Fund. For purposes of this discussion, a “fundamental” investment policy is one that may not be changed without a shareholder vote.
The Funds’ fundamental investment policies are set forth below:
Policy | Disciplined Asset Allocation Portfolios – | Variable Portfolio – Moderately Conservative | ||
Borrowing/ Issuing Senior Securities/ Buying on Margin / Selling Short | The Fund will not borrow money, except for temporary purposes (not for leveraging or investment) in an amount not exceeding 33 1/3% of its total assets (including the amount borrowed) less liabilities (other than borrowings) immediately after the borrowings.
The Fund will not issue senior securities, except as permitted under the 1940 Act, the rules and regulations thereunder and any applicable exemptive relief. | |||
Commodities | The Fund will not buy or sell physical commodities unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the fund from buying or selling options, futures contracts and foreign currency or from entering into forward currency contracts or from investing in securities or other instruments backed by, or whose value is derived from, physical commodities. | |||
Diversification | The Fund will not purchase securities (except securities issued or guaranteed by the U.S. government, its agencies or instrumentalities) of any one issuer if, as a result, more than 5% of its total assets will be invested in the securities of such issuer or it would own more than 10% of the voting securities of such issuer, except that: (a) up to 25% of its total assets may be invested without regard to these limitations and (b) a Fund’s assets may be invested in the securities of one or more management investment companies to the extent permitted by the 1940 Act, the rules and regulations thereunder, or any applicable exemptive relief. |
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Industry Concentration | The Fund will not concentrate in any one industry. According to the present interpretation by the SEC, this means that up to 25% of the Fund’s total assets, based on current market value at time of purchase, can be invested in any one industry. The Fund itself does not intend to concentrate, however, the aggregation of holdings of the underlying funds may result in the Fund indirectly investing more than 25% of its assets in a particular industry. The Fund does not control the investments of the underlying funds and any indirect concentration will occur only as a result of the Fund following its investment objectives by investing in the underlying funds. | The Fund will not concentrate in any one industry. According to the present interpretation by the SEC, this means that up to 25% of the fund’s total assets, based on current market value at time of purchase, can be invested in any one industry. | ||
Lending | The Fund will not lend securities or participate in an interfund lending program if the total of all such loans would exceed 33 1/3% of the fund’s total assets except this fundamental investment policy shall not prohibit the fund from purchasing money market securities, loans, loan participation or other debt securities, or from entering into repurchase agreements. Under current Board policy, the fund has no current intention to lend to a material extent. | |||
Real Estate | The Fund will not buy or sell real estate, unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the fund from investing in securities or other instruments backed by real estate or securities of companies engaged in the real estate business or real estate investment trusts. For purposes of this policy, real estate includes real estate limited partnerships. | |||
Underwriting | The Fund will not act as an underwriter (sell securities for others). However, under the securities laws, the fund may be deemed to be an underwriter when it purchases securities directly from the issuer and later resells them. |
Differences between the Selling Fund’s principal investment strategies, fundamental and non-fundamental investment policies and holdings and those of the Buying Fund may expose the Selling Fund’s shareholders to new or increased risks. A comparison of the principal risks of investing in the Selling Fund and the Buying Fund is provided under “Comparison of Principal Risks” beginning on page [—].
Comparison of Non-Fundamental Investment Policies
If the Reorganization occurs, the combined Fund will be subject to the non-fundamental investment policies (policies that may be changed without a shareholder vote) of the Buying Fund, which are the same as those of the Selling Fund.
The Funds’ non-fundamental investment policies are set forth below:
Policy | Disciplined Asset Allocation Portfolios – | Variable Portfolio – Moderately Conservative | ||
Illiquid Securities | No more than 15% of the Fund’s net assets will be held in securities and other instruments that are illiquid. |
Differences between the Selling Fund’s principal investment strategies, fundamental and non–fundamental investment policies and holdings and those of the Buying Fund may expose the Selling Fund’s shareholders to new or increased risks. A comparison of the principal risks of investing in the Selling Fund and the Buying Fund is provided under “Comparison of Principal Risks” below.
Although the Funds describe them somewhat differently, the principal risks associated with investments in the Buying Fund and the Selling Fund are similar because the Funds have similar investment objectives, principal investment strategies and investment policies. The actual risks of investing in each Fund depend on the securities held in each Fund’s portfolio and on market conditions, both of which change over time. The Buying Fund is subject to the principal risks described below.
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• | Affiliated Fund Risk. The risk that Columbia Management may have potential conflicts of interest in selecting underlying funds because the fees paid to it by some underlying funds are higher than the fees paid by other underlying funds. However, Columbia Management is a fiduciary to the Buying Fund and is legally obligated to act in the Buying Fund’s best interests when selecting underlying funds, without taking fees into consideration. The Selling Fund is also subject to this principal risk. |
• | Active Management/Allocation Risk. The risk that Columbia Management’s evaluations regarding asset classes or underlying funds and the Buying Fund’s allocations thereto may be incorrect. Because the assets of the Buying Fund will be invested in underlying funds, the Buying Fund’s investment performance is directly related to the investment performance of the underlying funds in which it invests. The ability of the Buying Fund to realize its investment objective(s) will depend, in part, on the extent to which the underlying funds realize their investment objectives. There is no guarantee that the underlying funds will achieve their investment objectives. There is also a risk that the selected underlying funds’ performance may be lower than the performance of the asset class they were selected to represent or may be lower than the performance of alternative underlying funds that could have been selected to represent the asset class. Also, the Buying Fund is exposed to the same risks as the underlying funds in direct proportion to the allocation of its assets among the underlying funds. The Selling Fund is also subject to this principal risk. |
• | Derivatives Risk. Derivatives are financial instruments that have a value which depends upon, or is derived from, the value of something else, such as one or more underlying securities, pools of securities, options, futures, indexes or currencies. Losses involving derivative instruments may be substantial, because a relatively small price movement in the underlying security(ies), instrument, currency or index may result in a substantial loss for the Buying Fund. In addition to the potential for increased losses, the use of derivative instruments may lead to increased volatility within the Buying Fund. Derivative instruments in which the Buying Fund invests will typically increase the Buying Fund’s exposure to principal risks to which it is otherwise exposed, and may expose the Buying Fund to additional risks, including leverage risk, hedging risk, correlation risk, and liquidity risk. |
• | Leverage risk is the risk that losses from the derivative instrument may be greater than the amount invested in the derivative instrument. |
• | Hedging risk is the risk that derivative instruments used to hedge against an opposite position may offset losses, but they may also offset gains. There is no guarantee that a hedging strategy will eliminate the risk which the hedging strategy is intended to offset, which may lead to losses within the Buying Fund. |
• | Correlation risk is related to hedging risk and is the risk that there may be an incomplete correlation between the hedge and the opposite position, which may result in increased or unanticipated losses. |
• | Liquidity risk is the risk that the derivative instrument may be difficult or impossible to sell or terminate, which may cause the Buying Fund to be in a position to do something Columbia Management would not otherwise choose, including accepting a lower price for the derivative instrument, selling other investments or foregoing another, more appealing investment opportunity. Derivative instruments which are not traded on an exchange, including, but not limited to, forward contracts, swaps and over–the–counter options, may have increased liquidity risk. |
• | Certain derivatives have the potential for unlimited losses, regardless of the size of the initial investment. See the SAI for more information on derivative instruments and related risks. |
The Selling Fund is not subject to derivatives risk as a principal risk, but may be subject to such risk to the extent of its investments, if any, in derivatives.
• | Risks of Underlying Funds – By investing in a combination of underlying funds, the Fund has exposure to the risks associated with many areas of the market. Since Moderately Conservative Portfolio intends to invest a significant portion of its assets in fixed income asset classes, the Fund may have higher exposure to the following principal risks of the underlying funds: Counterparty Risk, Credit Risk, Derivatives Risk, Interest Rate Risk, Issuer Risk and Prepayment and Extension Risk. Also, in addition to the Fund’s operating expenses, you will indirectly bear the operating expenses of the underlying funds. Thus, the expenses you bear as an investor in the Fund will be higher than if you invested directly in the underlying funds. A description of the more common principal risks to which the underlying funds (and thus, the Fund) are subject to are identified below. A more complete list of principal risks associated with direct investment in the underlying funds is set forth in Exhibit E. Additional risks of the underlying funds are set forth in the Merger SAI. The Selling Fund is also subject to this principal risk. |
Certain Principal Risks Of The Buying Fund’s Underlying Funds:
• | Active Management Risk – Each underlying fund is actively managed and its performance therefore will reflect in part the ability of the portfolio managers to select securities and to make investment decisions that are suited to achieving the underlying fund’s investment objectives. Due to their active management, the underlying funds could underperform other mutual funds with similar investment objectives. |
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• | Credit Risk – The risk that the issuer of a security, or the counterparty to a contract, will default or otherwise become unable or unwilling to honor a financial obligation, such as payments due on a bond or a note. If the underlying fund purchases unrated securities, or if the rating of a security is reduced after purchase, the underlying fund will depend on Columbia Management’s analysis of credit risk more heavily than usual. Non–investment grade securities, commonly called “high-yield” or “junk” bonds, may react more to perceived changes in the ability of the issuing entity or obligor to pay interest and principal when due than to changes in interest rates. Non-investment grade securities may have greater price fluctuations and are more likely to experience a default than investment grade bonds. |
• | Derivatives Risk – Derivatives are financial instruments that have a value which depends upon, or is derived from, the value of something else, such as one or more underlying securities, pools of securities, options, futures, indexes or currencies. Losses involving derivative instruments may be substantial, because a relatively small price movement in the underlying security(ies), instrument, currency or index may result in a substantial loss for the underlying fund. In addition to the potential for increased losses, the use of derivative instruments may lead to increased volatility within the underlying fund. Derivative instruments in which the underlying funds invest will typically increase each such fund’s exposure to principal risks to which they are otherwise exposed, and may expose the fund to additional risks, including leverage risk, hedging risk, correlation risk, and liquidity risk. |
• | Leverage risk is the risk that losses from the derivative instrument may be greater than the amount invested in the derivative instrument. |
• | Hedging risk is the risk that derivative instruments used to hedge against an opposite position may offset losses, but they may also offset gains. There is no guarantee that a hedging strategy will eliminate the risk which the hedging strategy is intended to offset, which may lead to losses within the underlying fund. |
• | Correlation risk is related to hedging risk and is the risk that there may be an incomplete correlation between the hedge and the opposite position, which may result in increased or unanticipated losses. |
• | Liquidity risk is the risk that the derivative instrument may be difficult or impossible to sell or terminate, which may cause the underlying fund to be in a position to do something the investment manager would not otherwise choose, including accepting a lower price for the derivative instrument, selling other investments or foregoing another, more appealing investment opportunity. Derivative instruments which are not traded on an exchange, including, but not limited to, forward contracts, swaps and over-the-counter options, may have increased liquidity risk. |
• | Certain derivatives have the potential for unlimited losses, regardless of the size of the initial investment. See the Merger SAI for more information on derivative instruments and related risks. |
• | Issuer Risk – An issuer may perform poorly, and therefore, the value of its stocks and bonds may decline. Poor performance may be caused by poor management decisions, competitive pressures, breakthroughs in technology, reliance on suppliers, labor problems or shortages, corporate restructurings, fraudulent disclosures, or other factors. |
• | Market Risk – The market value of securities may fall or fail to rise. Market risk may affect a single issuer, sector of the economy, industry, or the market as a whole. The market value of securities may fluctuate, sometimes rapidly and unpredictably. This risk is generally greater for small companies and for certain specialized instruments such as floating rate loans, which tend to be more vulnerable to adverse developments. In addition, focus on a particular style, for example, investment in value securities, may cause a fund to underperform other mutual funds if that style falls out of favor with the market. |
• | Non–Diversification Risk – Although the Funds are diversified funds, certain of the underlying funds are non–diversified funds. A non–diversified fund may invest more of its assets in fewer companies than if it were a diversified fund. Because each investment may therefore have a greater effect on the underlying fund’s performance, non–diversified underlying funds may be more exposed to the risks of loss and volatility than a fund that invests more broadly. |
• | Risks Of Foreign Investing – Foreign securities are securities of issuers based outside the United States. An issuer is deemed to be based outside the United States if it is organized under the laws of another country. Foreign securities are primarily denominated in foreign currencies. In addition to the risks normally associated with domestic securities of the same type, foreign securities are subject to the following foreign risks: |
• | Country risk includes the political, economic, and other conditions of the country. These conditions include lack of publicly available information, less government oversight (including lack of accounting, auditing, and financial reporting standards), the possibility of government-imposed restrictions, and even the nationalization of assets. The liquidity of foreign investments may be more limited than for most U.S. investments, which means that, at times it may be difficult to sell foreign securities at desirable prices. |
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• | Currency risk results from the constantly changing exchange rate between local currency and the U.S. dollar. Whenever an underlying fund holds securities valued in a foreign currency or holds the currency, changes in the exchange rate add to or subtract from the value of the investment. |
• | Custody risk refers to the process of clearing and settling trades. It also covers holding securities with local agents and depositories. Low trading volumes and volatile prices in less developed markets make trades harder to complete and settle. Local agents are held only to the standard of care of the local market. Governments or trade groups may compel local agents to hold securities in designated depositories that are not subject to independent evaluation. The less developed a country’s securities market is, the greater the likelihood of problems occurring. |
• | Emerging markets risk includes the dramatic pace of change (economic, social and political) in these countries as well as the other considerations listed above. These markets are in early stages of development and are extremely volatile. They can be marked by extreme inflation, devaluation of currencies, dependence on trade partners, and hostile relations with neighboring countries. |
The following bar charts and tables provide some illustration of the risks of investing in the Funds by showing, respectively:
• | how each Fund’s performance has varied for each full calendar year shown in the bar chart; and |
• | how each Fund’s average annual total returns compare to certain measures of market performance shown in the table. |
Both the bar chart and the table assume that all distributions have been reinvested. The performance of different classes varies because of differences in sales charges and other fees and expenses. How a Fund has performed in the past does not indicate how the Fund will perform in the future. The performance shown reflects any fee waiver or expense reimbursement arrangements in effect for the periods reported. In the absence of such fee waivers or expense reimbursement arrangements, the performance shown would have been lower.
Bar Chart. Class 2 share information is shown in the bar chart for the Selling Fund. Class 2 shares of the Buying Fund are new; accordingly, performance information for this class is not shown.
Table. The table below shows total returns from hypothetical investments in the indicated classes of shares of the Selling Fund. Class 2 shares of the Buying Fund are new; accordingly, performance information for this class is not shown. The returns shown are compared to measures of market performance shown for the same periods.
Disciplined Asset Allocation Portfolios – Moderately Conservative (Selling Fund)
CLASS 2 SHARE PERFORMANCE
(based on calendar years)
+18.93% |
2009 |
During the period shown in the bar chart, the highest return for a calendar quarter was +9.80% (quarter ended September 30, 2009) and the lowest return for a calendar quarter was –3.51% (quarter ended March 31, 2009).
The returns shown do not reflect fees and expenses imposed under your Contract, if any, and would be lower if they did.
The Fund’s Class 2 shares year-to-date return at September 30, 2010 was +5.64%.
Variable Portfolio – Moderately Conservative Portfolio
The Fund is new as of April 14, 2010 and therefore calendar year performance information is not available.
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The Fund’s Class 2 since inception return at September 30, 2010 was +4.20%.
Average Annual Total Returns (for periods ended December 31, 2009)(1) | ||||||||
Disciplined Asset Allocation Portfolios – Moderately Conservative (Selling Fund): | 1 year | Since inception (May 1, 2008) | ||||||
Class 2 returns before taxes | +18.93% | –3.43% | ||||||
Barclays Capital U.S. Aggregate Bond Index (reflects no deduction for fees, expenses or taxes) | +5.93% | +5.42% | ||||||
Blended Index (consists of 60% of Barclays Capital U.S. Aggregate Bond Index, 25% Russell 3000 Index, 10% MSCI EAFE Index (Gross) and 5% Citigroup 3–month U.S. Treasury Bill Index) (reflects no deduction for fees, expenses or taxes) | +13.96% | –0.19% | ||||||
Russell 3000 Index (reflects no deduction for fees, expenses or taxes) | +28.34% | –10.39% | ||||||
MSCI EAFE Index (Gross) (reflects no deduction for fees, expenses or taxes) | +32.46% | –13.31% | ||||||
Citigroup 3–Month U.S. Treasury Bill Index (reflects no deduction for fees, expenses or taxes) | +0.16% | +0.66% |
(1) | The returns shown do not reflect fees and expenses imposed under your Contract, if any, and would be lower if they did. |
Average Annual Total Returns
Variable Portfolio – Moderately Conservative Portfolio (Buying Fund)
The Fund is new as of the date of its prospectus and therefore performance information is not available. When available, Moderately Conservative Portfolio intends to compare its performance to the Barclays Capital U.S. Aggregate Bond Index and a Blended Index, consisting of 60% Barclays Capital U.S. Aggregate Bond Index, 24.5% Russell 3000 Index, 10.5% Morgan Stanley Capital International (MSCI) All Country World Index (ACWI) ex–US and 5% Citigroup 3–month U.S. Treasury Bill Index.
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Proposal 4 Comparison of Objectives, Strategies and Risks. Reorganization of Disciplined Asset Allocation Portfolios – Moderate into Variable Portfolio – Moderate Portfolio
Comparison of the Selling Fund and the Buying Fund
Both the Selling Fund and the Buying Fund:
• | Have Columbia Management as investment manager. |
• | Have the same policies for buying and selling shares and the same exchange rights. Please see Exhibit C for a description of these policies for the Buying Funds. |
• | Are structured as series of an open–end management investment company. The Selling Fund and the Buying Fund are organized as series of the same Massachusetts business trust. |
Comparison of Investment Objectives
The investment objectives of the Funds are as follows:
Selling Fund: Disciplined Asset Allocation Portfolios – Moderate seeks a high level of total return that is consistent with an acceptable level of risk.
Buying Fund: Variable Portfolio – Moderate Portfolio seeks to provide a high level of total return that is consistent with a moderate level of risk.
Because any investment involves risk, there can be no assurance that a Fund’s objective will be achieved. The investment objective of the Selling Fund may be changed only with shareholder approval, while the investment objective of the Buying Fund may be changed without shareholder approval.
Comparison of Principal Investment Strategies
The Selling Fund and the Buying Fund have similar principal investment strategies. Both the Selling Fund and the Buying Fund seek to achieve their investment objective by investing in a combination of underlying funds for which Columbia Management or an affiliate acts as investment manager or principal underwriter. See Exhibit D for a description of the investment objectives and strategies of the underlying funds of the Buying Fund. Each Fund allocates its assets across different asset classes. Under normal market conditions, the Buying Fund’s target ranges are 45–55% equity, 45–55% fixed income and 0–5% cash, while the Selling Fund’s target ranges are 30–70% equity, 10–70% fixed income, 0–20% cash and 0–20% alternative investments. The Buying Fund may invest directly in derivatives as a principal investment strategy; the Selling Fund does not have a similar principal investment strategy.
Additional information regarding the principal investment strategies of each Fund is set forth below:
Disciplined Asset Allocation Portfolios – Moderate | Variable Portfolio – Moderate Portfolio (Buying Fund) | |
The Fund is a “fund of funds” and seeks to achieve its objective by investing in a combination of underlying funds for which Columbia Management or an affiliate acts as investment manager or principal underwriter. By investing in a combination of underlying funds, the Fund seeks to minimize the risks associated with investing in a single fund. | ||
Columbia Management will allocate the Fund’s assets within and across different asset classes, potentially including an allocation to alternative investment strategies, in an effort to achieve the Fund’s objective of providing a high level of total return that is consistent with an acceptable level of risk. The Fund’s assets will be reallocated monthly subject to constraints that set minimum or maximum exposure between asset classes and within asset classes. | The Fund seeks to achieve its objective by investing in a combination of underlying funds representing three primary asset classes: equity, fixed income and cash. |
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Asset Class Allocation. Columbia Management will manage the Fund’s overall asset class mix: fixed income, equity, cash, and alternative investments. The target allocation range constraints set forth below are intended to promote diversification between the asset classes in an effort to achieve the Fund’s objective of providing a high level of total return that is consistent with an acceptable level of risk.
Under normal market conditions, the Fund intends to invest in each asset class within the following target asset allocation ranges:
Equity: 30–70%
Fixed Income: 10–70%
Cash: 0–20%
Alternative Investment Strategy: 0–20%
Market appreciation or depreciation may cause the Fund to be temporarily outside the ranges identified above. Columbia Management may modify the target allocation ranges only upon approval of the Board.
Investment Category Allocation. Within the equity and fixed income asset classes, Columbia Management establishes allocations for the Fund, seeking to achieve the Fund’s objective by investing in defined investment categories. Fixed income investment categories include: treasury inflation protected securities (TIPS), U.S. investment grade bonds, high yield bonds, international bonds and emerging markets bonds. Columbia Management also may allocate assets to money market (cash) or alternative investment strategy funds. Equity investment categories include: U.S. large cap value/growth, U.S. small and mid cap equities and international equities, including emerging market securities.
The Fund’s target allocation range constraints set forth within each investment category are intended to promote diversification within the asset classes. The quantitative model takes into account factors such as style, sector, market capitalization, geographic location, credit quality, interest rate risk, and yield potential. Proposed allocation shifts are reviewed and approved by Columbia Management as part of its qualitative review if necessary. | Under normal market conditions, the Fund intends to invest in each asset class within the following target asset allocation ranges:
Asset Class:
Equity: 45–55%
Fixed Income: 45–55%
Cash: 0–5%
Market appreciation or depreciation may cause the Fund to be temporarily outside the ranges identified above. Columbia Management may modify the target allocation ranges only upon approval of the Board. Allocation ranges include the Fund’s exposure to derivatives. | |
The Fund may invest directly in derivatives to produce incremental earnings, to hedge existing positions, to increase market exposure and investment flexibility, or to obtain or reduce credit exposure. Derivatives that the Fund may invest in include index futures, Treasury futures, currency forwards, index–based total return swaps and indexed–based credit default swaps. |
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Buying Fund Investment Styles
The investment style of the Buying Fund is set forth below:
In selecting the proportion of the Buying Fund’s assets to be invested within and across each of the three primary asset classes, Columbia Management considers the independent analysis of Morningstar Associates, an independent investment consultant, on a broad range of aspects related to the management of the Buying Fund including, but not limited to, the Buying Fund’s asset allocation targets, the performance of the underlying funds, the types of investment categories represented by the underlying funds, and the consideration of additional underlying funds. Columbia Management retains full discretion over the Buying Fund’s investment activities.
Columbia Management monitors underlying fund selections, allocations and investment performance, and will take actions it deems appropriate to position the Buying Fund to achieve its investment objective, including investing in any underlying fund, adding new underlying funds, and altering target allocations as necessary. Columbia Management will implement the Buying Fund’s asset allocation process by directing net cash inflows (outflows) to purchase (redeem) shares of the underlying funds which are underweight (overweight) the then–current target allocation, purchasing or redeeming shares of the underlying funds to maintain or change the percentage of the Buying Fund’s assets invested in the underlying funds, or investing directly in derivatives to seek targeted asset class levels.
Differences between the Selling Fund’s principal investment strategies, fundamental and non–fundamental investment policies and holdings and those of the Buying Fund may expose the Selling Fund’s shareholders to new or increased risks. A comparison of the principal risks of investing in the Selling Fund and the Buying Fund is provided under “Comparison of Principal Risks” beginning on page [•].
Comparison of Fundamental Investment Policies
If the Reorganization occurs, the combined Fund will be subject to the fundamental investment policies of the Buying Fund, which are substantially the same as those of the Selling Fund. For purposes of this discussion, a “fundamental” investment policy is one that may not be changed without a shareholder vote.
The Funds’ fundamental investment policies are set forth below:
Policy | Disciplined Asset Allocation | Variable Portfolio – Moderate | ||
Borrowing/ Issuing Senior Securities/ Buying on Margin / Selling Short | The Fund will not borrow money, except for temporary purposes (not for leveraging or investment) in an amount not exceeding 33 1/3% of its total assets (including the amount borrowed) less liabilities (other than borrowings) immediately after the borrowings.
The Fund will not issue senior securities, except as permitted under the 1940 Act, the rules and regulations thereunder and any applicable exemptive relief. | |||
Commodities | The Fund will not buy or sell physical commodities unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the fund from buying or selling options, futures contracts and foreign currency or from entering into forward currency contracts or from investing in securities or other instruments backed by, or whose value is derived from, physical commodities. | |||
Diversification | The Fund will not purchase securities (except securities issued or guaranteed by the U.S. government, its agencies or instrumentalities) of any one issuer if, as a result, more than 5% of its total assets will be invested in the securities of such issuer or it would own more than 10% of the voting securities of such issuer, except that: (a) up to 25% of its total assets may be invested without regard to these limitations and (b) a Fund’s assets may be invested in the securities of one or more management investment companies to the extent permitted by the 1940 Act, the rules and regulations thereunder, or any applicable exemptive relief. |
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Industry Concentration | The Fund will not concentrate in any one industry. According to the present interpretation by the SEC, this means that up to 25% of the Fund’s total assets, based on current market value at time of purchase, can be invested in any one industry. The Fund itself does not intend to concentrate, however, the aggregation of holdings of the underlying funds may result in the Fund indirectly investing more than 25% of its assets in a particular industry. The Fund does not control the investments of the underlying funds and any indirect concentration will occur only as a result of the Fund following its investment objectives by investing in the underlying funds. | The Fund will not concentrate in any one industry. According to the present interpretation by the SEC, this means that up to 25% of the fund’s total assets, based on current market value at time of purchase, can be invested in any one industry. | ||
Lending | The Fund will not lend securities or participate in an interfund lending program if the total of all such loans would exceed 33 1/3% of the fund’s total assets except this fundamental investment policy shall not prohibit the fund from purchasing money market securities, loans, loan participation or other debt securities, or from entering into repurchase agreements. Under current Board policy, the fund has no current intention to lend to a material extent. | |||
Real Estate | The Fund will not buy or sell real estate, unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the fund from investing in securities or other instruments backed by real estate or securities of companies engaged in the real estate business or real estate investment trusts. For purposes of this policy, real estate includes real estate limited partnerships. | |||
Underwriting | The Fund will not act as an underwriter (sell securities for others). However, under the securities laws, the fund may be deemed to be an underwriter when it purchases securities directly from the issuer and later resells them. |
Differences between the Selling Fund’s principal investment strategies, fundamental and non–fundamental investment policies and holdings and those of the Buying Fund may expose the Selling Fund’s shareholders to new or increased risks. A comparison of the principal risks of investing in the Selling Fund and the Buying Fund is provided under “Comparison of Principal Risks” beginning on page [—].
Comparison of Non-Fundamental Investment Policies
If the Reorganization occurs, the combined Fund will be subject to the non-fundamental investment policies (policies that may be changed without a shareholder vote) of the Buying Fund, which are the same as those of the Selling Fund.
The Funds’ non-fundamental investment policies are set forth below:
Policy | Disciplined Asset Allocation | Variable Portfolio – Moderate | ||
Illiquid Securities | No more than 15% of the Fund’s net assets will be held in securities and other instruments that are illiquid. |
Differences between the Selling Fund’s principal investment strategies, fundamental and non-fundamental investment policies and holdings and those of the Buying Fund may expose the Selling Fund’s shareholders to new or increased risks. A comparison of the principal risks of investing in the Selling Fund and the Buying Fund is provided under “Comparison of Principal Risks” below.
Although the Funds describe them somewhat differently, the principal risks associated with investments in the Buying Fund and the Selling Fund are generally similar because the Funds have similar investment objectives, principal investment strategies and
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investment policies. The actual risks of investing in each Fund depend on the securities held in each Fund’s portfolio and on market conditions, both of which change over time. The Buying Fund is subject to the principal risks described below. Similarities and material differences between the Buying Fund’s principal risks and those of the Selling Fund are also described below.
• | Affiliated Fund Risk. The risk that Columbia Management may have potential conflicts of interest in selecting underlying funds because the fees paid to it by some underlying funds are higher than the fees paid by other underlying funds. However, Columbia Management is a fiduciary to the Buying Fund and is legally obligated to act in the Buying Fund’s best interests when selecting underlying funds, without taking fees into consideration. The Selling Fund is also subject to this principal risk. |
• | Active Management/Allocation Risk. The risk that Columbia Management’s evaluations regarding asset classes or underlying funds and the Buying Fund’s allocations thereto may be incorrect. Because the assets of the Buying Fund will be invested in underlying funds, the Buying Fund’s investment performance is directly related to the investment performance of the underlying funds in which it invests. The ability of the Buying Fund to realize its investment objective will depend, in part, on the extent to which the underlying funds realize their investment objectives. There is no guarantee that the underlying funds will achieve their investment objectives. There is also a risk that the selected underlying funds’ performance may be lower than the performance of the asset class they were selected to represent or may be lower than the performance of alternative underlying funds that could have been selected to represent the asset class. Also, the Buying Fund is exposed to the same risks as the underlying funds in direct proportion to the allocation of its assets among the underlying funds. The Selling Fund is also subject to this principal risk. |
• | Derivatives Risk. Derivatives are financial instruments that have a value which depends upon, or is derived from, the value of something else, such as one or more underlying securities, pools of securities, options, futures, indexes or currencies. Losses involving derivative instruments may be substantial, because a relatively small price movement in the underlying security(ies), instrument, currency or index may result in a substantial loss for the Buying Fund. In addition to the potential for increased losses, the use of derivative instruments may lead to increased volatility within the Buying Fund. Derivative instruments in which the Buying Fund invests will typically increase the Buying Fund’s exposure to principal risks to which it is otherwise exposed, and may expose the Buying Fund to additional risks, including leverage risk, hedging risk, correlation risk, and liquidity risk. |
• | Leverage risk is the risk that losses from the derivative instrument may be greater than the amount invested in the derivative instrument. |
• | Hedging risk is the risk that derivative instruments used to hedge against an opposite position may offset losses, but they may also offset gains. There is no guarantee that a hedging strategy will eliminate the risk which the hedging strategy is intended to offset, which may lead to losses within the Buying Fund. |
• | Correlation risk is related to hedging risk and is the risk that there may be an incomplete correlation between the hedge and the opposite position, which may result in increased or unanticipated losses. |
• | Liquidity risk is the risk that the derivative instrument may be difficult or impossible to sell or terminate, which may cause the Buying Fund to be in a position to do something Columbia Management would not otherwise choose, including accepting a lower price for the derivative instrument, selling other investments or foregoing another, more appealing investment opportunity. Derivative instruments which are not traded on an exchange, including, but not limited to, forward contracts, swaps and over–the–counter options, may have increased liquidity risk. |
• | Certain derivatives have the potential for unlimited losses, regardless of the size of the initial investment. See the Merger SAI for more information on derivative instruments and related risks. |
The Selling Fund is not subject to derivatives risk as a principal risk, but may be subject to such risk to the extent of its investment, if any, in derivatives.
• | Risks of Underlying Funds. By investing in a combination of underlying funds, the Buying Fund has exposure to the risks associated with many areas of the market. Since the Moderate Portfolio intends to invest its assets in a balance of equity and fixed income asset classes, the Buying Fund may have higher exposure to the following principal risks of the underlying funds: Active Management Risk, Counterparty Risk, Credit Risk, Derivatives Risk, Interest Rate Risk, Issuer Risk, Market Risk, Prepayment and Extension Risk and Small and Mid-Sized Company Risk. Also, in addition to the Buying Fund’s operating expenses, you will indirectly bear the operating expenses of the underlying funds. Thus, the expenses you bear as an investor in the Buying Fund will be higher than if you invested directly in the underlying funds. A description of the more common principal risks to which the underlying funds (and thus, the Fund) are subject to are identified below. A more complete list of principal risks associated with direct investment in the underlying funds is set forth in Exhibit E. Additional risks of the underlying funds are set forth in the Merger SAI. The Selling Fund is also subject to this principal risk. |
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Certain Principal Risks of the Buying Fund’s Underlying Funds
• | Active Management Risk. Each underlying fund is actively managed and its performance therefore will reflect in part the ability of the portfolio managers to select securities and to make investment decisions that are suited to achieving the underlying fund’s investment objectives. Due to their active management, the underlying funds could underperform other mutual funds with similar investment objectives. |
• | Credit Risk. The risk that the issuer of a security, or the counterparty to a contract, will default or otherwise become unable or unwilling to honor a financial obligation, such as payments due on a bond or a note. If the underlying fund purchases unrated securities, or if the rating of a security is reduced after purchase, the underlying fund will depend on Columbia Management’s analysis of credit risk more heavily than usual. Non-investment grade securities, commonly called “high-yield” or “junk” bonds, may react more to perceived changes in the ability of the issuing entity or obligor to pay interest and principal when due than to changes in interest rates. Non-investment grade securities may have greater price fluctuations and are more likely to experience a default than investment grade bonds. |
• | Derivatives Risk. Derivatives are financial instruments that have a value which depends upon, or is derived from, the value of something else, such as one or more underlying securities, pools of securities, options, futures, indexes or currencies. Losses involving derivative instruments may be substantial, because a relatively small price movement in the underlying security(ies), instrument, currency or index may result in a substantial loss for the underlying fund. In addition to the potential for increased losses, the use of derivative instruments may lead to increased volatility within the underlying fund. Derivative instruments in which the underlying funds invest will typically increase each such fund’s exposure to principal risks to which they are otherwise exposed, and may expose the fund to additional risks, including leverage risk, hedging risk, correlation risk, and liquidity risk. |
• | Leverage risk is the risk that losses from the derivative instrument may be greater than the amount invested in the derivative instrument. |
• | Hedging risk is the risk that derivative instruments used to hedge against an opposite position may offset losses, but they may also offset gains. There is no guarantee that a hedging strategy will eliminate the risk which the hedging strategy is intended to offset, which may lead to losses within the underlying fund. |
• | Correlation risk is related to hedging risk and is the risk that there may be an incomplete correlation between the hedge and the opposite position, which may result in increased or unanticipated losses. |
• | Liquidity risk is the risk that the derivative instrument may be difficult or impossible to sell or terminate, which may cause the underlying fund to be in a position to do something Columbia Management would not otherwise choose, including accepting a lower price for the derivative instrument, selling other investments or foregoing another, more appealing investment opportunity. Derivative instruments which are not traded on an exchange, including, but not limited to, forward contracts, swaps and over–the–counter options, may have increased liquidity risk. |
• | Certain derivatives have the potential for unlimited losses, regardless of the size of the initial investment. See the Merger SAI for more information on derivative instruments and related risks. |
• | Issuer Risk. An issuer may perform poorly, and therefore, the value of its stocks and bonds may decline. Poor performance may be caused by poor management decisions, competitive pressures, breakthroughs in technology, reliance on suppliers, labor problems or shortages, corporate restructurings, fraudulent disclosures, or other factors. |
• | Market Risk. The market value of securities may fall or fail to rise. Market risk may affect a single issuer, sector of the economy, industry, or the market as a whole. The market value of securities may fluctuate, sometimes rapidly and unpredictably. This risk is generally greater for small companies and for certain specialized instruments such as floating rate loans, which tend to be more vulnerable to adverse developments. In addition, focus on a particular style, for example, investment in value securities, may cause a fund to underperform other mutual funds if that style falls out of favor with the market. |
• | Non–Diversification Risk. Although the Buying Fund is a diversified fund, certain of the underlying funds are non–diversified funds. A non-diversified fund may invest more of its assets in fewer companies than if it were a diversified fund. Because each investment may therefore have a greater effect on the underlying fund’s performance, non-diversified underlying funds may be more exposed to the risks of loss and volatility than a fund that invests more broadly. |
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Risks of Foreign Investing. Foreign securities are securities of issuers based outside the United States. An issuer is deemed to be based outside the United States if it is organized under the laws of another country. Foreign securities are primarily denominated in foreign currencies. In addition to the risks normally associated with domestic securities of the same type, foreign securities are subject to the following foreign risks:
• | Country risk includes the political, economic, and other conditions of the country. These conditions include lack of publicly available information, less government oversight (including lack of accounting, auditing, and financial reporting standards), the possibility of government–imposed restrictions, and even the nationalization of assets. The liquidity of foreign investments may be more limited than for most U.S. investments, which means that, at times it may be difficult to sell foreign securities at desirable prices. |
• | Currency risk results from the constantly changing exchange rate between local currency and the U.S. dollar. Whenever an underlying fund holds securities valued in a foreign currency or holds the currency, changes in the exchange rate add to or subtract from the value of the investment. |
• | Custody risk refers to the process of clearing and settling trades. It also covers holding securities with local agents and depositories. Low trading volumes and volatile prices in less developed markets make trades harder to complete and settle. Local agents are held only to the standard of care of the local market. Governments or trade groups may compel local agents to hold securities in designated depositories that are not subject to independent evaluation. The less developed a country’s securities market is, the greater the likelihood of problems occurring. |
• | Emerging markets risk includes the dramatic pace of change (economic, social and political) in these countries as well as the other considerations listed above. These markets are in early stages of development and are extremely volatile. They can be marked by extreme inflation, devaluation of currencies, dependence on trade partners, and hostile relations with neighboring countries. |
Performance
The following bar chart and table provide some illustration of the risks of investing in the Selling Fund by showing:
• | how the Selling Fund’s performance has varied for each full calendar year shown in the bar chart; and |
• | how the Selling Fund’s average annual total returns compare to certain measures of market performance shown in the table. |
Both the bar chart and the table assume that all distributions have been reinvested. How a Fund has performed in the past does not indicate how the Fund will perform in the future. The performance shown reflects any fee waiver or expense reimbursement arrangements in effect for the periods reported. In the absence of such fee waiver or expense reimbursement arrangements, the performance shown would have been lower.
Bar Chart. Class 2 share information is shown in the bar chart for the Selling Fund. Class 2 shares of the Buying Fund are new; accordingly, performance information for this class is not shown.
Table. The table below shows total returns from hypothetical investments in the indicated classes of shares of the Selling Fund. Class 2 shares of the Buying Fund are new; accordingly, performance information for this class is not shown. The returns shown are compared to measures of market performance shown for the same periods.
Disciplined Asset Allocation Portfolios – Moderate (Selling Fund)
CLASS 2 SHARE PERFORMANCE
(based on calendar years)
+20.70% |
2009 |
During the periods shown in the bar chart, the highest return for a calendar quarter was +11.70% (quarter ended September 30, 2009) and the lowest return for a calendar quarter was –5.54% (quarter ended March 31, 2009).
The returns shown do not reflect fees and expenses imposed under your Contract, if any, and would be lower if they did.
The Fund’s Class 2 shares’ year–to–date return at September 30, 2010 was +4.81%.
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Variable Portfolio – Moderate Portfolio
The Fund is new as of April 14, 2010 and therefore calendar year performance information is not available.
The Fund’s Class 2 since inception return at September 30, 2010 was +4.80%.
Annual Total Returns (for periods ended December 31, 2009) (1) | ||||||||
Disciplined Asset Allocation Portfolios – Moderate (Selling Fund) | 1 year | Since Inception (Class 2) (May 1, 2008) | ||||||
Class 2 Return before taxes | +20.70% | –5.26% | ||||||
Barclays Capital U.S. Aggregate Bond Index (reflects no deduction for fees or expenses) | +5.93% | +5.42% | ||||||
Blended Index (consists of 46% of Barclays Capital U.S. Aggregate Bond Index, 35% Russell 3000 Index, 15% MSCI EAFE Index (Gross) and 4% Citigroup 3–month U.S. Treasury Bill Index (reflects no deduction for fees or expenses) | +17.62% | –2.61% | ||||||
Russell 3000 Index (reflects no deduction for fees or expenses) | +28.34% | –10.39% | ||||||
MSCI EAFE Index (Gross) (reflects no deduction for fees or expenses) | +32.46% | –13.31% | ||||||
Citigroup 3–Month U.S. Treasury Bill Index (reflects no deduction for fees or expenses) | +0.16% | +0.66% |
(1) | The returns shown do not reflect fees and expenses imposed under your Contract, if any, and would be lower if they did. |
Average Annual Total Returns
Variable Portfolio – Moderate Portfolio
The Fund is new as of the date of this prospectus and therefore performance information is not available. When available, Moderate Portfolio intends to compare its performance to the Barclays Capital U.S. Aggregate Bond Index and a Blended Index, consisting of 50% Barclays Capital U.S. Aggregate Bond Index, 35% Russell 3000 Index and 15% Morgan Stanley Capital International (MSCI) All Country World Index (ACWI) ex–US.
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Proposal 5 Comparison of Objectives, Strategies and Risks. Reorganization of Disciplined Asset Allocation Portfolios – Moderately Aggressive into Variable Portfolio – Moderately Aggressive Portfolio
Comparison of the Selling Fund and the Buying Fund
Both the Selling Fund and the Buying Fund:
• | Have Columbia Management as investment manager. |
• | Have the same policies for buying and selling shares and the same exchange rights. Please see Exhibit C for a description of these policies for the Buying Funds. |
• | Are structured as series of an open–end management investment company. The Selling Fund and the Buying Fund are organized as series of the same Massachusetts business trust. |
Comparison of Investment Objectives
The investment objectives of the Funds are as follows:
Selling Fund: Disciplined Asset Allocation Portfolios – Moderately Aggressive seeks a high level of total return that is consistent with an acceptable level of risk.
Buying Fund: Variable Portfolio – Moderately Aggressive Portfolio seeks to provide a high level of total return that is consistent with a moderately aggressive level of risk.
Because any investment involves risk, there can be no assurance that a Fund’s objective will be achieved. The investment objective of the Selling Fund may be changed only with shareholder approval, while the investment objective of the Buying Fund may be changed without shareholder approval.
Comparison of Principal Investment Strategies
The Selling Fund and the Buying Fund have similar principal investment strategies. Both the Selling Fund and the Buying Fund seek to achieve their investment objective by investing in a combination of underlying funds for which Columbia Management or an affiliate acts as investment manager or principal underwriter. See Exhibit D for a description of the investment objectives and strategies of the underlying funds of the Buying Fund. Each Fund allocates its assets across different asset classes. Under normal market conditions, the Buying Fund’s target ranges are 60–70% equity, 30–40% fixed income and 0–5% cash, while the Selling Fund’s target ranges are 45–85% equity, 5–55% fixed income, 0–20% cash and 0–20% alternative investments. The Buying Fund may invest directly in derivatives as a principal investment strategy; the Selling Fund does not have a similar principal investment strategy.
Additional information regarding the principal investment strategies of each Fund is set forth below:
Disciplined Asset Allocation Portfolios – Moderately | Variable Portfolio – Moderately Aggressive Portfolio | |
The Fund is a “fund of funds” and seeks to achieve its objective by investing in a combination of underlying funds for which Columbia Management or an affiliate acts as investment manager or principal underwriter. By investing in a combination of underlying funds, the Fund seeks to minimize the risks associated with investing in a single fund. | ||
Columbia Management will allocate the Fund’s assets within and across different asset classes, potentially including an allocation to alternative investment strategies, in an effort to achieve the Fund’s objective of providing a high level of total return that is consistent with an acceptable level of risk. The Fund’s assets will be reallocated monthly subject to constraints that set minimum or maximum exposure between asset classes and within asset classes. | The Fund seeks to achieve its objective by investing in a combination of underlying funds representing three primary asset classes: equity, fixed income and cash. |
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Disciplined Asset Allocation Portfolios – | Variable Portfolio – Moderately Aggressive Portfolio | |
Asset Class Allocation. Columbia Management will manage the Fund’s overall asset class mix: fixed income, equity, cash, and alternative investments. The target allocation range constraints set forth below are intended to promote diversification between the asset classes in an effort to achieve the Fund’s objective of providing a high level of total return that is consistent with an acceptable level of risk.
Under normal market conditions, the Fund intends to invest in each asset class within the following target asset allocation ranges:
Equity: 45–85%
Fixed Income: 5–55%
Cash: 0–20%
Alternative Investment Strategy: 0–20%
Market appreciation or depreciation may cause the Fund to be temporarily outside the ranges identified above. Columbia Management may modify the target allocation ranges only upon approval of the Board.
Investment Category Allocation. Within the equity and fixed income asset classes, Columbia Management establishes allocations for the Fund, seeking to achieve the Fund’s objective by investing in defined investment categories. Fixed income investment categories include: treasury inflation protected securities (TIPS), U.S. investment grade bonds, high yield bonds, international bonds and emerging markets bonds. Columbia Management also may allocate assets to money market (cash) or alternative investment strategy funds. Equity investment categories include: U.S. large cap value/growth, U.S. small and mid cap equities and international equities, including emerging market securities.
The Fund’s target allocation range constraints within each investment category are intended to promote diversification within the asset classes. The quantitative model takes into account factors such as style, sector, market capitalization, geographic location, credit quality, interest rate risk, and yield potential. Proposed allocation shifts are reviewed and approved by Columbia Management as part of its qualitative review if necessary. | Under normal market conditions, the Fund intends to invest in each asset class within the following target asset allocation ranges:
Asset Class:
Equity: 60–70%
Fixed Income: 30–40%
Cash: 0–5%
Market appreciation or depreciation may cause the Fund to be temporarily outside the ranges identified above. Columbia Management may modify the target allocation ranges only upon approval of the Board. Allocation ranges include the Fund’s exposure to derivatives. | |
The Fund may invest directly in derivatives to produce incremental earnings, to hedge existing positions, to increase market exposure and investment flexibility, or to obtain or reduce credit exposure. Derivatives that the Fund may invest in include index futures, Treasury futures, currency forwards, index-based total return swaps and indexed-based credit default swaps. |
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Buying Fund Investment Styles
The investment style of the Buying Fund is set forth below:
In selecting the proportion of the Buying Fund’s assets to be invested within and across each of the three primary asset classes, Columbia Management considers the independent analysis of Morningstar Associates, an independent investment consultant, on a broad range of aspects related to the management of the Buying Fund including, but not limited to, the Buying Fund’s asset allocation targets, the performance of the underlying funds, the types of investment categories represented by the underlying funds, and the consideration of additional underlying funds. Columbia Management retains full discretion over the Buying Fund’s investment activities.
Columbia Management monitors underlying fund selections, allocations and investment performance, and will take actions it deems appropriate to position the Buying Fund to achieve its investment objective, including investing in any underlying fund, adding new underlying funds, and altering target allocations as necessary. Columbia Management will implement the Buying Fund’s asset allocation process by directing net cash inflows (outflows) to purchase (redeem) shares of the underlying funds which are underweight (overweight) the then–current target allocation, purchasing or redeeming shares of the underlying funds to maintain or change the percentage of the Buying Fund’s assets invested in the underlying funds, or investing directly in derivatives to seek targeted asset class levels.
Differences between the Selling Fund’s principal investment strategies, fundamental and non–fundamental investment policies and holdings and those of the Buying Fund may expose the Selling Fund’s shareholders to new or increased risks. A comparison of the principal risks of investing in the Selling Fund and the Buying Fund is provided under “Comparison of Principal Risks” beginning on page [—].
Comparison of Fundamental Investment Policies
If the Reorganization occurs, the combined Fund will be subject to the fundamental investment policies of the Buying Fund, which are substantially the same as those of the Selling Fund. For purposes of this discussion, a “fundamental” investment policy is one that may not be changed without a shareholder vote.
The Funds’ fundamental investment policies are set forth below:
Policy | Disciplined Asset Allocation Portfolios – Moderately | Variable Portfolio – Moderately Aggressive Portfolio | ||
Borrowing/ Issuing Senior Securities/ Buying on Margin / Selling Short | The Fund will not borrow money, except for temporary purposes (not for leveraging or investment) in an amount not exceeding 33 1/3 of its total assets (including the amount borrowed) less liabilities (other than borrowings) immediately after the borrowings.
The Fund will not issue senior securities, except as permitted under the 1940 Act, the rules and regulations thereunder and any applicable exemptive relief. | |||
Commodities | The Fund will not buy or sell physical commodities unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the fund from buying or selling options, futures contracts and foreign currency or from entering into forward currency contracts or from investing in securities or other instruments backed by, or whose value is derived from, physical commodities. | |||
Diversification | The Fund will not purchase securities (except securities issued or guaranteed by the U.S. government, its agencies or instrumentalities) of any one issuer if, as a result, more than 5% of its total assets will be invested in the securities of such issuer or it would own more than 10% of the voting securities of such issuer, except that: (a) up to 25% of its total assets may be invested without regard to these limitations and (b) a Fund’s assets may be invested in the securities of one or more management investment companies to the extent permitted by the 1940 Act, the rules and regulations thereunder, or any applicable exemptive relief. |
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Policy | Disciplined Asset Allocation Portfolios – Moderately | Variable Portfolio – Moderately Aggressive Portfolio | ||
Industry Concentration | The Fund will not concentrate in any one industry. According to the present interpretation by the SEC, this means that up to 25% of the Fund’s total assets, based on current market value at time of purchase, can be invested in any one industry. The Fund itself does not intend to concentrate, however, the aggregation of holdings of the underlying funds may result in the Fund indirectly investing more than 25% of its assets in a particular industry. The Fund does not control the investments of the underlying funds and any indirect concentration will occur only as a result of the Fund following its investment objectives by investing in the underlying funds. | The Fund will not concentrate in any one industry. According to the present interpretation by the SEC, this means that up to 25% of the fund’s total assets, based on current market value at time of purchase, can be invested in any one industry. | ||
Lending | The Fund will not lend securities or participate in an interfund lending program if the total of all such loans would exceed 33 1/3% of the fund’s total assets except this fundamental investment policy shall not prohibit the fund from purchasing money market securities, loans, loan participation or other debt securities, or from entering into repurchase agreements. Under current Board policy, the fund has no current intention to lend to a material extent. | |||
Real Estate | The Fund will not buy or sell real estate, unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the fund from investing in securities or other instruments backed by real estate or securities of companies engaged in the real estate business or real estate investment trusts. For purposes of this policy, real estate includes real estate limited partnerships. | |||
Underwriting | The Fund will not act as an underwriter (sell securities for others). However, under the securities laws, the fund may be deemed to be an underwriter when it purchases securities directly from the issuer and later resells them. |
Differences between the Selling Fund’s principal investment strategies, fundamental and non–fundamental investment policies and holdings and those of the Buying Fund may expose the Selling Fund’s shareholders to new or increased risks. A comparison of the principal risks of investing in the Selling Fund and the Buying Fund is provided under “Comparison of Principal Risks” beginning on page [—].
Comparison of Non-Fundamental Investment Policies
If the Reorganization occurs, the combined Fund will be subject to the non–fundamental investment policies (policies that may be changed without a shareholder vote) of the Buying Fund, which are the same as those of the Selling Fund.
The Funds’ non–fundamental investment policies are set forth below:
Policy | Disciplined Asset Allocation Portfolios – Moderately | Variable Portfolio – Moderately Aggressive Portfolio | ||
Illiquid Securities | No more than 15% of the fund’s net assets will be held in securities and other instruments that are illiquid. |
Differences between the Selling Fund’s principal investment strategies, fundamental and non–fundamental investment policies and holdings and those of the Buying Fund may expose the Selling Fund’s shareholders to new or increased risks. A comparison of the principal risks of investing in the Selling Fund and the Buying Fund is provided below under “Comparison of Principal Risks”.
Although the Funds describe them somewhat differently, the principal risks associated with investments in the Buying Fund and the Selling Fund are generally similar because the Funds have similar investment objectives, principal investment strategies and investment policies. The actual risks of investing in each Fund depend on the securities held in each Fund’s portfolio and on market conditions, both of which change over time. The Buying Fund is subject to the principal risks described below. Similarities and material differences between the Buying Fund’s principal risks and those of the Selling Fund are also described below.
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• | Affiliated Fund Risk. The risk that Columbia Management may have potential conflicts of interest in selecting underlying funds because the fees paid to it by some underlying funds are higher than the fees paid by other underlying funds. However, Columbia Management is a fiduciary to the Buying Fund and is legally obligated to act in the Buying Fund’s best interests when selecting underlying funds, without taking fees into consideration. The Selling Fund is also subject to this principal risk. |
• | Active Management/Allocation Risk. The risk that Columbia Management’s evaluations regarding asset classes or underlying funds and the Buying Fund’s allocations thereto may be incorrect. Because the assets of the Buying Fund will be invested in underlying funds, the Buying Fund’s investment performance is directly related to the investment performance of the underlying funds in which it invests. The ability of the Buying Fund to realize its investment objective(s) will depend, in part, on the extent to which the underlying funds realize their investment objectives. There is no guarantee that the underlying funds will achieve their investment objectives. There is also a risk that the selected underlying funds’ performance may be lower than the performance of the asset class they were selected to represent or may be lower than the performance of alternative underlying funds that could have been selected to represent the asset class. Also, the Buying Fund is exposed to the same risks as the underlying funds in direct proportion to the allocation of its assets among the underlying funds. The Selling Fund is also subject to this principal risk. |
• | Derivatives Risk. Derivatives are financial instruments that have a value which depends upon, or is derived from, the value of something else, such as one or more underlying securities, pools of securities, options, futures, indexes or currencies. Losses involving derivative instruments may be substantial, because a relatively small price movement in the underlying security(ies), instrument, currency or index may result in a substantial loss for the Buying Fund. In addition to the potential for increased losses, the use of derivative instruments may lead to increased volatility within the Buying Fund. Derivative instruments in which the Buying Fund invests will typically increase the Buying Fund’s exposure to principal risks to which it is otherwise exposed, and may expose the Buying Fund to additional risks, including leverage risk, hedging risk, correlation risk, and liquidity risk. |
¡ | Leverage risk is the risk that losses from the derivative instrument may be greater than the amount invested in the derivative instrument. |
¡ | Hedging risk is the risk that derivative instruments used to hedge against an opposite position may offset losses, but they may also offset gains. There is no guarantee that a hedging strategy will eliminate the risk which the hedging strategy is intended to offset, which may lead to losses within the Buying Fund. |
¡ | Correlation risk is related to hedging risk and is the risk that there may be an incomplete correlation between the hedge and the opposite position, which may result in increased or unanticipated losses. |
¡ | Liquidity risk is the risk that the derivative instrument may be difficult or impossible to sell or terminate, which may cause the Buying Fund to be in a position to do something Columbia Management would not otherwise choose, including accepting a lower price for the derivative instrument, selling other investments or foregoing another, more appealing investment opportunity. Derivative instruments which are not traded on an exchange, including, but not limited to, forward contracts, swaps and over–the–counter options, may have increased liquidity risk. |
¡ | Certain derivatives have the potential for unlimited losses, regardless of the size of the initial investment. See the SAI for more information on derivative instruments and related risks. |
The Selling Fund is not subject to derivatives risk as a principal risk, but may be subject to such risk to the extent of its investments, if any, in derivatives.
• | Risks Of Underlying Funds. By investing in a combination of underlying funds, the Buying Fund has exposure to the risks associated with many areas of the market. Since Moderately Aggressive Portfolio intends to invest a significant portion of its assets in equity asset classes, the Buying Fund may have higher exposure to the following principal risks of the underlying funds: Active Management risk, Derivatives Risk, Issuer Risk, Market Risk and Small and Mid–Sized Company Risk. Also, in addition to the Fund’s operating expenses, you will indirectly bear the operating expenses of the underlying funds. Thus, the expenses you bear as an investor in the Fund will be higher than if you invested directly in the underlying funds. A description of the more common principal risks to which the underlying funds (and thus, the Fund) are subject to are identified below. A more complete list of principal risks associated with direct investment in the underlying funds is set forth in Exhibit E. Additional risks of the underlying funds are set forth in the Merger SAI. The Selling Fund is also subject to this principal risk. |
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Certain Principal Risks Of The Buying Fund’s Underlying Funds:
• | Active Management Risk – Each underlying fund is actively managed and its performance therefore will reflect in part the ability of the portfolio managers to select securities and to make investment decisions that are suited to achieving the underlying fund’s investment objectives. Due to their active management, the underlying funds could underperform other mutual funds with similar investment objectives. |
• | Credit Risk – The risk that the issuer of a security, or the counterparty to a contract, will default or otherwise become unable or unwilling to honor a financial obligation, such as payments due on a bond or a note. If the underlying fund purchases unrated securities, or if the rating of a security is reduced after purchase, the underlying fund will depend on Columbia Management’s analysis of credit risk more heavily than usual. Non–investment grade securities, commonly called “high–yield” or “junk” bonds, may react more to perceived changes in the ability of the issuing entity or obligor to pay interest and principal when due than to changes in interest rates. Non–investment grade securities may have greater price fluctuations and are more likely to experience a default than investment grade bonds. |
• | Derivatives Risk – Derivatives are financial instruments that have a value which depends upon, or is derived from, the value of something else, such as one or more underlying securities, pools of securities, options, futures, indexes or currencies. Losses involving derivative instruments may be substantial, because a relatively small price movement in the underlying security(ies), instrument, currency or index may result in a substantial loss for the underlying fund. In addition to the potential for increased losses, the use of derivative instruments may lead to increased volatility within the underlying fund. Derivative instruments in which the underlying funds invest will typically increase each such fund’s exposure to principal risks to which they are otherwise exposed, and may expose the fund to additional risks, including leverage risk, hedging risk, correlation risk, and liquidity risk. |
• | Leverage risk is the risk that losses from the derivative instrument may be greater than the amount invested in the derivative instrument. |
• | Hedging risk is the risk that derivative instruments used to hedge against an opposite position may offset losses, but they may also offset gains. There is no guarantee that a hedging strategy will eliminate the risk which the hedging strategy is intended to offset, which may lead to losses within the underlying fund. |
• | Correlation risk is related to hedging risk and is the risk that there may be an incomplete correlation between the hedge and the opposite position, which may result in increased or unanticipated losses. |
• | Liquidity risk is the risk that the derivative instrument may be difficult or impossible to sell or terminate, which may cause the underlying fund to be in a position to do something the investment manager would not otherwise choose, including accepting a lower price for the derivative instrument, selling other investments or foregoing another, more appealing investment opportunity. Derivative instruments which are not traded on an exchange, including, but not limited to, forward contracts, swaps and over–the–counter options, may have increased liquidity risk. |
• | Certain derivatives have the potential for unlimited losses, regardless of the size of the initial investment. See the Merger SAI for more information on derivative instruments and related risks. |
• | Issuer Risk – An issuer may perform poorly, and therefore, the value of its stocks and bonds may decline. Poor performance may be caused by poor management decisions, competitive pressures, breakthroughs in technology, reliance on suppliers, labor problems or shortages, corporate restructurings, fraudulent disclosures, or other factors. |
• | Market Risk – The market value of securities may fall or fail to rise. Market risk may affect a single issuer, sector of the economy, industry, or the market as a whole. The market value of securities may fluctuate, sometimes rapidly and unpredictably. This risk is generally greater for small companies and for certain specialized instruments such as floating rate loans, which tend to be more vulnerable to adverse developments. In addition, focus on a particular style, for example, investment in value securities, may cause a fund to underperform other mutual funds if that style falls out of favor with the market. |
• | Non–Diversification Risk – Although the Funds are diversified funds, certain of the underlying funds are non–diversified funds. A non–diversified fund may invest more of its assets in fewer companies than if it were a diversified fund. Because each investment may therefore have a greater effect on the underlying fund’s performance, non–diversified underlying funds may be more exposed to the risks of loss and volatility than a fund that invests more broadly. |
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• | Risks Of Foreign Investing – Foreign securities are securities of issuers based outside the United States. An issuer is deemed to be based outside the United States if it is organized under the laws of another country. Foreign securities are primarily denominated in foreign currencies. In addition to the risks normally associated with domestic securities of the same type, foreign securities are subject to the following foreign risks: |
• | Country risk includes the political, economic, and other conditions of the country. These conditions include lack of publicly available information, less government oversight (including lack of accounting, auditing, and financial reporting standards), the possibility of government–imposed restrictions, and even the nationalization of assets. The liquidity of foreign investments may be more limited than for most U.S. investments, which means that, at times it may be difficult to sell foreign securities at desirable prices. |
• | Currency risk results from the constantly changing exchange rate between local currency and the U.S. dollar. Whenever an underlying fund holds securities valued in a foreign currency or holds the currency, changes in the exchange rate add to or subtract from the value of the investment. |
• | Custody risk refers to the process of clearing and settling trades. It also covers holding securities with local agents and depositories. Low trading volumes and volatile prices in less developed markets make trades harder to complete and settle. Local agents are held only to the standard of care of the local market. Governments or trade groups may compel local agents to hold securities in designated depositories that are not subject to independent evaluation. The less developed a country’s securities market is, the greater the likelihood of problems occurring. |
• | Emerging markets risk includes the dramatic pace of change (economic, social and political) in these countries as well as the other considerations listed above. These markets are in early stages of development and are extremely volatile. They can be marked by extreme inflation, devaluation of currencies, dependence on trade partners, and hostile relations with neighboring countries. |
Performance
The following bar charts and tables provide some illustration of the risks of investing in the Funds by showing, respectively:
• | how each Fund’s performance has varied for each full calendar year shown in the bar chart; and |
• | how each Fund’s average annual total returns compare to certain measures of market performance shown in the table. |
Both the bar chart and the table assume that all distributions have been reinvested. The returns shown do not reflect differences in expenses between share classes or fees and expenses imposed under your Contract, if any, and would be lower if they did. How a Fund has performed in the past (before and after taxes) does not indicate how the Fund will perform in the future. The performance shown reflects any fee waiver or expense reimbursement arrangements in effect for the periods reported. In the absence of such fee waivers or expense reimbursement arrangements, the performance shown would have been lower.
Bar Chart. Class 2 share information is shown in the bar chart for the Selling Fund. Class 2 shares of the Buying Fund are new; accordingly, performance information for this class is not shown.
Table. The table below shows total returns from hypothetical investments in the indicated classes of shares of the Selling Fund. Class 2 shares of the Buying Fund are new; accordingly, performance information for this class is not shown. The returns shown are compared to measures of market performance shown for the same periods.
Disciplined Asset Allocation Portfolios – Moderately Aggressive (Selling Fund)
Class 2 SHARE PERFORMANCE (based on calendar years)
+22.21% |
2009 |
During the periods shown in the bar chart, the highest return for a calendar quarter was +13.03% (quarter ended September 30, 2009) and the lowest return for a calendar quarter was –6.99% (quarter ended March 31, 2009).
The Fund’s Class 2 shares’ year–to–date return at September 30, 2010 was +4.46%.
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The returns shown do not reflect differences in expenses between share classes or fees and expenses imposed under your Contract, if any, and would be lower if they did.
Variable Portfolio – Moderately Aggressive Portfolio (Buying Fund)
SHARE PERFORMANCE (based on calendar years)
The Fund is new as of April 14, 2010 and therefore calendar year performance information is not available.
The Fund’s Class 2 since inception return at September 30, 2010 was +4.80%.
Average Annual Total Returns (for periods ended December 31, 2009) (1)
Disciplined Asset Allocation Portfolios – Moderately Aggressive (Selling Fund): | 1 year | Since Inception (5/01/08) | ||||||
Class 2 returns before taxes | +22.21 | % | –6.43 | % | ||||
Russell 3000 Index (reflects no deduction for fees, or expenses) | +28.34 | % | –10.39 | % | ||||
Blended Index (consists of 32% Barclays Capital U.S. Aggregate Bond Index, 45% Russell 3000 Index, 20% MSCI EAFE Index (Gross) and 3% Citigroup 3–month U.S. Treasury Bill Index ) (reflects no deduction for fees or expenses) | +21.26 | % | –5.11 | % | ||||
Barclays Capital U.S. Aggregate Bond Index (reflects no deduction for fees or expenses) | +5.93 | % | +5.42 | % | ||||
MSCI EAFE Index (Gross) (reflects no deduction for fees or expenses) | +32.46 | % | –13.31 | % | ||||
Citigroup 3–month U.S. Treasury Bill Index (reflects no deduction for fees or expenses) | +0.16 | % | +0.66 | % |
(1) | The returns shown do not reflect fees and expenses imposed under your Contract, if any, and would be lower if they did. |
Average Annual Total Returns
Variable Portfolio – Moderately Aggressive Portfolio (Buying Fund)
The Buying Fund is new as of April 14, 2010, and therefore performance information is not available. When available, the Buying Fund intends to compare its results to the Russell 3000 Index and a Blended Index, consisting of Blended Index (consists of 45.5% Russell 3000 Index, 35% Barclays Capital U.S. Aggregate Bond Index, 19.5% Morgan Stanley Capital International (MSCI) All Country World Index (ACWI) ex U.S.).
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Proposal 6 Comparison of Objectives, Strategies and Risks. Reorganization of Disciplined Asset Allocation Portfolios – Aggressive into Variable Portfolio – Aggressive Portfolio
Comparison of the Selling Fund and the Buying Fund
Both the Selling Fund and the Buying Fund:
• | Have Columbia Management as investment manager. |
• | Have the same policies for buying and selling shares and the same exchange rights. Please see Exhibit C for a description of these policies for the Buying Funds. |
• | Are structured as series of an open–end management investment company. The Selling Fund and the Buying Fund are organized as series of the same Massachusetts business trust. |
Comparison of Investment Objectives
The investment objectives of the Funds are as follows:
Selling Fund: Disciplined Asset Allocation Portfolios – Aggressive seeks to provide a high level of total return that is consistent with an acceptable level of risk.
Buying Fund: Variable Portfolio – Aggressive Portfolio seeks to provide a high level of total return that is consistent with an aggressive level of risk.
Because any investment involves risk, there can be no assurance that a Fund’s objective will be achieved. The investment objective of the Selling Fund may be changed only with shareholder approval, while the investment objective of the Buying Fund may be changed without shareholder approval.
Comparison of Principal Investment Strategies
The Selling Fund and the Buying Fund have similar principal investment strategies. Both the Selling Fund and the Buying Fund seek to achieve their investment objective by investing in a combination of underlying funds for which Columbia Management or an affiliate acts as investment manager or principal underwriter. See Exhibit D for a description of the investment objectives and strategies of the underlying funds of the Buying Fund. Each Fund allocates its assets across different asset classes. Under normal market conditions, the Buying Fund’s target ranges are 75–85% equity, 15–25% fixed income and 0–5% cash, while the Selling Fund’s target ranges are 60–89% equity, 0–40% fixed income, 0–20% cash and 0–20% alternative investments. The Buying Fund may invest directly in derivatives as a principal investment strategy; the Selling Fund does not have a similar principal investment strategy.
Additional information regarding the principal investment strategies of each Fund is set forth below:
Disciplined Asset Allocation Portfolios – Aggressive (Selling Fund) | Variable Portfolio – Aggressive Portfolio (Buying Fund) | |
The Fund is a “fund of funds” and seeks to achieve its objective by investing in a combination of underlying funds for which Columbia Management or an affiliate acts as investment manager or principal underwriter. By investing in a combination of underlying funds, the Fund seeks to minimize the risks associated with investing in a single fund. | ||
Columbia Management will allocate the Fund’s assets within and across different asset classes, potentially including an allocation to alternative investment strategies, in an effort to achieve the Fund’s objective of providing a high level of total return that is consistent with an acceptable level of risk. The Fund’s assets will be reallocated monthly subject to constraints that set minimum or maximum exposure between asset classes and within asset classes. | The Fund seeks to achieve its objective by investing in a combination of underlying funds representing three primary asset classes: equity, fixed income and cash. |
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Asset Class Allocation. Columbia Management will manage the Fund’s overall asset class mix: fixed income, equity, cash, and alternative investments. The target allocation range constraints set forth below are intended to promote diversification between the asset classes in an effort to achieve the Fund’s objective of providing a high level of total return that is consistent with an acceptable level of risk.
Under normal market conditions, the Fund intends to invest in each asset class within the following target asset allocation ranges:
Equity: 60–89%
Fixed Income: 0–40%
Cash: 0–20%
Alternative Investment Strategy: 0–20%
Market appreciation or depreciation may cause the Fund to be temporarily outside the ranges identified above. Columbia Management may modify the target allocation ranges only upon approval of the Board.
Investment Category Allocation. Within the equity and fixed income asset classes, Columbia Management establishes allocations for the Fund, seeking to achieve the Fund’s objective by investing in defined investment categories. Fixed income investment categories include: treasury inflation protected securities (TIPS), U.S. investment grade bonds, high yield bonds, international bonds and emerging markets bonds. Columbia Management also may allocate assets to money market (cash) or alternative investment strategy funds. Equity investment categories include: U.S. large cap value/growth, U.S. small and mid cap equities and international equities, including emerging market securities.
The Fund’s target allocation range constraints within each investment category are intended to promote diversification within the asset classes. The quantitative model takes into account factors such as style, sector, market capitalization, geographic location, credit quality, interest rate risk, and yield potential. Proposed allocation shifts are reviewed and approved by Columbia Management as part of its qualitative review if necessary. | Under normal market conditions, the Fund intends to invest in each asset class within the following target asset allocation ranges:
Asset Class: Equity: 75–85% Fixed Income: 15–25% Cash: 0–5%
Market appreciation or depreciation may cause the Fund to be temporarily outside the ranges identified above. Columbia Management may modify the target allocation ranges only upon approval of the Board. Allocation ranges include the Fund’s exposure to derivatives. | |
The Fund may invest directly in derivatives to produce incremental earnings, to hedge existing positions, to increase market exposure and investment flexibility, or to obtain or reduce credit exposure. Derivatives that the Fund may invest in include index futures, Treasury futures, currency forwards, index–based total return swaps and indexed–based credit default swaps. |
Buying Fund Investment Styles
The investment style of the Buying Fund is set forth below:
In selecting the proportion of the Buying Fund’s assets to be invested within and across each of the three primary asset classes, Columbia Management considers the independent analysis of Morningstar Associates, an independent investment consultant, on a broad range of aspects related to the management of the Buying Fund including, but not limited to, the Buying Fund’s asset allocation targets, the performance of the underlying funds, the types of investment categories represented by the underlying funds, and the consideration of additional underlying funds. Columbia Management retains full discretion over the Buying Fund’s investment activities.
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Columbia Management monitors underlying fund selections, allocations and investment performance, and will take actions it deems appropriate to position the Buying Fund to achieve its investment objective, including investing in any underlying fund, adding new underlying funds, and altering target allocations as necessary. Columbia Management will implement the Buying Fund’s asset allocation process by directing net cash inflows (outflows) to purchase (redeem) shares of the underlying funds which are underweight (overweight) the then–current target allocation, purchasing or redeeming shares of the underlying funds to maintain or change the percentage of the Buying Fund’s assets invested in the underlying funds, or investing directly in derivatives to seek targeted asset class levels.
Differences between the Selling Fund’s principal investment strategies, fundamental and non–fundamental investment policies and holdings and those of the Buying Fund may expose the Selling Fund’s shareholders to new or increased risks. A comparison of the principal risks of investing in the Selling Fund and the Buying Fund is provided under “Comparison of Principal Risks” beginning on page [•].
Comparison of Fundamental Investment Policies
If the Reorganization occurs, the combined Fund will be subject to the fundamental investment policies of the Buying Fund, which are substantially the same as those of the Selling Fund. For purposes of this discussion, a “fundamental” investment policy is one that may not be changed without a shareholder vote.
The Funds’ fundamental investment policies are set forth below:
Policy | Disciplined Asset Allocation Portfolios – Aggressive (Selling Fund) | Variable Portfolio – Aggressive Portfolio | ||
Borrowing/ Issuing Senior Securities/ Buying on Margin / Selling Short | The Fund will not borrow money, except for temporary purposes (not for leveraging or investment) in an amount not exceeding 33 1/3% of its total assets (including the amount borrowed) less liabilities (other than borrowings) immediately after the borrowings.
The Fund will not issue senior securities, except as permitted under the 1940 Act, the rules and regulations thereunder and any applicable exemptive relief. | |||
Commodities | The Fund will not buy or sell physical commodities unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the fund from buying or selling options, futures contracts and foreign currency or from entering into forward currency contracts or from investing in securities or other instruments backed by, or whose value is derived from, physical commodities. | |||
Diversification | The Fund will not purchase securities (except securities issued or guaranteed by the U.S. government, its agencies or instrumentalities) of any one issuer if, as a result, more than 5% of its total assets will be invested in the securities of such issuer or it would own more than 10% of the voting securities of such issuer, except that: (a) up to 25% of its total assets may be invested without regard to these limitations and (b) a Fund’s assets may be invested in the securities of one or more management investment companies to the extent permitted by the 1940 Act, the rules and regulations thereunder, or any applicable exemptive relief. | |||
Industry Concentration | The Fund will not concentrate in any one industry. According to the present interpretation by the SEC, this means that up to 25% of the Fund’s total assets, based on current market value at time of purchase, can be invested in any one industry. The Fund itself does not intend to concentrate, however, the aggregation of holdings of the underlying funds may result in the Fund indirectly investing more than 25% of its assets in a particular industry. The Fund does not control the investments of the underlying funds and any indirect concentration will occur only as a result of the Fund following its investment objectives by investing in the underlying funds. | The Fund will not concentrate in any one industry. According to the present interpretation by the SEC, this means that up to 25% of the fund’s total assets, based on current market value at time of purchase, can be invested in any one industry. |
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Lending | The Fund will not lend securities or participate in an interfund lending program if the total of all such loans would exceed 33 1/3% of the fund’s total assets except this fundamental investment policy shall not prohibit the fund from purchasing money market securities, loans, loan participation or other debt securities, or from entering into repurchase agreements. Under current Board policy, the fund has no current intention to lend to a material extent. | |||
Real Estate | The Fund will not buy or sell real estate, unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the fund from investing in securities or other instruments backed by real estate or securities of companies engaged in the real estate business or real estate investment trusts. For purposes of this policy, real estate includes real estate limited partnerships. | |||
Underwriting | The Fund will not act as an underwriter (sell securities for others). However, under the securities laws, the fund may be deemed to be an underwriter when it purchases securities directly from the issuer and later resells them. |
Differences between the Selling Fund’s principal investment strategies, fundamental and non–fundamental investment policies and holdings and those of the Buying Fund may expose the Selling Fund’s shareholders to new or increased risks. A comparison of the principal risks of investing in the Selling Fund and the Buying Fund is provided under “Comparison of Principal Risks” beginning on page [—].
Comparison of Non–Fundamental Investment Policies
If the Reorganization occurs, the combined Fund will be subject to the non–fundamental investment policies (policies that may be changed without a shareholder vote) of the Buying Fund, which are the same as those of the Selling Fund.
The Funds’ non–fundamental investment policies are set forth below:
Policy | Disciplined Asset Allocation Portfolios – Aggressive (Selling Fund) | Variable Portfolio – Aggressive Portfolio | ||
Illiquid Securities | No more than 15% of the fund’s net assets will be held in securities and other instruments that are illiquid. |
Differences between the Selling Fund’s principal investment strategies, fundamental and non–fundamental investment policies and current holdings and those of the Buying Fund may expose the Selling Fund’s shareholders to new or increased risks. A comparison of the principal risks of investing in the Selling Fund and the Buying Fund is provided under “Comparison of Principal Risks” below.
Although the Funds describe them somewhat differently, the principal risks associated with investments in the Buying Fund and the Selling Fund are generally similar because the Funds have similar investment objectives, principal investment strategies and investment policies. The actual risks of investing in each Fund depend on the securities held in each Fund’s portfolio and on market conditions, both of which change over time. The Buying Fund is subject to the principal risks described below. Similarities and material differences between the Buying Fund’s principal risks and those of the Selling Fund are also described below.
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• | Affiliated Fund Risk. The risk that Columbia Management may have potential conflicts of interest in selecting underlying funds because the fees paid to it by some underlying funds are higher than the fees paid by other underlying funds. However, Columbia Management is a fiduciary to the Buying Fund and is legally obligated to act in the Buying Fund’s best interests when selecting underlying funds, without taking fees into consideration. The Selling Fund is also subject to this principal risk. |
• | Active Management/Allocation Risk. The risk that Columbia Management’s evaluations regarding asset classes or underlying funds and the Buying Fund’s allocations thereto may be incorrect. Because the assets of the Buying Fund will be invested in underlying funds, the Buying Fund’s investment performance is directly related to the investment performance of the underlying funds in which it invests. The ability of the Buying Fund to realize its investment objective(s) will depend, in part, on the extent to which the underlying funds realize their investment objectives. There is no guarantee that the underlying funds will achieve their investment objectives. There is also a risk that the selected underlying funds’ performance may be lower than the performance of the asset class they were selected to represent or may be lower than the performance of alternative underlying funds that could have been selected to represent the asset class. Also, the Buying Fund is exposed to the same risks as the underlying funds in direct proportion to the allocation of its assets among the underlying funds. The Selling Fund is also subject to this principal risk. |
• | Derivatives Risk. Derivatives are financial instruments that have a value which depends upon, or is derived from, the value of something else, such as one or more underlying securities, pools of securities, options, futures, indexes or currencies. Losses involving derivative instruments may be substantial, because a relatively small price movement in the underlying security(ies), instrument, currency or index may result in a substantial loss for the Buying Fund. In addition to the potential for increased losses, the use of derivative instruments may lead to increased volatility within the Buying Fund. Derivative instruments in which the Buying Fund invests will typically increase the Buying Fund’s exposure to principal risks to which it is otherwise exposed, and may expose the Buying Fund to additional risks, including leverage risk, hedging risk, correlation risk, and liquidity risk. |
¡ | Leverage risk is the risk that losses from the derivative instrument may be greater than the amount invested in the derivative instrument. |
¡ | Hedging risk is the risk that derivative instruments used to hedge against an opposite position may offset losses, but they may also offset gains. There is no guarantee that a hedging strategy will eliminate the risk which the hedging strategy is intended to offset, which may lead to losses within the Buying Fund. |
¡ | Correlation risk is related to hedging risk and is the risk that there may be an incomplete correlation between the hedge and the opposite position, which may result in increased or unanticipated losses. |
¡ | Liquidity risk is the risk that the derivative instrument may be difficult or impossible to sell or terminate, which may cause the Buying Fund to be in a position to do something Columbia Management would not otherwise choose, including accepting a lower price for the derivative instrument, selling other investments or foregoing another, more appealing investment opportunity. Derivative instruments which are not traded on an exchange, including, but not limited to, forward contracts, swaps and over–the–counter options, may have increased liquidity risk. |
¡ | Certain derivatives have the potential for unlimited losses, regardless of the size of the initial investment. See the SAI for more information on derivative instruments and related risks. |
The Selling Fund is not subject to derivatives risk as a principal risk, but may be subject to such risk to the extent of its investments, if any, in derivatives.
• | Risks Of Underlying Funds – By investing in a combination of underlying funds, the Buying Fund has exposure to the risks of many areas of the market. Since Aggressive Portfolio intends to invest a significant portion of its assets in equity asset classes, the Buying Fund may have higher exposure to the following principal risks of the underlying funds: Active Management Risk, Derivatives Risk, Market Risk and Small– and Mid–Sized Company Risk. Also, in addition to the Buying Fund’s operating expenses, you will indirectly bear the operating expenses of the underlying funds. Thus, the expenses you bear as an investor in the Buying Fund will be higher than if you invested directly in the underlying funds. A description of the more common principal risks to which the underlying funds (and thus, the Fund) are subject to are identified below. A more complete list of principal risks associated with direct investment in the underlying funds is set forth in Exhibit E. Additional risks of the underlying funds are set forth in the Merger SAI. The Selling Fund is also subject to this principal risk. |
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Certain Principal Risks Of The Buying Fund’s Underlying Funds:
• | Active Management Risk – Each underlying fund is actively managed and its performance therefore will reflect in part the ability of the portfolio managers to select securities and to make investment decisions that are suited to achieving the underlying fund’s investment objectives. Due to their active management, the underlying funds could underperform other mutual funds with similar investment objectives. |
• | Credit Risk – The risk that the issuer of a security, or the counterparty to a contract, will default or otherwise become unable or unwilling to honor a financial obligation, such as payments due on a bond or a note. If the underlying fund purchases unrated securities, or if the rating of a security is reduced after purchase, the underlying fund will depend on Columbia Management’s analysis of credit risk more heavily than usual. Non–investment grade securities, commonly called “high–yield” or “junk” bonds, may react more to perceived changes in the ability of the issuing entity or obligor to pay interest and principal when due than to changes in interest rates. Non–investment grade securities may have greater price fluctuations and are more likely to experience a default than investment grade bonds. |
• | Derivatives Risk – Derivatives are financial instruments that have a value which depends upon, or is derived from, the value of something else, such as one or more underlying securities, pools of securities, options, futures, indexes or currencies. Losses involving derivative instruments may be substantial, because a relatively small price movement in the underlying security(ies), instrument, currency or index may result in a substantial loss for the underlying fund. In addition to the potential for increased losses, the use of derivative instruments may lead to increased volatility within the underlying fund. Derivative instruments in which the underlying funds invest will typically increase each such fund’s exposure to principal risks to which they are otherwise exposed, and may expose the fund to additional risks, including leverage risk, hedging risk, correlation risk, and liquidity risk. |
• | Leverage risk is the risk that losses from the derivative instrument may be greater than the amount invested in the derivative instrument. |
• | Hedging risk is the risk that derivative instruments used to hedge against an opposite position may offset losses, but they may also offset gains. There is no guarantee that a hedging strategy will eliminate the risk which the hedging strategy is intended to offset, which may lead to losses within the underlying fund. |
• | Correlation risk is related to hedging risk and is the risk that there may be an incomplete correlation between the hedge and the opposite position, which may result in increased or unanticipated losses. |
• | Liquidity risk is the risk that the derivative instrument may be difficult or impossible to sell or terminate, which may cause the underlying fund to be in a position to do something the investment manager would not otherwise choose, including accepting a lower price for the derivative instrument, selling other investments or foregoing another, more appealing investment opportunity. Derivative instruments which are not traded on an exchange, including, but not limited to, forward contracts, swaps and over–the–counter options, may have increased liquidity risk. |
• | Certain derivatives have the potential for unlimited losses, regardless of the size of the initial investment. See the Merger SAI for more information on derivative instruments and related risks. |
• | Issuer Risk – An issuer may perform poorly, and therefore, the value of its stocks and bonds may decline. Poor performance may be caused by poor management decisions, competitive pressures, breakthroughs in technology, reliance on suppliers, labor problems or shortages, corporate restructurings, fraudulent disclosures, or other factors. |
• | Market Risk – The market value of securities may fall or fail to rise. Market risk may affect a single issuer, sector of the economy, industry, or the market as a whole. The market value of securities may fluctuate, sometimes rapidly and unpredictably. This risk is generally greater for small companies and for certain specialized instruments such as floating rate loans, which tend to be more vulnerable to adverse developments. In addition, focus on a particular style, for example, investment in value securities, may cause a fund to underperform other mutual funds if that style falls out of favor with the market. |
• | Non–Diversification Risk – Although the Funds are diversified funds, certain of the underlying funds are non–diversified funds. A non–diversified fund may invest more of its assets in fewer companies than if it were a diversified fund. Because each investment may therefore have a greater effect on the underlying fund’s performance, non–diversified underlying funds may be more exposed to the risks of loss and volatility than a fund that invests more broadly. |
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• | Risks Of Foreign Investing – Foreign securities are securities of issuers based outside the United States. An issuer is deemed to be based outside the United States if it is organized under the laws of another country. Foreign securities are primarily denominated in foreign currencies. In addition to the risks normally associated with domestic securities of the same type, foreign securities are subject to the following foreign risks: |
• | Country risk includes the political, economic, and other conditions of the country. These conditions include lack of publicly available information, less government oversight (including lack of accounting, auditing, and financial reporting standards), the possibility of government–imposed restrictions, and even the nationalization of assets. The liquidity of foreign investments may be more limited than for most U.S. investments, which means that, at times it may be difficult to sell foreign securities at desirable prices. |
• | Currency risk results from the constantly changing exchange rate between local currency and the U.S. dollar. Whenever an underlying fund holds securities valued in a foreign currency or holds the currency, changes in the exchange rate add to or subtract from the value of the investment. |
• | Custody risk refers to the process of clearing and settling trades. It also covers holding securities with local agents and depositories. Low trading volumes and volatile prices in less developed markets make trades harder to complete and settle. Local agents are held only to the standard of care of the local market. Governments or trade groups may compel local agents to hold securities in designated depositories that are not subject to independent evaluation. The less developed a country’s securities market is, the greater the likelihood of problems occurring. |
• | Emerging markets risk includes the dramatic pace of change (economic, social and political) in these countries as well as the other considerations listed above. These markets are in early stages of development and are extremely volatile. They can be marked by extreme inflation, devaluation of currencies, dependence on trade partners, and hostile relations with neighboring countries. |
The following bar charts and tables provide some illustration of the risks of investing in the Funds by showing, respectively:
• | how each Fund’s performance has varied for each full calendar year shown in the bar chart; and |
• | how each Fund’s average annual total returns compare to certain measures of market performance shown in the table. |
Both the bar chart and the table assume that all distributions have been reinvested. The returns shown do not reflect differences in expenses between share classes or fees and expenses imposed under your Contract, if any, and would be lower if they did. How a Fund has performed in the past (before and after taxes) does not indicate how the Fund will perform in the future. The performance shown reflects any fee waiver or expense reimbursement arrangements in effect for the periods reported. In the absence of such fee waivers or expense reimbursement arrangements, the performance shown would have been lower.
Bar Chart. Class 2 share information is shown in the bar chart for the Selling Fund. Class 2 shares of the Buying Fund are new; accordingly, performance information for this class is not shown.
Table. The table below shows total returns from hypothetical investments in the indicated classes of shares of the Selling Fund. Class 2 shares of the Buying Fund are new; accordingly, performance information for this class is not shown. The returns shown are compared to measures of market performance shown for the same periods.
Disciplined Asset Allocation Portfolios – Aggressive (Selling Fund)
Class 2 PERFORMANCE (based on calendar years)
+23.82% |
2009 |
During the periods shown in the bar chart, the highest return for a calendar quarter was +14.14% (quarter ended September 30, 2009) and the lowest return for a calendar quarter was –8.06% (quarter ended March 31, 2009).
The returns shown do not reflect fees and expenses imposed under your Contract, if any, and would be lower if they did. The performance of other share classes may vary from that shown because of differences in expenses.
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The Fund’s Class 2 shares’ year–to–date return at September 30, 2010 was +4.07%.
Variable Portfolio – Aggressive Portfolio (Buying Fund)
SHARE PERFORMANCE (based on calendar years)
The Fund is new as of April 14, 2010 and therefore calendar year performance information is not available.
The Fund’s Class 2 since inception return at September 30, 2010 was +5.05%.
Average Annual Total Returns (for periods ended December 31, 2009)(1)
Disciplined Asset Allocation Portfolios – Aggressive (Selling Fund): | 1 year | Since Inception (5/01/08) | ||||||
Class 2 returns before taxes | +23.82 | % | –7.78 | % | ||||
Russell 3000 Index (reflects no deductions for fees or expenses) | +28.34 | % | –10.39 | % | ||||
Blended Index (consists of 56% Russell 3000 Index, 24% Morgan Stanley Capital International (MSCI) Europe Australasia and Far East (EAFE) index, 18% Barclays Capital U.S. Aggregate Bond Index and 2% Citigroup 3–month U.S. Treasury Bill Index) (reflects no deduction for fees, expenses, or taxes) | +24.85 | % | –7.66 | % | ||||
Barclays Capital U.S. Aggregate Bond Index (reflects no deductions for fees or expenses) | +5.93 | % | +5.42 | % | ||||
MSCI EAFE Index (Gross) (reflects no deductions for fees or expenses) | +32.46 | % | –13.31 | % | ||||
Citigroup 3–month U.S. Treasury Bill Index) (reflects no deductions for fees or expenses) | +0.16 | % | +0.66 | % |
(1) | The returns shown do not reflect fees and expenses imposed under your Contract, if any, and would be lower if they did. |
Average Annual Total Returns
Variable Portfolio – Aggressive Portfolio (Buying Fund)
The Buying Fund is new as of April 14, 2010, and therefore performance information is not available. When available, the Buying Fund intends to compare its results to the Russell 3000 Index and a Blended Index (consisting of 56% Russell 3000 Index, 24% Morgan Stanley Capital International (MSCI) All Country World Index (ACWI) ex U.S.) and 20% Barclays Capital U.S. Aggregate Bond Index.
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ADDITIONAL INFORMATION ABOUT EACH REORGANIZATION
The Board of each Fund has approved the Agreement. While shareholders and Contract Owners are encouraged to review the Agreement, which has been filed with the Securities and Exchange Commission as an exhibit to the registration statement of which this combined proxy statement/prospectus is a part, the following is a summary of certain terms of the Agreement:
• | Each Reorganization is expected to occur before the end of the second quarter of 2011, pending shareholder approval, receipt of any necessary regulatory approvals and satisfaction of any other conditions to closing. However, following such approvals, each Reorganization may happen at any time agreed to by the applicable Selling Fund and the corresponding Buying Fund. |
• | Each Selling Fund will transfer all of its assets to the corresponding Buying Fund and, in exchange, the corresponding Buying Fund will assume all the Selling Fund’s liabilities and will issue Reorganization Shares to the Selling Fund. The value of each Selling Fund’s assets, as well as the number of Reorganization Shares to be issued to the Selling Fund, will be determined in accordance with the Agreement. The Reorganization Shares will have an aggregate net asset value on the business day immediately preceding the closing of the Reorganization equal to the value of the assets received from the Selling Fund, less the liabilities assumed by the corresponding Buying Fund in the transaction. The Reorganization Shares will immediately be distributed to Selling Fund shareholders in proportion to their holdings of shares of the Selling Fund, in liquidation of the Selling Fund. As a result, shareholders of the Selling Fund will become shareholders of the corresponding Buying Fund. |
• | The net asset value of each Selling Fund and the corresponding Buying Fund will be computed as of the close of regular trading on the New York Stock Exchange on the business day next preceding the closing date of the applicable Reorganization. |
Conditions to Closing Each Reorganization
The completion of each Reorganization is subject to certain conditions described in the Agreement, including:
• | With respect to the RIC Reorganization (as described below), the Selling Fund will have declared and paid a dividend that, together with all previous dividends, will distribute all of the Selling Fund’s net investment income and net capital gains, if any, to the shareholders of the Selling Fund for its tax years ending on or prior to the closing date of the Reorganization. |
• | The Funds will have received any approvals, consents or exemptions from the SEC or any other regulatory body necessary to carry out the Reorganization. |
• | A registration statement on Form N–14 relating to the Reorganization will have been filed with the SEC and become effective. |
• | The shareholders of the Selling Fund will have approved the Agreement by the requisite vote. |
• | With respect to the RIC Reorganization (as described below), the Selling Fund will have received an opinion of tax counsel to the effect that, as further described below, the Separate Accounts as shareholders of the Selling Fund will not recognize gain or loss for U.S. federal income tax purposes upon the exchange of their Selling Fund shares for the Reorganization Shares of the corresponding Buying Fund in connection with the Reorganization. |
• | With respect to each Partnership–to–Partnership Reorganization (as described below), the Selling Fund will have received an opinion of tax counsel to the effect that the Selling Fund’s tax basis in its assets will carry over to the Buying Fund, and the Buying Fund’s holding period in those assets will include the Selling Fund’s holding period therein. |
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The Agreement and the transactions contemplated by it may be terminated and abandoned with respect to any Reorganization by resolution of the Board of any applicable Fund at any time prior to the closing date thereof. In the event of a termination, Columbia Management will bear all costs associated with the Reorganization.
Tax Status of the Reorganizations
RiverSource Variable Portfolio – Strategic Income Fund and Columbia Strategic Income Fund, Variable Series are, and the combined Fund will be, treated as RICs for U.S. federal income tax purposes (the Reorganization of those two funds, the “RIC Reorganization”), whereas the Selling Funds and Buying Funds in each Reorganization listed in Table 1 below (“Partnership-to-Partnership Reorganizations”) are, and the combined Funds will be, treated as partnerships. The tax consequences of the Reorganizations differ depending on whether a Selling Fund and its corresponding Buying Fund are treated as partnerships or as RICs for U.S. federal income tax purposes.
Provided that the Contracts qualify to be treated as life insurance contracts under Section 7702(a) of the Code or annuity contracts under Section 72 of the Code, the Reorganization will not be a taxable event for Contract Owners regardless of the tax status of the Reorganization, or whether the Selling Funds and Buying Funds are treated as partnerships or RICs.
RIC Reorganization
The RIC Reorganization is intended to qualify for U.S. federal income tax purposes as a tax-free reorganization under section 368(a) of the Code. As a condition to the closing of the RIC Reorganization, the Selling Fund and Buying Fund will receive an opinion from Ropes & Gray LLP to the effect that, as further described below, on the basis of existing provisions of the Code, U.S. Treasury regulations issued thereunder, current administrative rules, pronouncements and court decisions, for U.S. federal income tax purposes:
• | The RIC Reorganization will constitute a “reorganization” within the meaning of Section 368(a)(1) of the Code, and the Selling Fund and the Buying Fund will each be “a party to a reorganization” within the meaning of Section 368(b) of the Code. |
• | Under Sections 361 and 357 of the Code, no gain or loss will be recognized by the Selling Fund upon the transfer of all of its assets to the Buying Fund in exchange for Reorganization Shares and the assumption by Buying Fund of all of the liabilities of the Selling Fund, or upon the distribution of the Reorganization Shares by the Selling Fund to the Separate Accounts as shareholders in liquidation. |
• | Under Section 354 of the Code, no gain or loss will be recognized by the Separate Accounts as shareholders of the Selling Fund upon the exchange of their Selling Fund shares for Reorganization Shares of the Buying Fund. |
• | Under Section 358 of the Code, the aggregate tax basis of Reorganization Shares that a Separate Account receives as a Selling Fund shareholder in the RIC Reorganization will be the same as the aggregate tax basis of the Selling Fund shares exchanged therefor. |
• | Under Section 1223(1) of the Code, the holding period for the Reorganization Shares received by a Separate Account as a shareholder of the Selling Fund in the RIC Reorganization will be determined by including the holding period for the Selling Fund shares exchanged therefor, provided the Separate Account held such Selling Fund shares as capital assets. |
• | Under Section 1032 of the Code, no gain or loss will be recognized by the Buying Fund upon the receipt of assets of the Selling Fund in exchange for Reorganization Shares and the assumption by the Buying Fund of all of the liabilities of the Selling Fund. |
• | Under Section 362(b) of the Code, the Buying Fund’s tax basis in the assets of the Selling Fund transferred to the Buying Fund in the RIC Reorganization will be the same as the Selling Fund’s tax basis in such assets immediately prior to the RIC Reorganization. |
• | Under Section 1223(2) of the Code, the Buying Fund’s holding periods in the assets received from the Selling Fund in the RIC Reorganization will include the Selling Fund’s holding periods in such assets. |
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• | The Buying Fund will succeed to and take into account the items of the Selling Fund described in Section 381(c) of the Code, subject to the conditions and limitations specified in Sections 381, 382, 383 and 384 of the Code and the regulations thereunder. |
Ropes & Gray LLP will express no view with respect to the effect of the RIC Reorganization on any transferred asset as to which any unrealized gain or loss is required to be recognized under U.S. federal income tax principles (i) at the end of a taxable year or upon the termination thereof, or (ii) upon the transfer of such asset regardless of whether such a transfer would otherwise be a non-taxable transaction.
The opinion will be based on certain factual certifications made by the officers of the Selling Fund and the Buying Fund and will also be based on customary assumptions. The opinion will note and distinguish certain published precedent. It is possible that the Internal Revenue Service (the “IRS”) or a court could disagree with Ropes & Gray LLP’s opinion, which therefore cannot be free from doubt. Opinions of counsel are not binding upon the IRS or the courts.
Prior to the closing of the RIC Reorganization, the Selling Fund will declare a distribution to shareholders that, together with all previous distributions, will have the effect of distributing to its Separate Accounts as shareholders all of its investment company taxable income (computed without regard to the deduction for dividends paid), net tax-exempt income, if any, and net realized capital gains, if any, through the closing of the Reorganization, including any undistributed income or gains from prior years. The Buying Fund may similarly distribute its investment income and gains to its respective Separate Accounts as shareholders.
Although it is not expected to affect Contract Owners, as a result of the RIC Reorganization each Fund may lose the benefit of certain tax losses that could have been used to offset or defer future gains of the combined Fund, and the combined Fund will have tax attributes that reflect a blending of the tax attributes of each Fund at the time of the RIC Reorganization.
Partnership-to-Partnership Reorganizations
Table 1
Selling Fund | Buying Fund | |
Disciplined Asset Allocation Portfolios – Conservative | Variable Portfolio – Conservative Portfolio | |
Disciplined Asset Allocation Portfolios- Moderately Conservative | Variable Portfolio – Moderately Conservative Portfolio | |
Disciplined Asset Allocation Portfolios – Moderate | Variable Portfolio – Moderate Portfolio | |
Disciplined Asset Allocation Portfolios- Moderately Aggressive | Variable Portfolio – Moderately Aggressive Portfolio | |
Disciplined Asset Allocation Portfolio – Aggressive | Variable Portfolio – Aggressive Portfolio |
Each Partnership-to-Partnership Reorganization is expected to be treated for U.S. federal income tax purposes as a contribution of the Selling Fund’s assets to the Buying Fund in exchange for Reorganization Shares. As a condition to the closing of each Partnership-to-Partnership Reorganization, each Selling Fund and each Buying Fund will receive an opinion from Ropes & Gray LLP to the effect that, on the basis of existing provisions of the Code, U.S. Treasury regulations issued thereunder, current administrative rules, pronouncements and court decisions, for U.S. federal income tax purposes:
• | Under Section 723 of the Code, the Buying Fund’s tax basis in the assets of the Selling Fund transferred to the Buying Fund in the Partnership-to-Partnership Reorganization will be the same as the Selling Fund’s tax basis in such assets immediately prior to the Partnership-to-Partnership Reorganization. |
• | Under Section 1223(2) of the Code, the Buying Fund’s holding periods in the assets received from the Selling Fund in the Partnership-to-Partnership Reorganization will include the Selling Fund’s holding periods in such assets. |
Each opinion will be based on certain factual certifications made by the officers of the Selling Fund and the Buying Fund and will also be based on customary assumptions and certain other reasonable assumptions acceptable to Ropes & Gray LLP, the Selling Fund and the Buying Fund. It is possible that the IRS could disagree with Ropes & Gray LLP’s opinion. Opinions of counsel are not binding upon the IRS or the courts.
In accordance with the tax rules applicable to partnerships, each Selling Fund or Buying Fund, as the case may be, in the Partnership-to-Partnership Reorganizations will allocate to its respective Separate Accounts as shareholders a distributive share of investment income and gains recognized by the partnership for its tax year ending with the Reorganization.
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Tax Considerations Applicable to Contract Owners
As long as the Contracts funded through the Separate Accounts qualify as life insurance contracts under Section 7702(a) of the Code or annuity contracts under Section 72 of the Code, the distributions or allocations, as the case may be, made in connection with the Reorganizations (as described above) and the Reorganizations, whether or not treated as tax-free for U.S. federal income tax purposes, will not create any tax liability for Contract Owners. Contract Owners who choose to redeem or exchange their investments by surrendering their contracts or initiating a partial withdrawal, however, may be subject to taxes and a 10% penalty. For a description of the tax consequences of investing in Contracts, Contract Owners should consult the prospectus or other information provided by the Participating Insurance Company regarding their Contracts.
––––––––––––––––––––
This description of the U.S. federal income tax consequences of the Reorganizations is made without regard to the particular facts and circumstances of any shareholder or Contract Owner. Shareholders and Contract Owners are urged to consult their tax advisors regarding the effect, if any, of the Reorganization in light of their individual circumstances. Because the foregoing discussion relates only to the U.S. federal income tax consequences of the Reorganizations, shareholders and Contract Owners should also consult their tax advisors as to the state, local and foreign tax consequences, if any, of the Reorganizations.
Reasons for the Proposed Reorganizations and Board Deliberations
Each Reorganization was reviewed by the Board of the Selling Fund involved therein, with the advice and assistance of Fund counsel and independent legal counsel to the Board. Each Selling Fund is overseen by the same Board (the “RiverSource Board”). At regular and special meetings of the RiverSource Board in May, June and August 2010, the Board considered the Reorganization of each Selling Fund, as proposed by Columbia Management. In connection with those Board meetings, Columbia Management and its affiliates provided background materials, analyses and other information to the RiverSource Board regarding, among other things, the topics discussed below, including responses to specific requests by the RiverSource Board, and responded to questions raised by the RiverSource Board at those meetings. The RiverSource Board also considered information provided in connection with various other proposals by Columbia Management to integrate the funds advised by Columbia Management into a single fund family with greater uniformity, including proposals to standardize fees charged by Columbia management and its affiliates, as well as other service providers, for services provided to similar funds.
After the RiverSource Board reviewed, evaluated and discussed the materials, analyses and information provided to it at its meetings that the RiverSource Board considered relevant to its deliberations, the RiverSource Board, including the independent Board members thereof (the “Independent Directors”), unanimously approved the Reorganization of each Selling Fund. The RiverSource Board, including the Independent Directors, also unanimously determined that participation by each Selling Fund in its Reorganization was in the best interests of such Selling Fund and that the interests of existing shareholders of each Selling Fund would not be diluted as a result of the Reorganization.
The general factors considered by the RiverSource Board in assessing and approving each applicable Reorganization included, among others, in no order of priority:
1. | various potential benefits of the Reorganization to the shareholders of the Selling Funds; |
2. | the Reorganization as part of Columbia Management’s overall commitment to streamline and to improve its fund offerings for the benefit of Fund shareholders; |
3. | the relative similarity of investment objectives, principal investment strategies and policies of each Selling Fund and the corresponding Buying Fund and, in that connection, the anticipated continuity of investment for shareholders of each Selling Fund as it merges into its corresponding Buying Fund; |
4. | the estimated net operating expenses that shareholders of each class of shares of each Selling Fund are expected to experience as shareholders of the corresponding Buying Fund after the Reorganization relative to the operating expenses currently borne by such shareholders including that, on a net basis, such expenses generally are expected to decline or remain the same as a result of the Reorganization (after taking into account Columbia Management’s contractual agreement to limit the total operating expenses of each Buying Fund) (see “Fees and Expenses”); |
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5. | the current assets of each Selling Fund and the corresponding Buying Fund, and the anticipated combined pro forma assets of the Buying Fund after the Reorganization; |
6. | the portfolio management team expected to be responsible for management of the combined fund and the historical performance of each Selling Fund and the corresponding Buying Fund, recognizing that no assurances can be given that the Buying Fund will achieve any particular level of performance after the Reorganization; |
7. | the likelihood that each Selling Fund would achieve and/or maintain sufficient size to ensure its continued economic viability absent the Reorganization, the corresponding Buying Fund’s relative prospects for attracting additional assets after the Reorganization and potential economies of scale; |
8. | for each Reorganization where the Selling Fund and its corresponding Buying Fund have each elected to be treated as a “regulated investment company” (“RIC”) for U.S. federal income tax purposes (previously defined as a “RIC Reorganization”), the anticipated tax–free nature of the exchange of shares in the Reorganization for the Separate Accounts as shareholders of the Selling Fund, the expectation that the Reorganization would not be a taxable event for Contract Owners, and other expected U.S. federal income tax consequences of the Reorganization (see “Tax Status of the Reorganizations”); |
9. | for each Reorganization where the Selling Fund and its corresponding Buying Fund are each treated as a partnership for U.S. federal income tax purposes (previously defined as a “Partnership–to–Partnership Reorganization”), the expectation that the Selling Fund’s tax basis in its assets will carry over to the Buying Fund and the Buying Fund’s holding period in those assets will include the Selling Fund’s holding period therein, and other expected U.S. federal income tax consequences of the Reorganization (see “Tax Status of the Reorganizations” above); |
10. | the potential benefits of the Reorganization to Columbia Management and its affiliates; |
11. | that shareholders of the Selling Funds will experience no material change in shareholder services as a result of the Reorganization; |
12. | any brokerage costs resulting from the Reorganization (e.g., each Selling Fund’s turnover associated with, and resulting from, the sale of any securities the corresponding Buying Fund does not wish to acquire); and |
13. | that the direct costs associated with the Reorganization will be borne by the Selling Funds only to the extent that Columbia Management anticipates a reduction in expenses to shareholders of the Selling Funds in the first year following the Reorganization. |
In their deliberations, the RiverSource Board did not identify any single factor that was paramount or controlling and individual Board members may have attributed different weights to various factors. The RiverSource Board also evaluated all information available to it on a Selling Fund-by-Selling Fund basis, and made determinations separately in respect of each Selling Fund it oversees. Certain of the factors considered by the RiverSource Board are discussed in more detail below.
STREAMLINED PRODUCT LINE. The RiverSource Board considered that the Reorganizations are intended, among other things, to streamline Columbia Management’s product offerings by reducing the number of funds in the Combined Fund Complex. Reducing the number of funds in the complex is intended to enhance the funds’ prospects for attracting additional assets by better differentiating the funds for potential shareholders (which should lend to a more concentrated selling effort).
TAX CONSEQUENCES. The RiverSource Board examined the relative tax situations of each Selling Fund and the corresponding Buying Fund and the resulting tax impact of each proposed Reorganization to each Selling Fund’s shareholders. In that connection, as noted, the RiverSource Board considered, for each RIC Reorganization, the anticipated tax-free nature of the exchange of shares in the Reorganization for the Separate Accounts as shareholders of the Selling Fund, the expectation that the Reorganization would not be a taxable event for Contract Owners, and other expected U.S. federal income tax consequences of the Reorganization. With respect to each Partnership-to-Partnership Reorganization, RiverSource Board considered the expectation that: (i) the Selling Fund’s tax basis in its assets will carry over to the Buying Fund and the Buying Fund’s holding period in those assets will include the Selling Fund’s holding period therein; and (ii) the Reorganization will not create any tax liability for Contract Owners (subject to the conditions discussed herein; see “Tax Considerations Applicable to Contract Owners”).
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CONTINUITY OF INVESTMENT. The RiverSource Board took into account the fact that each Selling Fund and its corresponding Buying Fund have similar investment objectives and principal investment strategies. Specifically, the RiverSource Board noted the following with respect to each Reorganization:
Proposal 1
RiverSource Variable Portfolio – Strategic Income Fund into Columbia Strategic Income Fund, Variable Series. The RiverSource Board noted the similarity in the Funds’ investment objectives in that RiverSource Variable Portfolio – Strategic Income Fund (VP Strategic Income) seeks to provide shareholders with a high level of current income and capital growth as a secondary objective, and the Buying Fund seeks total return, consisting of current income and capital appreciation. The RiverSource Board also observed the Funds’ commonality in investment strategy in that that both Funds invest primarily in various fixed income investment categories. The RiverSource Board did take into account that VP Strategic Income may only invest up to 75% of its total assets in below investment grade debt securities, while the Buying Fund is not similarly constrained. It was observed though that both Funds are currently managed in a similar manner (and share a common portfolio management team).
Proposal 2
Disciplined Asset Allocation Portfolios – Conservative into Variable Portfolio – Conservative Portfolio. The RiverSource Board noted the similarity in the Funds’ investment program and objective in that each of Discipline Asset Allocation Portfolios – Conservative (DAAP Conservative) and the Buying Fund is a “fund-of-funds” and generally seeks to provide a high level of total return that targets a “conservative” level of risk tolerance. The RiverSource Board did take into account that DAAP Conservative’s target asset allocation ranges of investments are equity (0–40%), fixed income (20–99%), cash (0–40%) and alternative investments (0–20%), while the Buying Fund’s target asset allocation ranges of investments are equity (15–25%), fixed income (65–75%) and cash (5–15%).
Proposal 3
Disciplined Asset Allocation Portfolios – Moderately Conservative into Variable Portfolio – Moderately Conservative Portfolio. The RiverSource Board noted the similarity in the Funds’ investment program and objective in that each of Discipline Asset Allocation Portfolios – Moderately Conservative (DAAP Moderately Conservative) and the Buying Fund is a “fund-of-funds” and generally seeks to provide a high level of total return that targets a “moderately conservative” level of risk tolerance. The RiverSource Board did take into account that DAAP Moderately Conservative’s target asset allocation ranges of investments are equity (15–55%), fixed income (15–85%), cash (0–30%) and alternative investments (0–20%), while the Buying Fund’s target asset allocation ranges of investments are equity (30–40%), fixed income (55–65%) and cash (0–10%). It was observed though that both Funds are currently managed in a similar manner and that one of the portfolio managers for the Buying Fund serves in the same capacity for DAAP Moderately Conservative.
Proposal 4
Disciplined Asset Allocation Portfolios – Moderate into Variable Portfolio – Moderate Portfolio. The RiverSource Board noted the similarity in the Funds’ investment program and objective in that each of Discipline Asset Allocation Portfolios – Moderate (DAAP Moderate) and the Buying Fund is a “fund-of-funds” and generally seeks to provide a high level of total return that targets a “moderate” level of risk tolerance. The RiverSource Board did take into account that DAAP Moderate’s target asset allocation ranges of investments are equity (30–70%), fixed income (10–70%), cash (0–20%) and alternative investments (0–20%), while the Buying Fund’s target asset allocation ranges of investments are equity (45–55%), fixed income (45–55%) and cash (0–5%). It was observed though that both Funds are currently managed in a similar manner and that one of the portfolio managers for the Buying Fund serves in the same capacity for DAAP Moderate.
Proposal 5
Disciplined Asset Allocation Portfolios – Moderately Aggressive into Variable Portfolio – Moderately Aggressive Portfolio. The RiverSource Board noted the similarity in the Funds’ investment program and objective in that each of Discipline Asset Allocation Portfolios – Moderately Aggressive (DAAP Moderately Aggressive) and the Buying Fund is a “fund-of-funds” and generally seeks to provide a high level of total return that targets a “moderately aggressive” level of risk tolerance. The RiverSource Board did take into account that DAAP Moderately Aggressive’s target asset allocation ranges of investments are equity (45–85%), fixed income (5–55%), cash (0–20%) and alternative investments (0–20%), while the Buying Fund’s target asset allocation ranges of investments are equity (60–70%), fixed income (30–40%) and cash (0–5%). It was observed though that both Funds are currently managed in a similar manner and that one of the portfolio managers for the Buying Fund serves in the same capacity for DAAP Moderately Aggressive.
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Proposal 6
Disciplined Asset Allocation Portfolios – Aggressive into Variable Portfolio – Aggressive Portfolio. The RiverSource Board noted the similarity in the Funds’ investment program and objective in that each of Discipline Asset Allocation Portfolios – Aggressive (DAAP Aggressive) and the Buying Fund is a “fund-of-funds” and generally seeks to provide a high level of total return that targets an “aggressive” level of risk tolerance. The RiverSource Board did take into account that DAAP Aggressive’s target asset allocation ranges of investments are equity (60–89%), fixed income (0–40%), cash (0–20%) and alternative investments (0–20%), while the Buying Fund’s target asset allocation ranges of investments are equity (75–85%), fixed income (15–25%) and cash (0–5%). It was observed though that both Funds are currently managed in a similar manner and that one of the portfolio managers for the Buying Fund serves in the same capacity for DAAP Aggressive.
INVESTMENT PERFORMANCE . The RiverSource Board considered the performance record of each Selling Fund and of each corresponding Buying Fund, noting, however, that past performance is no guarantee of future results. The RiverSource Board also observed that for the Reorganizations of each of DAAP Conservative, DAAP Moderately Conservative, DAAP Moderate, DAAP Moderately Aggressive and DAAP Aggressive, its corresponding Buying Fund was launched in May 2010 and, thus, no meaningful performance comparison can be made to the Selling Funds (each of which was launched in May 2008). With respect to the Reorganization of VP Strategic Income into Columbia Strategic Income Fund, Variable Series, the RiverSource Board observed that while the Selling Fund has no meaningful performance track record (as it was launched in the second quarter of 2010), the Buying Fund ranks in the 2nd quartile on a 3- and 5-year basis. It was also noted that both Funds have similar investment objectives and are managed by the same portfolio management team.
ECONOMIES OF SCALE
The RiverSource Board observed that, in addition to the potential to realize immediate economies associated with consolidating a smaller Selling Fund into a larger combined Fund, such as the elimination of duplicative costs, the combined funds may be able to take advantage of other economies of scale associated with larger funds. For example, a larger fund may benefit more quickly from pre-established “breakpoints” in investment management services fees that are triggered as the fund’s net asset level increases, may have an enhanced ability to effect portfolio transactions on favorable terms and may have greater investment flexibility. Furthermore, the RiverSource Board observed that the combined fixed expenses of the larger combined Fund, such as audit and accounting expenses, could be reduced as they are spread across a larger asset base. The RiverSource Board also considered the potential benefits and economies of scale to Columbia Management resulting from the Reorganizations and whether those benefits were shared with Fund shareholders. The RiverSource Board also considered Columbia Management’s belief that each Buying Fund would be better positioned to experience growth in assets from investor inflows than each Selling Fund.
Board Recommendation and Required Vote
The RiverSource Board recommends that shareholders of each Selling Fund approve the proposed Agreement. For each Selling Fund, the Agreement must be approved by the affirmative vote of a majority of the outstanding voting securities of the Selling Fund (as defined in the 1940 Act). A vote of a majority of the outstanding voting securities of the Selling Fund is defined in the 1940 Act as the affirmative vote of the lesser of: (a) 67% or more of the shares of the Selling Fund that are present or represented by proxy at the Meeting, if the holders of more than 50% of the outstanding shares of the Selling Fund are present or represented by proxy at the Meeting; or (b) more than 50% of the outstanding shares of the Selling Fund.
If the Agreement is not approved for a Selling Fund, the RiverSource Board will consider what further action should be taken with respect to the particular Selling Fund. The approval of the Reorganization of one Selling Fund is not conditioned upon the approval of the Reorganization of any other Selling Fund.
If shareholders approve the Reorganization of a Selling Fund, it is anticipated that the Reorganization would occur before the end of the second quarter of 2011.
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Proposal 7 – Election of Directors
On May 1, 2010, Ameriprise Financial, Inc., the parent company of Columbia Management, the Board Election Funds’ investment manager, acquired the long-term asset management business of Columbia Management Group, LLC and certain of its affiliated companies from Bank of America, N.A. (the “Transaction”). In connection with the Transaction, Columbia Management became the investment manager of the Columbia-branded funds (the “Columbia Fund Complex”), in addition to the funds then branded as RiverSource, Seligman and Threadneedle funds (the “RiverSource Fund Complex,” and together with the Columbia Fund Complex, the “Combined Fund Complex”).
Following the Transaction, the board of directors of the Columbia RiverSource Fund Complex (collectively, the “Columbia RiverSource Board”) and the board of trustees of the Columbia Fund Complex had ongoing discussions regarding a potential consolidated board of directors/trustees to oversee all or a portion of the Combined Fund Complex. In September 2010, these discussions culminated in an agreement between the Columbia RiverSource Board and the current Columbia Nations Board to have a consolidated board of directors/trustees for a portion of the Combined Fund Complex. Specifically, it was agreed that the RiverSource Fund Complex and the portion of the Columbia Fund Complex overseen by the Columbia Nations Board should be overseen by a consolidated board of directors/trustees. In this regard, the Columbia Nations Board and Columbia RiverSource Board each determined that the consolidation would enhance the oversight of a larger fund family and should achieve cost efficiencies for fund shareholders.
Each Board Election Fund is a series of a corporation (a “Company”). In order to effect the consolidation, at joint meetings held on September 20, 2010, the Board Governance Committee of the Columbia RiverSource Board recommended the nomination of the Non-Interested Nominees (defined below) and the Interested Nominees (defined below) to the Columbia RiverSource Board. In addition, at joint meetings held on September 20, 2010, the Columbia RiverSource Board, including a majority of the directors who are not “interested persons,” as defined in the 1940 Act, of such Columbia RiverSource Board (each, a “Non-Interested Director” and collectively, the “Non-Interested Directors”), unanimously accepted and endorsed these nominations, nominated the Non-Interested Nominees and Interested Nominees and voted to present each Nominee to shareholders for election as directors/trustees. The Columbia RiverSource Board currently has no reason to believe that any Nominee will become unavailable for election as a director/trustee, but if such unavailability should occur before the Meeting, the proxies will be voted for such other individuals as the Board Governance Committee of the Columbia RiverSource Board and the full Columbia RiverSource Board may designate.
A Nominee is deemed to be “non-interested” to the extent the Nominee is not an “interested person,” as that term is defined in Section 2(a)(19) of the 1940 Act, of the Companies (each, a “Non-Interested Nominee” and collectively, the “Non-Interested Nominees”). The Non-Interested Nominees are: Kathleen Blatz, Edward J. Boudreau, Jr., Pamela G. Carlton, William P. Carmichael, Patricia M. Flynn, William A. Hawkins, R. Glenn Hilliard, Stephen R. Lewis, Jr., John F. Maher, John J. Nagorniak, Catherine James Paglia, Leroy C. Richie, Alison Taunton-Rigby and Minor M. Shaw.
Anthony M. Santomero and William F. Truscott (each, an “Interested Nominee” and collectively, the “Interested Nominees”) are or would be treated as “interested persons” of the Companies. Although Mr. Santomero is “independent” of Columbia Management and its affiliates, in that he is not a director, officer or employee thereof, the Companies treat William F. Truscott as an “interested person” of the Companies (an “Interested Director/Trustee”) because he currently serves as Chairman of the Board of Columbia Management (and was previously the President, Chairman of the Board and Chief Investment Officer of Columbia Management from 2001-2010) and as a senior executive of Ameriprise Financial, Inc., the parent company of Columbia Management, in which he is also a stockholder. The Companies would treat Anthony M. Santomero as an “interested person” of the Companies because he serves as a director of Citigroup, Inc. and Citigroup, N.A., which may engage from time to time in brokerage execution, principal transactions and/or lending relationships with the Funds or other funds or accounts advised/managed by Columbia Management and/or a Fund’s subadviser. However, Mr. Santomero is not a director, officer or employee of Columbia Management or any of its affiliates.
If the Nominees are elected by shareholders, at least 75% of the Columbia RiverSource Board’s directors will continue to be Non-Interested Directors/Trustees. The Nominees would serve as directors/trustees in accordance with the organizational documents of the Companies. Each director/trustee would serve for an indefinite term. A director/trustee’s term may terminate by the election of his or her successor, by the termination or dissolution of the Company, or by his or her death, resignation, removal, retirement or incapacity. A director/trustee may no longer serve on the Columbia RiverSource Board after the first board meeting after he or she reaches the mandatory retirement age established by the Columbia RiverSource Board or after the 15th anniversary of the first Columbia RiverSource Board or Columbia Nations Board meeting he or she attended as a director/trustee.
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Information Regarding the Non-Interested Nominees
Background information regarding each of the Non-Interested Nominees follows.
Name, Address and Age | Position(s) Held or to be Held with the Companies | Term of Office | Principal | Number of Portfolios in Combined Fund Complex Overseen or to Be Overseen(1) | Other Directorships Held by Nominee During the | |||||
Kathleen Blatz c/o Columbia Management Investment Advisers, LLC, 901 S. Marquette Ave. Minneapolis, MN 55402 Age [56] | Director/ Trustee | Indefinite term; Director/Trustee since 1/11/06 | Chief Justice, Minnesota Supreme Court, 1998-2006; Attorney | [193] | None | |||||
Edward J. Boudreau, Jr. c/o Columbia Management Investment Advisers, LLC, One Financial Center Boston, MA 02111 Age [66] | Director/ Trustee | Indefinite term; None | Managing Director – E.J. Boudreau & Associates (consulting), from 2000 through current | [193] | BofA Funds Series Trust (11 funds) | |||||
Pamela G. Carlton c/o Columbia Management Investment Advisers, LLC, 901 S. Marquette Ave. Minneapolis, MN 55402 Age [55] | Director/ Trustee | Indefinite term; Director/Trustee since 11/11/07 | President, Springboard-Partners in Cross Cultural Leadership (consulting company) | [193] | None | |||||
William P. Carmichael c/o Columbia Management Investment Advisers, LLC, One Financial Center Boston, MA 02111 Age [67] | Director/ Trustee | Indefinite term; None | Retired | [193] | BofA Funds Series Trust (11 funds); Cobra Electronics Corporation (electronic equipment manufacturer); Simmons Company (bedding); The Finish Line (sportswear) | |||||
Patricia M. Flynn c/o Columbia Management Investment Advisers, LLC, 901 S. Marquette Ave. Minneapolis, MN 55402 Age [59] | Director/ Trustee | Indefinite term; Director/Trustee since 11/1/04 | Trustee Professor of Economics and Management, Bentley University; former Dean, McCallum Graduate School of Business, Bentley University | [193] | None | |||||
William A. Hawkins c/o Columbia Management Investment Advisers, LLC, One Financial Center Boston, MA 02111 Age [68] | Director/ Trustee | Indefinite term; None | President and Chief Executive Officer – California Bank, N.A., from January 2008 through current | [193] | BofA Funds Series Trust (11 funds) |
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Name, Address and Age | Position(s) Held or to be Held with the Companies | Term of Office | Principal | Number of Portfolios in Combined Fund Complex Overseen or to Be Overseen(1) | Other Directorships Held by Nominee During the | |||||
R. Glenn Hilliard c/o Columbia Management Investment Advisers, LLC, One Financial Center Boston, MA 02111 Age [67] | Director/ Trustee | Indefinite term; None | Chairman and Chief Executive Officer – Hilliard Group LLC (investing and consulting), from April 2003 through current; Non-Executive Director & Chairman – Conseco, Inc. (insurance), September 2003 through current; Executive Chairman – Conseco, Inc. (insurance), August 2004 through September 2005 | [193] | BofA Funds Series Trust (11 funds); Conseco, Inc. (insurance) | |||||
Stephen R. Lewis, Jr. c/o Columbia Management Investment Advisers, LLC, 901 S. Marquette Ave. Minneapolis, MN 55402 Age [71] | Director/ Trustee | Indefinite term; Chairman of the Board since 1/1/07 and Director/Trustee since 1/1/02 | President Emeritus and Professor of Economics, Carleton College | [193] | Valmont Industries, Inc. (manufactures irrigation systems) | |||||
John F. Maher c/o Columbia Management Investment Advisers, LLC, 901 S. Marquette Ave. Minneapolis, MN 55402 Age [67] | Director/ Trustee | Indefinite term; Director/Trustee since 11/7/08 | Retired President and Chief Executive Officer and former Director, Great Western Financial Corporation (financial services), 1986-1997 | [193] | None | |||||
John J. Nagorniak c/o Columbia Management Investment Advisers, LLC, One Financial Center Boston, MA 02111 Age [66] | Director/ Trustee | Indefinite term; None | Retired; President and Director – Foxstone Financial, Inc. (consulting), 2000 through December 2007; Director – Mellon Financial Corporation affiliates (investing), 2000 through 2007; Chairman – Franklin Portfolio Associates (investing – Mellon affiliate) 1982 through 2007 | [193] | BofA Funds Series Trust (11 funds); Research Foundation of CFA Institute; Director – MIT Investment Company; Trustee – MIT 401k Plan | |||||
Catherine James Paglia c/o Columbia Management Investment Advisers, LLC, 901 S. Marquette Ave. Minneapolis, MN 55402 Age [57] | Director/ Trustee | Indefinite term; 11/1/04 | Director, Enterprise Asset Management, Inc. (private real estate and asset management company) | [193] | None |
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Name, Address and Age | Position(s) Held or to be Held with the Companies | Term of Office and Length of Time Served as a Director/Trustee | Principal | Number of Portfolios in Combined Fund Complex Overseen or to Be Overseen(1) | Other Directorships Held by Nominee During | |||||
Leroy C. Richie c/o Columbia Management Investment Advisers, LLC, 901 S. Marquette Ave. Minneapolis, MN 55402 Age [68] | Director/ Trustee | Indefinite term; Director/Trustee since 11/7/08 | Counsel, Lewis & Munday, P.C. since 2004; former Vice President and General Counsel, Automotive Legal Affairs, Chrysler Corporation (automotive) | [193] | Digital Ally, Inc. (digital imaging); Infinity, Inc. (oil and gas exploration and production); OGE Energy Corp. (energy and energy services) | |||||
Minor M. Shaw c/o Columbia Management Investment Advisers, LLC, One Financial Center Boston, MA 02111 Age [63] | Director/ Trustee | Indefinite term; None | President – Micco Corporation [(real estate development)] and Mickel Investment Group | [193] | Piedmont Natural Gas | |||||
Alison Taunton-Rigby c/o Columbia Management Investment Advisers, LLC, 901 S. Marquette Ave. Minneapolis, MN 55402 Age [66] | Director/ Trustee | Indefinite term; Director/Trustee since 11/13/02 | Chief Executive Officer and Director, RiboNovix, Inc. since 2003 (biotechnology); former President, Aquila Biopharmaceuticals | [193] | Idera Pharmaceuticals, Inc. (biotechnology); Healthways, Inc. (health management programs) |
(1) | If elected to serve on the Columbia RiverSource Board, the Non-Interested Nominee would oversee [141] funds of the RiverSource Fund Complex. If the Non-Interested Nominee also serves, or is elected to serve, on the Columbia Nations Board, then the Non-Interested Nominee would oversee [52] funds of the Columbia Fund Complex, for a total of [193] funds across the Combined Fund Complex. The number of funds overseen by each Non-Interested Nominee would be reduced substantially if those board-approved mergers are approved by shareholders of certain funds in the Combined Fund Complex. |
Information Regarding the Interested Nominees
Background information regarding each of the Interested Nominees follows.
Name, Address and Age | Position(s) Held or to be Held with the Companies | Term of Office and Length of Time Served as a Director/Trustee | Principal | Number of Portfolios in Combined Fund Complex Overseen or to Be Overseen(1) | Other | |||||
Anthony M. Santomero(2) c/o Columbia Management Investment Advisers, LLC, One Financial Center, Boston, MA 02111 Age [64] | Director/ Trustee | Indefinite term; None | Richard K. Mellon Professor Emeritus of Finance, The Wharton School, University of Pennsylvania, from 1972 through current; Senior Advisor – McKinsey & Company (consulting), July 2006 through January 2008; President and Chief Executive Officer – Federal Reserve Bank of Philadelphia, July 2000 through April 2006 | [193] | BofA Funds Series Trust (11 funds); Renaissance Reinsurance Ltd.; Penn Mutual Life Insurance Company; Citigroup, Inc.; Citibank, N.A. |
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Name, Address and Age | Position(s) Held or to be Held with the Companies | Term of Office and Length of Time Served as a Director/Trustee | Principal | Number of Portfolios in Combined Fund Complex Overseen or to Be Overseen(1) | Other | |||||
William F. Truscott(3) 53600 Ameriprise Financial Center Minneapolis, MN 55474 Age [49] | Director/ Trustee | Indefinite term; Director/ Trustee since 11/7/01 | Chairman of the Board, Columbia Management Investment Advisers, LLC (formerly RiverSource Investments, LLC) since May 2010 (previously President, Chairman of the Board and Chief Investment Officer, 2001-April 2010); Senior Vice president, Atlantic Funds, Columbia Funds and Nations Funds since May 2010; Chief Executive Officer, U.S. Asset Management & President – Annuities, Ameriprise Financial, Inc. since May 2010 (previously President – U.S. Asset Management and Chief Investment Officer, 2005-April 2010 and Senior Vice President – Chief Investment Officer, 2001-2005); Director, President and Chief Executive Officer, Ameriprise Certificate Company since 2006; Director, Columbia Management Investment Distributors, Inc. (formerly RiverSource Fund Distributors, Inc.) since May 2010 (previously Chairman of the Board and Chief Executive Officer, 2008-April 2010); Chairman of the Board and Chief Executive Officer, RiverSource Distributors, Inc. since 2006 | [193] | None |
(1) | If elected to serve on the Columbia RiverSource Board, the Interested Nominee would oversee [141] funds of the RiverSource Fund Complex. If the Interested Nominee also serves, or is elected to serve, on the Columbia Nations Board, then the Interested Nominee would oversee [52] funds of the Columbia Fund Complex, for a total of [193] funds across the Combined Fund Complex. The number of funds overseen by each Interested Nominee would be reduced substantially if certain board-approved mergers are approved by shareholders of those funds in the Combined Fund Complex. |
(2) | The Companies would treat Anthony M. Santomero as an “interested person” of the Companies for the reasons set forth above. |
(3) | William F. Truscott is an “interested person” of the Companies for the reasons set forth above. |
Nominees’ Beneficial Ownership of Shares of Each Board Election Fund
Exhibit F of this combined proxy statement/prospectus provides information, as of September 30, 2010 (unless otherwise indicated), about the beneficial ownership by the Nominees of shares of each Fund.
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Status of Current Directors
Kathleen Blatz, Arne H. Carlson, Pamela G. Carlton, Patricia M. Flynn, Anne P. Jones, Jeffrey Laikind, Stephen R. Lewis, Jr., John F. Maher, Catherine James Paglia, Leroy C. Richie, Alison Taunton-Rigby and William F. Truscott currently comprise the entire Columbia RiverSource Board. Due to the mandatory retirement age described above, Ms. Jones and Messrs. Carlson and Laikind have not been re-nominated to serve as directors/trustees to the Columbia RiverSource Boards. The Columbia RiverSource Boards met on [•] occasions during the fiscal year ended [•]. Information about directors of the Columbia RiverSource Board who are also Nominees is set forth under “Information Regarding the Non-Interested Nominees” and “Information Regarding the Interested Nominees” above.
Leadership Structure and Risk Oversight
[The Columbia RiverSource Board oversees management of the Companies and the Board Election Funds. The Columbia RiverSource Board has a duty to act in the best interest of shareholders when supervising and overseeing the management and operations of the Companies. The Columbia RiverSource Board currently consists of twelve directors who have extensive and varied experience and skills. Eleven of the directors are Non-Interested Directors. Information about the background and qualifications of each of the directors can be found in the sections titled “Information Regarding the Non-Interested Nominees” and “Information Regarding the Interested Nominees” above.]
[The Columbia RiverSource Board has appointed William P. Carmichael, a Non-Interested Director, to serve in the role of Chairman. The Chairman actively participates in the development of the agendas for meetings of the Columbia RiverSource Board, presides at meetings of the Columbia RiverSource Board and acts as a liaison with service providers, officers, attorneys, and other directors/trustees generally between meetings. The Chairman may also perform such other functions as may be delegated by the Columbia RiverSource Board from time to time. Except for any duties specified herein or pursuant to the Companies’ governing documents, the designation of Chairman does not impose on such Non-Interested Director any duties, obligations or liability that are greater than the duties, obligations or liability imposed on such person as a member of the Columbia RiverSource Board generally.] [The Nominees have agreed, if all of the Nominees are elected by the shareholders of the Company of which they are a series, to appoint Stephen R. Lewis, Jr. as Chairman subsequent to the Meeting.]
[The Columbia RiverSource Board has several standing committees (the “Committees”) which are an integral part of the Board Election Funds’ overall governance and risk management oversight structure. The standing Committees are the Board Governance Committee, the Compliance Committee, the Contracts Committee, the Distribution Committee, the Executive Committee, the Investment Review Committee and the Audit Committee. The roles of each Committee are more fully described in the section titled “Current Committees of the Columbia RiverSource Board” below.]
[The Board Election Funds have retained Columbia Management as the Funds’ investment manager and administrator. Columbia Management provides the Board Election Funds with investment advisory services, and is responsible for day-to-day management and administration of the Board Election Funds and management of the risks that arise from the Board Election Funds’ investments and operations. The Columbia RiverSource Board is responsible for overseeing Columbia Management and other service providers in the operation of the Companies, including with respect to risk management functions. The Board Election Funds and the Companies are subject to a number of risks, including investment, compliance, operational, and valuation risks, among others. Day-to-day risk management functions are subsumed within the responsibilities of Columbia Management, the Board Election Funds’ subadvisers and other service providers (depending on the nature of the risk), who carry out the Board Election Funds’ investment management and business affairs. Each of Columbia Management, the Board Election Funds’ subadvisers and other service providers has their own, Non-Interested interest in risk management, and their policies and methods of carrying out risk management functions will depend, in part, on their analysis of the risks, functions and business models.]
[Risk oversight forms part of the Columbia RiverSource Board’s general oversight of the Board Election Funds and the Companies and is addressed as part of various activities of the Columbia RiverSource Board and Committees. The Columbia RiverSource Board recognizes that it is not possible to identify all of the risks that may affect the Board Election Funds or to develop processes and controls to eliminate or even mitigate their occurrence or effects. As part of its regular oversight of the Companies, the Columbia RiverSource Board, directly and through one or more Committees, interacts with and reviews reports from, among others, Columbia Management, the Board Election Funds’ subadvisers, the Non-Interested registered public accounting firm for the Board Election Funds, and internal auditors for Columbia Management or its affiliates, as appropriate, regarding risks faced by the Board Election Funds and relevant risk functions. The Columbia RiverSource Board and the Audit Committee of each Board Election Fund also meet periodically with the Fund’s Chief Compliance Officer to receive reports regarding the compliance of the Fund and their principal
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service providers with the U.S. federal securities laws and their internal compliance policies and procedures. The Columbia RiverSource Board and its Audit Committee has oversight responsibilities with respect to the compliance program of the Board Election Funds and certain of their service providers, and also receive periodic and annual reports from the Board Election Funds’ Chief Compliance Officer, as required under applicable regulations. The Columbia RiverSource Board, with the assistance of the Investment Committee, reviews investment policies and risks in connection with its review of each Board Election Fund’s performance, and meets periodically with the portfolio managers of each Board Election Fund to receive reports regarding the management of the Funds, including each Board Election Fund’s investment risks. In addition, as part of the Columbia RiverSource Board’s periodic review of the Board Election Funds’ advisory, subadvisory and other service provider agreements, such Columbia RiverSource Board may consider risk management aspects of their operations and the functions for which they are responsible.]
[The Non-Interested Directors have engaged Non-Interested legal counsel to assist them in performing their oversight responsibilities. The Columbia RiverSource Board reviews its leadership structure periodically and believes that its structure is appropriate because it allows the Board to exercise informed and non-Interested judgment over matters under its purview, and it allocates areas of responsibility among Committees of directors and the full Columbia RiverSource Board in a manner that enhances effective oversight. In particular, the Columbia RiverSource Board believes that having a Non-Interested Director serve as the chair of the Columbia RiverSource Board and of each Committee promotes independence from Columbia Management in developing agendas and conducting meetings. The Columbia RiverSource Board believes that their Committee structure makes the oversight process more efficient and more effective by allowing smaller groups of directors/trustees to bring increased focus to matters within the purview of each Committee. The leadership structure of the Columbia RiverSource Board, including the manner in which it conducts its risk oversight role, may be changed, at any time and in the discretion of the Columbia RiverSource Board, including in response to changes in circumstances or the characteristics of the Companies. In this regard, it may be changed in certain respects as the Columbia RiverSource Board consolidates with the Columbia Nations Board and consider enhancing and reconciling various practices that have historically been different.
Current Committees of the Columbia RiverSource Board
The Columbia RiverSource Board has organized the following standing Committees to facilitate its work: the Board Governance Committee, the Compliance Committee, the Contracts Committee, the Distribution Committee, the Executive Committee, the Investment Review Committee and the Audit Committee. These Committees are comprised solely of Non-Interested Directors. The duties of these Committees are described below.
Mr. Lewis, as Chair of the Columbia RiverSource Board, acts as a point of contact between the Non-Interested Directors and Columbia Management between Columbia RiverSource Board meetings in respect of general matters.
Board Governance Committee
[The Board Governance Committee recommends to the Columbia RiverSource Board the size, structure and composition of the Columbia RiverSource Board and its Committees, the compensation to be paid to members of the Columbia RiverSource Board and a process for evaluating the Columbia RiverSource Board’s performance. The Board Governance Committee also reviews candidates for Columbia RiverSource Board membership including candidates recommended by shareholders. The Board Governance Committee also makes recommendations to the Columbia RiverSource Board regarding responsibilities and duties of the Columbia RiverSource Board, oversees proxy voting and supports the work of the Board Chair in relation to furthering the interests of the Board Election Funds and their shareholders on external matters.]
[To be considered as a candidate for director/trustee, recommendations must include a curriculum vitae and be mailed to the Chair of the Board, 901 Marquette Avenue South, Suite 2810, Minneapolis, MN 55402-3268. To be timely for consideration by the Board Governance Committee, the submission, including all required information, must be submitted in writing not less than 120 days before the date of the proxy statement for the previous year’s annual meeting of shareholders, if such a meeting is held. The Board Governance Committee will consider only one candidate submitted by such a shareholder or group for nomination for election at a meeting of shareholders. The Board Governance Committee will not consider self-nominated candidates or candidates nominated by members of a candidate’s family, including such candidate’s spouse, children, parents, uncles, aunts, grandparents, nieces and nephews.]
[The Board Governance Committee will consider and evaluate candidates submitted by the nominating shareholder or group on the basis of the same criteria as those used to consider and evaluate candidates submitted from other sources. The Board Governance Committee may take into account a wide variety of factors in considering director candidates, including (but not limited to): (i) the
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candidate’s knowledge in matters relating to the investment company industry; (ii) any experience possessed by the candidate as a director or senior officer of other public or private companies; (iii) the candidate’s educational background; (iv) the candidate’s reputation for high ethical standards and personal and professional integrity; (v) any specific financial, technical or other expertise possessed by the candidate, and the extent to which such expertise would complement the Columbia RiverSource Board’s existing mix of skills and qualifications; (vi) the candidate’s perceived ability to contribute to the ongoing functions of the Columbia RiverSource Board, including the candidate’s ability and commitment to attend meetings regularly, work collaboratively with other members of the Columbia RiverSource Board and carry out his or her duties in the best interests of the fund; (vii) the candidate’s ability to qualify as an Non-Interested director; and (viii) such other criteria as the Board Governance Committee determines to be relevant in light of the existing composition of the Columbia RiverSource Board and any anticipated vacancies or other factors.]
[Members of the Board Governance Committee (and/or the Columbia RiverSource Board) also [generally] meet personally with each nominee to evaluate the candidate’s ability to work effectively with other members of the Columbia RiverSource Board, while also exercising non-Interested judgment. Although the Columbia RiverSource Board does not have a formal diversity policy, the Columbia RiverSource Board endeavors to comprise itself of members with a broad mix of professional and personal backgrounds. Thus, the Board Governance Committee and the Columbia RiverSource Board accorded particular weight to the individual professional background of each Non-Interested Director.]
With respect to the directorship of Mr. Truscott, who is an Interested Nominee, the Board Governance Committee of each Columbia RiverSource Board, and the full Columbia RiverSource Board, have concluded that having a senior executive of the investment manager serve on the Columbia RiverSource Board can facilitate the Non-Interested Directors’ increased access to information regarding Columbia Management, which is the Companies’ most significant service provider.
Compliance Committee
The Compliance Committee supports the Board Election Funds’ maintenance of a strong compliance program by: providing a forum for Non-Interested Directors to consider compliance matters impacting the Board Election Funds or their key service providers; developing and implementing, in coordination with the Board Election Funds’ Chief Compliance Officer (“CCO”), a process for the review and consideration of compliance reports that are provided to the Columbia RiverSource Board; and providing a designated forum for the Board Election Funds’ CCO to meet with Non-Interested Directors on a regular basis to discuss compliance matters.
Contracts Committee
The Contracts Committee reviews and oversees the contractual relationships with service providers. The Contracts Committee receives and analyzes reports covering the level and quality of services provided under contracts with the Board Election Fund and advises the Columbia RiverSource Board regarding actions taken on these contracts during the annual review process.
Distribution Committee
The Distribution Committee reviews and supports product development, marketing, sales activity and practices related to the Board Election Funds and will report to the Columbia RiverSource Board as appropriate.
Executive Committee
The Executive Committee acts for the Columbia RiverSource Board between meetings of the Columbia RiverSource Board.
Investment Review Committee
The Investment Review Committee reviews and oversees the management of each Board Election Funds’ assets. The Investment Review Committee considers investment management policies and strategies, investment performance, risk management techniques, and securities trading practices and reports areas of concern to the Columbia RiverSource Board.
Audit Committee
The Audit Committee oversees the accounting and financial reporting processes of the Board Election Funds and internal controls over financial reporting. The Audit Committee oversees the quality and integrity of the Board Election Funds’ financial statements and Non-Interested audits as well as the Funds’ compliance with legal and regulatory requirements relating to the Funds’ accounting
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and financial reporting, internal controls over financial reporting and Non-Interested audits. The Audit Committee also makes recommendations regarding the selection of the Board Election Funds’ Non-Interested registered public accounting firm and reviews and evaluates the qualifications, independence and performance of the Non-Interested registered public accounting firm.
The Audit Committee oversees the Board Election Funds’ risks by, among other things, meeting with the Funds’ internal auditors, establishing procedures for the confidential, anonymous submission by employees of concerns about accounting or audit matters, and overseeing the Funds’ Disclosure Controls and Procedures.
Committee Meetings
The following table shows the number of times the Committees met during each Board Election Fund’s most recent fiscal period. The table is organized by fiscal-year end.
Fiscal Period | Board Governance | Compliance | Contracts | Distribution | Executive | Investment Review | Audit | |||||||||||||||||||||
For Funds with fiscal periods ending December 31 | 5 | 5 | 6 | 4 | 2 | 6 | 6 | |||||||||||||||||||||
RiverSource Variable Portfolio – Strategic Income Fund | ||||||||||||||||||||||||||||
Disciplined Asset Allocation Portfolios – Conservative | ||||||||||||||||||||||||||||
Disciplined Asset Allocation Portfolios – Moderately Conservative | ||||||||||||||||||||||||||||
Disciplined Asset Allocation Portfolios – Moderate | ||||||||||||||||||||||||||||
Disciplined Asset Allocation Portfolios – Moderately Aggressive | ||||||||||||||||||||||||||||
Disciplined Asset Allocation Portfolios – Aggressive |
Nominee Qualifications
[The Companies’ Articles of Incorporation and By-Laws do not set forth any specific qualifications to serve as a director. The charter of the Board Governance Committee also does not set forth any specific qualifications, but does set forth certain factors that the Board Governance Committee may take into account in considering director candidates. The Board Governance Committee charter is attached as Exhibit G to this combined proxy statement/prospectus.
[The Board Governance Committee does not have a formal process for identifying and evaluating nominees, including nominees recommended by shareholders. Instead, the Board Governance Committee follows the process it deems appropriate under the circumstances. The attributes or skills the Board Governance Committee may take into account in considering director/trustee candidates include: (i) the candidate’s knowledge in matters relating to the investment company industry; (ii) any experience possessed by the candidate as a director or senior officer of other public or private companies; (iii) the candidate’s educational background; (iv) the candidate’s reputation for high ethical standards and personal and professional integrity; (v) any specific financial, technical or other expertise possessed by the candidate, and the extent to which such expertise would complement the Columbia RiverSource Board’s existing mix of skills and qualifications; (vi) the candidate’s perceived ability to contribute to the ongoing functions of the Board, including the candidate’s ability and commitment to attend meetings regularly, work collaboratively with other members of the Board and carry out his or her duties in the best interests of the fund; (vii) the candidate’s ability to qualify as a Non-Interested director; and (viii) such other criteria as the committee determines to be relevant in light of the existing composition of the Board and any anticipated vacancies or other factors. Members of the committee (and/or the Board) also meet personally with each nominee to evaluate the candidate’s ability to work effectively with other members of the Board, while also exercising Non-Interested judgment.]
The following is a summary of the particular professional and other experience of each Nominee that qualifies such Nominee to serve as a director of the Companies as of the date of this combined proxy statement/prospectus:
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Kathleen Blatz. Ms. Blatz has been a director on the Columbia RiverSource Board since 2006. Ms. Blatz has ten years of judicial experience and substantial other legal and government experience. Ms. Blatz served as an associate justice of the Minnesota Supreme Court from 1996 to 1998 and as Chief Justice of the court from 1998 to 2006. Ms. Blatz served in the Minnesota House of Representatives from 1979 to 1994.
Edward J. Boudreau, Jr. Mr. Boudreau has been a trustee of certain trusts in the Columbia Fund Complex since 2005. In addition, he has over thirty years of business and consulting experience, primarily in the financial services industry, including as the chief executive of a mutual fund management company.
Pamela G. Carlton. Ms. Carlton has been a director on the Columbia RiverSource Board since 2007. Ms. Carlton has significant experience in consulting and in investments, having served as a Managing Director in U.S. Equity Research at J.P. Morgan Chase.
William P. Carmichael. Mr. Carmichael has been a trustee of certain trusts in the Columbia Fund Complex since 1999, and has served as Chairman of the Columbia Nations Board and of the boards of the other trusts in the Columbia Fund Complex since 2003. Mr. Carmichael served in various senior financial and directorship positions with global consumer products companies. Mr. Carmichael is a certified public accountant and a licensed attorney.
Patricia M. Flynn. Ms. Flynn has been a director on the Columbia RiverSource Board since 2004. Ms. Flynn currently serves as Trustee Professor of Economics and Management of Bentley University, and was the former dean of a graduate school of business.
William A. Hawkins. Mr. Hawkins has been a trustee of certain trusts in the Columbia Fund Complex since 2005. He currently serves as the President and Chief Executive Officer of California General Bank and has over thirty years of executive level experience in the banking industry. Mr. Hawkins is a certified financial planner and a chartered property and casualty underwriter, as well as holding series 7, 24 and 63 licenses from the Financial Industry Regulatory Authority.
R. Glenn Hilliard. Mr. Hilliard has been a trustee of certain trusts in the Columbia Fund Complex since 2005. Mr. Hilliard is currently the Chairman and Chief Executive Officer of The Hilliard Group, LLC. Mr. Hilliard has over five years executive level experience in the insurance industry. Mr. Hilliard has served on the board of directors and as non-executive chairman of Conseco, Inc. for a number of years. Mr. Hilliard is also a licensed attorney.
Stephen R. Lewis, Jr. Mr. Lewis has been the Chairman of the Columbia RiverSource Board since 2007 and a director on the Columbia RiverSource Board since 2002. From 1987 to 2002, Mr. Lewis served as President of Carleton College, after which he continued to serve as President Emeritus and Professor Emeritus of Economics. Mr. Lewis has more than thirty years experience in Asia and Africa, primarily advising governments on economic policy and negotiations of foreign investment and financing agreements. Mr. Lewis is also a director of Valmont Industries, Inc.
John F. Maher. Mr. Maher has been a director on the Columbia RiverSource Board since 2008. Mr. Maher has extensive experience in the financial services industry, and was formerly President, Chief Executive Officer and a director of Great Western Financial Corporation.
John J. Nagorniak. Mr. Nagorniak has been a trustee of the trusts in the Columbia Fund Complex since 2008. Mr. Nagorniak has served in executive level and director positions for over twenty-five years. He is a chartered financial analyst and is currently a trustee of the Research Foundation of the CFA Institute.
Catherine James Paglia. Ms. Paglia has been a director on the Columbia RiverSource Board since 2004. Ms. Paglia has extensive experience in the asset management industry, and currently serves as a director of Enterprise Asset Management, Inc., a private real estate and asset management company.
Leroy C. Richie. Mr. Richie has been a director on the Columbia RiverSource Board since 2008. Mr. Richie has over twenty years of legal experience, including, currently, as Counsel at Lewis & Munday, P.C., and formerly served as Vice President and General Counsel, Automotive Legal Affairs, of Chrysler Corporation from 1990 to 1997.
Anthony M. Santomero. Dr. Santomero has been a trustee of certain trusts in the Columbia Fund Complex since 2008. Dr. Santomero has over thirty years of experience as a professor of finance and private consultant specializing in issues including risk management, financial restructuring, credit risk evaluation and management, and regulation. He has served as consultant to financial institutions and agencies in the U.S. and various countries in the European Union and the European Community itself, as well as institutions in various countries around the world. Additionally, Dr. Santomero has served as President and Chief Executive Officer of the Federal Reserve Bank of Philadelphia.
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Minor M. Shaw. Ms. Shaw has served as a trustee of certain trusts in the Columbia Fund Complex since 2003. Ms. Shaw is the President of certain private companies and is a member of the board of Piedmont Natural Gas and Blue Cross and Blue Shield of South Carolina. Ms. Shaw also serves as an active member on the boards of numerous educational and public service organizations.
Alison Taunton-Rigby. Ms. Taunton-Rigby has been a director on the Columbia RiverSource Board since 2002. Ms. Taunton-Rigby has been the Chief Executive Officer and a director of RiboNovix, Inc. since 2003. She also formerly served as the President of Aquila Biopharmaceuticals.
William F. Truscott. Mr. Truscott has been a director on the Columbia RiverSource Board since 2001. Mr. Truscott has over nine years of experience as President and Chief Investment Officer of Columbia Management, and currently serves as Chairman of the board of Columbia Management. Mr. Truscott is also an executive officer of Ameriprise Financial, Inc., the parent company of Columbia Management.
Procedures for Communications to the Columbia RiverSource Board
Shareholders who want to communicate with the Columbia RiverSource Board or an individual director should send written communications to 901 S. Marquette Ave., Minneapolis, MN 55402, addressed to the Columbia RiverSource Board or the individual director. The Secretary of the applicable Company may determine not to forward to the Columbia RiverSource Board or individual directors/trustees any letter that does not relate to the business of a Fund.
Executive Officers of the Companies
Information about the executive officers of each Company is included in Exhibit H of this combined proxy statement/prospectus.
Remuneration for Directors and Officers
The Non-Interested Directors determine the amount of compensation that they receive, including the amount paid to the Chair of the Columbia RiverSource Board. In determining compensation for the Non-Interested Directors, the Non-Interested Directors take into account a variety of factors including, among other things, their collective significant work experience (e.g., in business and finance, government or academia). The Non-Interested Directors also recognize that these individuals’ advice and counsel are in demand by other organizations, that these individuals may reject other opportunities because of the time demands of their duties as Non-Interested Directors, and that they undertake significant legal responsibilities. The Non-Interested Directors also consider the compensation paid to Non-Interested board members of other mutual fund complexes of comparable size. In determining the compensation paid to the Chair, the Non-Interested Directors take into account, among other things, the Chair’s significant additional responsibilities (e.g., setting the agenda for Columbia RiverSource Board meetings, communicating or meeting regularly with the Funds’ CCO, counsel to the Non-Interested Directors, and the Funds’ service providers) which result in a significantly greater time commitment required of the Columbia RiverSource Board Chair. The Chair’s compensation, therefore, has generally been set at a level between 2.5 and 3 times the level of compensation paid to other Non-Interested Directors.
Non-Interested Directors are currently paid an annual retainer of $125,000. Committee and subcommittee Chairs each receive an additional annual retainer of $5,000. In addition, Non-Interested Directors are paid the following fees for attending Columbia RiverSource Board and Committee meetings: $5,000 per day of in-person Columbia RiverSource Board meetings and $2,500 per day of in-person Committee or sub-committee meetings (if such meetings are not held on the same day as a Columbia RiverSource Board meeting). Non-Interested Directors are not paid for special meetings conducted by telephone. In 2010, the Columbia RiverSource Board’s Chair will receive total annual cash compensation of $430,000. [Persons who are employees, officers or directors of Columbia Management receive no remuneration for serving as directors of the Companies.]
The Non-Interested Directors may elect to defer payment of up to 100% of the compensation they receive in accordance with a Deferred Compensation Plan (the Deferred Plan). Under the Deferred Plan, a Columbia RiverSource Board Director may elect to have his or her deferred compensation treated as if they had been invested in shares of one or more Funds in the RiverSource Fund Complex and the amount paid to the Columbia RiverSource Board member under the Deferred Plan will be determined based on the performance of such investments. Distributions may be taken in a lump sum or over a period of years. The Deferred Plan will remain unfunded for U.S. federal income tax purposes under the Internal Revenue Code of 1986, as amended (the “Code”). It is anticipated
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that deferral of Columbia RiverSource Board member compensation in accordance with the Deferred Plan will have, at most, a negligible impact on fund assets and liabilities. See Exhibit I for information on the amount of compensation paid to the Directors on a Fund-by-Fund basis and in the aggregate.
Required Vote and Recommendation
Election of each Nominee requires the affirmative vote of a plurality of the votes cast, and each share may be voted for as many individuals as there are directors to be elected and for whose election the share is entitled to be voted.
The election of Nominees to the Board of Trustees is not contingent on the approval of any Reorganization.
THE COLUMBIA RIVERSOURCE BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE ELECTION OF EACH NOMINEE.
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SECTION C – PROXY VOTING AND SHAREHOLDER MEETING INFORMATION
Voting. Shareholders of record of each Selling Fund on December 17, 2010 (the “Record Date”) are entitled to vote at the Meeting. With respect to each Reorganization and the election of Nominees, shares of each Selling Fund are entitled to one vote for each dollar of net asset value, or a proportional fractional vote for each fractional dollar, represented by those shares on the Record Date. All share classes of a Selling Fund will vote together as one class on the Selling Fund’s proposed Reorganization. With respect to the election of Nominees for director, shareholders of each Selling Fund will vote together with shareholders of each other series of RiverSource Variable Series Trust as a single class.
[[Except for certain seed capital investments,]] all shares of the Selling Funds are owned of record by sub-accounts of separate accounts of Participating Insurance Companies established to fund benefits under Contracts issued by the Participating Insurance Companies. The Participating Insurance Company that issued your Contract is the legal owner of your Selling Fund’s shares and will vote those shares at the Meeting. However, as a Contract Owner, you are entitled to instruct the Participating Insurance Company how to vote the shares attributable to your contract.
Contract Owner Instructions. The Participating Insurance Companies are mailing copies of these proxy materials to Contract Owners who, by completing and signing the accompanying voting instruction card, will instruct the Participating Insurance Company how they wish the shares of the applicable Selling Fund to be voted. Contract Owners also may provide their instructions to the Participating Insurance Company by telephone or internet. Each Contract Owner is entitled to instruct his or her Participating Insurance Company as to how to vote its shares held on behalf of such Contract Owner. The Participating Insurance Companies will vote shares of each Selling Fund as instructed by their Contract Owners. If a Contract Owner simply signs and returns the voting instruction card, the Participating Insurance Companies will treat the card as an instruction to vote the shares represented thereby in favor of the Agreement. The Participating Insurance Companies intend to vote shares for which no voting instruction cards are returned in the same proportion as the shares for which voting instruction cards are returned. Shares attributable to amounts retained by the Participating Insurance Companies will be voted in the same proportion as votes cast by Contract Owners. Accordingly, there are not expected to be any “broker non-votes.” “Broker non-votes” are shares held by brokers or nominees as to which (i) the broker or nominee does not have discretionary voting power and (ii) the broker or nominee has not received instructions from the beneficial owner or other person who is entitled to instruct how the shares will be voted. Any Contract Owner giving instructions to a Participating Insurance Company has the power to revoke such instructions by providing superseding instructions by mail, telephone or internet. All properly executed instructions received in time for the Meeting will be voted as specified in the instructions. Because the Participating Insurance Companies may vote all Selling Fund shares even if only a small number of Contract Owners forward voting instructions to the Participating Insurance Companies, it is possible that a small number of Contract Owners may determine the outcome of the vote for a Selling Fund.
Quorum and Methods of Tabulation. A quorum is required for shareholders of a Selling Fund to take action at the Meeting. For each Selling Fund, ten percent (10%) of the shares outstanding and entitled to vote, present at the Meeting in person or by proxy, constitutes a quorum.
All shares represented at the Meeting in person or by proxy will be counted for purposes of establishing a quorum. For the purpose of determining whether a quorum is present, shares represented by proxies that reflect abstentions will be counted as shares that are present and entitled to vote. Abstentions will have the effect of votes against the proposal.
Shareholder Proxies. If a shareholder properly authorizes its proxy by internet or telephone, or by executing and returning the enclosed proxy card by mail, and the proxy is not subsequently revoked, the shareholder’s vote will be cast at the Meeting and at any postponement or adjournment thereof. If a shareholder gives instructions, the shareholder’s vote will be cast in accordance with those instructions. If a shareholder returns a signed proxy card without instructions, the shareholder’s vote will be cast in favor of the Reorganization of the shareholder’s Selling Fund and in favor of the election of each of the Nominees.
Revoking a Shareholder’s Proxy. A shareholder may revoke its proxy prior to the Meeting by providing written notice to [[—]] at [[address]], or change its vote by submitting a subsequently executed and dated proxy card, by authorizing its proxy by internet or telephone on a later date or by attending the Meeting and casting its vote in person. If a shareholder authorizes its proxy by internet or telephone, it may change its instructions prior to the Meeting by authorizing a subsequent proxy by internet or telephone or by completing, signing and returning a proxy card dated as of a date that is later than its last internet or telephone proxy authorization or by attending the Meeting and casting its vote in person. Merely attending the Meeting without voting will not revoke a prior proxy.
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Simultaneous Meetings. The meeting for each Selling Fund will be held simultaneously with the meeting for each other Selling Fund, with each proposal being voted on separately by the shareholders of the relevant Selling Fund. If any shareholder objects to the holding of simultaneous meetings, the shareholder may move for an adjournment of his or her Selling Fund’s meeting to a time after the Meeting so that a meeting for that Selling Fund may be held separately. If a shareholder makes this motion, the persons named as proxies will take into consideration the reasons for the objection in deciding whether to vote in favor of the adjournment, and may vote for or against the adjournment in their discretion.
Solicitation of Proxies. The Board of each Selling Fund is asking for your vote and for you to vote as promptly as possible. The expenses of the solicitation will be allocated to each Fund subject to the limitations as described in Exhibit A. Proxies will be solicited primarily through the mailing of the Prospectus/Proxy Statement and its enclosures, but proxies may be solicited through further mailings, telephone calls, personal interviews or e-mail by officers of each Selling Fund or by employees or agents of Columbia Management and its affiliated companies. In addition, Computershare Fund Services, 280 Oser Avenue, Hauppauge, NY 11788, has been engaged to assist in the solicitation of proxies, at the estimated costs set forth below, plus expenses.
Fund | Estimated Cost | |
RiverSource Variable Portfolio – Strategic Income Fund | $[•] | |
Disciplined Asset Allocation Portfolios – Conservative | $[•] | |
Disciplined Asset Allocation Portfolios – Moderately Conservative | $[•] | |
Disciplined Asset Allocation Portfolios – Moderate | $[•] | |
Disciplined Asset Allocation Portfolios – Moderately Aggressive | $[•] | |
Disciplined Asset Allocation Portfolios – Aggressive | $[•] |
Shareholder Proposals. The Selling Funds do not hold annual meetings of shareholders. Shareholders who wish to make a proposal not involving the nomination of a person for election as a director or trustee at a Selling Fund’s next special meeting that may be included in the Selling Fund’s proxy materials must notify the relevant Selling Fund a reasonable amount of time before the Selling Fund begins to print and mail its proxy materials. The fact that a Selling Fund receives such a shareholder proposal in a timely manner does not ensure inclusion of the proposal in the proxy materials, because there are other requirements in the proxy rules relating to such inclusion. In connection with an annual meeting (or special meeting in lieu of an annual meeting) at which directors or trustees are to be elected, a shareholder may nominate a person for election as director or trustee if the shareholder provides notice to the relevant Fund on Schedule 14N within the timeframe specified by such Fund in an 8–K filing in advance of such meeting and satisfies certain eligibility and other requirements set forth in Exchange Act Rule 14a–11.
Dissenters’ Right of Appraisal. Neither Contract Owners nor shareholders of the Selling Funds have appraisal or dissenters’ rights.
Other Business. The Board does not know of any matters to be presented at the Meeting other than the Reorganizations and the election of Trustees. If other business should properly come before the Meeting, the persons named as proxies will vote thereon in their discretion.
Adjournment. If the quorum required for the Meeting has not been met for any Selling Fund, the persons named as proxies may propose adjournment of the Meeting and vote all shares that they are entitled to vote in favor of such adjournment. For each Selling Fund, the Meeting may be adjourned from time to time by a majority of the votes properly cast upon the question, whether or not a quorum is present, and the meeting may be held as adjourned within a reasonable time after the date set for the original meeting without further notice.
The persons named as proxies will vote in favor of adjournment with respect to a proposal those shares they are entitled to vote in favor of such proposal. They will vote against any such adjournment those shares they are required to vote against such proposal. The costs of any additional solicitation and of any adjourned Meeting will be borne in the same manner as the other expenses associated with the proposals described herein.
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SECTION D — CAPITALIZATION, OWNERSHIP OF FUND SHARES AND FINANCIAL HIGHLIGHTS
This section contains the following information about the Buying Funds and the Selling Funds (all information is shown for the most recently ended fiscal year unless otherwise noted):
Table | Content | |
D–1 | Current and pro forma capitalization of each Selling Fund and each Buying Fund | |
D–2 | Current and pro forma ownership of shares of each Selling Fund and each Buying Fund | |
D–3 | Financial highlights of each Buying Fund |
The Funds’ Investment Manager and Distributor. Columbia Management Investment Advisers, LLC, 100 Federal Street, Boston, MA 02110, is the investment manager for each Fund. Columbia Management Investment Distributors, Inc., One Financial Center, Boston, MA 02111, is the distributor for each Fund.
Capitalization of Selling Funds and Buying Funds
The following table shows the capitalization of each Fund as of June 30, 2010 and on a pro forma basis, assuming the proposed Reorganization had taken place as of that date. The pro forma net assets are determined by adding the net assets of the Selling Fund and the net assets of the corresponding Buying Fund. The pro forma shares outstanding are determined by dividing the net assets of the Selling Fund by the net asset value per share of the corresponding Buying Fund and adding the actual shares outstanding of the Buying Fund.
Table D–1. Current and Pro Forma Capitalization of each Selling Fund and each Buying Fund
Fund | Net assets | Net asset value per share | Shares outstanding | |||||||||
RiverSource Variable Portfolio – Strategic Income Fund (Selling Fund) | ||||||||||||
Class 1 | $ | 752,259,136 | $ | 9.97 | 75,441,619 | |||||||
Class 2 | $ | 4,984 | $ | 9.97 | 500 | |||||||
Total | $ | 752,264,120 | 75,442,119 | |||||||||
Columbia Strategic Income Fund, Variable Series (Current) (Buying Fund) | ||||||||||||
Class A | $ | 37,014,008 | $ | 8.92 | 4,149,161 | |||||||
Class B | $ | 28,833,249 | $ | 8.87 | 3,251,157 | |||||||
Total | $ | 65,847,257 | 7,400,318 | |||||||||
Columbia Strategic Income Fund, Variable Series (Pro Forma)* | ||||||||||||
Class A | $ | 789,265,454 | $ | 8.92 | 88,483,145 | |||||||
Class B | $ | 28,832,242 | $ | 8.87 | 3,251,719 | |||||||
Total | $ | 818,097,696 | 91,734,864 | |||||||||
Disciplined Asset Allocation Portfolios – Conservative (Selling Fund) | ||||||||||||
Class 2 | $ | 54,272,647 | $ | 9.83 | 5,521,265 | |||||||
Total | $ | 54,272,647 | 5,521,265 | |||||||||
Variable Portfolio – Conservative Portfolio (Current) (Buying Fund) | ||||||||||||
Class 2 | $ | 41,371,696 | $ | 9.87 | 4,190,910 | |||||||
Class 4 | $ | 1,789,663,223 | $ | 9.86 | 181,439,899 | |||||||
Total | $ | 1,831,034,919 | 185,630,809 |
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Fund | Net assets | Net asset value per share | Shares outstanding | |||||||||
Variable Portfolio – Conservative Portfolio (Pro Forma)* | ||||||||||||
Class 2 | $ | 95,623,866 | $ | 9.87 | 9,687,584 | |||||||
Class 4 | $ | 1,789,663,223 | $ | 9.86 | 181,439,899 | |||||||
Total | $ | 1,885,287,089 | 191,127,483 | |||||||||
Disciplined Asset Allocation Portfolios – Moderately Conservative (Selling Fund) | ||||||||||||
Class 2 | $ | 59,610,391 | $ | 9.28 | 6,425,150 | |||||||
Total | $ | 59,610,391 | 6,425,150 | |||||||||
Variable Portfolio – Moderately Conservative Portfolio (Current) (Buying Fund) | ||||||||||||
Class 2 | $ | 97,907,662 | $ | 9.79 | 9,999,868 | |||||||
Class 4 | $ | 3,806,355,943 | $ | 9.80 | 388,348,914 | |||||||
Total | $ | 3,904,263,605 | 398,348,782 | |||||||||
Variable Portfolio – Moderately Conservative Portfolio (Pro Forma)* | ||||||||||||
Class 2 | $ | 157,497,597 | $ | 9.79 | 16,086,685 | |||||||
Class 4 | $ | 3,806,355,943 | $ | 9.80 | 388,348,914 | |||||||
Total | $ | 3,963,853,540 | 404,435,599 | |||||||||
Disciplined Asset Allocation Portfolios – Moderate (Selling Fund) | ||||||||||||
Class 2 | $ | 110,132,876 | $ | 8.79 | 12,526,741 | |||||||
Total | $ | 110,132,876 | 12,526,741 | |||||||||
Variable Portfolio, Moderate Portfolio (Current) (Buying Fund) | ||||||||||||
Class 2 | $ | 287,058,342 | $ | 9.67 | 29,671,520 | |||||||
Class 4 | $ | 14,013,302,396 | $ | 9.68 | 1,448,108,521 | |||||||
Total | $ | 14,300,360,738 | 1,477,780,041 | |||||||||
Variable Portfolio, Moderate Portfolio (Pro Forma)* | ||||||||||||
Class 2 | $ | 397,167,660 | $ | 9.67 | 41,058,213 | |||||||
Class 4 | $ | 14,013,302,396 | $ | 9.68 | 1,448,108,521 | |||||||
Total | $ | 14,410,470,056 | 1,489,166,734 | |||||||||
Disciplined Asset Allocation Portfolios – Moderately Aggressive (Selling Fund) | ||||||||||||
Class 2 | $ | 65,855,127 | $ | 8.50 | 7,746,367 | |||||||
Total | $ | 65,855,127 | 7,746,367 | |||||||||
Variable Portfolio, Moderately Aggressive Portfolio (Current) (Buying Fund) | ||||||||||||
Class 2 | $ | 182,670,713 | $ | 9.54 | 19,155,633 | |||||||
Class 4 | $ | 8,793,014,320 | $ | 9.54 | 921,555,395 | |||||||
Total | $ | 8,975,685,033 | 940,711,028 |
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Fund | Net assets | Net asset value per share | Shares outstanding | |||||||||
Variable Portfolio, Moderately Aggressive Portfolio (Pro Forma)* | ||||||||||||
Class 2 | $ | 248,502,628 | $ | 9.54 | 26,056,253 | |||||||
Class 4 | $ | 8,793,014,320 | $ | 9.54 | 921,555,395 | |||||||
Total | $ | 9,041,516,948 | 947,611,648 | |||||||||
Disciplined Asset Allocation Portfolios – Aggressive (Selling Fund) | ||||||||||||
Class 2 | $ | 24,954,827 | $ | 8.18 | 3,049,980 | |||||||
Total | $ | 24,954,827 | 3,049,980 | |||||||||
Variable Portfolio, Aggressive Portfolio (Current) (Buying Fund) | ||||||||||||
Class 2 | $ | 38,027,489 | $ | 9.34 | 4,072,189 | |||||||
Class 4 | $ | 2,252,004,949 | $ | 9.34 | 241,137,223 | |||||||
Total | $ | 2,290,032,438 | 245,209,412 | |||||||||
Variable Portfolio, Aggressive Portfolio (Pro Forma)* | ||||||||||||
Class 2 | $ | 62,961,281 | $ | 9.34 | 6,741,760 | |||||||
Class 4 | $ | 2,252,004,949 | $ | 9.34 | 241,137,223 | |||||||
Total | $ | 2,314,966,230 | 247,878,983 |
* | Pro Forma figures reflect the effect of estimated merger costs of $[•]. |
Ownership of Selling Fund and Buying Fund Shares
The following table provides information on each person who may be deemed to be a “control person” (as that term is defined in the 1940 Act) of a Fund as of October 31, 2010 because it owns, directly or indirectly, of record more than 25% of the outstanding shares of the Fund, by virtue of its fiduciary roles with respect to its clients or otherwise. A control person may be able to facilitate shareholder approval of proposals it favors and to impede shareholder approval of proposals it opposes. In this regard, if a control person owns a sufficient number of a Fund’s outstanding shares, then, for certain shareholder proposals, such control person may be able to approve, or to prevent approval, of such proposals without regard to votes by other Fund shareholders.
[[Table to be inserted]]
The following table provides information on shareholders who owned [[of record or, to the knowledge of the Fund, beneficially,]] more than 5% of any class of a Fund’s outstanding shares as of October 31, 2010. [[As of October 31, 2010, the officers and trustees of each Fund, as a group, owned less than 1% of the outstanding shares of each class of such Fund.]]
Table D–2. Current and Pro Forma Ownership of Fund Shares
Fund | Name and Address of Shareholder | Percent of shares held | Percent of shares held following Reorganization | |||||||
RiverSource Variable Portfolio – Strategic Income Fund (Selling Fund) | ||||||||||
Class 1 | [•] | [•]% | N/A | |||||||
Class 2 | [•] | [•]% | N/A | |||||||
Columbia Strategic Income Fund, Variable Series (Buying Fund) | ||||||||||
Class A | [•] | [•]% | [•]% | |||||||
Class B | [•] | [•]% | [•]% |
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Fund | Name and Address of Shareholder | Percent of shares held | Percent of shares held following Reorganization | |||||||
Disciplined Asset Allocation Portfolios – Aggressive (Selling Fund) | ||||||||||
Class 2 | [•] | [•]% | N/A | |||||||
Variable Portfolio, Aggressive Portfolio (Buying Fund) | ||||||||||
Class 2 | [•] | [•]% | [•]% | |||||||
Class 4 | [•] | [•]% | [•]% | |||||||
Disciplined Asset Allocation Portfolios – Aggressive (Selling Fund) | ||||||||||
Class 2 | [•] | [•]% | N/A | |||||||
Variable Portfolio, Aggressive Portfolio (Buying Fund) | ||||||||||
Class 2 | [•] | [•]% | [•]% | |||||||
Class 4 | [•] | [•]% | [•]% | |||||||
Disciplined Asset Allocation Portfolios – Aggressive (Selling Fund) | ||||||||||
Class 2 | [•] | [•]% | N/A | |||||||
Variable Portfolio, Aggressive Portfolio (Buying Fund) | ||||||||||
Class 2 | [•] | [•]% | [•]% | |||||||
Class 4 | [•] | [•]% | [•]% | |||||||
Disciplined Asset Allocation Portfolios – Aggressive (Selling Fund) | ||||||||||
Class 2 | [•] | [•]% | N/A | |||||||
Variable Portfolio, Aggressive Portfolio (Buying Fund) | ||||||||||
Class 2 | [•] | [•]% | [•]% | |||||||
Class 4 | [•] | [•]% | [•]% | |||||||
Disciplined Asset Allocation Portfolios – Aggressive (Selling Fund) | ||||||||||
Class 2 | [•] | [•]% | N/A | |||||||
Variable Portfolio, Aggressive Portfolio (Buying Fund) | ||||||||||
Class 2 | [•] | [•]% | [•]% | |||||||
Class 4 | [•] | [•]% | [•]% |
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The following tables are intended to help you understand the Fund’s financial performance. Certain information reflects financial results for a single share of a class held for the periods shown. Per share net investment income (loss) amounts of the Funds are calculated based on average shares outstanding during the period. Total returns assume reinvestment of all dividends and distributions. Total returns do not reflect payment of the expenses that apply to the variable accounts or contract charges, if any, and are not annualized for periods of less than one year. The information shown below for Columbia Strategic Income Fund, Variable Series has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, whose report, along with the Fund’s financial statements, is included in the Fund’s annual report to shareholders, except that the information shown for the six-month period ended June 30, 2010 is unaudited. The information shown below for Variable Portfolio – Conservative Portfolio; Variable Portfolio – Moderately Conservative Portfolio; Variable Portfolio, Moderate Portfolio; Variable Portfolio – Moderately Aggressive Portfolio and Variable Portfolio – Aggressive Portfolio is unaudited. The financial statements, when available, will be audited by Ernst & Young, LLP, an independent registered public accounting firm. The independent registered public accounting firm’s reports and the Buying Funds’ financial statements are also incorporated by reference into the Merger SAI.
Table D – 3. Financial Highlights of Buying Funds
Financial Highlights – Columbia Strategic Income Fund, Variable Series
Class A | (Unaudited) Six Months Ended June 30, | Year ended December 31, | ||||||||||||||||||||||
Per share data | 2010 | 2009 | 2008 | 2007 | 2006(a) | 2005 | ||||||||||||||||||
Net asset value, beginning of period | $ | 8.60 | $ | 8.01 | $ | 9.47 | $ | 9.70 | $ | 10.12 | $ | 9.96 | ||||||||||||
Income from investment operations: | ||||||||||||||||||||||||
Net investment income (loss)(b) | 0.23 | 0.51 | 0.53 | 0.55 | 0.59 | 0.61 | ||||||||||||||||||
Net realized and unrealized gain (loss) on investments, foreign currency transactions, forward foreign currency exchange contracts, futures contracts and credit default swap contracts | 0.09 | 1.04 | (1.21 | ) | 0.01 | 0.09 | (0.45 | ) | ||||||||||||||||
Total from investment operations | 0.32 | 1.55 | (0.68 | ) | 0.56 | 0.68 | 0.16 | |||||||||||||||||
Less distributions to Shareholders: | ||||||||||||||||||||||||
from net investment income | — | (0.96 | ) | (0.78 | ) | (0.79 | ) | (1.10 | ) | — | ||||||||||||||
Net asset value, end of period | $ | 8.92 | $ | 8.60 | $ | 8.01 | $ | 9.47 | $ | 9.70 | $ | 10.12 | ||||||||||||
Total return(c)(d) | 3.72 | %(e) (f) | 20.40 | %(e) | (7.81 | %) | 6.07 | % | 7.07 | % | 1.61 | %(e) | ||||||||||||
Ratios to average net assets/ Supplemental data | ||||||||||||||||||||||||
Net expenses(g) | 0.65 | %(h) | 0.65 | % | 0.84 | % | 0.82 | % | 0.79 | % | 0.76 | % | ||||||||||||
Waiver/Reimbursement | 0.27 | %(h) | 0.25 | % | — | — | — | — | (i) | |||||||||||||||
Net investment income (loss)(g) | 5.17 | %(h) | 6.11 | % | 5.89 | % | 5.69 | % | 5.92 | % | 6.06 | % | ||||||||||||
Net assets, end of period (000s) | $ | 37,014 | $ | 39,774 | $ | 37,407 | $ | 54,416 | $ | 65,347 | $ | 83,586 | ||||||||||||
Portfolio turnover rate(j) | 29 | %(f) | 50 | % | 28 | % | 44 | % | 42 | % | 40 | % |
Notes to Financial Highlights:
(a) | On May 1, 2006, Colonial Strategic Income Fund, Variable Series was renamed Columbia Strategic Income Fund, Variable Series. |
(b) | Per share data was calculated using the average shares outstanding during the period. |
(c) | Total return at net asset value assuming all distributions reinvested. |
(d) | Total return does not include any insurance company charges imposed by your insurance company’s separate accounts. If included, total return would be reduced. |
(e) | Had the investment advisor and/or any of its affiliates not waived fees or reimbursed a portion of expenses, total return would have been reduced. |
(f) | Not annualized. |
(g) | The benefits derived from custody credits had an impact of less than 0.01%. |
(h) | Annualized. |
(i) | Rounds to less than 0.01%. |
(j) | Portfolio turnover excludes dollar roll transactions. |
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Financial Highlights – Columbia Strategic Income Fund, Variable Series
Class B | (Unaudited) Six Months Ended June 30, | Year ended December 31, | ||||||||||||||||||||||
Per share data | 2010 | 2009 | 2008 | 2007 | 2006(a) | 2005 | ||||||||||||||||||
Net asset value, beginning of period | $ | 8.56 | $ | 7.98 | $ | 9.43 | $ | 9.67 | $ | 10.09 | $ | 9.95 | ||||||||||||
Income from investment operations: | ||||||||||||||||||||||||
Net investment income (loss)(b) | 0.21 | 0.49 | 0.51 | 0.53 | 0.57 | 0.58 | ||||||||||||||||||
Net realized and unrealized gain (loss) on investments, foreign currency transactions, forward foreign currency exchange contracts, futures contracts and credit default swap contracts | 0.10 | 1.03 | (1.19 | ) | — | 0.08 | (0.44 | ) | ||||||||||||||||
Total from investment operations | 0.31 | 1.52 | (0.68 | ) | 0.53 | 0.65 | 0.14 | |||||||||||||||||
Less distributions to Shareholders: | ||||||||||||||||||||||||
from net investment income | — | (0.94 | ) | (0.77 | ) | (0.77 | ) | (1.07 | ) | — | ||||||||||||||
Net asset value, end of period | $ | 8.87 | $ | 8.56 | $ | 7.98 | $ | 9.43 | $ | 9.67 | $ | 10.09 | ||||||||||||
Total return(c)(d)(e) | 3.62 | %(f) | 20.14 | % | (7.92 | %) | 5.75 | % | 6.84 | % | 1.41 | % | ||||||||||||
Ratios to average net assets/ Supplemental data | ||||||||||||||||||||||||
Net expenses(g) | 0.90 | %(h) | 0.90 | % | 1.00 | % | 1.00 | % | 1.00 | % | 1.00 | % | ||||||||||||
Waiver/Reimbursement | 0.27 | %(h) | 0.25 | % | 0.09 | % | 0.07 | % | 0.04 | % | 0.01 | % | ||||||||||||
Net investment income (loss)(g) | 4.91 | %(h) | 5.87 | % | 5.73 | % | 5.50 | % | 5.71 | % | 5.82 | % | ||||||||||||
Net assets, end of period (000s) | $ | 28,833 | $ | 30,755 | $ | 33,737 | $ | 52,012 | $ | 53,550 | $ | 56,507 | ||||||||||||
Portfolio turnover rate(i) | 29 | %(f) | 50 | % | 28 | % | 44 | % | 42 | % | 40 | % | ||||||||||||
Notes to Financial Highlights:
(a) | On May 1, 2006, Colonial Strategic Income Fund, Variable Series was renamed Columbia Strategic Income Fund, Variable Series. |
(b) | Per share data was calculated using the average shares outstanding during the period. |
(c) | Total return at net asset value assuming all distributions reinvested. |
(d) | Had the investment advisor and/or any of its affiliates not waived fees or reimbursed a portion of expenses, total return would have been reduced. |
(e) | Total return does not include any insurance company charges imposed by your insurance company’s separate accounts. If included, total return would be reduced. |
(f) | Not annualized. |
(g) | The benefits derived from custody credits had an impact of less than 0.01%. |
(h) | Annualized. |
(i) | Portfolio turnover excludes dollar roll transactions. |
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Financial Highlights –Variable Portfolio – Conservative Portfolio
Class 2 | Period ended June 30, 2010(a) | |||
Per share data | (Unaudited) | |||
Net asset value, beginning of period | $ | 9.93 | ||
Income from investment operations: | ||||
Net investment income (loss) | 0.27 | |||
Net gains (losses) (both realized and unrealized) | (0.33 | ) | ||
Total from investment operations | (0.06 | ) | ||
Net asset value, end of period | $ | 9.87 | ||
Total return | (0.60 | %) | ||
Ratios to average net assets(b) | ||||
Total expenses | 0.29 | %(c) | ||
Net investment income (loss) | 19.53 | %(c) | ||
Supplemental data | ||||
Net assets, end of period (in millions) | $ | 41 | ||
Portfolio turnover rate | 27 | % | ||
See Accompanying Notes to Financial Highlights
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Financial Highlights – Variable Portfolio – Moderately Conservative Portfolio
Class 2 | Period ended June 30, 2010(a) | |||
Per share data | (Unaudited) | |||
Net asset value, beginning of period | $ | 9.99 | ||
Income from investment operations: | ||||
Net investment income (loss) | 0.21 | |||
Net gains (losses) (both realized and unrealized) | (0.41 | ) | ||
Total from investment operations | (0.20 | ) | ||
Net asset value, end of period | $ | 9.79 | ||
Total return | (2.00 | %) | ||
Ratios to average net assets(b) | ||||
Total expenses | 0.28 | %(c) | ||
Net investment income (loss) | 15.33 | %(c) | ||
Supplemental data | ||||
Net assets, end of period (in millions) | $ | 98 | ||
Portfolio turnover rate | 35 | % | ||
See Accompanying Notes to Financial Highlights
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Financial Highlights – Variable Portfolio – Moderate Portfolio
Class 2 Per share data | Period ended June 30, 2010(a) (Unaudited) | |||
Net asset value, beginning of period | $ | 9.99 | ||
Income from investment operations: | ||||
Net investment income (loss) | 0.20 | |||
Net gains (losses) (both realized and unrealized) | (0.52 | ) | ||
Total from investment operations | (0.32 | ) | ||
Net asset value, end of period | $ | 9.67 | ||
Total return | (3.20 | %) | ||
Ratios to average net assets(b) | ||||
Total expenses | 0.28 | %(c) | ||
Net investment income (loss) | 14.56 | %(c) | ||
Supplemental data | ||||
Net assets, end of period (in millions) | $ | 287 | ||
Portfolio turnover rate | 24 | % | ||
See Accompanying Notes to Financial Highlights
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Financial Highlights – Variable Portfolio – Moderately Aggressive Portfolio
Class 2 Per share data | Period ended June 30, 2010(a) (Unaudited) | |||
Net asset value, beginning of period | $ | 9.99 | ||
Income from investment operations: | ||||
Net investment income (loss) | 0.15 | |||
Net gains (losses) (both realized and unrealized) | (0.60 | ) | ||
Total from investment operations | (0.45 | ) | ||
Net asset value, end of period | $ | 9.54 | ||
Total return | (4.50 | %) | ||
Ratios to average net assets(b) | ||||
Total expenses | 0.28 | %(c) | ||
Net investment income (loss) | 11.05 | %(c) | ||
Supplemental data | ||||
Net assets, end of period (in millions) | $ | 183 | ||
Portfolio turnover rate | 22 | % | ||
See Accompanying Notes to Financial Highlights
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Financial Highlights – Variable Portfolio – Aggressive Portfolio
Class 2 Per share data | Period ended June 30, 2010(a) (Unaudited) | |||
Net asset value, beginning of period | $ | 9.90 | ||
Income from investment operations: | ||||
Net investment income (loss) | 0.05 | |||
Net gains (losses) (both realized and unrealized) | (0.61 | ) | ||
Total from investment operations | (0.56 | ) | ||
Net asset value, end of period | $ | 9.34 | ||
Total return | (5.66 | %) | ||
Ratios to average net assets(b) | ||||
Total expenses | 0.28 | %(c) | ||
Net investment income (loss) | 3.66 | %(c) | ||
Supplemental data | ||||
Net assets, end of period (in millions) | $ | 38 | ||
Portfolio turnover rate | 23 | % | ||
See Accompanying Notes to Financial Highlights
Notes to Financial Highlights
(a) | For the period from May 7, 2010 (when shares became available) to June 30, 2010. |
(b) | In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the underlying funds in which it invests. Such indirect expenses are not included in the reported expense ratios. |
(c) | Annualized. |
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Each Selling Fund and the corresponding Buying Fund may bear a portion of the out–of–pocket expenses associated with its Reorganization. Out–of–pocket expenses associated with a Reorganization include, but are not limited to: (1) the expenses associated with the preparation, printing and mailing of any shareholder communications, including this proxy statement/prospectus, and any filings with the SEC and/or other governmental authorities in connection with the Reorganization; (2) the fees and expenses of any proxy solicitation firm retained in connection with the Reorganization; and (3) the legal and other fees and expenses incurred in connection with the Reorganization.
All fees paid to governmental authorities for the registration or qualification of a Buying Fund shares to be issued in a Reorganization and all transfer agency costs related to such shares will be allocated to the applicable Buying Fund. All fees and expenses related to printing and mailing communications to Selling Fund shareholders will be allocated to the applicable Selling Fund. All of the other out–of–pocket expenses of a Reorganization, including without limitation, accounting, legal and custodial expenses, will be allocated equally among the applicable Funds. Following this initial allocation among the Funds, Columbia Management limits the expenses actually borne by a Fund to the anticipated reduction in expenses to be incurred by that Fund over the first year following the Reorganization. Any Reorganization expenses to be borne by a Fund that are reduced as a result of these limitations are absorbed by Columbia Management, not by any other Fund. The estimated costs of each Reorganization expected to be borne by each Selling Fund and each Buying Fund, in the aggregate and on a per–share basis based on shares outstanding as of August 31, 2010, are set forth below:
Costs Estimated to be Borne | ||||
Fund | Total | Per Share | ||
RiverSource Variable Portfolio – Strategic Income Fund (Selling Fund) | $0 | N/A | ||
Columbia Strategic Income Fund, Variable Series (Buying Fund) | $13,681 | $0.002 | ||
Disciplined Asset Allocation Portfolios – Conservative (Selling Fund) | $20,477 | $0.000 | ||
Variable Portfolio, Conservative Portfolio (Buying Fund) | $0 | $0.000 | ||
Disciplined Asset Allocation Portfolios – Moderately Conservative (Selling Fund) | $20,456 | $0.000 | ||
Variable Portfolio, Moderately Conservative Portfolio (Buying Fund) | $0 | $0.000 | ||
Disciplined Asset Allocation Portfolios – Moderate (Selling Fund) | $23,558 | $0.000 | ||
Variable Portfolio, Moderate Portfolio (Buying Fund) | $0 | $0.000 | ||
Disciplined Asset Allocation Portfolios – Moderately Aggressive (Selling Fund) | $23,212 | $0.003 | ||
Variable Portfolio, Moderately Aggressive Portfolio (Buying Fund) | $0 | $0.000 | ||
Disciplined Asset Allocation Portfolios – Aggressive (Selling Fund) | $21,035 | $0.007 | ||
Variable Portfolio, Aggressive Portfolio (Buying Fund) | $0 | $0.000 |
Should any Reorganization fail to occur, Columbia Management will bear all costs associated with that Reorganization.
Based on the operating expense ratios shown in the Fees and Expense section above for each Buying Fund, it is projected that, after the Reorganizations, assuming all of the Reorganizations are consummated, each class of each Selling Fund will benefit from expense savings that will offset the allocated Reorganization expenses. However, the benefit of those projected expense savings will not be realized immediately. It is projected that the aggregate expense savings for the Selling Funds will not exceed the allocated Reorganization expenses of the Selling Fund until approximately the number of months after its Reorganization set forth below.
Fund | Number of Months | |
RiverSource Variable Portfolio – Strategic Income Fund | N/A | |
Disciplined Asset Allocation Portfolios – Conservative | 6 | |
Disciplined Asset Allocation Portfolios – Moderately Conservative | 5 | |
Disciplined Asset Allocation Portfolios – Moderate | 3 | |
Disciplined Asset Allocation Portfolios – Moderately Aggressive | 5 | |
Disciplined Asset Allocation Portfolios – Aggressive | 11 |
If a Contract Owner ceases to have an indirect interest in the Fund prior to the indicated time, the Contract Owner will receive no net benefit from the projected expense savings.
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Table of Contents
Additional Information Applicable to the Buying Funds
Below is information regarding the Buying Funds. All references to a Fund or the Funds in this Exhibit B refer to a Buying Fund or the Buying Funds, respectively, unless otherwise noted.
Fund Management and Compensation (for all Buying Funds)
Columbia Management, 100 Federal Street, Boston, MA 02110, is the investment manager to the Combined Fund Complex, and is a wholly owned subsidiary of Ameriprise Financial, Inc. In addition to managing investments for the Combined Fund Complex, Columbia Management manages investments for itself and its affiliates. For institutional clients, Columbia Management and its affiliates provide investment management and related services, such as separate account asset management and institutional trust and custody, as well as other investment products. For all of its clients, Columbia Management seeks to allocate investment opportunities in an equitable manner over time. See the Merger SAI for more information.
Subject to oversight by each Fund’s Board, Columbia Management manages the day–to–day operations of each Fund, determines what securities and other investments each Fund should buy or sell and executes the portfolio transactions. Although Columbia Management is responsible for the investment management of each Fund, Columbia Management may delegate certain of its duties to one or more investment subadvisers. Columbia Management may use the research and other capabilities of its affiliates and third parties in managing investments.
The Combined Fund Complex has received an order from the SEC that permits Columbia Management, subject to the approval of each Fund’s Board, to appoint a subadviser or change the terms of a subadvisory agreement for the Fund without first obtaining shareholder approval. The order permits the Fund to add or change unaffiliated subadvisers or change the fees paid to subadvisers from time to time without the expense and delays associated with obtaining shareholder approval of the change. Columbia Management and its affiliates may have other relationships, including significant financial relationships, with current or potential subadvisers or their affiliates, which may create a conflict of interest. In making recommendations to each Fund’s Board to appoint or to change a subadviser, or to change the terms of a subadvisory agreement, Columbia Management does not consider any other relationship it or its affiliates may have with a subadviser, and Columbia Management discloses to the Board the nature of any material relationships it has with a subadviser or its affiliates.
Each Fund pays Columbia Management a fee for managing its assets. The fees paid by Columbia Strategic Income Fund, Variable Series for its most recent fiscal year was 0.60% of its average daily net assets. The other Buying Funds have not operated for a full fiscal year, and do not pay Columbia Management a direct management fee for managing their assets. Under these Funds’ investment management services agreement, however, each Fund pays its taxes, brokerage commissions, and nonadvisory expenses.
Under its investment management services agreement (“IMS Agreement”), each Buying Fund also pays taxes, brokerage commissions and nonadvisory expenses. A discussion regarding the basis for each Fund’s Board approving the IMS Agreement is available in each Buying Fund’s semiannual report for the period ended June 30, 2010.
Each Fund may from time to time take temporary defensive investment positions that are inconsistent with that Fund’s principal investment strategies in attempting to respond to adverse market, economic, political or other conditions including, for example, investments in money market instruments or holdings of cash or cash equivalents. Each Fund may not achieve its investment objective while it is investing defensively.
Portfolio Managers
Information about the portfolio managers who are primarily responsible for overseeing each Fund’s investments is shown below. The Merger SAI provides more information about each portfolio manager’s compensation, other accounts managed by each portfolio manager and each portfolio manager’s ownership of securities in each Fund.
B-1
Table of Contents
Columbia Strategic Income Fund, Variable Series
The portfolio managers responsible for the day–to–day management of the Fund are:
Colin J. Lundgren, CFA, Lead Manager.
• | Service with the Fund since 2010. |
• | Vice President, Institutional Fixed Income. |
• | Joined RiverSource Investments in 1986. |
• | Began investment career in 1989. |
• | BA, Lake Forest College. |
Gene R. Tannuzzo, CFA, Co–Manager
• | Service with the Fund since 2010. |
• | Sector manager, multi–sector fixed income. |
• | Joined RiverSource Investments in 2003 as an associate analyst in municipal bond research. |
• | Began investment career in 2003. |
• | BSB, University of Minnesota, Carlson School of Management. |
Brian Lavin, CFA Co–manager.
• | Service with the Fund since 2010. |
• | Sector Manager on high yield fixed income sector team. |
• | Joined RiverSource Investments in 1994 as a high yield analyst. |
• | Began investment career in 1986. |
• | MBA, University of Wisconsin –– Milwaukee. |
Variable Portfolio – Conservative Portfolio; Variable Portfolio – Moderately Conservative Portfolio; Variable Portfolio – Moderate Portfolio; Variable Portfolio – Moderately Aggressive Portfolio; Variable Portfolio – Aggressive Portfolio:
The portfolio managers responsible for the day–to–day management of the Funds are:
Colin J. Lundgren, CFA, Portfolio Manager
• | Managed the Funds since May 2010. |
• | Vice President, Institutional Fixed Income. |
• | Joined RiverSource Investments in 1986. |
• | Began investment career in 1989. |
• | BA, Lake Forest College. |
Gene R. Tannuzzo, CFA, Portfolio Manager
• | Managed the Funds since May 2010. |
• | Sector manager, multi–sector fixed income. |
• | Joined RiverSource Investments in 2003 as an associate analyst in municipal bond research. |
• | Began investment career in 2003. |
• | BSB, University of Minnesota, Carlson School of Management. |
Kent M. Bergene, Vice President, Mutual Fund Products
• | Managed the Funds since May 2010. |
• | Joined RiverSource Investments in 1981. |
• | Vice President, Mutual Funds, since 2001; Director, Variable Annuity Products, from 1997 to 2000. |
• | BS, University of North Dakota. |
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Table of Contents
Legal Proceedings
Ameriprise Financial and certain of its affiliates have historically been involved in a number of legal, arbitration and regulatory proceedings, including routine litigation, class actions and governmental actions, concerning matters arising in connection with the conduct of their business activities. Ameriprise Financial believes that each Fund is not currently the subject of, and that neither Ameriprise Financial or any of its affiliates is the subject of, any pending legal, arbitration or regulatory proceedings that are likely to have a material adverse effect on each Fund or the ability of Ameriprise Financial or its affiliates to perform under their contracts with each Fund. Information regarding certain pending and settled legal proceedings may be found in each Fund’s shareholder reports and in the Merger SAI. Additionally, Ameriprise Financial is required to make 10–Q, 10–K and, as necessary, 8–K filings with the SEC on legal and regulatory matters that relate to Ameriprise Financial and its affiliates. Copies of these filings may be obtained by accessing the SEC website at www.sec.gov.
Service Section – Columbia Strategic Income Fund, Variable Series
Certain Legal Matters
Ameriprise Financial and certain of its affiliates have historically been involved in a number of legal, arbitration and regulatory proceedings, including routine litigation, class actions and governmental actions, concerning matters arising in connection with the conduct of their business activities. Ameriprise Financial believes that the Fund is not currently the subject of, and that neither Ameriprise Financial nor any of its affiliates is the subject of, any pending legal, arbitration or regulatory proceedings that are likely to have a material adverse effect on the Fund or the ability of Ameriprise Financial or its affiliates to perform under their contracts with the Fund. Information regarding certain pending and settled legal proceedings may be found in the Fund’s shareholder reports and in the Merger SAI. Additionally, Ameriprise Financial is required to make 10-Q, 10-K and, as necessary, 8-K filings with the SEC on legal and regulatory matters that relate to Ameriprise Financial and its affiliates. Copies of these filings may be obtained by accessing the SEC website at www.sec.gov.
Service Section – General
The Funds’ primary service providers are referred to as follows: Columbia Management or the investment manager refers to Columbia Management Investment Advisers, LLC (formerly RiverSource Investments, LLC), the Transfer Agent refers to Columbia Management Investment Services Corp. (formerly, RiverSource Services Corporation) and the Distributor refers to Columbia Management Investment Distributors, Inc. (formerly RiverSource Fund Distributors, Inc.).
Additional information about the Funds can be obtained by calling toll-free 800.345.6611, or by writing (regular mail) to The Funds, c/o Columbia Management Investment Services Corp., P.O. Box 8081, Boston, MA 02266-8081 or (express mail) The Funds, c/o Columbia Management Investment Services Corp., 30 Dan Road, Canton, MA 02021-2809.
Service Section – Columbia Mid Cap Growth Fund and Columbia Strategic Income Fund
References to the “Fund” are deemed to refer to Columbia Mid Cap Growth Fund or Columbia Strategic Income Fund.
Description of the Share Classes
Share Class Features
The Fund offers Class A shares and Class B shares. Each share class has its own cost structure and other features.
The following summarizes the primary features of the Class A shares.
Class A Shares | ||
Eligible Investors | Shares of the Fund are available only to separate accounts of participating insurance companies as underlying investment for variable annuity contracts and/or variable life insurance policies. | |
Investment Limits | none | |
Conversion Features | none | |
Front-End Sales Charges | none | |
Contingent Deferred Sales Charges (CDSCs) | none | |
Maximum Distribution and Service Fees | none |
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The following summarizes the primary features of the Class B shares.
Class B Shares | ||
Eligible Investors | Shares of the Fund are available only to separate accounts of participating insurance companies as underlying investment for variable annuity contracts and/or variable life insurance policies. | |
Investment Limits | none | |
Conversion Features | none | |
Front-End Sales Charges | none | |
Contingent Deferred Sales Charges (CDSCs) | none | |
Maximum Distribution and Service Fees | 0.25% distribution fee |
FUNDamentalsTM
Selling and/or Servicing Agents
The terms “selling agent” and “servicing agent” refer to the financial intermediary that employs your financial advisor. Selling and/or servicing agents include, for example, brokerage firms, banks, investment advisors, third party administrators and other financial intermediaries, including affiliates of Ameriprise Financial.
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Selling and/or Servicing Agent Compensation
The Distributor and the investment manager make payments, from their own resources, to selling and/or servicing agents, including other Ameriprise Financial affiliates, for marketing/sales support services relating to the Funds. Such payments are generally based upon one or more of the following factors: average net assets of the Funds sold by the Distributor attributable to that intermediary, gross sales of the Funds distributed by the Distributor attributable to that intermediary, reimbursement of ticket charges (fees that a selling and/or servicing agent charges its representatives for effecting transactions in Fund shares) or a negotiated lump sum payment. While the financial arrangements may vary for each intermediary, the support payments to any one intermediary are generally between 0.05% and 0.50% on an annual basis for payments based on average net assets of the Fund attributable to the intermediary.
The Distributor and the investment manager may make payments in larger amounts or on a basis other than those described above when dealing with certain selling and/or servicing agents, including certain affiliates of Bank of America Corporation (Bank of America). Such increased payments may enable such selling and/or servicing agents to offset credits that they may provide to customers.
Amounts paid by the Distributor and the investment manager and their affiliates are paid out of the Distributor’s and the investment manager’s own resources and do not increase the amount paid by you or the Fund. You can find further details in the Merger SAI about the payments made by the Distributor and the investment manager and their affiliates, as well as a list of the selling and/or servicing agents, including Ameriprise Financial affiliates, to which the Distributor and the investment manager have agreed to make marketing support payments. Your selling and/or servicing agent may charge you fees and commissions in addition to those described herein. You should consult with your selling and/or servicing agent and review carefully any disclosure your selling and/or servicing agent provides regarding its services and compensation. Depending on the financial arrangement in place at any particular time, a selling and/or servicing agent and its financial advisors may have a financial incentive for recommending the Fund or a particular share class over others.
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Buying, Selling and Transferring Shares
Share Price Determination
The price you pay or receive when you buy, sell or transfer shares is the Fund’s next determined net asset value (or NAV) per share for a given share class. The Fund calculates the net asset value per share for each class of the Fund at the end of each business day.
FUNDamentalsTM
NAV Calculation
Each of the Fund’s share classes calculates its NAV per share as follows:
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NAV = | (Value of assets of the share class) – (Liabilities of the share class) | |||
Number of outstanding shares of the class
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FUNDamentalsTM
Business Days
A business day is any day that the New York Stock Exchange (NYSE) is open. A business day ends at the close of regular trading on the NYSE, usually at 4:00 p.m. Eastern time. If the NYSE closes early, the business day ends as of the time the NYSE closes. On holidays and other days when the NYSE is closed, the Fund’s net asset value is not calculated and the Fund does not accept buy or sell orders. However, the value of the Fund’s assets may still change on days that the NYSE is closed, including to the extent that the Fund holds foreign securities that trade on days that foreign securities markets are open.
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The value of the Fund’s shares is based on the total market value of all of the securities and other assets that it holds as of a specified time. The prices reported on stock exchanges and other securities markets around the world are usually used to value securities in the Fund. The Fund uses the amortized cost method, which approximates market value, to value short-term investments maturing in 60 days or less.
If a market price isn’t readily available, the Fund will determine the price of the security held by the Fund based on the investment manager’s determination of the security’s fair value. A market price is considered not readily available if, among other circumstances, the most recent reported price is deemed unreliable. In addition, the Fund may use fair valuation to price securities that trade on a foreign exchange when a significant event has occurred after the foreign exchange closes but before the time at which the Fund’s share price is calculated. Foreign exchanges typically close before the time at which Fund share prices are calculated, and may be closed altogether on some days when the Fund is open. Such significant events affecting a foreign security may include, but are not limited to: (1) those impacting a single issuer; (2) governmental action that affects securities in one sector or country; (3) natural disasters or armed conflicts affecting a country or region; or (4) significant domestic or foreign market fluctuations. The Fund uses various criteria, including an evaluation of U.S. market moves after the close of foreign markets, in determining whether a security’s market price is readily available and, if not, the fair value of the security.
Fair valuation may have the effect of reducing stale pricing arbitrage opportunities presented by the pricing of Fund shares. However, when the Fund uses fair valuation to price securities, it may value those securities higher or lower than another fund would have priced the security. Also, the use of fair valuation may cause the Fund’s performance to diverge to a greater degree from the performance of various benchmarks used to compare the Fund’s performance because benchmarks generally do not use fair valuation techniques. Because of the judgment involved in fair valuation decisions, there can be no assurance that the value ascribed to a particular security is accurate. The Fund has retained one or more independent fair valuation pricing services to assist in the fair valuation process for foreign securities. International markets are sometimes open on days when U.S. markets are closed, which means that the value of foreign securities owned by the Fund could change on days when Fund shares cannot be bought or sold.
Shareholder Information
Class A shares and Class B shares have their own unique fees and other features. The Fund encourages you to consult with a financial advisor who can help you with your investment decisions and for more information about the share classes offered by the funds of the Trust.
The Funds are generally available for purchase only by participating insurance companies in connection with variable annuity contracts and variable life insurance policies. Please refer to the prospectus that describes your annuity contract and/or life insurance policy for information about how to buy, sell and transfer your investment among shares of the Funds.
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Shares of the Fund may not be purchased or sold directly by individual owners of variable annuity contracts and/or variable life insurance policies. When you sell your shares through your variable annuity contract and/or variable life insurance policy, the Fund is effectively buying them back. This is called a redemption. The right of redemption may be suspended or payment postponed whenever permitted by applicable laws and regulations.
Depending on the context, references to “you” or “your” herein refer either to the holder of a variable annuity contract or variable life insurance policy who may select Fund shares to fund his or her investment in the policy or contract or to the participating insurance company as the holder of Fund shares through one or more separate accounts.
Order Processing
Orders to buy and sell shares of the Fund that are placed by your participating insurance company are processed on business days. Orders received in good form by the Transfer Agent or a selling and/or servicing agent, including your participating insurance company, before the end of a business day will receive that day’s net asset value per share. Orders received after the end of a business day will receive the next business day’s net asset value per share. The market value of the Fund’s investments may change between the time you submit your order and the time the Fund next calculates its net asset value per share. The business day that applies to an order is also called a trade date.
Cash Flows
The timing and magnitude of cash inflows from investors buying Fund shares could prevent the Fund from always being fully invested. Conversely, the timing and magnitude of cash outflows to investors selling Fund shares could require large ready reserves of uninvested cash to meet shareholder redemptions. Either situation could adversely impact the Fund’s performance.
Information Sharing Agreements
As required by Rule 22c-2 under the 1940 Act, the Funds or certain of their service providers will enter into information sharing agreements with financial intermediaries, including participating life insurance companies and financial intermediaries that sponsor or offer retirement plans through which shares of the Funds are made available for purchase. Pursuant to Rule 22c-2, financial intermediaries are required, upon request, to: (i) provide shareholder account and transaction information and (ii) execute instructions from the Fund to restrict or prohibit further purchases of Fund shares by shareholders who have been identified by the Fund as having engaged in transactions that violate the Fund’s excessive trading policies and procedures. See Buying, Selling and Transferring Shares – Excessive Trading Practices for more information.
Excessive Trading Practices Policy of Non-Money Market Funds
Right to Reject or Restrict Share Transaction Orders – The Fund is intended for investors with long-term investment purposes and is not intended as a vehicle for frequent trading activity (market timing) that is excessive. Investors should transact in Fund shares primarily for investment purposes. The Fund’s Board has adopted excessive trading policies and procedures that are designed to deter excessive trading by investors (the Excessive Trading Policies and Procedures). The Fund discourages and does not accommodate excessive trading.
The Fund reserves the right to reject, without any prior notice, any buy or transfer order for any reason, and will not be liable for any loss resulting from rejected orders. For example, the Fund may in its discretion restrict or reject a buy or transfer order even if the transaction is not subject to the specific transfer limitation described below if the Fund or its agents determine that accepting the order could interfere with efficient management of the Fund’s portfolio or is otherwise contrary to the Fund’s best interests. The Excessive Trading Policies and Procedures apply equally to buy or transfer transactions communicated directly to the Transfer Agent and to those received by selling and/or servicing agents.
Specific Buying and Transferring Limitations – If a Fund detects that an investor has made two “material round trips” in any 28-day period, it will generally reject the investor’s future buy orders, including transfer buy orders, involving any Fund.
For these purposes, a “round trip” is a purchase or transfer into the Fund followed by a sale or transfer out of the Fund, or a sale or transfer out of the Fund followed by a purchase or transfer into the Fund. A “material” round trip is one that is deemed by the Fund to be material in terms of its amount or its potential detrimental impact on the Fund. Independent of this limit, the Fund may, in its discretion, reject future buy orders by any person, group or account that appears to have engaged in any type of excessive trading activity.
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These limits generally do not apply to automated transactions or transactions by registered investment companies that invest in the Fund using a “fund-of-funds” structure. These limits do not apply to payroll deduction contributions by retirement plan participants, transactions initiated by a retirement plan sponsor or certain other retirement plan transactions consisting of rollover transactions, loan repayments and disbursements, and required minimum distribution redemptions. They may be modified or rescinded for accounts held by certain retirement plans to conform to plan limits, for considerations relating to the Employee Retirement Income Security Act of 1974 or regulations of the Department of Labor, and for certain asset allocation or wrap programs. Accounts known to be under common ownership or control generally will be counted together, but accounts maintained or managed by a common intermediary generally will not be considered to be under common ownership or control. The Fund retains the right to modify these restrictions at any time without prior notice to shareholders.
Limitations on the Ability to Detect and Prevent Excessive Trading Practices – The Fund takes various steps designed to detect and prevent excessive trading, including daily review of available shareholder transaction information. However, the Fund receives buy, sell and transfer orders through selling and/or servicing agents, and cannot always know of or reasonably detect excessive trading that may be facilitated by selling and/or servicing agents or by the use of the omnibus account arrangements they offer. Omnibus account arrangements are common forms of holding shares of mutual funds, particularly among certain selling and/or servicing agents such as broker/dealers, retirement plans and variable insurance products. These arrangements often permit selling and/or servicing agents to aggregate their clients’ transactions and accounts, and in these circumstances, the identity of the shareholders is often not known to the Fund.
Some selling and/or servicing agents apply their own restrictions or policies to underlying investor accounts, which may be more or less restrictive than those described here. This may impact the Fund’s ability to curtail excessive trading, even where it is identified. For these and other reasons, it is possible that excessive trading may occur despite the Fund’s efforts to detect and prevent it.
Although these restrictions and policies involve judgments that are inherently subjective and may involve some selectivity in their application, the Fund seeks to act in a manner that it believes is consistent with the best interests of shareholders in making any such judgments.
Risks of Excessive Trading – Excessive trading creates certain risks to the Fund’s long-term shareholders and may create the following adverse effects:
• | negative impact on the Fund’s performance; |
• | potential dilution of the value of the Fund’s shares; |
• | interference with the efficient management of the Fund’s portfolio, such as the need to maintain undesirably large cash positions, the need to use its line of credit or the need to buy or sell securities it otherwise would not have bought or sold; |
• | losses on the sale of investments resulting from the need to sell securities at less favorable prices; |
• | increased taxable gains to the Fund’s remaining shareholders resulting from the need to sell securities to meet sell orders; and |
• | increased brokerage and administrative costs. |
To the extent that the Fund invests significantly in foreign securities traded on markets that close before the Fund’s valuation time, it may be particularly susceptible to dilution as a result of excessive trading. Because events may occur after the close of foreign markets and before the Fund’s valuation time that influence the value of foreign securities, investors may seek to trade Fund shares in an effort to benefit from their understanding of the value of foreign securities as of the Fund’s valuation time. This is often referred to as price arbitrage. The Fund has adopted procedures designed to adjust closing market prices of foreign securities under certain circumstances to reflect what the Fund believes to be the fair value of those securities as of its valuation time. To the extent the adjustments don’t work fully, investors engaging in price arbitrage may cause dilution in the value of the Fund’s shares held by other shareholders.
Similarly, to the extent that the Fund invests significantly in thinly traded high-yield bonds (junk bonds) or equity securities of small-capitalization companies, because these securities are often traded infrequently, investors may seek to trade their shares in an effort to benefit from their understanding of the value of these securities. This is also a type of price arbitrage. Any such frequent trading strategies may interfere with efficient management of the Fund’s portfolio to a greater degree than would be the case for mutual funds that invest in highly liquid securities, in part because the Fund may have difficulty selling those portfolio securities at advantageous times or prices to satisfy large and/or frequent sell orders. Any successful price arbitrage may also cause dilution in the value of Fund shares held by other shareholders.
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Distributions and Taxes
Distributions to Shareholders
A mutual fund can make money two ways:
• | It can earn income on its investments. Examples of fund income are interest paid on money market instruments and bonds, and dividends paid on common stocks. |
• | A mutual fund can also have capital gains if the value of its investments increases. While a fund continues to hold an investment, any gain is unrealized. If the fund sells an investment, it generally will realize a capital gain if it sells that investment for a higher price than it originally paid. Capital gains are either short-term or long-term, depending on whether the fund holds the securities for one year or less (short-term gains) or more than one year (long-term gains). |
FUNDamentalsTM
Distributions
Mutual funds make payments of fund earnings to shareholders, distributing them among all shareholders of the fund. As a shareholder, you are entitled to your portion of a fund’s distributed income, including capital gains.
Reinvesting your distributions buys you more shares of a fund – which lets you take advantage of the potential for compound growth. Putting the money you earn back into your investment means it, in turn, may earn even more money. Over time, the power of compounding has the potential to significantly increase the value of your investment. There is no assurance, however, that you’ll earn more money if you reinvest your distributions rather than receive them in cash.
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The Fund intends to pay out, in the form of distributions to shareholders, a sufficient amount of its income and gains so that the Fund will qualify for treatment as a regulated investment company and generally will not have to pay any federal excise tax. The Fund generally intends to distribute any net realized capital gain (whether long-term or short-term gain) at least once a year. Normally, the Fund will declare and pay distributions of net investment income according to the following schedule:
Declaration and Distribution Schedule
Declarations | annually | |
Distributions | annually |
The Fund may, however, declare and pay distributions of net investment income more frequently.
Different share classes of the Fund usually pay different net investment income distribution amounts, because each class has different expenses. Each time a distribution is made, the net asset value per share of the share class is reduced by the amount of the distribution.
The Fund will automatically reinvest distributions in additional shares of the same share class of the Fund unless you inform us you want your distributions to be paid in cash.
Taxes and Your Investment
The Fund intends to qualify each year as a regulated investment company. A regulated investment company generally is not subject to tax at the fund level on income and gains from investments that are distributed to shareholders. However, the Fund’s failure to qualify as a regulated investment company would result in fund level taxation, and consequently, a reduction in income available for distribution to you.
Shares of the Fund are only offered to you through a variable annuity contract and/or variable life insurance policy of a participating insurance company. You should review the prospectus and other information provided to you by your participating insurance company regarding the federal income taxation of your variable annuity contract and/or variable life insurance policy.
Your contract or policy may qualify for favorable tax treatment. As long as your variable annuity contract or variable life insurance policy continues to qualify for favorable tax treatment, you will only be taxed on your investment in the Fund through such contract or policy, even if the Fund makes distributions and/or you change your investment options under the contract or policy. In order to qualify for such treatment, among other things, the “separate accounts” of participating insurance companies, which maintain and invest net proceeds from the variable annuity contracts and variable life insurance policies, must be “adequately diversified.” The Fund intends to operate in such a manner so that a separate account investing only in Fund shares on behalf of a holder of a variable annuity contract or variable life insurance policy will be “adequately diversified.” If the Fund does not meet such requirements, your
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contract or policy could lose its favorable tax treatment and income and gain allocable to your contract or policy could be taxable currently to you.
This could also occur if variable annuity contract or variable life insurance policy holders are found to have an impermissible level of control over the investments underlying their contracts or policies. Please see the Merger SAI for more information regarding tax treatment of the Fund.
FUNDamentalsTM
Taxes
The information provided above is only a summary of how U.S. federal income taxes may affect your investment in the Fund. It is not intended as a substitute for careful tax planning. Your investment in the Fund may have other tax implications.
It does not apply to certain types of investors who may be subject to special rules, including foreign or tax-exempt investors.
You should consult with your own tax advisor about the particular tax consequences to you of an investment in the Fund, including the effect of any foreign, state and local taxes, and the effect of possible changes in applicable tax laws.
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Service Section – Variable Portfolio – Conservative Portfolio, Variable Portfolio – Moderately Conservative Portfolio, Variable Portfolio – Moderate Portfolio, Variable Series – Moderately Aggressive Portfolio and Variable Portfolio – Aggressive Portfolio
ADDITIONAL SERVICES AND COMPENSATION
In addition to acting as the Funds’ investment manager, Columbia Management and its affiliates also receive compensation for providing other services to the Funds.
ADMINISTRATION SERVICES. Ameriprise Financial, 200 Ameriprise Financial Center, Minneapolis, Minnesota 55474, provides or compensates others to provide administrative services to the Funds. These services include administrative, accounting, treasury, and other services.
DISTRIBUTION AND SHAREHOLDER SERVICES. Columbia Management Investment Distributors, Inc., One Financial Center, Boston, MA 02111 (the distributor) provides underwriting and distribution services to the Funds. Under the Distribution Agreement and related distribution and shareholder servicing plans, the distributor receives distribution and shareholder servicing fees on Class 2 and Class 4 shares. The distributor uses these fees to support its distribution and servicing activity for Class 2 and Class 4 shares. More information on how these fees are used is set forth under “Buying and Selling Shares — Description of Fund Shares” below and in the Merger SAI.
The Merger SAI provides additional information about the services provided under the agreements set forth above.
PAYMENTS TO AFFILIATED INSURANCE COMPANIES
The Funds are sold exclusively as underlying investment options of variable insurance policies and annuity contracts (products) offered by RiverSource Life Insurance Company (RiverSource Life) and its wholly-owned subsidiary, RiverSource Life Insurance Co. of New York (collectively, the Companies). Columbia Management and its affiliates make or support payments out of their own resources to the Companies as a result of the Companies including the Funds as investment options in the products. These allocations may be significant. In addition, employees of Ameriprise Financial and its affiliates, including employees of the Companies, may be separately incented to include the Funds in the product, as employee compensation and business unit operating goals at all levels are tied to the company’s success. These products may also include unaffiliated mutual funds as investment options, and the Companies receive payments from the sponsors of these unaffiliated mutual funds as a result of including these funds in the products. The amount of payment from sponsors of unaffiliated funds or allocation from Columbia Management and its affiliates varies, and may be significant. The amount of the payment or allocation the Companies receive from a Fund may create an incentive for the Companies and may influence their decision regarding which funds to include in a product. Employees of Ameriprise Financial and its affiliates, including employees of affiliated broker-dealers, may be separately incented to recommend or sell shares of the Funds, as employee compensation and business unit operating goals at all levels are tied to the company’s success. Certain employees, directly or indirectly, may receive higher compensation and other benefits as investment in the Funds increase. In addition, management, sales leaders and other employees may spend more of their time and resources promoting Ameriprise Financial and its subsidiary companies, including Columbia Management, and the distributor, and the products they offer, including the Funds. These arrangements are sometimes referred to as “revenue sharing payments,” and are in addition to any Rule 12b-1 distribution and/or service fees or other amounts paid by the Funds for account maintenance, sub-accounting or recordkeeping services provided directly by the Companies. See the prospectus for your annuity contract or life insurance policy for more information regarding these payments and allocations.
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POTENTIAL CONFLICTS OF INTEREST
Shares of the Funds may serve as the underlying investments for both variable annuity contracts and variable life insurance policies issued by the Companies. Due to differences in tax treatment or other considerations, the interests of various contract owners might at some time be in conflict. The Funds currently do not foresee any such conflict. However, if they do arise, the Funds’ board intends to consider what action, if any, should be taken in response to such conflicts. If such a conflict were to occur, one or more of each Company’s separate accounts might be required to withdraw its investments in the Funds. This might force the Funds to sell securities at disadvantageous prices.
ADDITIONAL MANAGEMENT INFORMATION
MANAGER OF MANAGERS EXEMPTION. The Funds have received an order from the Securities and Exchange Commission that permits Columbia Management, subject to the approval of the Funds’ board, to appoint a subadviser or change the terms of a subadvisory agreement for a Fund without first obtaining shareholder approval. The order permits the Fund to add or change unaffiliated subadvisers or change the fees paid to subadvisers from time to time without the expense and delays associated with obtaining shareholder approval of the change. Columbia Management and its affiliates may have other relationships, including significant financial relationships, with current or potential subadvisers or their affiliates, which may create a conflict of interest. In making recommendations to the Funds’ board to appoint or to change a subadviser, or to change the terms of a subadvisory agreement, Columbia Management does not consider any other relationship it or its affiliates may have with a subadviser, and Columbia Management discloses the nature of any material relationships it has with a subadviser to the Funds’ board.
AFFILIATED PRODUCTS. Columbia Management seeks to balance potential conflicts between the Funds and the underlying funds in which they invest. For example, a Fund may seek to minimize the impact of its purchase and redemption of shares of the underlying funds, which may cause the underlying funds to incur transactions costs by implementing such transactions over a reasonable time frame. This delay may result in the Fund paying more or less for shares of the underlying funds than if the transactions were executed in one transaction. In addition, because Columbia Management earns different fees from the underlying funds, in determining the allocation of the Fund’s assets among the underlying funds, Columbia Management may have an economic conflict of interest. Columbia Management reports to the Funds’ board on the steps it has taken to manage any potential conflicts.
FUND HOLDINGS DISCLOSURE. The Funds’ board has adopted policies and procedures that govern the timing and circumstances of disclosure to shareholders and third parties of information regarding the securities owned by the Funds. A description of these policies and procedures is included in the Merger SAI.
LEGAL PROCEEDINGS. Ameriprise Financial and certain of its affiliates have historically been involved in a number of legal, arbitration and regulatory proceedings, including routine litigation, class actions, and governmental actions, concerning matters arising in connection with the conduct of their business activities. Ameriprise Financial believes that the Funds are not currently the subject of, and that neither Ameriprise Financial nor any of its affiliates are the subject of, any pending legal, arbitration or regulatory proceedings that are likely to have a material adverse effect on the Funds or the ability of Ameriprise Financial or its affiliates to perform under their contracts with the Funds. Information regarding certain pending and settled legal proceedings may be found in the Funds’ shareholder reports and in the SAI. Additionally, Ameriprise Financial is required to make 10-Q, 10-K and, as necessary, 8-K filings with the Securities and Exchange Commission on legal and regulatory matters that relate to Ameriprise Financial and its affiliates. Copies of these filings may be obtained by accessing the SEC website at www.sec.gov.
BUYING AND SELLING SHARES
DESCRIPTION OF FUND SHARES
Each Fund may offer Class 2 shares to separate accounts funding variable annuity contracts and variable life insurance policies issued by affiliated life insurance companies. Class 4 shares are offered to participants in the Portfolio Navigator asset allocation program, and to owners of other series of annuity contracts or life insurance policies issued by RiverSource Life Insurance Company or RiverSource Life Insurance Co. of New York, as described in the prospectus for that annuity contract or life insurance policy. Not all Funds or share classes may be available under your annuity contract or life insurance policy. Under a Rule 12b-1 plan adopted by each Fund, Class 2 and Class 4 shares each pay an annual shareholder servicing and distribution (“12b-1”) fee of up to 0.25% of average net assets. Each Fund pays this fee to the distributor, the principal underwriter of each Fund. The distributor uses this fee to make payments to the insurance companies or their affiliates for services that the insurance companies provide to contract owners who invest in Class 2 and Class 4 shares, and for distribution related expenses. Because these 12b-1 fees are paid out of the Fund’s assets on an ongoing basis, over time they will increase the cost of your investment and may cost you more than other types of sales charges.
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PRICING AND VALUING OF FUND SHARES
The net asset value (NAV) is the value of a single share of a Fund. The NAV is determined by dividing the value of a Fund’s assets, minus any liabilities, by the number of shares outstanding. The NAV is calculated as of the close of business on the New York Stock Exchange (NYSE), normally 4:00 p.m. Eastern time, on each day that the NYSE is open. The assets of the Fund will consist primarily of shares of the underlying funds, which are valued at their NAV. The underlying funds’ securities are valued primarily on the basis of market quotations and floating rate loans are valued primarily on the basis of indicative bids. Both market quotations and indicative bids are obtained from outside pricing services approved and monitored under procedures adopted by the Funds’ board. Certain short-term securities with maturities of 60 days or less are valued at amortized cost.
When reliable market quotations or indicative bids are not readily available, investments are priced at fair value based on procedures adopted by the Funds’ board. These procedures are also used when the value of an investment held by an underlying fund is materially affected by events that occur after the close of a securities market but prior to the time as of which the underlying fund’s NAV is determined. Valuing investments at fair value involves reliance on judgment. The fair value of an investment is likely to differ from any available quoted or published price. To the extent that an underlying fund has significant holdings of small cap stocks, high yield bonds, floating rate loans, or foreign securities that may trade infrequently, fair valuation may be used more frequently than for other funds. The underlying funds use an unaffiliated service provider to assist in determining fair values for foreign securities.
Foreign investments are valued in U.S. dollars. Some of an underlying fund’s securities may be listed on foreign exchanges that trade on weekends or other days when the underlying fund does not price its shares. In that event, the NAV of the underlying fund’s shares may change on days when the Fund will not be able to purchase or sell the underlying fund’s shares.
PURCHASING SHARES
You may not buy (nor will you own) shares of the Fund directly. You invest by buying an annuity contract or life insurance policy and allocating your purchase payments to the subaccount that invests in the Fund. Your purchase price will be the next NAV calculated after your request is received in good order by the Fund or an authorized insurance company.
For further information concerning minimum and maximum payments and submission and acceptance of your application, see your annuity contract or life insurance policy prospectus.
TRANSFERRING/SELLING SHARES
There is no sales charge associated with the purchase of Fund shares, but there may be charges associated with the surrender or withdrawal of your annuity contract or life insurance policy. Any charges that apply to the subaccount and your contract are described in your annuity contract or life insurance policy prospectus.
You may transfer all or part of your value in a subaccount investing in shares of the Fund to one or more of the other subaccounts investing in shares of other funds with different investment objectives.
You may provide instructions to sell any shares you have allocated to the subaccounts. Proceeds will be mailed within seven days after your surrender or withdrawal request is accepted by an authorized agent. The amount you receive may be more or less than the amount you invested. Your sale price will be the next NAV calculated after your request is received in good order by the Fund or an authorized insurance company.
Please refer to your annuity contract or life insurance policy prospectus for more information about transfers among subaccounts as well as surrenders and withdrawals.
MARKET TIMING
The Funds’ board has adopted a policy that the Funds will not knowingly permit market timing. Market timing is frequent or short-term trading activity by certain investors in a fund intending to profit at the expense of other investors in a fund; for example, short-term trading of funds that invest in securities that trade on overseas securities markets in order to take advantage of inefficiencies in
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the fund’s pricing of those securities (the change in values of such securities between the close of the overseas markets and the close of the U.S. markets provides an opportunity for short-term investors to profit at the expense of other investors in the fund). This type of short-term trading is sometimes referred to as “arbitrage” market timing. Market timing may adversely impact a fund’s performance by preventing the investment manager from fully investing the assets of the fund, diluting the value of shares held by long-term shareholders, or increasing the fund’s transaction costs.
The assets of the Funds consist primarily of shares of underlying funds. Underlying funds may be more susceptible to the risks of market timing. Underlying funds that invest directly in securities that trade infrequently may be vulnerable to market timers. To the extent an underlying fund has significant holdings in securities that trade on overseas markets, small cap stocks, floating rate loans and/or high yield bonds, the risks of market timing may be greater for that fund than for other funds that do not. See Appendix D for a list of underlying funds’ investment strategies. See “Pricing and Valuing of Fund Shares” above for a discussion of the underlying funds’ policy on fair value pricing, which is intended, in part, to reduce the frequency and impact of market timing.
The Funds and the underlying funds are currently offered as investment options under variable annuity contracts and life insurance policies offered by affiliated insurance companies. Because the affiliated insurance companies process Fund and underlying fund trades on an omnibus basis and the Funds and underlying funds cannot generally ascertain the identity of a particular contract or policyholder or whether the same contract or policyholder has placed a particular purchase or sale order, the Board has not adopted procedures to monitor market timing activity at the Fund or underlying fund level, but rather has approved procedures of the affiliated insurance companies, designed and administered by them to detect and deter market timing activities at the contract or policy level.
Please refer to your annuity contract or life insurance policy prospectus for specific details on transfers between accounts and market timing policies and procedures.
The procedures of the affiliated insurance companies that are designed to detect and deter market timing activities at the contract or policy level cannot provide a guarantee that all market timing activity will be identified and restricted. The ability of an affiliated insurance company to detect and curtail excessive trading may be limited by operational systems and technological limitations. Also, contract and policyholders seeking to engage in market timing may deploy a variety of strategies to avoid detection. In addition, state law and the terms of some contracts and policies may prevent or restrict the effectiveness of the market timing procedures. Market timing activity that is not identified, prevented or restricted may impact the performance of a Fund and increase costs ultimately borne by contract owners.
DISTRIBUTIONS AND TAXES
The Funds will be treated as partnerships for federal income tax purposes, and do not expect to make regular distributions to shareholders.
REINVESTMENTS
Since all distributions by the Funds are automatically reinvested in additional Fund shares, the total value of your holdings will not change. The reinvestment price is the next calculated NAV after the distribution is paid.
TAXES
Each Fund intends to comply with the regulations relating to the diversification requirements under section 817(h) of the Internal Revenue Code.
IMPORTANT: This information is a brief and selective summary of some of the tax rules that apply to an investment in the Funds. Because tax matters are highly individual and complex, you should consult a qualified tax advisor.
Federal income taxation of subaccounts, life insurance companies and annuity contracts or life insurance policies is discussed in your annuity contract or life insurance policy prospectus.
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Comparison of Organizational Documents
This chart highlights material differences between the terms of the Declarations of Trusts and By–Laws of the Buying and Selling Funds.
Group A: | Selling Funds: RiverSource Variable Portfolio – Strategic Income Fund, Disciplined Asset Allocation Portfolios – Conservative, Disciplined Asset Allocation Portfolios – Moderately Conservative, Disciplined Asset Allocation Portfolios – Moderate, Disciplined Asset Allocation Portfolios – Moderately Aggressive, Disciplined Asset Allocation Portfolios – Aggressive Buying Funds: Variable Portfolio – Conservative Portfolio, Variable Portfolio – Moderately Conservative Portfolio, Variable Portfolio, Moderate Portfolio, Variable Portfolio – Moderately Aggressive Portfolio, Variable Portfolio – Aggressive Portfolio |
Group B: | Buying Fund: Columbia Strategic Income Fund, Variable Series |
Policy | Group A | Group B | ||
Shareholder Liability | The shareholders of a Massachusetts business trust could, under certain circumstances, be held personally liable as partners for its obligations. However, the Declaration of Trust contains express disclaimers of shareholder liability for acts, obligations or affairs of the Trust. The Declaration of Trust also provides for indemnification and reimbursement of expenses out of the assets of a series for any shareholder held personally liable for obligations of such series. Therefore, the possibility that a shareholder could be held liable would be limited to a situation in which the assets of the applicable series had been exhausted. | |||
Shareholder Voting Rights | Each whole share (or fractional share) outstanding on the record date shall be entitled to a number of votes on any matter on which it is entitled to vote equal to the net asset value of the share (or fractional share) in U. S. dollars determined at the close of business on the record date (for example, a share having a net asset value of $10.50 would be entitled to 10.5 votes).
The shareholders have the power to vote (i) for the election of Trustees, (ii) to the same extent as shareholders of a Massachusetts business trust as to whether or not a court action, proceeding or claim should or should not be brought or maintained derivatively or as a class action on behalf of the Trust or shareholder, (iii) with respect to termination of the Trust or any class or series of the trust, (iv) with respect to the approval or termination in accordance with the 1940 Act of any contract with any one or more corporations, trusts, associations, partnerships, limited partnerships or other types of organizations, or individuals as to which shareholder approval is required by the 1940 Act, and (v) with respect to additional matters relating to the Trust as may be required by the 1940 Act, the Declaration of Trust, the By-Laws or any registration of the Trust with the SEC (or any successor agency) or any State, or as the Trustees may consider necessary or desirable.
On any matter submitted to a vote of shareholders, all shares entitled to vote will be voted in the aggregate as a single class without regard to series or class of shares, except that shares may be voted by individual series or classes (1) when required by the 1940 Act, (2) when the Trustees have determined that the matter affects one or more series or classes of shares materially differently, or (3) when the matter affects only the interests of one or more series or classes.
If authorized by the Trustees, Shareholders shall be entitled to vote cumulatively in the election of Trustees. | At all meetings of shareholders, each shareholder of record is entitled to one vote for each dollar of net asset value (number of shares owned times net asset value per share) and each fractional dollar amount is entitled to a proportionate fractional vote.
The shareholders have the power to vote (i) for the election of Trustees, (ii) to the same extent as shareholders of a Massachusetts business trust as to whether or not a court action, proceeding or claim should or should not be brought or maintained derivatively or as a class action on behalf of the Trust or shareholder, (iii) with respect to termination of the Trust or any class or series of the trust, (iv) with respect to the approval or termination in accordance with the 1940 Act of any contract with any one or more corporations, trusts, associations, partnerships, limited partnerships or other types of organizations, or individuals as to which shareholder approval is required by the 1940 Act, and (v) with respect to additional matters relating to the Trust as may be required by the 1940 Act, the Declaration of Trust, the By-Laws or any registration of the Trust with the SEC (or any successor agency) or any State, or as the Trustees may consider necessary or desirable.
On any matter submitted to a vote of shareholders, all shares entitled to vote will be voted in the aggregate as a single class without regard to series or class of shares, except that shares may be voted by individual series or classes (1) when required by the 1940 Act, (2) when the Trustees have determined that the matter affects one or more series or classes of shares materially differently, or (3) when the matter affects only the interests of one or more series or classes.
There shall be no cumulative voting in the election of Trustees. |
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Policy | Group A | Group B | ||
Shareholder Meetings | The Declaration of Trust and By-Laws do not address annual shareholder meetings. Regular shareholder meetings are not required for business trusts under the General Laws of Massachusetts.
Shareholder meetings will be held when called by the Trustees for the purpose of taking action on any matter requiring the vote or authority of the shareholders, or for any other matter the Trustees deem necessary or desirable. | |||
Shareholder Quorum | The presence in person or by proxy of 10% of the votes entitled to be cast at a meeting constitutes a quorum.
When any one or more series or classes votes as a single class separate from any other shares which are to vote on the same matters as a separate class or classes, 10% of the votes entitled to be cast by each such class entitled to vote constitutes a quorum at a shareholders’ meeting of that class.
A meeting may be adjourned by a majority of the votes properly cast upon the question, whether or not a quorum is present, and the meeting may be held as adjourned within a reasonable time after the date set for the original meeting without further notice. | The presence in person or by proxy of 30% of the votes entitled to be cast at a meeting constitutes a quorum.
When any one or more series or classes votes as a single class separate from any other shares which are to vote on the same matters as a separate class or classes, 30% of the votes entitled to be cast by each such class entitled to vote constitutes a quorum at a shareholders’ meeting of that class.
A meeting may be adjourned by a majority of the votes properly cast upon the question, whether or not a quorum is present, and the meeting may be held as adjourned within a reasonable time after the date set for the original meeting without further notice. | ||
Shareholder Consent | Except as otherwise provided by law, the Declaration of Trust or the By-Laws, any action required or permitted to be taken at any meeting of shareholders may be taken without a meeting if a majority of the shareholders entitled to vote consent to the action in writing and the consents are filed with the records of the Trust. The consent will be treated for all purposes as a vote taken at a meeting of shareholders. | |||
Notice to Shareholders of Record Date | Written notice of any meeting of shareholders must be given by the Trustees at least 7 days before the meeting.
The Trustees may set a record date for the purpose of determining the shareholders entitled to notice of or to vote at a shareholder meeting. The record date cannot be more than 90 days or less than 7 days before the date of the meeting. | |||
Shareholder Proxies | Shareholders may vote in person or by proxy.
A proxy with respect to shares held in the name of two or more persons will be valid if executed by any one of them unless at or prior to exercise of the proxy the Trust receives a specific written notice to the contrary from any one of them. A proxy purporting to be executed by or on behalf of a shareholder will be deemed valid unless challenged at or prior to its exercise and the burden of proving invalidity rests on the challenger. |
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Policy | Group A | Group B | ||
Trustee Power to Amend Organizational Document | The Trustees may amend the Declaration of Trust at any time by an instrument in writing signed by a majority of the then Trustees provided that notice of such amendment is transmitted promptly to shareholders of record.
The Trustees need not, however, provide notice of an amendment if the amendment is for the purpose of supplying an omission, curing any ambiguity or curing, correcting or supplementing any defective or inconsistent provision contained in the Declaration of Trust, or having any other purpose which is ministerial or clerical in nature.
The By-Laws may be amended or repealed, in whole or in part, by a majority of the Trustees then in office at any meeting of the Trustees, or by written consent in lieu thereof. In no event, however, are the Trustees permitted to adopt By-Laws that conflict or are inconsistent with the Declaration of Trust. | |||
Termination of Trust | The Trust may be terminated by the Trustees by written notice to the Shareholders, or by the affirmative vote of shares representing at least two-thirds of the votes entitled to be cast for each series voting separately by series.
Any Series or class may be terminated by the affirmative vote of shares representing at least two-thirds of the votes entitled to be cast for that series or class, or by the Trustees by written notice to the shareholders of that series or class. | The Trust may be terminated by the Trustees with written notice to shareholders, or by the affirmative vote of at least two-thirds of the shares of each series entitled to vote.
Any series of or class may be terminated by the affirmative vote of at least two-thirds of the shares of that series or class, or by the Trustees by written notice to the shareholders of that series or class. | ||
Merger or Consolidation | Subject to applicable laws, the Trustees may, without shareholder consent, cause the Trust or any series to be merged or consolidated with another trust or company. The Trustees may also transfer all or a substantial portion of the Trust’s assets to another fund or company. | |||
Removal of Trustees | Trustees may be removed with or without cause by majority vote of the Trustees. | |||
Trustee Committees | The Trustees may appoint from their own number and terminate committees consisting of one or more Trustees, which may exercise the powers and authority of the Trustees to the extent that the Trustees determine. | |||
Trustee Liability | Trustees are not subject to personal liability, except by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of the office of Trustee. Additionally, Trustees are not personally liable for any neglect or wrong-doing of any officer, agent, or employee of the Trust or for any act or omission of any other Trustee.
Trustees that are singled out as experts on particular issues, such as a chair of a committee, are not held to any higher standard than their non-expert counterparts. |
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Policy | Group A | Group B | ||
Trustee Indemnification | The Trust indemnifies and holds harmless, to the full extent that a Massachusetts business trust would be authorized by the Massachusetts Business Corporation Act, each of its Trustees against all liabilities and expenses, including amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and attorneys’ fees incurred in connection with the defense of any civil or criminal suit or action, except with respect to any matter (i) as to which a Trustee is finally adjudicated in any such action or proceeding not to have acted in good faith in reasonable belief that such Trustee’s action was in the best interests of the Trust; or (ii) where the Trustee acted in willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such Trustee’s office.
Expenses, including counsel fees, so incurred by any such Trustee (but excluding amounts paid in satisfaction of judgments, in compromise or as fines or penalties) will be paid from time to time by the Trust in advance of the final disposition of any such action, suit or proceeding upon receipt of an undertaking by or on behalf of such Trustee to repay amounts so paid to the Trust if it is ultimately determined that indemnification of such expenses is not authorized under the By-Laws, provided, however, that either (a) such Trustee shall have provided appropriate security for such undertaking, (b) the Trust shall be insured against losses arising from any such advance payments, or (c) either a majority of the disinterested Trustees acting on the matter (provided that a majority of the disinterested Trustees then in office act on the matter), or independent legal counsel in a written opinion, will have determined, based upon a review of readily available facts, that there is reason to believe that such Trustee will be found entitled to indemnification under the By-Laws. | The Trust indemnifies each of its Trustees against all liabilities and expenses, including amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and attorneys’ fees incurred in connection with the defense of any civil or criminal suit or action, except with respect to any matter (i) as to which a Trustee is finally adjudicated in any such action or proceeding not to have acted in good faith in reasonable belief that such Trustee’s action was in the best interests of the Trust; or (ii) where the Trustee acted in willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such Trustee’s office.
Expenses, including counsel fees, so incurred by any such Trustee (but excluding amounts paid in satisfaction of judgments, in compromise or as fines or penalties) will be paid from time to time by the Trust in advance of the final disposition of any such action, suit or proceeding upon receipt of an undertaking by or on behalf of such Trustee to repay amounts so paid to the Trust if it is ultimately determined that indemnification of such expenses is not authorized under the By-Laws, provided, however, that either (a) such Trustee shall have provided appropriate security for such undertaking, (b) the Trust shall be insured against losses arising from any such advance payments, or (c) either a majority of the disinterested Trustees acting on the matter (provided that a majority of the disinterested Trustees then in office act on the matter), or independent legal counsel in a written opinion, will have determined, based upon a review of readily available facts, that there is reason to believe that such Trustee will be found entitled to indemnification under the By-Laws. | ||
Dividends | Dividends and distributions may be paid to shareholders from the Trust’s net income with the frequency as the Trustees may determine. | |||
Capitalization | The beneficial interest in the Trust shall at all times be divided into an unlimited number of shares without par value. | |||
Number of Trustees and Vacancies | The Trustees may fix the number of Trustees, fill vacancies in the Trustees, including vacancies arising from an increase in the number of Trustees, or remove Trustees with or without cause.
Shareholders may elect Trustees at any meeting of Shareholders called by the Trustees for that purpose and to the extent required by applicable law, including paragraphs (a) and (b) of Section 16 of the 1940 Act.
Each Trustee serves during the continued lifetime of the Trust until he or she dies, resigns or is removed, or, if sooner, until the next meeting of Shareholders called for the purpose of electing Trustees and until the election and qualification of his or her successor. | The Trustees may fix the number of Trustees, fill vacancies in the Trustees, including vacancies arising from an increase in the number of Trustees, or remove Trustees with or without cause.
Shareholders may fix the number of Trustees and elect Trustees at any meeting of Shareholders called by the Trustees for that purpose and to the extent required by applicable law, including paragraphs (a) and (b) of Section 16 of the 1940 Act.
Each Trustee serves during the continued lifetime of the Trust until he or she dies, resigns or is removed, or, if sooner, until the next meeting of Shareholders called for the purpose of electing Trustees and until the election and qualification of his or her successor. |
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Policy | Group A | Group B | ||
Independent Chair of the Board | The Board of Trustees are required to elect one Trustee who is not an “interested person” of the Trust (as defined in Section 2(a)(19) of the 1940 Act) to serve as Chair of the Board.
The Chair of the Board’s duties include serving as the lead independent Trustee and presiding at each meeting of the Trustees as chairman of the meeting. In addition, the Chair of the Board has the duties and powers specified in the By-Laws and has such other duties and powers as may be determined by the Trustees. | The Declaration of Trust and By-Laws do not require an independent chair of the Board of Trustees. | ||
Inspection of Books and Records | The original or a copy of the Declaration of Trust, and of each amendment thereto, is kept at the office of the Trust where it may be inspected by any shareholder. | |||
Involuntary Redemption of Accounts | The Trust has the right at its option and at any time to redeem shares of any shareholder at the net asset value thereof: (i) if at such time such shareholder owns shares of any series or class having an aggregate net asset value of less than an amount determined from time to time by the Trustees; or (ii) to the extent that such shareholder owns shares equal to or in excess of a percentage determined from time to time by the Trustees of the outstanding shares of the Trust or of any series or class. |
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Underlying Fund – Investment Objectives and Strategies
The following is a brief description of the investment objectives and strategies of the underlying funds in which the Funds may invest as part of their principal investment strategies. RiverSource Investments may add new underlying funds for investment or change underlying funds without the approval of shareholders. Additional information regarding the underlying funds is available in the prospectus and statement of additional information for the underlying funds. This prospectus is not an offer for any of the underlying funds. For a copy of a prospectus of the underlying fund, which contains this and other information, call 1(800) 221-2450. Read the prospectus carefully before you invest.
Underlying Funds | Investment Objectives and Strategies | |
Equity Funds | ||
RiverSource Variable Portfolio-Diversified Equity Income Fund | The Fund seeks to provide shareholders with a high level of current income and, as a secondary objective, steady growth of capital.
The Fund’s assets primarily are invested in equity securities. Under normal market conditions, the Fund will invest at least 80% of its net assets in dividend-paying common and preferred stocks. The Fund may invest up to 25% of its net assets in foreign investments. The Fund can invest in any economic sector, and, at times, it may emphasize one or more particular sectors. | |
RiverSource Variable Portfolio-Dynamic Equity Fund | The Fund seeks capital appreciation.
Under normal market conditions, at least 80% of the Fund’s net assets are invested in equity securities. | |
RiverSource Variable Portfolio-Mid Cap Growth Fund | The Fund seeks to provide shareholders with growth of capital.
Under normal market conditions, the Fund will invest at least 80% of its net assets at the time of purchase in the common stocks of mid-capitalization companies. The Fund will provide shareholders with at least 60 days’ notice of any change in the 80% policy. The investment manager defines mid-cap companies as those whose market capitalization (number of shares outstanding multiplied by the share price) falls within the range of the companies that comprise the Russell Midcap® Growth Index (the Index). Over time, the market capitalizations of the companies in the Index will change. As they do, the size of the companies in which the Fund invests may change. As long as an investment continues to meet the Fund’s other investment criteria, the Fund may choose to continue to hold a stock even if the company’s market capitalization grows beyond the largest market capitalization of a company within the Index or falls below the market capitalization of the smallest company within the Index. The Fund can invest in any economic sector and, at times, it may emphasize one or more particular sectors. | |
RiverSource Variable Portfolio-Mid Cap Value Fund | The Fund seeks to provide shareholders with long-term growth of capital.
Under normal circumstances, the Fund invests at least 80% of its net assets (including the amount of any borrowings for investment purposes) in equity securities of medium-sized companies. Medium-sized companies are those whose market capitalizations at the time of purchase fall within the range of the Russell Midcap Value Index (the Index). The market capitalization range of the companies in the Index is subject to change. Up to 20% of the Fund may be invested in stocks of smaller or larger companies, preferreds, convertibles, or other debt securities. The Fund may invest up to 25% of its net assets in foreign investments. The Fund can invest in any economic sector and, at times, it may emphasize one or more particular sectors. | |
Seligman Variable Portfolio-Growth Fund | The Fund seeks to provide shareholders with long-term capital growth.
The Fund invests primarily in common stocks of large U.S. companies that fall within the range of the Russell 1000 Growth Index. RiverSource Investments, LLC (the investment manager) chooses common stocks for the Fund through fundamental analysis, considering both qualitative and quantitative factors. Up to 25% of the Fund’s net assets may be invested in foreign investments. |
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Seligman Variable Portfolio-Larger-Cap Value Fund | The Fund seeks to provide shareholders with long-term growth of capital.
Under normal market conditions, at least 80% of the Fund’s net assets are invested in equity securities of companies with a market capitalization greater than $5 billion. Up to 25% of the Fund’s net assets may be invested in foreign investments. The Fund can invest in any economic sector and, at times, it may emphasize one or more particular sectors. | |
Seligman Variable Portfolio-Smaller-Cap Value Fund | The Fund seeks to provide shareholders with long-term capital growth.
The Fund’s assets primarily are invested in equity securities. Under normal market conditions, at least 80% of the Fund’s net assets are invested in equity securities of companies with market capitalizations of up to $2 billion or that fall within the range of the Russell 2000 Index at the time of investment. The Fund can invest in any economic sector and, at times, it may emphasize one or more particular sectors. Up to 25% of the Fund’s net assets may be invested in foreign investments. | |
Threadneedle Variable Portfolio-Emerging Markets Fund | The Fund seeks to provide shareholders with long-term capital growth.
The Fund’s assets are primarily invested in equity securities of emerging markets companies. Emerging markets are countries characterized as developing or emerging by either the World Bank or the United Nations. Under normal market conditions, at least 80% of the Fund’s net assets will be invested in securities of companies that are located in emerging market countries, or that earn 50% or more of their total revenues from goods or services produced in emerging market countries or from sales made in emerging market countries. | |
Threadneedle Variable Portfolio-International Opportunity Fund | The Fund seeks to provide shareholders with capital appreciation.
The Fund’s assets primarily are invested in equity securities of foreign issuers that are believed to offer strong growth potential. The Fund may invest in developed and in emerging markets. | |
Variable Portfolio-AllianceBernstein International Value Fund | The Fund seeks to provide shareholders with long-term capital growth.
The Fund’s assets primarily are invested in equity securities of foreign issuers that are believed to be undervalued and offer growth potential. The Fund may invest in both developed and emerging markets. | |
Variable Portfolio-American Century Growth Fund | The Fund seeks to provide shareholders with long-term capital growth.
The Fund invests primarily in common stocks of larger-sized companies selected for their growth prospects. Management of the Fund is based on the belief that, over the long term, stock price movements follow growth in earnings, revenues and/or cash flow. | |
Variable Portfolio-Columbia Wanger International Equities Fund | The Fund seeks to provide shareholders with long-term capital growth.
Under normal market conditions, at least 80% of the Fund’s net assets (including the amount of any borrowings for investment purposes) will be invested in equity securities. Under normal circumstances, the Fund invests at least 75% of its total assets in foreign companies in developed markets (for example, Japan, Canada and the United Kingdom) and in emerging markets (for example, China, India and Brazil). | |
Variable Portfolio-Columbia Wanger U.S. Equities Fund | The Fund seeks to provide shareholders with long-term capital growth.
Under normal circumstances, at least 80% of the Fund’s net assets (including the amount of any borrowings for investment purposes) are invested in equity securities of U.S. companies. | |
Variable Portfolio-Davis New York Venture Fund | The Fund seeks to provide shareholders with long-term capital growth.
The Fund’s assets are primarily invested in equity securities of U.S. companies. Under normal market conditions, the Fund’s assets will be invested primarily in companies with market capitalizations of at least $5 billion at the time of the Fund’s investment. The Fund may invest up to 25% of its net assets in foreign investments. | |
Variable Portfolio-Goldman Sachs Mid Cap Value Fund | The Fund seeks to provide shareholders with long-term growth of capital.
Under normal market conditions, the Fund will invest at least 80% of its net assets (including the amount of any borrowings for investment purposes) in the equity securities of mid-capitalization companies. For these purposes, the Fund considers mid-cap companies to be those whose market capitalization falls within the range of the Russell Midcap® Value Index (the Index). The market capitalization range and the composition of the Index are subject to change. |
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Variable Portfolio-Invesco International Growth Fund | The Fund seeks to provide shareholders with long-term capital growth.
The Fund’s assets are primarily invested in equity securities of foreign issuers. The Fund will normally invest in securities of companies located in at least three countries outside the U.S., emphasizing investment companies in the developed countries of Western Europe and the Pacific Basin. The Fund may also invest up to 20% of its assets in securities that provide exposure to emerging markets. | |
Variable Portfolio-Jennison Mid Cap Growth Fund | The Fund seeks to provide shareholders with long-term capital growth.
Under normal market conditions, the Fund will invest at least 80% of its net assets (including the amount of any borrowings for investment purposes) in the equity securities of mid-capitalization companies. Mid-capitalization companies are defined as those companies with a market capitalization that falls within the range of the companies that comprise the Russell Midcap® Growth Index. Up to 25% of the Fund’s net assets may be invested in foreign investments. | |
Variable Portfolio-Marsico Growth Fund | The Fund seeks to provide shareholders with long-term capital growth.
The Fund invests primarily in equity securities of large capitalization companies. The Fund defines large capitalization companies as those with a market capitalization greater than $5 billion at the time of purchase. Up to 25% of the Fund’s net assets may be invested in foreign investments. | |
Variable Portfolio-MFS Value Fund | The Fund seeks to provide shareholders with long-term capital growth.
The Fund’s assets are invested primarily in equity securities. The Fund invests primarily in the stocks of companies that are believed to be undervalued compared to their perceived worth (value companies). Value companies tend to have stock prices that are low relative to their earnings, dividends, assets, or other financial measures. The Fund may invest up to 25% of its net assets in foreign securities. | |
Variable Portfolio-Mondrian International Small Cap Fund | The Fund seeks to provide shareholders with long-term capital growth.
The Fund invests primarily in equity securities of non-U.S. small cap companies. Under normal market conditions, the Fund will invest at least 80% of its net assets (including the amount of any borrowings for investment purposes) in the stocks of non-U.S. small cap companies. Small cap companies are defined as those companies whose market capitalization falls within the range of companies in the Morgan Stanley Capital International World Ex-U.S. Small Cap Index (the Index). The Index is composed of stocks which are categorized as small capitalization stocks and is designed to measure equity performance in 22 global developed markets, excluding the U.S. | |
Variable Portfolio-Morgan Stanley Global Real Estate Fund | The Fund seeks to provide shareholders with current income and capital appreciation.
Under normal market conditions, the Fund invests at least 80% of its net assets (including the amount of any borrowings for investment purposes) in equity and equity-related securities issued by companies in the real estate industry located throughout the world (Global Real Estate Companies). The Fund is a non-diversified fund that will invest primarily in companies in the real estate industry located in the developed countries of North America, Europe and Asia, but may also invest in emerging markets. | |
Variable Portfolio-NFJ Dividend Value Fund | The Fund seeks to provide shareholders with long-term growth of capital and income.
Under normal market conditions, at least 80% of the Fund’s net assets (including the amount of any borrowings for investment purposes) are invested in equity securities of companies that pay or are expected to pay dividends. Up to 25% of the Fund’s net assets may be invested in foreign investments, including those from emerging markets. | |
Variable Portfolio-Partners Small Cap Growth Fund | The Fund seeks to provide shareholders with long-term capital growth.
Under normal market conditions, at least 80% of the Fund’s net assets (including the amount of any borrowings for investment purposes) are invested in the equity securities of small-capitalization companies Small-capitalization companies are defined as those companies with a market capitalization of up to $2.5 billion, or that falls within the range of the Russell 2000® Growth Index (the Index). Up to 25% of the Fund’s net assets may be invested in foreign investments. |
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Variable Portfolio-Partners Small Cap Value Fund | The Fund seeks to provide shareholders with long-term capital appreciation.
Under normal market conditions, at least 80% of the Fund’s net assets are invested in small cap companies. For these purposes, small cap companies are those that have a market capitalization, at the time of investment, of up to $2.5 billion or that fall within the range of the Russell 2000® Value Index. The Fund may invest up to 25% of its net assets in foreign investments. The Fund will provide shareholders with at least 60 days’ notice of any change in the 80% policy. | |
Variable Portfolio-Pyramis® International Equity Fund | The Fund seeks to provide shareholders with long-term growth of capital.
Under normal market conditions, at least 80% of the Fund’s net assets (including the amount of any borrowings for investment purposes) will be invested in equity securities of foreign issuers located or traded in countries other than the U.S. that are believed to offer strong growth potential. The Fund will normally invest its assets in common stocks of companies whose market capitalizations fall within the range of the companies that comprise the Morgan Stanley Capital International EAFE Index. | |
Variable Portfolio-UBS Large Cap Growth Fund | The Fund seeks to provide shareholders with long-term capital growth.
Under normal market conditions, the Fund invests at least 80% of its net assets (including the amount of any borrowings for investment purposes) in equity securities of large capitalization US. companies. The Fund defines large capitalization companies as those with a market capitalization greater than $3 billion at the time of purchase. Up to 25% of the Fund’s net assets may be invested in foreign investments. | |
Fixed Income Funds | ||
RiverSource Variable Portfolio-Diversified Bond Fund | The Fund seeks to provide shareholders with a high level of current income while attempting to conserve the value of the investment for the longest period of time.
Under normal market conditions, the Fund invests at least 80% of its net assets in bonds and other debt securities. At least 50% of the Fund’s net assets will be invested in securities like those included in the Barclays Capital U.S. Aggregate Bond Index (the Index), which are investment grade and denominated in U.S. dollars. The Index includes securities issued by the U.S. government, corporate bonds, and mortgage- and asset-backed securities. Although the Fund emphasizes high- and medium-quality debt securities, it will assume some credit risk in an effort to achieve higher yield and/or capital appreciation by buying lower-quality (junk) bonds. Up to 25% of the Fund’s net assets may be invested in foreign investments, which may include investments in emerging markets. | |
RiverSource Variable Portfolio-Global Bond Fund | The Fund seeks to provide shareholders with high total return through income and growth of capital.
The Fund is a non-diversified mutual fund that invests primarily in debt obligations of U.S. and foreign issuers. Under normal market conditions, at least 80% of the Fund’s net assets will be invested in investment-grade corporate or government debt obligations, including money market instruments, of issuers located in at least three different countries. Although the Fund emphasizes high- and medium-quality debt securities, it may assume some credit risk in seeking to achieve higher dividends and/or capital appreciation by buying below investment grade bonds (junk bonds). | |
RiverSource Variable Portfolio-Global Inflation Protected Securities Fund | The Fund seeks to provide shareholders with total return that exceeds the rate of inflation over the long-term.
The Fund is a non-diversified fund that, under normal market conditions, invests at least 80% of its net assets in inflation-protected debt securities. These securities include inflation-indexed bonds of varying maturities issued by U.S. and foreign governments, their agencies or instrumentalities, and corporations. The Fund invests only in securities rated investment grade, or, if unrated, deemed to be of comparable quality by the investment manager. Inflation-protected securities are designed to protect the future purchasing power of the money invested in them. The value of the bond’s principal or the interest income paid on the bond is adjusted to track changes in an official inflation measure. | |
RiverSource Variable Portfolio-High Yield Bond Fund | The Fund seeks to provide shareholders with high current income as its primary objective and, as its secondary objective, capital growth.
Under normal market conditions, the Fund will invest at least 80% of its net assets in high-yield debt instruments (commonly referred to as “junk”). These high yield debt instruments include corporate debt securities as well as bank loans rated below investment grade by a nationally recognized statistical rating organization, or if unrated, determined to be of comparable quality. Up to 25% of the Fund may be invested in high yield debt instruments of foreign issuers. |
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RiverSource Variable Portfolio-Income Opportunities Fund | The Fund seeks to provide shareholders with a high total return through current income and capital appreciation.
Under normal market conditions, the Fund’s assets are invested primarily in income-producing debt securities, with an emphasis on the higher rated segment of the high-yield (junk bond) market. These income-producing debt securities include corporate debt securities as well as bank loans. The Fund will purchase only securities rated B or above, or unrated securities believed to be of the same quality. If a security falls below a B rating, the Fund may continue to hold the security. Up to 25% of the Fund’s net assets may be in foreign investments. | |
RiverSource Variable Portfolio-Limited Duration Bond Fund | The Fund seeks to provide shareholders with a level of current income consistent with preservation of capital.
Under normal market conditions, the Fund invests at least 80% of its net assets (including the amount of any borrowings for investment purposes) in bonds and other debt securities. The Fund will primarily invest in debt securities with short- and intermediate-term maturities which the Fund defines as those with maturities up to seven years. The Fund will primarily invest in corporate bonds, securities issued by the U.S. government, and mortgage- and asset-backed securities. The Fund may invest up to 15% of its net assets in securities rated below investment grade. Up to 25% of the Fund’s net assets may be invested in foreign investments, which may include investments in emerging markets. | |
RiverSource Variable Portfolio-Short Duration US Government Fund | The Fund seeks to provide shareholders with a high level of current income and safety of principal consistent with an investment in U.S. government and government agency securities.
Under normal market conditions, at least 80% of the Fund’s net assets are invested in debt securities issued or guaranteed as to principal and interest by the U.S. government, or its agencies or instrumentalities. The Fund invests in direct obligations of the U.S. government, such as Treasury bonds, bills, and notes, and of its agencies and instrumentalities. The Fund may invest to a substantial degree in securities issued by various entities sponsored by the U.S. government, such as the Federal National Mortgage Association (FNMA or Fannie Mae) and the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac). These issuers are chartered or sponsored by acts of Congress; however, their securities are neither issued nor guaranteed by the United States Treasury. When market conditions are favorable, the Fund may also invest in debt securities that are not issued by the U.S. government, its agencies or instrumentalities, or that are denominated in currencies other than the U.S. dollar. | |
RiverSource Variable Portfolio-Strategic Income Fund | The Fund seeks to provide shareholders with a high level of current income and capital growth as a secondary objective.
The Fund’s assets are primarily allocated among various fixed income investment categories including: high yield bonds, emerging markets bonds, floating rate loans, government and corporate bonds, mortgage- and asset-backed securities, Treasury inflation protected securities, international bonds and cash or cash equivalents. A smaller portion of the Fund may be allocated to real estate investment trusts (REITs) and U.S. and international equity securities. | |
Variable Portfolio-American Century Diversified Bond Fund | The Fund seeks to provide shareholders with a high level of current income.
Under normal market conditions, the Fund invests at least 80% of its net assets (including the amount of any borrowings for investment purposes) in bonds and other debt securities. At least 50% of the Fund’s net assets will be invested in securities like those included in the Barclays Capital U.S. Aggregate Bond Index (the Index), which are investment grade and denominated in US. dollars. The Index includes securities issued by the U.S. government, corporate bonds, and mortgage- and asset- backed securities. Although the Fund emphasizes high- and medium-quality debt securities, it will assume some credit risk in an effort to achieve higher yield and/or capital appreciation by buying lower-quality (junk) bonds. |
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Table of Contents
Variable Portfolio-Eaton Vance Floating-Rate Income Fund | The Fund seeks to provide shareholders with a high level of current income.
Under normal market conditions, the Fund invests at least 80% of its net assets (including the amount of any borrowings for investment purposes) in income producing floating rate loans and other floating rate debt securities. These debt obligations will generally be rated non-investment grade by recognized rating agencies (similar to “junk bonds”) or, if unrated, be considered by the investment manager to be of comparable quality. The Fund may also purchase investment grade fixed income debt securities and money market instruments. Up to 25% of the Fund’s net assets may be invested in foreign investments. | |
Variable Portfolio-J.P. Morgan Core Bond Fund | The Fund seeks to provide shareholders with a high level of current income while conserving the value of the investment for the longest period of time
Under normal market conditions, the Fund invests at least 80% of its net assets (including the amount of any borrowings for investment purposes) in bonds and other debt securities. Although the Fund is not an index fund, it invests primarily in securities like those included in the Barclays U.S. Aggregate Bond Index (the Index), which are investment grade and denominated in U.S. dollars. The Index includes securities issued by the U.S. government, corporate bonds, and mortgage- and asset-backed securities. The Fund does not expect to invest in securities rated below investment grade, although it may hold securities that, subsequent to the Fund’s investment, have been downgraded to a below investment grade rating. | |
Variable Portfolio-PIMCO Mortgage-Backed Securities Fund | The Fund seeks to provide shareholders with total return through current income and capital appreciation.
Under normal market conditions, the Fund invests at least 80% of its net assets (including the amount of any borrowings for investment purposes) in mortgage-related fixed income instruments. These instruments have varying maturities and include but are not limited to mortgage pass-through securities, collateralized mortgage obligations, commercial mortgage-backed securities and mortgage dollar rolls, and may be represented by forwards or derivatives such as options, futures contracts or swap agreements. | |
Variable Portfolio-Wells Fargo Short Duration Government Fund | The Fund seeks to provide shareholders with current income consistent with capital preservation.
Under normal market conditions, the Fund invests at least 80% of its net assets (including the amount of any borrowings for investment purposes) in U.S. Government obligations, including debt securities issued or guaranteed by the U.S. Treasury, U.S. Government agencies or government-sponsored entities. The Fund may invest up to 20% of its net assets within non-government mortgage and asset-backed securities. | |
Money Market Funds | ||
RiverSource Variable Portfolio-Cash Management Fund | The Fund seeks to provide shareholders with maximum current income consistent with liquidity and stability of principal.
The Fund’s assets primarily are invested in money market instruments, such as marketable debt obligations issued by corporations or the U.S. government or its agencies, bank certificates of deposit, bankers’ acceptances, letters of credit, and commercial paper, including asset-backed commercial paper. The Fund may invest more than 25% of its total assets in money market instruments issued by U.S. banks, U.S. branches of foreign banks and U.S. government securities. Additionally, the Fund may invest up to 25% of its total assets in U.S. dollar-denominated foreign investments. |
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Exhibit E
Underlying Funds – Risks
The following is a brief description of principal risks associated with the underlying funds in which the Funds may invest as part of their principal investment strategies. Additional information regarding the principal risks for the underlying funds is available in the applicable underlying fund’s prospectus and Statement of Additional Information.
RiverSource VP-Diversified Equity Income | RiverSource VP-Dynamic Equity | RiverSource VP-Mid Cap Growth | RiverSource VP-Mid Cap Value | Seligman VP-Growth | Seligman VP-Larger-Cap Value | Seligman VP-Smaller-Cap Value | Threadneedle VP-Emerging Markets | Threadneedle VP- International Opportunity | ||||||||||||||||||||||||||||
Active Management Risk | X | X | X | X | X | X | X | X | X | |||||||||||||||||||||||||||
Confidential Information Access Risk | ||||||||||||||||||||||||||||||||||||
Counterparty Risk | ||||||||||||||||||||||||||||||||||||
Credit Risk | ||||||||||||||||||||||||||||||||||||
Derivatives Risk | X | X | X | X | ||||||||||||||||||||||||||||||||
Focused Portfolio Risk | X | X | ||||||||||||||||||||||||||||||||||
Foreign Currency Risk | ||||||||||||||||||||||||||||||||||||
Geographic Concentration Risk | X | X | ||||||||||||||||||||||||||||||||||
Highly Leveraged Transactions Risk | ||||||||||||||||||||||||||||||||||||
Impairment of Collateral Risk | ||||||||||||||||||||||||||||||||||||
Industry Concentration Risk | ||||||||||||||||||||||||||||||||||||
Inflation Protected Securities Risk | ||||||||||||||||||||||||||||||||||||
Initial Public Offering (IPO) Risk | ||||||||||||||||||||||||||||||||||||
Interest Rate Risk | ||||||||||||||||||||||||||||||||||||
Issuer Risk | X | X | X | X | X | X | X | X | X | |||||||||||||||||||||||||||
Leverage Risk | ||||||||||||||||||||||||||||||||||||
Liquidity Risk | ||||||||||||||||||||||||||||||||||||
Market Risk | X | X | X | X | X | X | X | X | X | |||||||||||||||||||||||||||
Mid-Sized Company Risk | X | X | ||||||||||||||||||||||||||||||||||
Mortgage-Related and Other Asset-Backed Securities Risk | ||||||||||||||||||||||||||||||||||||
Non-Diversification Risk | ||||||||||||||||||||||||||||||||||||
Prepayment and Extension Risk | ||||||||||||||||||||||||||||||||||||
Quantitative Model Risk | X | |||||||||||||||||||||||||||||||||||
Real Estate Industry Risk | ||||||||||||||||||||||||||||||||||||
Reinvestment Risk | ||||||||||||||||||||||||||||||||||||
Risks of Foreign Investing | X | X | X | X | X | X | X | |||||||||||||||||||||||||||||
Sector Risk | X | X | X | X | X | |||||||||||||||||||||||||||||||
Small and Mid-Sized Company Risk | X | X | X | X | X | |||||||||||||||||||||||||||||||
Small Company Risk | X | |||||||||||||||||||||||||||||||||||
Stripped Securities Risk | ||||||||||||||||||||||||||||||||||||
Value Securities Risk | ||||||||||||||||||||||||||||||||||||
Varying Distribution Levels Risk |
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VP-Alliance Bernstein International Value | VP- American Century Growth | VP- Columbia Wanger International Equities | VP- Columbia Wanger U.S. Equities | VP-Davis New York Venture | VP- Goldman Sachs Mid Cap Value | VP- Invesco International Growth | VP- Jennison Mid Cap Growth | VP- Marsico Growth | VP-MFS Value | VP- Mondrian International Small Cap | VP-Morgan Stanley Global Real Estate | |||||||||||||||||||||||||||||||||||||
Active Management Risk | X | X | X | X | X | X | X | X | X | X | X | X | ||||||||||||||||||||||||||||||||||||
Confidential Information Access Risk | ||||||||||||||||||||||||||||||||||||||||||||||||
Counterparty Risk | ||||||||||||||||||||||||||||||||||||||||||||||||
Credit Risk | ||||||||||||||||||||||||||||||||||||||||||||||||
Derivatives Risk | X | X | X | |||||||||||||||||||||||||||||||||||||||||||||
Focused Portfolio Risk | ||||||||||||||||||||||||||||||||||||||||||||||||
Foreign Currency Risk | X | |||||||||||||||||||||||||||||||||||||||||||||||
Geographic Concentration Risk | ||||||||||||||||||||||||||||||||||||||||||||||||
Highly Leveraged Transactions Risk | ||||||||||||||||||||||||||||||||||||||||||||||||
Impairment of Collateral Risk | ||||||||||||||||||||||||||||||||||||||||||||||||
Industry Concentration Risk | ||||||||||||||||||||||||||||||||||||||||||||||||
Inflation Protected Securities Risk | ||||||||||||||||||||||||||||||||||||||||||||||||
Initial Public Offering (IPO) Risk | X | |||||||||||||||||||||||||||||||||||||||||||||||
Interest Rate Risk | ||||||||||||||||||||||||||||||||||||||||||||||||
Issuer Risk | X | X | X | X | X | X | X | X | X | X | X | |||||||||||||||||||||||||||||||||||||
Leverage Risk | ||||||||||||||||||||||||||||||||||||||||||||||||
Liquidity Risk | X | |||||||||||||||||||||||||||||||||||||||||||||||
Market Risk | X | X | X | X | X | X | X | X | X | X | X | X | ||||||||||||||||||||||||||||||||||||
Mid-Sized Company Risk | X | X | ||||||||||||||||||||||||||||||||||||||||||||||
Mortgage-Related and Other Asset-Backed Securities Risk | ||||||||||||||||||||||||||||||||||||||||||||||||
Non-Diversification Risk | X | |||||||||||||||||||||||||||||||||||||||||||||||
Prepayment and Extension Risk | ||||||||||||||||||||||||||||||||||||||||||||||||
Quantitative Model Risk | X | |||||||||||||||||||||||||||||||||||||||||||||||
Real Estate Industry Risk | X | |||||||||||||||||||||||||||||||||||||||||||||||
Reinvestment Risk | ||||||||||||||||||||||||||||||||||||||||||||||||
Risks of Foreign Investing | X | X | X | X | X | X | X | X | X | |||||||||||||||||||||||||||||||||||||||
Sector Risk | X | |||||||||||||||||||||||||||||||||||||||||||||||
Small and Mid-Sized Company Risk | X | X | X | |||||||||||||||||||||||||||||||||||||||||||||
Small Company Risk | ||||||||||||||||||||||||||||||||||||||||||||||||
Stripped Securities Risk | ||||||||||||||||||||||||||||||||||||||||||||||||
Value Securities Risk | X | X | ||||||||||||||||||||||||||||||||||||||||||||||
Varying Distribution Levels Risk |
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Table of Contents
VP-NFJ Dividend Value | VP-Partners Small Cap Growth | VP-Partners Small Cap Value | VP-Pyramis® International Equity | VP-UBS Large Cap Growth | RiverSource VP- Diversified Bond | RiverSource VP-Global Bond | RiverSource VP-Global Inflation Protected Securities | RiverSource VP-High Yield Bond | ||||||||||||||||||||||||||||
Active Management Risk | X | X | X | X | X | X | X | X | X | |||||||||||||||||||||||||||
Confidential Information Access Risk | ||||||||||||||||||||||||||||||||||||
Counterparty Risk | X | |||||||||||||||||||||||||||||||||||
Credit Risk | X | X | X | X | ||||||||||||||||||||||||||||||||
Derivatives Risk | X | X | X | X | X | X | ||||||||||||||||||||||||||||||
Focused Portfolio Risk | ||||||||||||||||||||||||||||||||||||
Foreign Currency Risk | ||||||||||||||||||||||||||||||||||||
Geographic Concentration Risk | X | |||||||||||||||||||||||||||||||||||
Highly Leveraged Transactions Risk | X | |||||||||||||||||||||||||||||||||||
Impairment of Collateral Risk | X | |||||||||||||||||||||||||||||||||||
Industry Concentration Risk | ||||||||||||||||||||||||||||||||||||
Inflation Protected Securities Risk | X | |||||||||||||||||||||||||||||||||||
Initial Public Offering (IPO) Risk | ||||||||||||||||||||||||||||||||||||
Interest Rate Risk | X | X | X | X | ||||||||||||||||||||||||||||||||
Issuer Risk | X | X | X | X | X | X | ||||||||||||||||||||||||||||||
Leverage Risk | ||||||||||||||||||||||||||||||||||||
Liquidity Risk | X | X | X | X | ||||||||||||||||||||||||||||||||
Market Risk | X | X | X | X | X | X | X | X | X | |||||||||||||||||||||||||||
Mid-Sized Company Risk | ||||||||||||||||||||||||||||||||||||
Mortgage-Related and Other Asset-Backed Securities Risk | ||||||||||||||||||||||||||||||||||||
Non-Diversification Risk | X | X | ||||||||||||||||||||||||||||||||||
Prepayment and Extension Risk | X | X | X | X | ||||||||||||||||||||||||||||||||
Quantitative Model Risk | X | |||||||||||||||||||||||||||||||||||
Real Estate Industry Risk | ||||||||||||||||||||||||||||||||||||
Reinvestment Risk | ||||||||||||||||||||||||||||||||||||
Risks of Foreign Investing | X | X | X | X | X | X | X | X | X | |||||||||||||||||||||||||||
Sector Risk | X | X | ||||||||||||||||||||||||||||||||||
Small and Mid-Sized Company Risk | ||||||||||||||||||||||||||||||||||||
Small Company Risk | X | X | ||||||||||||||||||||||||||||||||||
Stripped Securities Risk | ||||||||||||||||||||||||||||||||||||
Value Securities Risk | ||||||||||||||||||||||||||||||||||||
Varying Distribution Levels Risk | X |
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Table of Contents
RiverSource VP-Income Opportunities | RiverSource VP-Limited Duration Bond | RiverSource VP-Short Duration US Government | RiverSource VP-Strategic Income | VP-American Century Diversified Bond | VP-Eaton Vance Floating- Rate Income | VP-J.P. Morgan Core Bond | VP-PIMCO Mortgage- Backed Securities | VP-Wells Fargo Short Duration Government | RiverSource VP-Cash Management | |||||||||||||||||||||||||||||||
Active Management Risk | X | X | X | X | X | X | X | X | X | X | ||||||||||||||||||||||||||||||
Confidential Information Access Risk | X | X | ||||||||||||||||||||||||||||||||||||||
Counterparty Risk | X | X | X | |||||||||||||||||||||||||||||||||||||
Credit Risk | X | X | X | X | X | X | X | X | X | X | ||||||||||||||||||||||||||||||
Derivatives Risk | X | X | X | X | X | X | ||||||||||||||||||||||||||||||||||
Focused Portfolio Risk | ||||||||||||||||||||||||||||||||||||||||
Foreign Currency Risk | ||||||||||||||||||||||||||||||||||||||||
Geographic Concentration Risk | ||||||||||||||||||||||||||||||||||||||||
Highly Leveraged Transactions Risk | X | X | X | |||||||||||||||||||||||||||||||||||||
Impairment of Collateral Risk | X | X | X | |||||||||||||||||||||||||||||||||||||
Industry Concentration Risk | X | |||||||||||||||||||||||||||||||||||||||
Inflation Protected Securities Risk | ||||||||||||||||||||||||||||||||||||||||
Initial Public Offering (IPO) Risk | ||||||||||||||||||||||||||||||||||||||||
Interest Rate Risk | X | X | X | X | X | X | X | X | X | X | ||||||||||||||||||||||||||||||
Issuer Risk | X | X | X | X | ||||||||||||||||||||||||||||||||||||
Leverage Risk | X | X | ||||||||||||||||||||||||||||||||||||||
Liquidity Risk | X | X | X | X | X | X | X | X | ||||||||||||||||||||||||||||||||
Market Risk | X | X | X | X | X | X | X | X | X | |||||||||||||||||||||||||||||||
Mid-Sized Company Risk | ||||||||||||||||||||||||||||||||||||||||
Mortgage-Related and Other Asset-Backed Securities Risk | X | X | ||||||||||||||||||||||||||||||||||||||
Non-Diversification Risk | ||||||||||||||||||||||||||||||||||||||||
Prepayment and Extension Risk | X | X | X | X | X | X | X | X | X | |||||||||||||||||||||||||||||||
Quantitative Model Risk | X | |||||||||||||||||||||||||||||||||||||||
Real Estate Industry Risk | X | |||||||||||||||||||||||||||||||||||||||
Reinvestment Risk | X | |||||||||||||||||||||||||||||||||||||||
Risks of Foreign Investing | X | X | X | X | ||||||||||||||||||||||||||||||||||||
Sector Risk | ||||||||||||||||||||||||||||||||||||||||
Small and Mid-Sized Company Risk | X | |||||||||||||||||||||||||||||||||||||||
Small Company Risk | ||||||||||||||||||||||||||||||||||||||||
Stripped Securities Risk | X | |||||||||||||||||||||||||||||||||||||||
Value Securities Risk | ||||||||||||||||||||||||||||||||||||||||
Varying Distribution Levels Risk |
E-4
Table of Contents
Active Management Risk. Each underlying fund is actively managed and its performance therefore will reflect in part the ability of the portfolio managers to select securities and to make investment decisions that are suited to achieving the underlying fund’s investment objectives. Due to their active management, the underlying funds could underperform other mutual funds with similar investment objectives.
Confidential Information Access Risk. In managing the underlying fund, the investment manager normally will seek to avoid the receipt of material, non–public information (Confidential Information) about the issuers of floating rate loans being considered for acquisition by the underlying fund, or held in the underlying fund. In many instances, issuers of floating rate loans offer to furnish Confidential Information to prospective purchasers or holders of the issuer’s floating rate loans to help potential investors assess the value of the loan. The investment manager’s decision not to receive Confidential Information from these issuers may disadvantage the Fund as compared to other floating rate loan investors, and may adversely affect the price the underlying fund pays for the loans it purchases, or the price at which the underlying fund sells the loans. Further, in situations when holders of floating rate loans are asked, for example, to grant consents, waivers or amendments, the investment manager’s ability to assess the desirability of such consents, waivers or amendments may be compromised. For these and other reasons, it is possible that the investment manager’s decision under normal circumstances not to receive Confidential Information could adversely affect the underlying fund’s performance.
Counterparty Risk. Counterparty risk is the risk that a counterparty to a security or loan held by an underlying fund becomes bankrupt or otherwise fails to perform its obligations due to financial difficulties. The underlying fund may experience significant delays in obtaining any recovery in a bankruptcy or other reorganization proceeding, and there may be no recovery or limited recovery in such circumstances. The underlying fund will typically enter into financial instrument transactions with counterparties whose credit rating is investment grade, or, if unrated, determined to be of comparable quality by the investment manager.
Credit Risk. The risk that the issuer of a security, or the counterparty to a contract, will default or otherwise become unable or unwilling to honor a financial obligation, such as payments due on a bond or a note. If the underlying fund purchases unrated securities, or if the rating of a security is reduced after purchase, the underlying fund will depend on the investment manager’s analysis of credit risk more heavily than usual. Non–investment grade securities, commonly called “high–yield” or “junk” bonds, may react more to perceived changes in the ability of the issuing entity or obligor to pay interest and principal when due than to changes in interest rates. Non–investment grade securities may have greater price fluctuations and are more likely to experience a default than investment grade bonds.
Derivatives Risk. Derivatives are financial instruments that have a value which depends upon, or is derived from, the value of something else, such as one or more underlying securities, pools of securities, options, futures, indexes or currencies. Losses involving derivative instruments may be substantial, because a relatively small price movement in the underlying security(ies), instrument, currency or index may result in a substantial loss for the underlying fund. In addition to the potential for increased losses, the use of derivative instruments may lead to increased volatility within the underlying fund. Derivative instruments in which the underlying funds invest will typically increase each such fund’s exposure to principal risks to which they are otherwise exposed, and may expose the fund to additional risks, including leverage risk, hedging risk, correlation risk, and liquidity risk.
Leverage risk is the risk that losses from the derivative instrument may be greater than the amount invested in the derivative instrument.
Hedging risk is the risk that derivative instruments used to hedge against an opposite position may offset losses, but they may also offset gains. There is no guarantee that a hedging strategy will eliminate the risk which the hedging strategy is intended to offset, which may lead to losses within the underlying fund.
Correlation risk is related to hedging risk and is the risk that there may be an incomplete correlation between the hedge and the opposite position, which may result in increased or unanticipated losses.
Liquidity risk is the risk that the derivative instrument may be difficult or impossible to sell or terminate, which may cause the underlying fund to be in a position to do something the investment manager would not otherwise choose, including accepting a lower price for the derivative instrument, selling other investments or foregoing another, more appealing investment opportunity. Derivative instruments which are not traded on an exchange, including, but not limited to, forward contracts, swaps and over–the–counter options, may have increased liquidity risk. Certain derivatives have the potential for unlimited losses, regardless of the size of the initial investment. See the Merger SAI for more information on derivative instruments and related risks.
Focused Portfolio Risk. The underlying fund expects to invest in a limited number of companies. Accordingly, the underlying fund may have more volatility and is considered to have more risk than a fund that invests in a greater number of companies because changes in the value of a single security may have a more significant effect, either negative or positive, on the underlying fund’s net asset value. To the extent the underlying fund invests its assets in fewer securities, the underlying fund is subject to greater risk of loss if any of those securities declines in price.
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Foreign Currency Risk. The underlying fund’s exposure to foreign currencies subjects the underlying fund to constantly changing exchange rates and the risk that those currencies will decline in value relative to the U.S. dollar, or, in the case of short positions, that the U.S. dollar will decline in value relative to the currency being sold forward. Currency rates in foreign countries may fluctuate significantly over short periods of time for a number of reasons, including changes in interest rates and economic or political developments in the U.S. or abroad. As a result, the underlying fund’s exposure to foreign currencies may reduce the returns of the underlying fund. Trading of foreign currencies also includes the risk of clearing and settling trades which, if prices are volatile, may be difficult or impossible.
Geographic Concentration Risk. The underlying fund may be particularly susceptible to economic, political or regulatory events affecting companies and countries within the specific geographic region in which an underlying fund focuses its investments. Currency devaluations could occur in countries that have not yet experienced currency devaluation to date, or could continue to occur in countries that have already experienced such devaluations. As a result, the underlying fund may be more volatile than a more geographically diversified fund.
Highly Leveraged Transactions Risk. The corporate loans and corporate debt securities in which the underlying fund invests substantially consist of transactions involving refinancings, recapitalizations, mergers and acquisitions, and other financings for general corporate purposes. The underlying fund’s investments also may include senior obligations of a borrower issued in connection with a restructuring pursuant to Chapter 11 of the U.S. Bankruptcy Code (commonly known as “debtor–in–possession” financings), provided that such senior obligations are determined by the underlying fund’s investment manager upon its credit analysis to be a suitable investment by such underlying fund. In such highly leveraged transactions, the borrower assumes large amounts of debt in order to have the financial resources to attempt to achieve its business objectives. Such business objectives may include but are not limited to: management’s taking over control of a company (leveraged buy–out); reorganizing the assets and liabilities of a company (leveraged recapitalization); or acquiring another company. Loans or securities that are part of highly leveraged transactions involve a greater risk (including default and bankruptcy) than other investments.
Impairment of Collateral Risk. The value of collateral, if any, securing a floating rate loan can decline, and may be insufficient to meet the borrower’s obligations or difficult to liquidate. In addition, the underlying fund’s access to collateral may be limited by bankruptcy or other insolvency laws. Further, certain floating rate loans may not be fully collateralized and may decline in value.
Industry Concentration Risk. Investments that are concentrated in a particular issuer will make the underlying fund’s portfolio value more susceptible to the events or conditions impacting that particular industry. Because the underlying fund may invest more than 25% of its total assets in money market instruments issued by banks, the value of these investments may be adversely affected by economic, political or regulatory developments in or that impact the banking industry.
Inflation Protected Securities Risk. Inflation–protected debt securities tend to react to change in real interest rates. Real interest rates can be described as nominal interest rates minus the expected impact of inflation. In general, the price of an inflation–protected debt security falls when real interest rates rise, and rises when real interest rates fall. Interest payments on inflation–protected debt securities will vary as the principal and/or interest is adjusted for inflation and may be more volatile than interest paid on ordinary bonds. In periods of deflation, these securities may generate no income at all.
Initial Public Offering (IPO) Risk. IPOs are subject to many of the same risks as investing in companies with smaller market capitalizations. To the extent the underlying fund determines to invest in IPOs it may not be able to invest to the extent desired, because, for example, only a small portion (if any) of the securities being offered in an IPO may be made available. The investment performance of the underlying fund during periods when it is unable to invest significantly or at all in IPOs may be lower than during periods when the underlying fund is able to do so. In addition, as the underlying fund increases in size, the impact of IPOs on the underlying fund’s performance will generally decrease. IPOs sold within 12 months of purchase will result in increased short–term capital gains, which will be taxable to shareholders as ordinary income.
Interest Rate Risk. Interest rate risk is the risk of losses attributable to changes in interest rates. Interest rate risk is generally associated with bond prices: when interest rates rise, bond prices fall. In general, the longer the maturity or duration of a bond, the greater its sensitivity to changes in interest rates.
Issuer Risk. An issuer may perform poorly, and therefore, the value of its stocks and bonds may decline. Poor performance may be caused by poor management decisions, competitive pressures, breakthroughs in technology, reliance on suppliers, labor problems or shortages, corporate restructurings, fraudulent disclosures, or other factors.
Leverage Risk. Leverage occurs when the underlying fund increases its assets available for investment using borrowings, short sales, derivatives, or similar instruments or techniques. Due to the fact that short sales involve borrowing securities and then selling them, the underlying fund’s short sales effectively leverage the underlying fund’s assets. The use of leverage may make any change in the
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underlying fund’s net asset value (NAV) even greater and thus result in increased volatility of returns. The underlying fund’s assets that are used as collateral to secure the short sales may decrease in value while the short positions are outstanding, which may force the underlying fund to use its other assets to increase the collateral. Leverage can also create an interest expense that may lower the underlying fund’s overall returns. Lastly, there is no guarantee that a leveraging strategy will be successful.
Liquidity Risk. The risk associated from a lack of marketability of securities which may make it difficult or impossible to sell at desirable prices in order to minimize loss. The underlying fund may have to lower the selling price, sell other investments, or forego another, more appealing investment opportunity.
Market Risk. The market value of securities may fall or fail to rise. Market risk may affect a single issuer, sector of the economy, industry, or the market as a whole. The market value of securities may fluctuate, sometimes rapidly and unpredictably. This risk is generally greater for small companies and for certain specialized instruments such as floating rate loans, which tend to be more vulnerable to adverse developments. In addition, focus on a particular style, for example, investment in value securities, may cause a fund to underperform other mutual funds if that style falls out of favor with the market.
Mid–Sized Company Risk. Investments in mid–sized companies often involve greater risks than investments in larger, more established companies because mid–sized companies may lack the management experience, financial resources, product diversification and competitive strengths of larger companies. In addition, in some instances the securities of mid–sized companies are traded only over–the–counter or on regional securities exchanges and the frequency and volume of their trading is substantially less than is typical of larger companies.
Mortgage–Related and Other Asset–Backed Securities Risks. Generally, rising interest rates tend to extend the duration of fixed rate mortgage–related securities, making them more sensitive to changes in interest rates. As a result, in a period of rising interest rates, if an underlying fund holds mortgage–related securities, it may exhibit additional volatility. This is known as extension risk. In addition, adjustable and fixed rate mortgage–related securities are subject to prepayment risk. When interest rates decline, borrowers may pay off their mortgages sooner.
Non–Diversification Risk. Although the Funds are diversified funds, certain of the underlying funds are non–diversified funds. A non–diversified fund may invest more of its assets in fewer companies than if it were a diversified fund. Because each investment may therefore have a greater effect on the underlying fund’s performance, non–diversified underlying funds may be more exposed to the risks of loss and volatility than a fund that invests more broadly.
Prepayment and Extension Risk. Prepayment and extension risk is the risk that a loan, bond or other security might be called or otherwise converted, prepaid, or redeemed before maturity. This risk is primarily associated with asset–backed securities, including mortgage–backed securities and floating rate loans. If a loan or security is converted, prepaid, or redeemed before maturity, particularly during a time of declining interest rates or declining spreads, the investment manager may not be able to reinvest in securities or loans providing as high a level of income, resulting in a reduced yield to the underlying fund. Conversely, as interest rates rise or spreads widen, the likelihood of prepayment decreases. The investment manager may be unable to capitalize on securities with higher interest rates or wider spreads because the underlying fund’s investments are locked in at a lower rate for a longer period of time.
Quantitative Model Risk. Certain underlying funds employ quantitative methods that may result in performance different from the market as a whole as a result of the factors used in the quantitative method, the weight placed on each factor, and changes in the factors’ historical trends. There can be no assurance that the methodology will enable these underlying funds to achieve their objectives.
Real Estate Industry Risk. Certain underlying funds concentrate their investments in securities of companies operating in the real estate industry, making such underlying fund susceptible to risks associated with the ownership of real estate and with the real estate industry in general. These risks can include fluctuations in the value of the underlying properties, defaults by borrowers or tenants, market saturation, decreases in market rates for rents, and other economic, political, or regulatory occurrences affecting the real estate industry, including real estate investment trusts (REITs). Investments in REITs depend upon specialized management skills, and REITs may have limited financial resources, may have less trading volume, and may be subject to more abrupt or erratic price movements than the overall securities markets. REITs are also subject to the risk of failing to qualify for tax–free pass–through of income. Some REITs (especially mortgage REITs) are affected by risks similar to those associated with investments in debt securities including changes in interest rates and the quality of credit extended.
Reinvestment risk is the risk that the underlying fund will not be able to reinvest income or principal at the same rate it currently is earning.
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Risks of Foreign Investing. Foreign securities are securities of issuers based outside the United States. An issuer is deemed to be based outside the United States if it is organized under the laws of another country. Foreign securities are primarily denominated in foreign currencies. In addition to the risks normally associated with domestic securities of the same type, foreign securities are subject to the following foreign risks:
Country risk includes the political, economic, and other conditions of the country. These conditions include lack of publicly available information, less government oversight (including lack of accounting, auditing, and financial reporting standards), the possibility of government–imposed restrictions, and even the nationalization of assets. The liquidity of foreign investments may be more limited than for most U.S. investments, which means that, at times it may be difficult to sell foreign securities at desirable prices.
Currency risk results from the constantly changing exchange rate between local currency and the U.S. dollar. Whenever an underlying fund holds securities valued in a foreign currency or holds the currency, changes in the exchange rate add to or subtract from the value of the investment.
Custody risk refers to the process of clearing and settling trades. It also covers holding securities with local agents and depositories. Low trading volumes and volatile prices in less developed markets make trades harder to complete and settle. Local agents are held only to the standard of care of the local market. Governments or trade groups may compel local agents to hold securities in designated depositories that are not subject to independent evaluation. The less developed a country’s securities market is, the greater the likelihood of problems occurring.
Emerging markets risk includes the dramatic pace of change (economic, social and political) in these countries as well as the other considerations listed above. These markets are in early stages of development and are extremely volatile. They can be marked by extreme inflation, devaluation of currencies, dependence on trade partners, and hostile relations with neighboring countries.
Sector Risk. If an underlying fund emphasizes one or more economic sectors, it may be more susceptible to the financial, market or economic events affecting the particular issuers and industries in which it invests than funds that do not emphasize particular sectors. The more an underlying fund diversifies across sectors, the more it spreads risk and potentially reduces the risks of loss and volatility.
Small and Mid–Sized Company Risk. Investments in small and medium companies often involve greater risks than investments in larger, more established companies because small and medium companies may lack the management experience, financial resources, product diversification experience and competitive strengths of larger companies. Additionally, in many instances, the securities of small and medium companies are traded only over–the–counter or on regional securities exchanges and the frequency and volume of their trading is substantially less and may be more volatile than is typical of larger companies.
Small Company Risk. Investments in small capitalization companies often involve greater risks than investments in larger, more established companies because small capitalization companies may lack the management experience, financial resources, product diversification, experience and competitive strengths of larger companies. In addition, in many instances the securities of small capitalization companies are traded only over–the–counter or on regional securities exchanges and the frequency and volume of their trading is substantially less and may be more volatile than is typical of larger companies.
Stripped Securities Risk. Stripped securities are the separate income or principal components of debt securities. These securities are particularly sensitive to changes in interest rates, and therefore subject to greater fluctuations in price than typical interest bearing debt securities. For example, stripped mortgage–backed securities have greater interest rate risk than mortgage–backed securities with like maturities, and stripped treasury securities have greater interest rate risk than traditional government securities with identical credit ratings.
Value Securities Risk. Value securities involve the risk that they may never reach what the investment manager believes is their full market value either because the market fails to recognize the stock’s intrinsic worth or the investment manager misgauged that worth. They also may decline in price, even though in theory they are already undervalued. Because different types of stocks tend to shift in and out of favor depending on market and economic conditions, the underlying fund’s performance may sometimes be lower or higher than that of other types of funds (such as those emphasizing growth stocks).
Varying Distribution Levels Risk. The amount of the distributions paid by the underlying fund generally depends on the amount of income and/or dividends received by the underlying fund on the securities it holds. The Fund may not be able to pay distributions or may have to reduce its distribution level if the income and/or dividends the Fund receives from its investments decline.
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Share Ownership of Nominees
As of September 30, 2010, the Nominees and officers of the Companies, as a group, beneficially owned less than 1% of each class of shares of each Fund. The table below shows, for each Nominee, the amount of shares of each Fund beneficially owned by the Nominee. [[It also shows the aggregate value of all investments in shares of the Combined Funds Complex overseen or to be overseen by the Nominees, including notional amounts through the Deferred Compensation Agreement.]] Ownership information is presented in the following ranges: A = $0; B = $1-$10,000; C = $10,001-$50,000; D = $50,001-$100,000; and E = over $100,000.
Independent Nominee Ownership as of September 30, 2010
Fund | Kathleen Blatz | Edward J. Boudreau, Jr. | Pamela G. Carlton | William P. Carmichael | Patricia M. Flynn | William A. Hawkins | ||||||
RiverSource Variable Portfolio – Strategic Income Fund | A | A | A | A | A | A | ||||||
Disciplined Asset Allocation Portfolios – Conservative | A | A | A | A | A | A | ||||||
Disciplined Asset Allocation Portfolios – Moderately Conservative | A | A | A | A | A | A | ||||||
Disciplined Asset Allocation Portfolios – Moderate | A | A | A | A | A | A | ||||||
Disciplined Asset Allocation Portfolios – Moderately Aggressive | A | A | A | A | A | A | ||||||
Disciplined Asset Allocation Portfolios – Aggressive | A | A | A | A | A | A | ||||||
Aggregate Dollar Range of Shares in all Funds in the Combined Funds Complex Overseen or to be Overseen by the Nominee | E | E | E* | E | E* | A |
* | Total includes deferred compensation invested in share equivalents |
Fund | R. Glenn Hilliard | Stephen R. Lewis, Jr. | John F. Maher | John J. Nagorniak | Catherine James Paglia | Leroy C. Richie | ||||||
RiverSource Variable Portfolio – Strategic Income Fund | A | A | A | A | A | A | ||||||
Disciplined Asset Allocation Portfolios – Conservative | A | A | A | A | A | A | ||||||
Disciplined Asset Allocation Portfolios – Moderately Conservative | A | A | A | A | A | A | ||||||
Disciplined Asset Allocation Portfolios – Moderate | A | A | A | A | A | A | ||||||
Disciplined Asset Allocation Portfolios – Moderately Aggressive | A | A | A | A | A | A | ||||||
Disciplined Asset Allocation Portfolios – Aggressive | A | A | A | A | A | A | ||||||
Aggregate Dollar Range of Shares in all Funds in the Combined Funds Complex Overseen or to be Overseen by the Nominee | E | E* | E* | E | E* | E |
* | Total includes deferred compensation invested in share equivalents |
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Fund | Alison Taunton- Rigby | Minor M. Shaw | ||
RiverSource Variable Portfolio – Strategic Income Fund | A | A | ||
Disciplined Asset Allocation Portfolios – Conservative | A | A | ||
Disciplined Asset Allocation Portfolios – Moderately Conservative | A | A | ||
Disciplined Asset Allocation Portfolios – Moderate | A | A | ||
Disciplined Asset Allocation Portfolios – Moderately Aggressive | A | A | ||
Disciplined Asset Allocation Portfolios – Aggressive | A | A | ||
Aggregate Dollar Range of Shares in all Funds in the Combined Funds Complex Overseen or to be Overseen by the Nominee | E | E |
Interested Nominee Ownership as of September 30, 2010
Fund | William F. Truscott | Anthony M. Santomero | ||
RiverSource Variable Portfolio – Strategic Income Fund | A | A | ||
Disciplined Asset Allocation Portfolios – Conservative | A | A | ||
Disciplined Asset Allocation Portfolios – Moderately Conservative | A | A | ||
Disciplined Asset Allocation Portfolios – Moderate | A | A | ||
Disciplined Asset Allocation Portfolios – Moderately Aggressive | A | A | ||
Disciplined Asset Allocation Portfolios – Aggressive | A | A | ||
Aggregate Dollar Range of Shares in all Funds in the Combined Funds Complex Overseen or to be Overseen by the Nominee | E | E |
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RIVERSOURCE FUNDS BOARD
Board Governance Committee Charter
Introduction
The Board of Directors/Trustees of each RiverSource Fund (the “Board”) is responsible for protecting the interests of each RiverSource Fund (each, a “Fund” and collectively, the “Funds”) and its shareholders. In this connection, the Board has established a Board Governance Committee (the “Committee”). The Board has adopted this Board Governance Committee Charter (the “Charter”) for purposes of delineating the scope of the Committee’s authority and responsibility, and defining key attributes of the Committee and its members.
Committee Purpose
The mission of the Committee under this Charter is to review and oversee Fund governance matters, including protecting and furthering the interest of the Funds and their shareholders on external matters.
Committee Authority and Responsibilities
To carry out its purpose, the Committee shall have the following powers and duties:
• | Governance Matters |
o | Make recommendations to the Board on: |
› | The responsibilities and duties of the Board; |
› | The criteria to be used to determine the size and structure of the Board, and the background and characteristics of Independent Directors/Trustees of the Board (the “Independent Directors”); |
› | The persons to serve as Board members based on approved criteria whenever necessary to fill a vacancy or in conjunction with a regular meeting of shareholders in which nominees are required to be submitted for a vote of shareholders; |
› | The process for conducting the annual evaluation of the Board’s performance; |
› | The nomination of the Board Chair, the members to serve on each committee of the Board, and the member who should serve as Chair of each committee; and |
› | The compensation to be paid to the Independent Directors. |
o | Have one or more of its members meet personally with each candidate for Board membership to evaluate the candidate’s ability to work effectively with other members of the Board, while also exercising independent judgment. |
o | Consider the individual professional and personal backgrounds of each Board candidate or nominee and assess how those would fit into the mix of experiences represented by the then-current Board. |
o | Oversee the proxy voting policies and procedures with respect to voting proxies relating to portfolio securities. |
o | Assist the Board Chair in furthering the interests of the Funds and their shareholders with respect to matters involving regulatory, governmental and investor organizations. |
• | Reporting to Board |
o | The Committee shall report quarterly to the Board, or more frequently as appropriate, on matters considered, conclusions reached, and action taken by the Committee. Recommendations to the Board or action recommended to be taken by the Board will be at the discretion of the Committee members and the Committee Chair. |
The Committee shall be assigned such additional areas of responsibility as appropriate to assist the Board in meeting its fiduciary duties in an efficient and effective manner.
The members of the Committee shall serve as the directors of Board Services Corporation (“BSC”) as provided by the Operating Guidelines of BSC.
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Committee Operations
The agenda for each Committee meeting shall be prepared under the direction and control of the Chair.
The Committee shall ordinarily meet in person; however, members may attend telephonically, and the Committee may act by written consent, to the extent permitted by law and by the Funds’ bylaws.
The Committee shall have the authority to meet privately and to admit non-members individually.
The Committee shall prepare and retain minutes of its meetings and appropriate documentation of decisions made outside of meetings by delegated authority.
The Committee shall evaluate its performance at least annually.
Committee Membership
The Committee shall be comprised exclusively of Independent Directors. Each member of the Committee, including the Chair, will be appointed by the vote of a majority of the Independent Directors then serving on the Board. Members of the Committee will serve at the pleasure of the Independent Directors on the Board.
Meetings
The Committee meets on the dates established on an annual agenda. The Committee may hold additional meetings as called by the Committee Chair, the Board Chair, or any two members of the Committee. A majority of the Committee will constitute a quorum. Every act done or decision made by a majority of the Committee members present at a meeting duly held at which a quorum is present will be regarded as the act of the Committee. At each meeting, the Committee will hold an executive session for Committee members and Independent Counsel only.
Miscellaneous
The Committee will have the resources and authority appropriate to discharge its responsibilities, including authority to retain experts or consultants, subject to the approval of the Independent Directors.
The Committee will review this Charter periodically, and will recommend any changes to the Board. The Board will initially review this Charter, and thereafter will review any material changes to this Charter recommended by the Committee. Board approval is required for initial adoption and any material changes to this Charter.
Effective Date
Adopted by the Board on January 10, 2008, amended on November 12, 2009 and further amended on January 13, 2010.
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Executive Officer and Director Information
Information regarding the current executive officers of each RiverSource Company, and the principal executive officer and directors of Columbia Management, is shown below.
Name, Year of Birth and Address | Position with the Companies and Year First Elected to Office | Position with Columbia Management and Year First Elected or Appointed to Office | Principal Occupation(s) During the Past Five Years | |||
J. Kevin Connaughton (Born 1964) One Financial Center Boston, MA 02111 | President (Principal Executive Officer) (2010) | Senior Vice President and General Manager – Mutual Fund Products (2010) | President, Columbia Funds since 2009 (previously Senior Vice President and Chief Financial Officer, June 2008 – January 2009); President, Atlantic Funds and Nations Funds since 2009; Managing Director of Columbia Management Advisors, LLC, December 2004 – April 2010; Treasurer, Columbia Funds, October 2003 – May 2008; Treasurer, the Liberty Funds, Stein Roe Funds and Liberty All-Start Funds, December 2000 – December 2006; Senior Vice President – Columbia Management Advisors, LLC, April 2003 – December 2004; President, Columbia Funds, Liberty Funds and Stein Roe Funds, February 2004 – October 2004 | |||
Amy K. Johnson (Born 1965) 5228 Ameriprise Financial Center Minneapolis, MN 55474 | Vice President (2006) | Senior Vice President and Chief Operating Officer (2010) | Chief Administrative Officer, Columbia Management, 2009 – April 2010 (previously Vice President – Asset Management and Trust Company Services, 2006 – 2009 and Vice President – Operations and Compliance, 2004 – 2006); Senior Vice President, Columbia Funds, Atlantic Funds and Nations Funds since May 2010; Director of Product Development – Mutual Funds, Ameriprise Financial, Inc. 2001 – 2004 | |||
Jeffrey P. Fox (Born [1955]) 105 Ameriprise Financial Center Minneapolis, MN 55474 | Treasurer (2002) | [None] | Chief Financial Officer, Columbia Management Investment Distributors, LLC (formerly RiverSource Fund Distributors, Inc.) and of Seligman Data Corp. since 2008; Vice President – Investment Accounting, Ameriprise Financial, Inc. since 2002; Chief Financial Officer, RiverSource Distributors, Inc. since 2006 | |||
Scott R. Plummer (Born 1959) 5228 Ameriprise Financial Center Minneapolis, MN 55474 | Vice President, General Counsel and Secretary (2006) | Vice President and Chief Legal Officer (2005) | Vice President and Lead Chief Counsel – Asset Management, Ameriprise Financial, Inc. since May 2010 (previously Vice President and Chief Counsel – Asset Management, from 2005 to April 2010, and Vice President – Asset Management Compliance from 2004 to 2005); Vice President, Chief Counsel and Assistant Secretary, Columbia Management Investment Distributors, Inc. since 2008; Vice President, General Counsel and Secretary, Ameriprise Certificate Company since 2005; Chief Counsel, RiverSource Distributors, Inc. since 2006; Senior Vice President, Secretary and Chief Legal Officer, Columbia Funds, since 2010; Senior Vice President, Secretary and Chief Legal Officer, Columbia Funds, since May 2010. |
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Name, Year of Birth and Address | Position with the Companies and Year First Elected to Office | Position with Columbia Management and Year First Elected or Appointed to Office | Principal Occupation(s) During the Past Five Years | |||
Michael A. Jones (Born 1959) 100 Federal Street Boston, MA 02110 | Vice President (2010) | Director and President (2010) | President and Director, Columbia Management Investment Distributors, Inc. since May 2010; Manager, Chairman, Chief Executive Officer and President, Columbia Management Advisors, LLC from 2007 to April 2010; Chief Executive Officer, President and Director, Columbia Management Distributors, Inc. from November 2006 to April 2010; previously, co-president and senior managing director at Robeco Investment Management. | |||
Colin Moore (Born 1958) One Financial Center Boston, MA 02111 | Senior Vice President (2010) | Director and Chief Investment Officer (2010) | Manager, Managing Director and Chief Investment Officer of Columbia Management Advisors, LLC from 2007 to April 2010; Head of Equities, Columbia Management Advisors, LLC from 2002 to 2007. | |||
Linda J. Wondrack (Born 1964) One Financial Center Boston, MA 02111 | Vice President (2010) | Vice President and Chief Compliance Officer (2010) | Senior Vice President and Chief Compliance Officer, Columbia Funds, since 2007; Director (Columbia Management Group, LLC and Investment Product Group Compliance), Bank of America, from June 2005 to April 2010; Director of Corporate Compliance and Conflicts Officer of MFS Investment Management (investment management) from August 2004 to May 2005. | |||
Neysa M. Alecu (Born [1964]) 2934 Ameriprise Financial Center Minneapolis, MN 55474 | Money Laundering Prevention Officer since 11/9/05 and Identity Theft Prevention Officer since 2008 | [None] | Vice President – Compliance, Ameriprise Financial, Inc., since 2008; Anti-Money Laundering Officer and Identity Theft Prevent Officer, Columbia Management Investment Distributors, Inc. (formerly RiverSource Fund Distributors, Inc.) since 2008; Anti-Money Laundering Officer, Ameriprise Financial, Inc., since 2005; Compliance Director, Ameriprise Financial, Inc., 2004 – 2008 | |||
Stephen T. Welsh (Born 1957) One Financial Center Boston, MA 02111 | [None] | President and Director (2010) | President and Director, Columbia Management Services, Inc. from July 2004 to April 2010; Managing Director, Columbia Management Distributors, Inc. from August 2007 to April 2010; Vice President, Columbia Funds, since 2006 | |||
Brian J. McGrane [ADDRESS] | [None] | Director, Senior Vice President and Chief Financial Officer | [•] |
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Exhibit I
Director/Trustee Compensation
Total directors/trustees’ fees paid by each Fund and the RiverSource Companies to the directors/trustees are listed below for each Fund’s last fiscal year. No director/trustee listed below received pension or retirement benefits accrued as part of any Fund’s expenses in any Fund’s last fiscal year. [[All directors/trustees receive reimbursements for reasonable expenses related to their attendance at meetings of the Columbia RiverSource Boards or standing Committees, which are not reflected in the amounts shown.]]
Independent Director/Trustee Compensation from Funds
Fund | Blatz1 | Carlson2 | Carlton3 | Flynn4 | Jones5 | Laikind6 | ||||||
For Funds with fiscal years ending December 31 | ||||||||||||
RiverSource Variable Portfolio – Strategic Income Fund | * | * | * | * | * | * | ||||||
Amount Deferred | N/A | N/A | N/A | N/A | N/A | N/A | ||||||
Disciplined Asset Allocation Portfolios – Conservative | * | * | * | * | * | * | ||||||
Amount Deferred | N/A | N/A | N/A | N/A | N/A | N/A | ||||||
Disciplined Asset Allocation Portfolios – Moderately Conservative | * | * | * | * | * | * | ||||||
Amount Deferred | N/A | N/A | N/A | N/A | N/A | N/A | ||||||
Disciplined Asset Allocation Portfolios – Moderate | * | * | * | * | * | * | ||||||
Amount Deferred | N/A | N/A | N/A | N/A | N/A | N/A | ||||||
Disciplined Asset Allocation Portfolios – Moderately Aggressive | * | * | * | * | * | * | ||||||
Amount Deferred | N/A | N/A | N/A | N/A | N/A | N/A | ||||||
Disciplined Asset Allocation Portfolios – Aggressive | * | * | * | * | * | * | ||||||
Amount Deferred | N/A | N/A | N/A | N/A | N/A | N/A |
* The Funds-of-Funds do not pay additional compensation to the Board members for attending meetings. Compensation is paid directly from the affiliated underlying funds in which each Fund-of-Funds invests.
1 During the calendar year ended December 31, 2009, Ms. Blatz deferred $0 of her total compensation from the RiverSource Fund Complex pursuant to the deferred compensation plan. As of December 31, 2009, the value of Ms. Blatz’s account under that plan was $[•].
2 During the calendar year ended December 31, 2009, Mr. Carlson deferred $0 of his total compensation from the RiverSource Fund Complex pursuant to the deferred compensation plan. As of December 31, 2009, the value of Mr. Carlson’s account under that plan was $[•].
3 During the calendar year ended December 31, 2009, Ms. Carlton deferred $64,000 of her total compensation from the RiverSource Fund Complex pursuant to the deferred compensation plan. As of December 31, 2009, the value of Ms. Carlton’s account under that plan was $[•].
4 During the calendar year ended December 31, 2009, Ms. Flynn deferred $49,500 of her total compensation from the RiverSource Fund Complex pursuant to the deferred compensation plan. As of December 31, 2009, the value of Ms. Flynn’s account under that plan was $[•].
5 During the calendar year ended December 31, 2009, Ms. Jones deferred $0 of her total compensation from the RiverSource Fund Complex pursuant to the deferred compensation plan. As of December 31, 2009, the value of Ms. Jones’ account under that plan was $[•].
6 During the calendar year ended December 31, 2009, Mr. Laikind deferred $0 of his total compensation from the RiverSource Fund Complex pursuant to the deferred compensation plan. As of December 31, 2009, the value of Mr. Laikind’s account under that plan was $[•].
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Fund | Lewis7 | Maher8 | Paglia9 | Richie10 | Taunton- Rigby11 | |||||
For Funds with fiscal years ending January 31 | ||||||||||
RiverSource Variable Portfolio – Strategic Income Fund | * | * | * | * | * | |||||
Amount Deferred | N/A | N/A | N/A | N/A | N/A | |||||
Disciplined Asset Allocation Portfolios – Conservative | * | * | * | * | * | |||||
Amount Deferred | N/A | N/A | N/A | N/A | N/A | |||||
Disciplined Asset Allocation Portfolios – Moderately Conservative | * | * | * | * | * | |||||
Amount Deferred | N/A | N/A | N/A | N/A | N/A | |||||
Disciplined Asset Allocation Portfolios – Moderate | * | * | * | * | * | |||||
Amount Deferred | N/A | N/A | N/A | N/A | N/A | |||||
Disciplined Asset Allocation Portfolios – Moderately Aggressive | * | * | * | * | * | |||||
Amount Deferred | N/A | N/A | N/A | N/A | N/A | |||||
Disciplined Asset Allocation Portfolios – Aggressive | * | * | * | * | * | |||||
Amount Deferred | N/A | N/A | N/A | N/A | N/A |
* The Funds-of-Funds do not pay additional compensation to the Board members for attending meetings. Compensation is paid directly from the affiliated underlying funds in which each Fund-of-Funds invests.
7 During the calendar year ended December 31, 2009, Mr. Lewis deferred $60,000 of his total compensation from the RiverSource Fund Complex pursuant to the deferred compensation plan. As of December 31, 2009, the value of Mr. Lewis account under that plan was $[•].
8 During the calendar year ended December 31, 2009, Mr. Maher deferred $ 155,000of his total compensation from the RiverSource Fund Complex pursuant to the deferred compensation plan. As of December 31, 2009, the value of Mr. Maher account under that plan was $[•].
9 During the calendar year ended December 31, 2009, Ms. Paglia deferred $0 of her total compensation from the RiverSource Fund Complex pursuant to the deferred compensation plan. As of December 31, 2009, the value of Ms. Paglia’s account under that plan was $[•].
10 During the calendar year ended December 31, 2009, Mr. Richie deferred $0 of his total compensation from the RiverSource Fund Complex pursuant to the deferred compensation plan. As of December 31, 2009, the value of Mr. Richie’s account under that plan was $[•].
11 During the calendar year ended December 31, 2009, Ms. Taunton-Rigby deferred $0 of her total compensation from the RiverSource Fund Complex pursuant to the deferred compensation plan. As of December 31, 2009, the value of Ms. Taunton-Rigby’s account under that plan was $[•].
Interested Director/Trustee Compensation from Funds
Fund | Truscott1 | |
For Funds with fiscal years ending December 31 | ||
RiverSource Variable Portfolio – Strategic Income Fund | * | |
Amount Deferred | N/A | |
Disciplined Asset Allocation Portfolios – Conservative | * | |
Amount Deferred | N/A | |
Disciplined Asset Allocation Portfolios – Moderately Conservative | * | |
Amount Deferred | N/A | |
Disciplined Asset Allocation Portfolios – Moderate | * | |
Amount Deferred | N/A | |
Disciplined Asset Allocation Portfolios – Moderately Aggressive | * | |
Amount Deferred | N/A | |
Disciplined Asset Allocation Portfolios – Aggressive | * | |
Amount Deferred | N/A |
* The Funds-of-Funds do not pay additional compensation to the Board members for attending meetings. Compensation is paid directly from the affiliated underlying funds in which each Fund-of-Funds invests.
1 During the calendar year ended December 31, 2009, Mr. Truscott deferred $0 of his total compensation from the RiverSource Fund Complex pursuant to the deferred compensation plan. As of December 31, 2009, the value of Mr. Truscott’s account under that plan was $[•].
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Aggregate Independent Director/Trustee Compensation for Calendar Year Ended December 31, 2009
Total Compensation from the RiverSource Fund Complex Paid to Independent Directors/Trustees for Calendar Year Ended December 31, 2009(a) | ||
Kathleen Blatz | $172,500 | |
Arne H. Carlson | $177,500 | |
Pamela G. Carlton | $160,000 | |
Patricia M. Flynn | $165,000 | |
Anne P. Jones | $172,500 | |
Jeffrey Laikind | $160,000 | |
Stephen R. Lewis, Jr. | $400,000 | |
John F. Maher | $155,000 | |
Catherine James Paglia | $177,500 | |
Leroy C. Richie | $165,000 | |
Alison Taunton-Rigby | $165,000 |
(a) Board member compensation is a combination of a base fee and meeting fees, with the exception of the Chair of the Board, who receives a base annual compensation. Payment of compensation is administered by a company providing limited administrative services to the funds and to the Board.
Aggregate Interested Director/Trustee Compensation for Calendar Year Ended December 31, 2009
Total Compensation from the Columbia Fund Complex Paid to Interested Directors/Trustee for the Calendar Year Ended December 31, 2009 | ||
William F. Truscott | $0 |
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STATEMENT OF ADDITIONAL INFORMATION
[—], 2010
This Statement of Additional Information (the “SAI”) relates to the following proposed reorganizations (the “Reorganizations”):
(1) | RiverSource Variable Portfolio – Strategic Income Fund, a series of RiverSource Variable Series Trust (a “Selling Fund”) into Columbia Strategic Income Fund, Variable Series, a series of Columbia Funds Variable Insurance Trust (a “Buying Fund”). |
(2) | Disciplined Asset Allocation Portfolios – Conservative, a series of RiverSource Variable Series Trust (a “Selling Fund”) into Variable Portfolio – Conservative Portfolio, a series of RiverSource Variable Series Trust (a “Buying Fund”). |
(3) | Disciplined Asset Allocation Portfolios – Moderately Conservative, a series of RiverSource Variable Series Trust (a “Selling Fund”) into Variable Portfolio – Moderately Conservative Portfolio, a series of RiverSource Variable Series Trust (a “Buying Fund”). |
(4) | Disciplined Asset Allocation Portfolios – Moderate, a series of RiverSource Variable Series Trust (a “Selling Fund”) into Variable Portfolio, Moderate Portfolio, Variable Series, a series of RiverSource Variable Series Trust (a “Buying Fund”). |
(5) | Disciplined Asset Allocation Portfolios – Moderately Aggressive, a series of RiverSource Variable Series Trust (a “Selling Fund”) into Variable Portfolio – Moderately Aggressive Portfolio, a series of RiverSource Variable Series Trust (a “Buying Fund”). |
(6) | Disciplined Asset Allocation Portfolios – Aggressive, a series of RiverSource Variable Series Trust (a “Selling Fund”) into Variable Portfolio – Aggressive Portfolio, a series of RiverSource Variable Series Trust (a “Buying Fund”). |
This SAI contains information which may be of interest to shareholders of the Selling Funds but which is not included in the combined Prospectus/Proxy Statement dated [•], 2010 (the “Proxy Statement/Prospectus”) which relates to the Reorganizations. As described in the Proxy Statement/Prospectus, the Reorganizations would involve the transfer of all the assets of each Selling Fund in exchange for shares of the corresponding Buying Fund and the assumption of all the liabilities of each Selling Fund by the corresponding Buying Fund. Each Selling Fund would distribute the Buying Fund shares it receives to its shareholders in complete liquidation of each Selling Fund.
This SAI is not a prospectus and should be read in conjunction with the Proxy Statement/Prospectus. The Proxy Statement/Prospectus has been filed with the Securities and Exchange Commission and is available upon request and without charge by writing to each Buying Fund at c/o Columbia Management Investment Services Corp., P.O. Box 8081, Boston, MA 02266-8081 or calling 800.345.6611.
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Appendix A – Statement of Additional Information of Columbia Strategic Income Fund, Variable Series | A-1 | |||
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Additional Information about Each Buying Fund
Attached hereto as Appendix A is the Statement of Additional Information of Columbia Strategic Income Fund, Variable Series dated April 29, 2010, as supplemented (the “Columbia SAI”).
Attached hereto as Appendix B is the Statement of Additional Information of Variable Portfolio – Conservative Portfolio; Variable Portfolio – Moderately Conservative Portfolio; Variable Portfolio, Moderate Portfolio; Variable Portfolio – Moderately Aggressive Portfolio and Variable Portfolio – Aggressive Portfolio, dated April 14, 2010, as supplemented (the “RiverSource SAI”).
Independent Registered Public Accounting Firms
The financial statements for Variable Portfolio – Conservative Portfolio; Variable Portfolio – Moderately Conservative Portfolio; Variable Portfolio, Moderate Portfolio; Variable Portfolio – Moderately Aggressive Portfolio and Variable Portfolio – Aggressive Portfolio, when available, will be audited by the independent registered public accounting firm, Ernst & Young LLP, 220 South 6th Street, Suite 1400, Minneapolis, MN 55402-3900. The independent registered public accounting firm will also provide other accounting and tax-related services as requested by the fund. PricewaterhouseCoopers LLP, located at 125 High Street, Boston, MA 02110-1707, is the independent registered public accounting firm for Columbia Strategic Income Fund, Variable Series, providing audit and other accounting and tax-related services as requested by the fund. The Report of Independent Registered Public Accounting Firm, Financial Highlights and Financial Statements included in Columbia Strategic Income Fund, Variable Series’s Annual Report to Shareholders for the fiscal year ended December 31, 2009 and Semiannual Report to Shareholders for the period ended June 30, 2010 are incorporated by reference into this SAI. The financial statements for Variable Portfolio – Conservative Portfolio; Variable Portfolio – Moderately Conservative Portfolio; Variable Portfolio, Moderate Portfolio; Variable Portfolio – Moderately Aggressive Portfolio and Variable Portfolio – Aggressive Portfolio are unaudited. The audited financial statements for Columbia Strategic Income Fund, Variable Series incorporated by reference into this SAI have been so included and incorporated in reliance upon the reports of PricewaterhouseCoopers LLP, given on their authority as experts in auditing and accounting.
The financial statements for RiverSource Variable Portfolio – Strategic Income Fund are unaudited. The audited financial statements for Disciplined Asset Allocation Portfolios – Conservative, Disciplined Asset Allocation Portfolios – Moderately Conservative, Disciplined Asset Allocation Portfolios – Moderate, Disciplined Asset Allocation Portfolios – Moderately Aggressive and Disciplined Asset Allocation Portfolios – Aggressive incorporated by reference into the Proxy Statement/Prospectus have been so included and incorporated in reliance upon the reports of Ernst & Young LLP, given on their authority as experts in auditing and accounting.
Pro forma financial statements of the Buying Funds for the Reorganizations are attached hereto as Appendix C.
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Appendix A – Statement of Additional Information of Columbia Strategic Income Fund, Variable Series
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COLUMBIA FUNDS VARIABLE INSURANCE TRUST
Columbia Asset Allocation Fund, Variable Series
Columbia Federal Securities Fund, Variable Series
Columbia International Fund, Variable Series
Columbia Large Cap Growth Fund, Variable Series
Columbia Large Cap Value Fund, Variable Series
Columbia Mid Cap Value Fund, Variable Series
Columbia Money Market Fund, Variable Series
Columbia S&P 500 Index Fund, Variable Series
Columbia Select Large Cap Growth Fund, Variable Series
Columbia Small Cap Value Fund, Variable Series
Columbia Small Company Growth Fund, Variable Series
Columbia Strategic Income Fund, Variable Series
Supplement dated August 30, 2010
to the Statement of Additional Information (the “SAI”) dated April 29, 2010, as supplemented
Effective September 7, 2010, the SAI for the Funds set forth above is supplemented as follows:
The disclosure in the first paragraph of the section entitled Investment Advisory and Other Services – Other Services Provided – The Transfer Agent is replaced with the following, except with respect to the disclosure relating to fees and reimbursements paid to the Previous Transfer Agent:
Columbia Management Investment Services Corp. (formerly, RiverSource Service Corporation) is the transfer agent for the Funds. The Transfer Agent is located at One Financial Center, Boston, MA 02111. Under the Transfer Agency Agreement, the Transfer Agent provides transfer agency, dividend disbursing agency and shareholder servicing agency services to the Funds. Effective September 7, 2010, the Funds pay the Transfer Agent a transfer agency fee at an annual rate of 0.06% of average net assets, payable monthly and, prior to September 7, 2010, paid the Transfer Agent an annual transfer agency fee of $22.36 per account, payable monthly. In addition, prior to September 7, 2010, the Funds reimbursed the Transfer Agent for the fees and expenses the Transfer Agent paid to financial intermediaries that maintained omnibus accounts with the Funds, subject to a cap of up to $22.36 per account for financial intermediaries that sought payment by the Transfer Agent on a per account basis and a cap equal to 0.15% of a Fund’s net assets represented by such an account for financial intermediaries that sought payment by the Transfer Agent based on a percentage of net assets. The Transfer Agent also may retain as additional compensation for its services revenues for fees for wire, telephone and redemption orders, IRA trustee agent fees and account transcripts due the Transfer Agent from Fund shareholders and credits (net of bank charges) earned with respect to balances in accounts the Transfer Agent maintains in connection with its services to the Funds. The fees paid to the Transfer Agent may be changed by the Board without shareholder approval.
Shareholders should retain this Supplement for future reference.
C-6512-2 A (8/10)
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COLUMBIA FUNDS VARIABLE INSURANCE TRUST
Columbia Strategic Income Fund, Variable Series
(the “Fund”)
Supplement dated August 11, 2010 to the
Statement of Additional Information dated April 29, 2010, as supplemented
The section entitled “Investment Advisory and Other Services –The Advisor and Investment Advisory Services” is revised as follows:
1. | All references to Laura Ostrander and Scott Schroepfer as Portfolio Managers of the Fund are deleted. |
2. | The following is added to the table under the heading “Portfolio Manager(s) of the Advisor”: |
Portfolio Manager | Fund(s) | |
Brian Lavin | Strategic Income Fund VS |
3. | The following is added to the table under the heading “Performance Benchmarks”: |
Portfolio Manager | Fund(s) | Primary Benchmark(s) | Peer Group | |||
Brian Lavin | Strategic Income Fund VS | Barclays Capital Government/ Credit Bond Index Blended Benchmark* | Lipper General Bond Funds Variable Underlying Funds (VUF) Classification |
* | A custom composite established by the Advisor, consisting of a 35% weighting of the Barclays Capital Aggregate Bond Index, a 35% weighting of the JPMorgan Global High Yield Index, a 15% weighting of the Citigroup Non-U.S. World Government Bond Index-Unhedged and a 15% weighting of the JPMorgan EMBI Global Diversified Index. |
4. | The following is added to the table under the heading “Other Accounts Managed by the Portfolio Manager(s) – Strategic Income Fund VS”: |
Other SEC-registered open- end and closed-end funds | Other pooled investment vehicles | Other accounts | ||||||||||||||||||||||
Portfolio Manager | Number of accounts | Assets | Number of accounts | Assets | Number of accounts | Assets | ||||||||||||||||||
Brian Lavin* | 2 | $ | 2.92 billion | 1 | $ | 9.56 million | 4 | $ | 766.77 million |
* | Account information is provided as of April 30, 2010. |
5. | The following is added to the table under the heading “Other Accounts Managed by the Portfolio Manager(s) for which the Advisory Fee is Based on Performance” – Strategic Income Fund VS”: |
Other SEC-registered open- end and closed-end funds | Other pooled investment vehicles | Other accounts | ||||||||||||||||||||||
Portfolio Manager | Number of accounts | Assets | Number of accounts | Assets | Number of accounts | Assets | ||||||||||||||||||
Brian Lavin* | 0 | $ | 0 | 0 | $ | 0 | 0 | $ | 0 |
* | Account information is provided as of April 30, 2010. |
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6. | The following is added to the table under the heading “Portfolio Manager Ownership of the Funds as of December 31, 2009”: |
Portfolio Manager | Fund(s) | Dollar Range of Equity Securities in the | ||
Brian Lavin* | Strategic Income Fund VS | None |
* | Account information is provided as of April 30, 2010. |
Shareholders should retain this Supplement for future reference.
C-1036-1 A (8/10)
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Columbia Management®
COLUMBIA FUNDS VARIABLE INSURANCE TRUST | ||
Class A and Class B Shares | ||
STATEMENT OF ADDITIONAL INFORMATION | ||
April 29, 2010 | ||
Columbia Asset Allocation Fund, Variable Series | ||
Columbia Federal Securities Fund, Variable Series | ||
Columbia International Fund, Variable Series | ||
Columbia Large Cap Growth Fund, Variable Series | ||
Columbia Large Cap Value Fund, Variable Series | ||
Columbia Mid Cap Value Fund, Variable Series | ||
Columbia Money Market Fund, Variable Series | ||
Columbia S&P 500® Index Fund, Variable Series | ||
Columbia Select Large Cap Growth Fund, Variable Series | ||
Columbia Small Cap Value Fund, Variable Series | ||
Columbia Small Company Growth Fund, Variable Series | ||
Columbia Strategic Income Fund, Variable Series | ||
Columbia Value and Restructuring Fund, Variable Series |
This Statement of Additional Information (SAI) is not a prospectus, is not a substitute for reading any prospectus and is intended to be read in conjunction with the Funds’ prospectuses dated April 29, 2010. The most recent annual reports for the Funds, which include the Funds’ audited financial statements dated December 31, 2009, are incorporated by reference into this SAI.
Copies of the Funds’ current prospectuses and annual and semi-annual reports may be obtained without charge by writing Columbia Funds, c/o Columbia Management Services, Inc., P.O. Box 8081, Boston, MA 02266-8081; by calling Columbia Management Services, Inc. at 800.345.6611; or by contacting the applicable Participating Insurance Company, or the broker/dealers offering certain variable annuity contracts (VA contracts) or variable life insurance policies (VLI policies) issued by the Participating Insurance Company through which shares of the Funds are available.
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Other Roles and Relationships of Bank of America and its Affiliates — Certain Conflicts of Interest | 76 | |||
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General Brokerage Policy, Brokerage Transactions and Broker Selection | 102 | |||
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SAI PRIMER
The SAI is a part of the Funds’ registration statement that is filed with the SEC. The registration statement includes the Funds’ prospectuses, the SAI and certain exhibits. The SAI, and any supplements to it, can be found online by accessing the SEC’s website at www.sec.gov.
The SAI generally provides additional information about the Funds that is not required to be in the Funds’ prospectuses. The SAI expands discussions of certain matters described in the Funds’ prospectuses and provides certain additional information about the Funds that may be of interest to some investors. Among other things, the SAI provides information about:
• | the organization of the Trust; |
• | the Funds’ investments; |
• | the Funds’ investment advisor, investment sub-advisor(s) (if any) and other service providers, including roles and relationships of Bank of America and its affiliates, and conflicts of interest; |
• | the governance of the Funds; |
• | the Funds’ brokerage practices; |
• | the share classes offered by the Funds; |
• | the purchase, redemption and pricing of Fund shares; and |
• | the application of U.S. federal income tax laws. |
Investors may find this information important and helpful. If you have any questions about the Funds, please call Columbia Funds at 800.345.6611 or contact your financial advisor.
Before reading the SAI, you should consult the Glossary below, which defines certain of the terms used in the SAI.
Glossary
Term | Definition | |
1933 Act | Securities Act of 1933, as amended | |
1934 Act | Securities Exchange Act of 1934, as amended | |
1940 Act | Investment Company Act of 1940, as amended | |
500 Index Fund VS | Columbia S&P 500® Index Fund, Variable Series | |
Administration Agreement | The administration agreement between the Trust, on behalf of certain of the Funds, and the Administrator | |
Administrator | Columbia Management Advisors, LLC | |
Advisor | Columbia Management Advisors, LLC | |
Asset Allocation Fund VS | Columbia Asset Allocation Fund, Variable Series | |
BANA | Bank of America, National Association | |
BAS | Banc of America Securities LLC | |
Bank of America | Bank of America Corporation | |
BFDS/DST | Boston Financial Data Services, Inc./DST Systems, Inc. | |
Board | The Trust’s Board of Trustees |
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Term | Definition | |
Brandes | Brandes Investment Partners, L.P. | |
CMA | Columbia Management Advisors, LLC | |
CMOs | Collateralized mortgage obligations | |
Code | Internal Revenue Code of 1986, as amended | |
Codes of Ethics | The codes of ethics adopted by the Board pursuant to Rule 17j-1 under the 1940 Act | |
Columbia Funds Complex | The mutual fund complex that is comprised of the open-end investment management companies advised by the Advisor or its affiliates and principally underwritten by Columbia Management Distributors, Inc., as that term is defined under Item 17 of Form N-1A | |
Columbia Funds or Columbia Funds Family | The fund complex that is comprised of the open-end investment management companies advised by the Advisor or its affiliates and principally underwritten by Columbia Management Distributors, Inc. | |
Custodian or State Street | State Street Bank and Trust Company | |
Distributor | Columbia Management Distributors, Inc. | |
Distribution Agreement | The distribution agreement between the Trust, on behalf of the Funds, and the Distributor | |
Distribution Plan(s) | One or more of the plans adopted by the Board pursuant to Rule 12b-1 under the 1940 Act for the distribution of the Funds’ shares | |
FDIC | Federal Deposit Insurance Corporation | |
Federal Securities Fund VS | Columbia Federal Securities Fund, Variable Series | |
FHLMC | Federal Home Loan Mortgage Corporation | |
Fitch | Fitch Investors Service, Inc. | |
FNMA | Federal National Mortgage Association | |
FSF | Financial Services Firm | |
The Fund(s) or a Fund | One or more of the open-end management investment companies listed on the front cover of this SAI that are series of the Trust | |
GNMA | Government National Mortgage Association | |
Independent Trustee(s) | The Trustee(s) of the Board who are not “interested persons” of the Funds as defined in the 1940 Act | |
Interested Trustee | The Trustee of the Board who is an “interested person” of the Funds as defined in the 1940 Act | |
International Fund VS | Columbia International Fund, Variable Series | |
Investment Advisory Agreement(s) | One or more of the investment advisory agreements between the Trust, on behalf of the Funds, and the Advisor | |
IRS | United States Internal Revenue Service | |
Large Cap Growth Fund VS | Columbia Large Cap Growth Fund, Variable Series | |
Large Cap Value Fund VS | Columbia Large Cap Value Fund, Variable Series | |
LIBOR | London Interbank Offered Rate | |
Marsico | Marsico Capital Management, LLC |
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Term | Definition | |
Merrill Lynch | Merrill Lynch & Co., Inc. | |
Mid Cap Value Fund VS | Columbia Mid Cap Value Fund, Variable Series | |
MLPF&S | Merrill Lynch, Pierce, Fenner & Smith Incorporated | |
Money Market Fund(s) | One or more of the money market funds in the Columbia Funds Family | |
Money Market Fund VS | Columbia Money Market Fund, Variable Series | |
Moody’s | Moody’s Investors Service, Inc. | |
NASDAQ | National Association of Securities Dealers Automated Quotations system | |
NIMNAI | Nordea Investment Management North America, Inc. | |
NRSRO | Nationally recognized statistical ratings organization (such as Moody’s, Fitch or S&P) | |
NSCC | National Securities Clearing Corporation | |
NYSE | New York Stock Exchange | |
Participating Insurance Companies | Life insurance companies that issue the variable annuity and variable life insurance separate accounts for which the Funds serve as underlying investment vehicles | |
Principal Underwriter | Columbia Management Distributors, Inc. | |
REIT | Real estate investment trust | |
REMIC | Real estate mortgage investment conduit | |
RIC | A “regulated investment company,” as such term is used in the Internal Revenue Code of 1986, as amended | |
S&P | Standard & Poor’s Corporation (“Standard & Poor’s” and “S&P” are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by the Advisor. The Columbia Funds are not sponsored, endorsed, sold or promoted by Standard & Poor’s and Standard & Poor’s makes no representation regarding the advisability of investing in the Columbia Funds). | |
SAI | This Statement of Additional Information | |
SEC | United States Securities and Exchange Commission | |
Selling Agent(s) | One or more of the banks, broker/dealers or other financial institutions that have entered into a sales support agreement with the Distributor | |
Select Large Cap Growth Fund VS | Columbia Select Large Cap Growth Fund, Variable Series | |
Servicing Agent(s) | One or more of the banks, broker/dealers or other financial institutions that have entered into a shareholder servicing agreement with the Distributor | |
Small Cap Value Fund VS | Columbia Small Cap Value Fund, Variable Series | |
Small Company Growth Fund VS | Columbia Small Company Growth Fund, Variable Series | |
Strategic Income Fund VS | Columbia Strategic Income Fund, Variable Series | |
Transfer Agency Agreement | The transfer agency agreement between the Trust, on behalf of the Funds, and Columbia Management Services, Inc. |
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Term | Definition | |
Transfer Agent | Columbia Management Services, Inc. | |
The Trust | Columbia Funds Variable Insurance Trust, the registered investment company in the Columbia Funds Family to which this SAI relates | |
Trustee(s) | One or more of the Board’s Trustees | |
Value and Restructuring Fund VS | Columbia Value and Restructuring Fund, Variable Series |
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ABOUT THE TRUST
The Trust is a registered investment company under the 1940 Act within the Columbia Funds Family. Columbia Funds offers over 100 mutual funds in major asset classes, and the Advisor had approximate assets under management of $274.7 billion as of March 31, 2010.
The Trust, a business trust organized under the laws of Massachusetts, commenced operations on January 1, 1989, and is registered with the SEC as an open-end management investment company. The Trust currently offers thirteen Funds with differing investment goals, policies and restrictions. Currently, the Trust consists of Asset Allocation Fund VS, Federal Securities Fund VS, International Fund VS, Large Cap Growth Fund VS, Large Cap Value Fund VS, Mid Cap Value Fund VS, Money Market Fund VS, 500 Index Fund VS, Select Large Cap Growth Fund VS, Small Cap Value Fund VS, Small Company Growth Fund VS, Strategic Income Fund VS and Value and Restructuring Fund VS. Each Fund is a diversified series of the Trust.
Each Fund offers two separate classes of shares, Class A shares and Class B shares, except Money Market Fund VS which only offers Class A shares. Class B shares differ from Class A shares solely in that Class B shares have a fee pursuant to Rule 12b-1 of the 1940 Act, which is used for certain shareholder service and distribution expenses. Sales of shares of each class are made without a sales charge at each Fund’s per share net asset value. The Trust may add or remove Funds and/or classes from time to time. The Trust is the funding vehicle for VA contracts and VLI policies offered by the separate accounts of Participating Insurance Companies.
The Trust was organized under an Agreement and Declaration of Trust (Declaration of Trust) as a Massachusetts business trust on June 9, 1987. The Declaration of Trust may be amended by a vote of either the Trust’s shareholders or the Board. The Trust is authorized to issue an unlimited number of shares of beneficial interest without par value, in one or more series, each with one or more classes, as the Board may authorize.
Prior to May 1, 2006 (the Fund Reorganization Date), International Fund VS, Large Cap Value Fund VS, Mid Cap Value Fund VS, 500 Index Fund VS, Small Cap Value Fund VS and Strategic Income Fund VS were organized as series of Liberty Variable Investment Trust, a Massachusetts business trust (the Predecessor Funds) that commenced investment operations on July 1, 1993. The information provided for each of these Funds in this SAI for periods prior to the Fund Reorganization Date relates to the Predecessor Funds.
Effective May 1, 2006, the Trust changed its name from SteinRoe Variable Investment Trust to its current name.
Effective April 7, 2003, Asset Allocation Fund VS changed its name from Stein Roe Balanced Fund, Variable Series to Liberty Asset Allocation Fund, Variable Series. Effective May 1, 2006, Asset Allocation Fund VS changed its name from Liberty Asset Allocation Fund, Variable Series to its current name.
Effective May 1, 2006, Federal Securities Fund VS changed its name from Liberty Federal Securities Fund, Variable Series to its current name.
Effective April 7, 2003, International Fund VS changed its name from Colonial International Fund for Growth, Variable Series to its current name.
Effective February 25, 2005, Large Cap Growth Fund VS changed its name from Stein Roe Growth Stock Fund, Variable Series to its current name.
Effective April 7, 2003, Large Cap Value Fund VS changed its name from Colonial U.S. Growth & Income Fund, Variable Series to Liberty Growth & Income Fund, Variable Series. Effective May 1, 2006, Large Cap Value Fund VS changed its name from Liberty Growth & Income Fund, Variable Series to its current name.
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Effective May 1, 2006, Mid Cap Value Fund VS changed its name from Liberty Select Value Fund, Variable Series to its current name.
Effective April 7, 2003, Money Market Fund VS changed its name from Stein Roe Money Market Fund, Variable Series to Liberty Money Market Fund, Variable Series. Effective May 1, 2006, Money Market Fund VS changed its name from Liberty Money Market Fund, Variable Series to its current name.
Effective May 1, 2006, 500 Index Fund VS changed its name from Liberty S&P 500® Index Fund, Variable Series to its current name.
Select Large Cap Growth Fund VS and Value and Restructuring Fund VS each commenced operations on September 2, 2008.
Effective May 1, 2006, Small Cap Value Fund VS changed its name from Colonial Small Cap Value Fund, Variable Series to its current name.
Effective April 14, 2003, Small Company Growth Fund VS changed its name from Stein Roe Small Company Growth Fund, Variable Series to Liberty Small Company Growth Fund, Variable Series. Effective May 1, 2006, Small Company Growth Fund VS changed its name from Liberty Small Company Growth Fund, Variable Series to its current name.
Effective May 1, 2006, Strategic Income Fund VS changed its name from Colonial Strategic Income Fund, Variable Series to its current name.
The Board monitors events to identify any material conflicts that may arise between the interests of the Participating Insurance Companies or between the interests of owners of VA contracts and VLI policies. The Trust currently does not foresee any disadvantages to the owners of VA contracts and VLI policies arising from the fact that certain interests of owners may differ.
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The investment objective, principal investment strategies (i.e., as used in this SAI and the corresponding prospectuses, a strategy which generally involves the ability to invest 10% or more of a Fund’s total assets) and related principal investment risks for each Fund are discussed in each Fund’s prospectuses.
Certain Investment Activity Limits
The overall investment and other activities of the Advisor and its affiliates may limit the investment opportunities for each Fund in certain markets where limitations are imposed by regulators upon the amount of investment by affiliated investors, in the aggregate or in individual issuers. From time to time, each Fund’s activities also may be restricted because of regulatory restrictions applicable to the Advisor and its affiliates and/or because of their internal policies. See Investment Advisory and Other Services — Other Roles and Relationships of Bank of America and its Affiliates — Certain Conflicts of Interest.
Fundamental and Non-Fundamental Investment Policies
The following discussion of “fundamental” and “non-fundamental” investment policies and limitations for each Fund supplements the discussion of investment policies in the Funds’ prospectuses. A fundamental policy may be changed only with Board and shareholder approval. A non-fundamental policy may be changed by the Board and does not require shareholder approval, but may require notice to shareholders in certain instances.
Unless otherwise noted, whenever an investment policy or limitation states a maximum percentage of a Fund’s assets that may be invested in any security or other asset, or sets forth a policy regarding an investment standard, compliance with such percentage limitation or standard will be determined solely at the time of the Fund’s acquisition of such security or asset. Borrowings and other instruments that may give rise to leverage and the restriction on investing in illiquid securities are monitored on an ongoing basis.
Fundamental Investment Policies
The 1940 Act provides that a “vote of a majority of the outstanding voting securities” means the affirmative vote of the lesser of (1) more than 50% of the outstanding shares of a Fund, or (2) 67% or more of the shares present at a meeting if more than 50% of the outstanding shares are represented at the meeting in person or by proxy. The following fundamental investment policies cannot be changed without such a vote.
Each Fund may not, as a matter of fundamental policy:
1. Underwrite any issue of securities issued by other persons within the meaning of the 1933 Act except when it might be deemed to be an underwriter either: (i) in connection with the disposition of a portfolio security; or (ii) in connection with the purchase of securities directly from the issuer thereof in accordance with the Fund’s investment objective. This restriction shall not limit the Fund’s ability to invest in securities issued by other registered investment companies;
2. Purchase or sell real estate, except each Fund may: (i) purchase securities of issuers which deal or invest in real estate, (ii) purchase securities which are secured by real estate or interests in real estate and (iii) hold and dispose of real estate or interests in real estate acquired through the exercise of its rights as a holder of securities which are secured by real estate or interests therein;
3. Purchase or sell commodities, except that each Fund may to the extent consistent with its investment objective: (i) invest in securities of companies that purchase or sell commodities or which invest in such programs, (ii) purchase and sell options, forward contracts, futures contracts, and options on futures contracts and (iii) enter into swap contracts and other financial transactions relating to commodities. This limitation does not apply to foreign currency transactions including without limitation forward currency contracts;
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4. Purchase any securities which would cause 25% or more of the value of its total assets at the time of purchase to be invested in the securities of one or more issuers conducting their principal business activities in the same industry, provided that: (i) there is no limitation with respect to obligations issued or guaranteed by the U.S. Government, any state or territory of the United States or any of their agencies, instrumentalities or political subdivisions; and (ii) notwithstanding this limitation or any other fundamental investment limitation, assets may be invested in the securities of one or more management investment companies to the extent permitted by the 1940 Act, the rules and regulations thereunder and any applicable exemptive relief. (For Money Market Fund VS only, the following sentence is added: “This restriction shall not apply to securities of issuers in the financial services industry.”);
5. Make loans, except to the extent permitted by the 1940 Act, the rules and regulations thereunder and any applicable exemptive relief;
6. Borrow money or issue senior securities except to the extent permitted by the 1940 Act, the rules and regulations thereunder and any applicable exemptive relief; and
7. Purchase securities (except securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities) of any one issuer if, as a result, more than 5% of its total assets will be invested in the securities of such issuer or it would own more than 10% of the voting securities of such issuer, except that: (i) up to 25% of its total assets may be invested without regard to these limitations and (ii) a Fund’s assets may be invested in the securities of one or more management investment companies to the extent permitted by the 1940 Act, the rules and regulations thereunder, and any applicable exemptive relief.
Non-Fundamental Investment Policies
Each Fund may not, as a matter of non-fundamental policy, purchase securities of other investment companies except to the extent permitted by the 1940 Act, the rules and regulations thereunder and any applicable exemptive relief. If shares of the Fund are purchased by another fund in reliance on Section 12(d)(1)(G) of the 1940 Act, for so long as shares of the Fund are held by such fund, the Fund will not purchase securities of a registered open-end investment company or registered unit investment trust in reliance on Section 12(d)(1)(F) or Section 12(d)(1)(G) of the 1940 Act.
Asset Allocation Fund VS, Federal Securities Fund VS, Large Cap Growth Fund VS, Money Market Fund VS and Small Company Growth Fund VS
The Asset Allocation Fund VS, Federal Securities Fund VS, Large Cap Growth Fund VS, Money Market Fund VS and Small Company Growth Fund VS are also subject to the following restrictions and policies, which are not fundamental and may be changed by the Trustees without shareholder approval. A Fund may:
(a) not invest in companies for the purpose of exercising control or management;
(b) not purchase more than 3% of the stock of another investment company; or purchase stock of other investment companies equal to more than 5% of the Fund’s total assets (valued at time of purchase) in the case of any one other investment company and 10% of such assets (valued at the time of purchase) in the case of all other investment companies in the aggregate; any such purchases are to be made in the open market where no profit to a sponsor or dealer results from the purchase, other than the customary broker’s commission, except for securities acquired as part of a merger, consolidation or acquisition of assets;
(c) not mortgage, pledge, hypothecate or in any manner transfer, as security for indebtedness, any securities owned or held by it, except as may be necessary in connection with (i) permitted borrowings and (ii) options, futures and options on futures;
(d) not issue senior securities, except to the extent permitted by the 1940 Act (including permitted borrowings);
(e) not purchase portfolio securities for the Fund from, or sell portfolio securities to, any of the officers and directors or Trustees of the Trust or of its investment adviser;
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(f) not invest more than 5% of its net assets (valued at time of purchase) in warrants, nor more than 2% of its net assets in warrants that are not listed on the New York or American Stock Exchanges;
(g) not write an option on a security unless, in compliance with SEC requirements, cash or liquid securities equal in value to the commodity value (less any applicable margin deposits) have been deposited in a segregated account;
(h) buy or sell an option on a security, a futures contract or an option on a futures contract so long as the total initial margin and premiums on the contracts do not exceed 5% of its total assets;
(i) not purchase securities on margin (except for use of short-term credits as are necessary for the clearance of transactions), make short sales of securities, or participate on a joint or a joint and several basis in any trading account in securities (except in connection with transactions in options, futures, and options on futures) (all Funds except Federal Securities Fund VS);
(j) not purchase a put or call option if the aggregate premiums paid for all put and call options exceed 20% of its net assets (less the amount by which any such positions are in-the-money), excluding put and call options purchased as closing transactions;
(k) not invest more than 15% (except as to Money Market Fund VS, which may not invest more than 10%) of the Fund’s net assets (taken at market value at the time of each purchase) in illiquid securities including repurchase agreements maturing in more than seven days; or
(l) invest up to 20% of its total assets in foreign securities (applies to Large Cap Growth Fund VS only).
Further, as to Money Market Fund VS with respect to 100% of its assets, SEC rules prohibit the Fund from investing more than 5% of its assets, taken at market value at the time of purchase, in the securities of any one issuer; provided that (i) the Fund may invest more than 5% of its assets in securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities and (ii) the Fund may invest more than 5% of its assets for a period of up to three business days after the purchase thereof (but not more than 25% of its assets) in the securities of any one first-tier issuer (as determined by SEC rules); provided, further, that the Fund may not make more than one investment in accordance with this exception at any one time.
Under normal market conditions, Money Market Fund VS will invest at least 25% of its assets in securities of issuers in the financial services industries. This policy may cause the Fund to be more adversely affected by changes in market or economic conditions and other circumstances affecting the financial services industries. The financial services industries include issuers that are in the following categories: banks; financial companies such as mortgage companies; investment banks; brokerage companies; special purpose entities; and personal and business credit institutions.
Additional Voluntary Restrictions Pertaining to Small Company Growth Fund VS
Small Company Growth Fund VS also is subject to the following additional restrictions and policies under certain applicable insurance laws pertaining to variable annuity contract separate accounts. These policies and restrictions are not fundamental and may be changed by the Trustees without shareholder approval:
The borrowing limits for the Fund are (1) 10% of net asset value when borrowing for any general purpose and (2) 25% of net asset value when borrowing as a temporary measure to facilitate redemptions. For this purpose, net asset value is the market value of all investments or assets owned less outstanding liabilities of the Fund at the time that any new or additional borrowing is undertaken.
The Fund also will be subject to the following diversification guidelines pertaining to investments in foreign securities:
1. The Fund will be invested in a minimum of five different foreign countries at all times when it holds investments in foreign securities. However, this minimum is reduced to four when foreign country
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investments comprise less than 80% of the Fund’s net asset value; to three when less than 60% of such value; to two when less than 40%; and to one when less than 20%.
2. Except as set forth in item 3 below, the Fund will have no more than 20% of its net asset value invested in securities of issuers located in any one foreign country.
3. The Fund may have an additional 15% of its value invested in securities of issuers located in any one of the following countries: Australia, Canada, France, Japan, the United Kingdom or Germany.
If a percentage limit with respect to any of the foregoing fundamental and non-fundamental policies is satisfied at the time of investment or borrowing, a later increase or decrease in a Fund’s assets will not constitute a violation of the limit.
International Fund VS
Other Non-Fundamental Investment Policies. As non-fundamental investment policies of International Fund VS, which may be changed without a shareholder vote, the International Fund VS may not:
1. Purchase securities on margin, but it may receive short-term credit to clear securities transactions and may make initial or maintenance margin deposits in connection with futures transactions;
2. Have a short securities position, unless the Fund owns, or owns rights (exercisable without payment) to acquire, an equal amount of such securities;
3. Invest more than 15% of its net assets in illiquid assets;
4. With respect to 75% of total assets, purchase any voting security of an issuer if, as a result of such purchase, the Fund would own more than 10% of the outstanding voting securities of such issuer;
5. Purchase puts, calls, straddles, spreads, or any combination thereof if, as a result of such purchase, the Fund’s aggregate investment in such securities would exceed 5% of total assets;
6. Purchase or sell commodities contracts if the total initial margin and premiums on the contracts would exceed 5% of its total assets;
7. Acquire any security issued by a person that, in its most recent fiscal year, derived 15% or less of its gross revenues from securities related activities (within the meaning of Rule 12d3-1 under the 1940 Act) if the Fund would control such person after such acquisition; or
8. Acquire any security issued by a person that, in its most recent fiscal year, derived more than 15% of its gross revenues from securities related activities (as so defined) unless (i) immediately after such acquisition of any equity security, the Fund owns 5% or less of the outstanding securities of that class of the issuer’s equity securities, (ii) immediately after such acquisition of a debt security, the Fund owns 10% or less of the outstanding principal amount of the issuer’s debt securities, and (iii) immediately after such acquisition, the Fund has invested not more than 5% of its total assets in the securities of the issuer.
Large Cap Value Fund VS
Other Non-Fundamental Investment Policies. As non-fundamental investment policies of Large Cap Value Fund VS, which may be changed without a shareholder vote, the Large Cap Value Fund VS may not:
1. Purchase securities on margin, but it may receive short-term credit to clear securities transactions and may make initial or maintenance margin deposits in connection with futures transactions;
2. Have a short securities position, unless the Fund owns, or owns rights (exercisable without payment) to acquire, an equal amount of such securities;
3. Invest more than 15% of its net assets in illiquid assets; or
4. Purchase or sell commodity contracts if the total initial margin and premiums on the contracts would exceed 5% of its total assets.
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Mid Cap Value Fund VS
Other Non-Fundamental Investment Policies. As non-fundamental investment policies of the Mid Cap Value Fund VS, which may be changed without a shareholder vote, the Mid Cap Value Fund VS may not:
1. Purchase securities on margin, but it may receive short-term credit to clear securities transactions and may make initial or maintenance margin deposits in connection with futures transactions;
2. Have a short securities position, unless the Fund owns, or owns rights (exercisable without payment) to acquire, an equal amount of such securities; or
3. Invest more than 15% of its net assets in illiquid assets.
500 Index Fund VS
Other Non-Fundamental Investment Policies. As non-fundamental investment policies of the 500 Index Fund VS, which may be changed without a shareholder vote, the 500 Index Fund VS may not:
1. Purchase securities on margin, but it may receive short-term credit to clear securities transactions and may make initial or maintenance margin deposits in connection with futures transactions;
2. Have a short securities position, unless the Fund owns, or owns rights (exercisable without payment) to acquire, an equal amount of such securities; or
3. Invest more than 15% of its net assets in illiquid assets.
Small Cap Value Fund VS
Other Non-Fundamental Investment Policies. As non-fundamental investment policies of Small Cap Value Fund VS, which may be changed without a shareholder vote, the Small Cap Value Fund VS may not:
1. Purchase securities on margin, but it may receive short-term credit to clear securities transactions and may make initial or maintenance margin deposits in connection with futures transactions;
2. Have a short securities position, unless the Fund owns, or owns rights (exercisable without payment) to acquire, an equal amount of such securities;
3. Purchase or sell commodity contracts if the total initial margin and premiums on the contracts would exceed 5% of its total assets; or
4. Invest more than 15% of its net assets in illiquid assets.
Strategic Income Fund VS
Other Non-Fundamental Investment Policies. As non-fundamental investment policies of Strategic Income Fund VS, which may be changed without a shareholder vote, the Strategic Income Fund VS may not:
1. Purchase securities on margin, but it may receive short-term credit to clear securities transactions and may make initial or maintenance margin deposits in connection with futures transactions;
2. Purchase or sell commodities contracts if the total initial margin and premiums on the contracts would exceed 5% of its total assets;
3. Have a short securities position, unless the Fund owns, or owns rights (exercisable without payment) to acquire, an equal amount of such securities; or
4. Invest more than 15% of its net assets in illiquid assets.
In addition to the restrictions set forth above, each Fund may be subject to investment restrictions imposed under state insurance laws and regulations. These restrictions are non-fundamental and, in the event of
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amendments to the applicable statutes or regulations, each Fund will comply, without the approval of its shareholders, with the requirements as so modified.
If a percentage limitation is satisfied at the time of investment, a later increase in such percentage resulting from a change in the value of a Fund’s portfolio securities will not constitute a violation of the limitation.
Rule 144A under the 1933 Act allows for a broader institutional trading market for securities otherwise subject to restrictions on resale to the general public. Rule 144A establishes a “safe harbor” from the registration requirements of the 1933 Act for resales of certain securities to qualified institutional buyers. A Fund’s investment in Rule 144A securities could have the effect of increasing the level of illiquidity of the Fund during any period that qualified institutional buyers were no longer interested in purchasing these securities. For purposes of the limitations on purchases of illiquid instruments described above, Rule 144A securities will not be considered to be illiquid if the Advisor has determined, in accordance with guidelines established by the Board of Trustees, that an adequate trading market exists for such securities.
Permissible Investments and Related Risks
Each Fund’s prospectuses identify and summarize the individual types of securities in which the Fund invests as part of its principal investment strategies and the principal risks associated with such investments.
The table below identifies for each Fund certain types of securities in which it is permitted to invest, including certain types of securities that are described in each Fund’s prospectuses. A Fund generally has the ability to invest 10% or more of its total assets in each type of security described in its prospectuses (and in each sub-category of such security type described in this SAI). To the extent that a type of security identified below is not described in the Fund’s prospectuses (or as a sub-category of such security type in this SAI), the Fund generally invests less than 10% of the Fund’s total assets in such security type.
Information about individual types of securities (including certain of their associated risks) in which some or all of the Funds may invest is set forth below. Each Fund’s investment in these types of securities is subject to its investment objective and fundamental and non-fundamental investment policies.
Temporary Defensive Positions. Each Fund may temporarily invest in money market instruments or hold cash. It may do so without limit, when the Advisor or the Fund’s sub-advisor, if applicable: (i) believes that the market conditions are not favorable for profitable investing; (ii) is unable to locate favorable investment opportunities; or (iii) determines that a temporary defensive position is advisable or necessary in order to meet anticipated redemption requests, or for other reasons. While a Fund engages in such strategies, it may not achieve its investment objective.
See also About the Funds’ Investments — Permissible Investments and Related Risks — Money Market Instruments.
Permissible Fund Investments
Investment Type | Asset Allocation Fund VS | Inter- national Fund VS | Large Cap Growth Fund VS | Large Cap Value Fund VS | Mid Cap Value Fund VS | 500 Index Fund VS | Money Market Fund VS | Federal Securities Fund VS | Strategic Income Fund VS | |||||||||||||||||||||||||||
Asset-Backed Securities | ü | ü | ü | ü | ü | ü | ü | ü | ü | |||||||||||||||||||||||||||
Bank Obligations (Domestic and Foreign) | ü | ü | ü | ü | ü | ü | ü | ü | ü | |||||||||||||||||||||||||||
Common Stock | ü | ü | ü | ü | ü | ü | ü |
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Investment Type | Asset Allocation Fund VS | Inter- national Fund VS | Large Cap Growth Fund VS | Large Cap Value Fund VS | Mid Cap Value Fund VS | 500 Index Fund VS | Money Market Fund VS | Federal Securities Fund VS | Strategic Income Fund VS | |||||||||||||||||||||||||||
Convertible Securities | ü | ü | ü | ü | ü | |||||||||||||||||||||||||||||||
Corporate Debt Securities | ü | ü | ü | ü | ü | ü | ü | ü | ü | |||||||||||||||||||||||||||
Custody Receipts and Trust Certificates | ü | ü | ü | ü | ü | ü | ü | ü | ü | |||||||||||||||||||||||||||
Derivatives | ü | ü | ü | ü | ü | ü | ü | ü | ||||||||||||||||||||||||||||
Index or Linked Securities (Structured Products) | ü | ü | ü | ü | ü | ü | ü | ü | ||||||||||||||||||||||||||||
Futures Contracts and Options on Futures Contracts | ü | ü | ü | ü | ü | ü | ü | ü | ||||||||||||||||||||||||||||
Stock Options and Stock Index Options | ü | ü | ü | ü | ü | ü | ü | ü | ||||||||||||||||||||||||||||
Swap Agreements | ü | ü | ü | ü | ü | ü | ü | ü | ||||||||||||||||||||||||||||
Dollar Rolls | ü | ü | ü | |||||||||||||||||||||||||||||||||
Foreign Currency Transactions | ü | ü | ü | ü | ü | ü | ||||||||||||||||||||||||||||||
Foreign Securities | ü | ü | ü | ü | ü | ü | ü | |||||||||||||||||||||||||||||
Guaranteed Investment Contracts (Funding Agreements) | ü | ü | ||||||||||||||||||||||||||||||||||
Illiquid Securities | ü | ü | ü | ü | ü | ü | ü | ü | ü | |||||||||||||||||||||||||||
Initial Public Offerings | ü | ü | ü | ü | ü | |||||||||||||||||||||||||||||||
Investments in Other Investment Companies | ü | ü | ü | ü | ü | ü | ü | ü | ü | |||||||||||||||||||||||||||
Low and Below Investment Grade Securities | ü | ü | ||||||||||||||||||||||||||||||||||
Money Market Instruments | ü | ü | ü | ü | ü | ü | ü | ü | ü | |||||||||||||||||||||||||||
Mortgage-Backed Securities | ü | ü | ü | ü | ü | ü | ü | ü | ü | |||||||||||||||||||||||||||
Municipal Securities | ü | ü | ||||||||||||||||||||||||||||||||||
Participation Interests | ü | ü | ||||||||||||||||||||||||||||||||||
Preferred Stock | ü | ü | ü | |||||||||||||||||||||||||||||||||
Private Placement and Other Restricted Securities | ü | ü | ü | ü | ü | ü | ü | ü | ü | |||||||||||||||||||||||||||
Real Estate Investment Trusts and Master Limited Partnerships | ü | ü | ü | ü | ü | ü | ||||||||||||||||||||||||||||||
Repurchase Agreements | ü | ü | ü | ü | ü | ü | ü | ü | ü | |||||||||||||||||||||||||||
Reverse Repurchase Agreements | ü | ü | ü | ü | ü | ü | ü | ü | ü | |||||||||||||||||||||||||||
Standby Commitments | ü | |||||||||||||||||||||||||||||||||||
Stripped Securities |
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Investment Type | Asset Allocation Fund VS | Inter- national Fund VS | Large Cap Growth Fund VS | Large Cap Value Fund VS | Mid Cap Value Fund VS | 500 Index Fund VS | Money Market Fund VS | Federal Securities Fund VS | Strategic Income Fund VS | |||||||||||||||||||||||||||
U.S. Government and Related Obligations | ü | ü | ü | ü | ü | ü | ü | ü | ü | |||||||||||||||||||||||||||
Variable- and Floating-Rate Obligations | ü | ü | ü | ü | ü | ü | ü | ü | ü | |||||||||||||||||||||||||||
Warrants and Rights | ü | ü | ü | ü | ü | ü | ü | ü | ||||||||||||||||||||||||||||
When-Issued, Delayed Delivery and Forward Commitment Transactions | ü | ü | ü | ü | ü | ü | ü | ü | ü | |||||||||||||||||||||||||||
Zero-Coupon, Pay-in-Kind and Step-Coupon Securities | ü | ü | ü |
Investment Type | Select Large Cap Growth Fund VS | Small Cap Value Fund VS | Small Company Growth Fund VS | Value and Restructuring Fund VS | ||||||||||||
Asset-Backed Securities | ü | ü | ü | ü | ||||||||||||
Bank Obligations (Domestic and Foreign) | ü | ü | ü | ü | ||||||||||||
Common Stock | ü | ü | ü | ü | ||||||||||||
Convertible Securities | ü | ü | ü | ü | ||||||||||||
Corporate Debt Securities | ü | ü | ü | ü | ||||||||||||
Custody Receipts and Trust Certificates | ü | ü | ü | ü | ||||||||||||
Derivatives | ü | ü | ü | ü | ||||||||||||
Index or Linked Securities (Structured Products) | ü | ü | ü | ü | ||||||||||||
Futures Contracts and Options on Futures Contracts | ü | ü | ü | ü | ||||||||||||
Stock Options and Stock Index Options | ü | ü | ü | ü | ||||||||||||
Swap Agreements | ü | ü | ü | ü | ||||||||||||
Dollar Rolls | ü | ü | ||||||||||||||
Foreign Currency Transactions | ü | ü | ü | ü | ||||||||||||
Foreign Securities | ü | ü | ü | ü | ||||||||||||
Guaranteed Investment Contracts (Funding Agreements) | ü | ü | ||||||||||||||
Illiquid Securities | ü | ü | ü | ü | ||||||||||||
Initial Public Offerings | ü | ü | ü | ü | ||||||||||||
Investments in Other Investment Companies | ü | ü | ü | ü | ||||||||||||
Low and Below Investment Grade Securities | ü | ü | ||||||||||||||
Money Market Instruments | ü | ü | ü | ü | ||||||||||||
Mortgage-Backed Securities | ü | ü | ü | ü | ||||||||||||
Municipal Securities | ü | ü | ||||||||||||||
Participation Interests | ü | ü | ||||||||||||||
Preferred Stock | ü | ü | ü | ü | ||||||||||||
Private Placement and Other Restricted Securities | ü | ü | ü | ü | ||||||||||||
Real Estate Investment Trusts and Master Limited Partnerships | ü | ü | ü | ü | ||||||||||||
Repurchase Agreements | ü | ü | ü | ü | ||||||||||||
Reverse Repurchase Agreements | ü | ü | ü | ü | ||||||||||||
Standby Commitments | ü | ü | ||||||||||||||
Stripped Securities | ü | ü | ||||||||||||||
U.S. Government and Related Obligations | ü | ü | ü | ü | ||||||||||||
Variable- and Floating-Rate Obligations | ü | ü | ü | ü |
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Investment Type | Select Large Cap Growth Fund VS | Small Cap Value Fund VS | Small Company Growth Fund VS | Value and Restructuring Fund VS | ||||||||||||
Warrants and Rights | ü | ü | ü | ü | ||||||||||||
When-Issued, Delayed Delivery and Forward Commitment Transactions | ü | ü | ü | ü | ||||||||||||
Zero-Coupon, Pay-in-Kind and Step-Coupon Securities | ü | ü |
Asset-Backed Securities
Asset-backed securities represent interests in, or debt instruments that are backed by, pools of various types of assets that generate cash payments generally over fixed periods of time. Such securities entitle the security holders to receive distributions that are tied to the payments made on the underlying assets (less fees paid to the originator, servicer, or other parties, and fees paid for credit enhancement), so that the payments made on the underlying assets effectively pass through to such security holders. Asset-backed securities typically are created by an originator of loans or owner of accounts receivable that sells such underlying assets to a special purpose entity in a process called a securitization. The special purpose entity issues securities that are backed by the payments on the underlying assets, and have a minimum denomination and specific term. Asset-backed securities may be structured as fixed-, variable- or floating-rate obligations or as zero-coupon, pay-in-kind and step-coupon securities and may be privately placed or publicly offered. See Permissible Fund Investments — Variable- and Floating-Rate Obligations, Permissible Fund Investments — Zero-Coupon, Pay-in-Kind and Step-Coupon Securities and Permissible Fund Investments — Private Placement and Other Restricted Securities for more information.
Investing in asset-backed securities is subject to certain risks. For example, the value of asset-backed securities may be affected by, among other factors, changes in: interest rates, the market’s assessment of the quality of underlying assets, the creditworthiness of the servicer for the underlying assets, information concerning the originator of the underlying assets, or the creditworthiness or rating of the entities that provide any supporting letters of credit, surety bonds, derivative instruments, or other credit enhancement. The value of asset-backed securities also will be affected by the exhaustion, termination or expiration of any credit enhancement.
Declining or low interest rates may lead to a more rapid rate of repayment on the underlying assets, resulting in accelerated payments on asset-backed securities that then would be reinvested at a lesser rate of interest. Rising or high interest rates tend to lead to a slower rate of repayment on the underlying assets, resulting in slower than expected payments on asset-backed securities that can, in turn, lead to a decline in value. The impact of changing interest rates on the value of asset-backed securities may be difficult to predict and result in greater volatility. Holders of asset-backed securities generally have no recourse against the originator of the underlying assets in the event of a default on the underlying assets. Credit risk reflects the risk that a holder of asset-backed securities, backed by pools of receivables such as mortgage loans, may not receive all or part of its principal because the issuer, any credit enhancer and/or an underlying obligor has defaulted on its obligations. Credit risk is increased for asset-backed securities that are subordinated to another security (i.e., if the holder of an asset-backed security is entitled to receive payments only after payment obligations to holders of the other security are satisfied). The more deeply subordinated the security, the greater the credit risk associated with the security will be.
Bank Obligations (Domestic and Foreign)
Bank obligations include certificates of deposit, bankers’ acceptances, time deposits and promissory notes that earn a specified rate of return and may be issued by (i) a domestic branch of a domestic bank, (ii) a foreign branch of a domestic bank, (iii) a domestic branch of a foreign bank or (iv) a foreign branch of a foreign bank. Bank obligations may be structured as fixed-, variable- or floating-rate obligations. See Permissible Fund Investments — Variable- and Floating-Rate Obligations for more information.
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Certificates of deposit, or so-called CDs, typically are interest-bearing debt instruments issued by banks and have maturities ranging from a few weeks to several years. Bankers’ acceptances are time drafts drawn on and accepted by banks, are a customary means of effecting payment for merchandise sold in import-export transactions and are a general source of financing. Yankee dollar certificates of deposit are negotiable CDs issued in the United States by branches and agencies of foreign banks. Eurodollar certificates of deposit are CDs issued by foreign (mainly European) banks with interest and principal paid in U.S. dollars. Such CDs typically have maturities of less than two years and have interest rates that typically are pegged to LIBOR. A time deposit can be either a savings account or CD that is an obligation of a financial institution for a fixed term. Typically, there are penalties for early withdrawals of time deposits. Promissory notes are written commitments of the maker to pay the payee a specified sum of money either on demand or at a fixed or determinable future date, with or without interest.
Bank investment contracts are issued by banks. Pursuant to such contracts, a Fund may make cash contributions to a deposit fund of a bank. The bank then credits to the Fund payments at floating or fixed interest rates. A Fund also may hold funds on deposit with its custodian for temporary purposes.
Investing in bank obligations is subject to certain risks. Certain bank obligations, such as some CDs, are insured by the FDIC up to certain specified limits. Many other bank obligations, however, are neither guaranteed nor insured by the FDIC or the U.S. Government. These bank obligations are “backed” only by the creditworthiness of the issuing bank or parent financial institution. Domestic and foreign banks are subject to different governmental regulation. Accordingly, certain obligations of foreign banks, including Eurodollar and Yankee dollar obligations, involve different investment risks than those affecting obligations of domestic banks, including, among others, the possibilities that: (i) their liquidity could be impaired because of political or economic developments; (ii) the obligations may be less marketable than comparable obligations of domestic banks; (iii) a foreign jurisdiction might impose withholding and other taxes at high levels on interest income; (iv) foreign deposits may be seized or nationalized; (v) foreign governmental restrictions such as exchange controls may be imposed, which could adversely affect the payment of principal or interest on those obligations; (vi) there may be less publicly available information concerning foreign banks issuing the obligations; and (vii) the reserve requirements and accounting, auditing and financial reporting standards, practices and requirements applicable to foreign banks may differ from those applicable to domestic banks. Foreign banks generally are not subject to examination by any U.S. Government agency or instrumentality.
Common Stock
Common stock represents a unit of equity ownership of a corporation. Owners typically are entitled to vote on the selection of directors and other important corporate governance matters, and to receive dividend payments, if any, on their holdings. However, ownership of common stock does not entitle owners to participate in the day-to-day operations of the corporation. Common stocks of domestic and foreign public corporations can be listed, and their shares traded, on domestic stock exchanges, such as the NYSE or the NASDAQ Stock Market. Domestic and foreign corporations also may have their shares traded on foreign exchanges, such as the London Stock Exchange or Tokyo Stock Exchange. Common stock may be privately placed or publicly offered. See Permissible Fund Investments — Private Placement and Other Restricted Securities for more information.
Investing in common stocks is subject to certain risks. Stock market risk, for example, is the risk that the value of such stocks, like the broader stock markets, may decline over short or even extended periods of time, perhaps substantially or unexpectedly. Domestic and foreign stock markets tend to be cyclical, with periods when stock prices generally rise and periods when stock prices generally decline. The value of individual stocks will rise and fall based on factors specific to each company, such as changes in earnings or management, as well as general economic and market factors.
If a corporation is liquidated, the claims of secured and unsecured creditors and owners of debt securities and “preferred” stock take priority over the claims of those who own common stock.
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Investing in common stocks also poses risks applicable to the particular type of company issuing the common stock. For example, stocks of smaller companies tend to have greater price swings than stocks of larger companies because, among other things, they trade less frequently and in lower volumes, are more susceptible to changes in economic conditions, may be more reliant on singular products or services and are more vulnerable to larger competitors. Common stocks of these types of companies may have a higher potential for gains, but also may be subject to greater risk of loss.
Investing in common stocks also poses risks applicable to a particular industry, such as technology, financial services, consumer goods or natural resources (e.g., oil and gas). To some extent, the prices of common stocks tend to move by industry sector. When market conditions favorably affect, or are expected favorably to affect, an industry, the share prices of the common stocks of companies in that industry tend to rise. Conversely, negative news or a poor outlook for a particular industry can cause the share prices of the common stocks of companies in that industry to decline quickly.
Convertible Securities
Convertible securities include bonds, debentures, notes, preferred stocks or other securities that may be converted or exchanged (by the holder or by the issuer) into shares of the underlying common stock (or cash or securities of equivalent value) at a stated exchange ratio or predetermined price (the conversion price). As such, convertible securities combine the investment characteristics of debt securities and equity securities. A holder of convertible securities is entitled to receive the income of a bond, debenture or note or the dividend of a preferred stock until the conversion privilege is exercised. The market value of convertible securities generally is a function of, among other factors, interest rates, the rates of return of similar nonconvertible securities and the financial strength of the issuer. The market value of convertible securities tends to decline as interest rates rise and, conversely, to rise as interest rates decline. However, a convertible security’s market value tends to reflect the market price of the common stock of the issuing company when that stock price approaches or is greater than its conversion price. As the market price of the underlying common stock declines, the price of the convertible security tends to be influenced more by the rate of return of the convertible security. Because both interest rate and market movements can influence their value, convertible securities generally are not as sensitive to changes in interest rates as similar debt securities nor generally are they as sensitive to changes in share price as their underlying common stock. Convertible securities may be structured as fixed-, variable- or floating-rate obligations or as zero-coupon, pay-in-kind and step-coupon securities and may be privately placed or publicly offered. See Permissible Fund Investments — Variable- and Floating-Rate Obligations, Permissible Fund Investments — Zero-Coupon, Pay-in-Kind and Step-Coupon Securities and Permissible Fund Investments — Private Placement and Other Restricted Securities for more information.
Investing in convertible securities is subject to certain risks. Certain convertible securities, particularly securities that are convertible into securities of an issuer other than the issuer of the convertible security, may be illiquid and, therefore, may be more difficult to resell in a timely fashion or for a fair price, which could result in investment losses. Certain convertible securities may have a mandatory conversion feature, pursuant to which the securities convert automatically into common stock or other equity securities (of the same or a different issuer) at a specified date and a specified exchange ratio. Certain convertible securities may be convertible at the option of the issuer, which may require a holder to convert the security into the underlying common stock, even at times when the value of the underlying common stock or other equity security has declined substantially.
In addition, some convertible securities may be rated below investment grade or may not be rated and, therefore, may be considered speculative investments. Companies that issue convertible securities frequently are small- and mid-capitalization companies and, accordingly, carry the risks associated with such companies. In addition, the credit rating of a company’s convertible securities generally is lower than that of its conventional debt securities. Convertible securities are senior to equity securities and have a claim to the assets of an issuer prior to the holders of the issuer’s common stock in the event of liquidation but generally are subordinate to similar non-convertible debt securities of the same issuer. Some convertible securities are particularly sensitive to
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changes in interest rates when their predetermined conversion price is much higher than the price for the issuing company’s common stock.
Corporate Debt Securities
Corporate debt securities are fixed income securities typically issued by businesses to finance their operations. Notes, bonds, debentures and commercial paper are the most common types of corporate debt securities, with the primary difference being their interest rates, maturity dates and secured or unsecured status. Commercial paper has the shortest term and usually is unsecured. The broad category of corporate debt securities includes debt issued by domestic or foreign companies of all kinds, including those with small-, mid- and large-capitalizations. The category also includes bank loans, as well as assignments, participations and other interests in bank loans. Corporate debt securities may be rated investment grade or below investment grade and may be structured as fixed-, variable- or floating-rate obligations or as zero-coupon, pay-in-kind and step-coupon securities and may be privately placed or publicly offered. See Permissible Fund Investments — Variable- and Floating-Rate Obligations, Permissible Fund Investments — Zero-Coupon, Pay-in-Kind and Step-Coupon Securities and Permissible Fund Investments — Private Placement and Other Restricted Securities for more information.
Extendible commercial notes (ECNs) are very similar to commercial paper except that with ECNs, the issuer has the option to extend the notes’ maturity. ECNs are issued at a discount rate, with an initial redemption of not more than 90 days from the date of issue. If ECNs are not redeemed by the issuer on the initial redemption date, the issuer will pay a premium (step-up) rate based on the ECN’s credit rating at the time.
Because of the wide range of types and maturities of corporate debt securities, as well as the range of creditworthiness of issuers, corporate debt securities can have widely varying risk/return profiles. For example, commercial paper issued by a large established domestic corporation that is rated by an NRSRO as investment grade may have a relatively modest return on principal but present relatively limited risk. On the other hand, a long-term corporate note issued, for example, by a small foreign corporation from an emerging market country that has not been rated by an NRSRO may have the potential for relatively large returns on principal but carries a relatively high degree of risk.
Investing in corporate debt securities is subject to certain risks including, among others, credit and interest rate risk. Credit risk is the risk that a Fund could lose money if the issuer of a corporate debt security is unable to pay interest or repay principal when it becomes due. Some corporate debt securities that are rated below investment grade by an NRSRO generally are considered speculative because they present a greater risk of loss, including default, than higher quality debt securities. The credit risk of a particular issuer’s debt security may vary based on its priority for repayment. For example, higher ranking (senior) debt securities have a higher priority than and, therefore, may be paid in full before, lower ranking (subordinated) securities. In addition, in the event of bankruptcy, holders of higher-ranking senior securities may receive amounts otherwise payable to the holders of more junior securities. Interest rate risk is the risk that the value of certain corporate debt securities will tend to fall when interest rates rise. In general, corporate debt securities with longer terms tend to fall more in value when interest rates rise than do corporate debt securities with shorter terms.
Custody Receipts and Trust Certificates
Custody receipts and trust certificates are derivative products that evidence direct ownership in a pool of securities. Typically, a sponsor will deposit a pool of securities with a custodian in exchange for custody receipts evidencing interests in those securities. The sponsor generally then will sell the custody receipts or trust certificates in negotiated transactions at varying prices. Each custody receipt or trust certificate evidences the individual securities in the pool and the holder of a custody receipt or trust certificate generally will have all the rights and privileges of owners of those securities.
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Investing in custody receipts and trust certificates is subject to certain risks. Custody receipts and trust certificates generally are subject to the same risks as the securities evidenced by the receipts or certificates. Custody receipts and trust certificates also may be less liquid than the underlying securities.
Derivatives
General.
Derivatives are financial instruments whose values are based on (or “derived” from) traditional securities (such as a stock or a bond), assets (such as a commodity, like gold), reference rates (such as LIBOR) or market indices (such as the S&P 500® Index). Some forms of derivatives, such as exchange-traded futures and options on securities, commodities, or indices, are traded on regulated exchanges. These types of derivatives are standardized contracts that can easily be bought and sold, and whose market values are determined and published daily. Non-standardized derivatives, on the other hand, tend to be more specialized or complex, and may be harder to value. Derivatives afford leverage and, when used properly, can enhance returns and be useful in hedging portfolios. Some common types of derivatives include futures; options; options on futures; forward foreign currency exchange contracts; forward contracts on securities and securities indices; linked securities and structured products; CMOs; stripped securities; warrants; swap agreements and swaptions.
A Fund may use derivatives for a variety of reasons, including, for example: (i) to enhance its return; (ii) to attempt to protect against possible changes in the market value of securities held in or to be purchased for its portfolio resulting from securities markets or currency exchange rate fluctuations (i.e., to hedge); (iii) to protect its unrealized gains reflected in the value of its portfolio securities; (iv) to facilitate the sale of such securities for investment purposes; (v) to reduce transaction costs; and/or (vi) to manage the effective maturity or duration of its portfolio.
A Fund’s use of derivatives presents risks different from, and possibly greater than, the risks associated with investing directly in traditional securities. The use of derivatives can lead to losses because of adverse movements in the price or value of the underlying security, asset, index or reference rate, which may be magnified by certain features of the derivatives. These risks are heightened when a Fund uses derivatives to enhance its return or as a substitute for a position or security, rather than solely to hedge or offset the risk of a position or security held by a Fund. There is also a risk that the derivative will not correlate well with the security for which it is substituting. A Fund’s use of derivatives to leverage risk also may exaggerate a loss, potentially causing a Fund to lose more money than if it had invested in the underlying security, or limit a potential gain.
The success of management’s derivative strategies will depend on its ability to assess and predict the impact of market or economic developments on the underlying security, asset, index or reference rate and the derivative itself, without necessarily the benefit of observing the performance of the derivative under all possible market conditions. Other risks arise from a Fund’s potential inability to terminate or sell its derivative positions as a liquid secondary market for such positions may not exist at times when a Fund may wish to terminate or sell them. Over-the-counter instruments (investments not traded on an exchange) may be illiquid. Derivatives traded in the over-the-counter market are subject to the risk that the other party will not meet its obligations. Also, with some derivative strategies there is the risk that a Fund may not be able to find a suitable derivative transaction counterparty, and thus may be unable to invest in derivatives altogether. The use of derivatives may also increase the amount and accelerate the timing of taxes payable by shareholders.
A Fund may use any or all of the above investment techniques and may purchase different types of derivative instruments at any time and in any combination. There is no particular strategy that dictates the use of one technique over another, as the use of derivatives is a function of numerous variables, including market conditions.
Index or Linked Securities (Structured Products)
General. Indexed or linked securities, also often referred to as “structured products,” are instruments that may have varying combinations of equity and debt characteristics. These instruments are structured to recast the
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investment characteristics of the underlying security or reference asset. If the issuer is a unit investment trust or other special purpose vehicle, the structuring will typically involve the deposit with or purchase by such issuer of specified instruments (such as commercial bank loans or securities) and/or the execution of various derivative transactions, and the issuance by that entity of 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.
Indexed and Inverse Floating Rate Securities. A Fund may invest in securities that provide a potential return based on a particular index of value or interest rates. For example, a Fund may invest in securities that pay interest based on an index of interest rates. The principal amount payable upon maturity of certain securities also may be based on the value of the index. To the extent a Fund invests in these types of securities, a Fund’s return on such securities will rise and fall with the value of the particular index: that is, if the value of the index falls, the value of the indexed securities owned by a Fund will fall. Interest and principal payable on certain securities may also be based on relative changes among particular indices.
A Fund may also invest in so-called “inverse floaters” or “residual interest bonds” on which the interest rates vary inversely with a floating rate (which may be reset periodically by a dutch auction, a remarketing agent, or by reference to a short-term tax-exempt interest rate index). A Fund may purchase synthetically-created inverse floating rate bonds evidenced by custodial or trust receipts. Generally, income on inverse floating rate bonds will decrease when interest rates increase, and will increase when interest rates decrease. Such securities have the effect of providing a degree of investment leverage, since they may increase or decrease in value in response to changes, as an illustration, in market interest rates at a rate that is a multiple of the rate at which fixed-rate securities increase or decrease in response to such changes. As a result, the market values of such securities will generally be more volatile than the market values of fixed-rate securities. To seek to limit the volatility of these securities, a Fund may purchase inverse floating obligations that have shorter-term maturities or that contain limitations on the extent to which the interest rate may vary. Certain investments in such obligations may be illiquid. A Fund may invest in indexed and inverse securities for hedging purposes or to seek to increase returns. When used for hedging purposes, indexed and inverse securities involve correlation risk. Furthermore, where such a security includes a contingent liability, in the event of an adverse movement in the underlying index or interest rate, a Fund may be required to pay substantial additional margin to maintain the position.
Credit Linked Securities. Among the income producing securities in which a Fund may invest are credit linked securities. The issuers of these securities frequently are limited purpose trusts or other special purpose vehicles that, in turn, invest in a derivative instrument or basket of derivative instruments, such as credit default swaps, interest rate swaps and other securities, in order to provide exposure to certain fixed income markets. For instance, a Fund may invest in credit linked securities as a cash management tool in order to gain exposure to a certain market and/or to remain fully invested when more traditional income producing securities are not available.
Like an investment in a bond, investments in these credit linked securities represent the right to receive periodic income payments (in the form of distributions) and payment of principal at the end of the term of the security. However, these payments are conditioned on or linked to the issuer’s receipt of payments from, and the issuer’s potential obligations to, the counterparties to the derivative instruments and other securities in which the issuer invests. For instance, the issuer may sell one or more credit default swaps, under which the issuer would receive a stream of payments over the term of the swap agreements provided that no event of default has occurred with respect to the referenced debt obligation upon which the swap is based. If a default occurs, the stream of payments may stop and the issuer would be obligated to pay the counterparty the par (or other agreed upon value) of the referenced debt obligation. This, in turn, would reduce the amount of income and/or principal
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that a Fund would receive. A Fund’s investments in these instruments are indirectly subject to the risks associated with derivative instruments, including, among others, credit risk, default or similar event risk, counterparty risk, interest rate risk, leverage risk and management risk. These securities generally are exempt from registration under the 1933 Act. Accordingly, there may be no established trading market for the securities and they may constitute illiquid investments.
Index-, Commodity-, Currency- and Equity-Linked Securities. “Index-linked” or “commodity-linked” notes are debt securities of companies that call for interest payments and/or payment at maturity in different terms than the typical note where the borrower agrees to make fixed interest payments and to pay a fixed sum at maturity. Principal and/or interest payments on an index-linked or commodity-linked note depend on the performance of one or more market indices, such as the S&P 500® Index, a weighted index of commodity futures such as crude oil, gasoline and natural gas or the market prices of a particular commodity or basket of commodities. Equity-linked securities are short-term or intermediate term instruments having a value at maturity and/or interest rate determined by reference to the market prices of one or more equity securities. At maturity, the principal amount of an equity-linked debt security is often exchanged for common stock of the issuer or is payable in an amount based on the issuer’s common stock price at the time of maturity. Currency-linked debt securities are short-term or intermediate-term instruments having a value at maturity, and/or an interest rate, determined by reference to one or more foreign currencies. Payment of principal or periodic interest may be calculated as a multiple of the movement of one currency against another currency, or against an index.
Index, commodity, currency and equity-linked securities may entail substantial risks. Such instruments may be subject to significant price volatility. The company issuing the instrument may fail to pay the amount due on maturity. The underlying investment or security may not perform as expected by the Advisor. Markets, underlying securities and indexes may move in a direction that was not anticipated by the Advisor. Performance of the derivatives may be influenced by interest rate and other market changes in the United States and abroad, and certain derivative instruments may be illiquid.
Linked securities are often issued by unit investment trusts. Examples of this include such index-linked securities as S&P Depositary Receipts (SPDRs), which is an interest in a unit investment trust holding a portfolio of securities linked to the S&P 500® Index, and a type of exchange-traded fund (ETF). Because a unit investment trust is an investment company under the 1940 Act, a Fund’s investments in SPDRs are subject to the limitations set forth in Section 12(d)(1)(A) of the 1940 Act. SPDRs closely track the underlying portfolio of securities, trade like a share of common stock and pay periodic dividends proportionate to those paid by the portfolio of stocks that comprise the S&P 500® Index. As a holder of interests in a unit investment trust, a Fund would indirectly bear its ratable share of that unit investment trust’s expenses. At the same time, a Fund would continue to pay its own management and advisory fees and other expenses, as a result of which a Fund and its shareholders in effect would be absorbing levels of fees with respect to investments in such unit investment trusts.
Equity-linked securities include issues such as Structured Yield Product Exchangeable for Stock (STRYPES), Trust Automatic Common Exchange Securities (TRACES), Trust Issued Mandatory Exchange Securities (TIMES), and Trust Enhanced Dividend Securities (TRENDS). The issuers of these equity-linked securities generally purchase and hold a portfolio of stripped U.S. Treasury securities maturing on a quarterly basis through the conversion date, and a forward purchase contract with an existing shareholder of the company relating to the common stock. Quarterly distributions on such equity-linked securities generally consist of the cash received from the U.S. Treasury securities and such equity-linked securities generally are not entitled to any dividends that may be declared on the common stock.
Investing in structured products and linked securities is subject to certain risks. Because structured products typically involve no credit enhancement, their credit risk generally will be equivalent to that of the underlying instruments. Investments in structured products may be structured as a class that is either subordinated or unsubordinated to the right of payment of another class. Subordinated structured products typically have higher rates of return and present greater risks than unsubordinated structured products. Structured products sometimes are sold in private placement transactions and often have a limited trading market.
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Investments in “linked” securities have the potential to lead to significant losses because of unexpected movements in the underlying financial asset, index, currency or other investment. The ability of a Fund to utilize linked-securities successfully will depend on its ability correctly to predict pertinent market movements, which cannot be assured. Because currency-linked securities usually relate to foreign currencies, some of which may be currencies from emerging market countries, there are certain additional risks associated with such investments.
SPDRs are subject to the risks of an investment in a broadly based portfolio of common stocks, including the risk that the general level of stock prices may decline, thereby adversely affecting the value of such investment. In addition, because individual investments in SPDRs are not redeemable, except upon termination of the unit investment trust, the liquidity of small holdings of SPDRs will depend upon the existence of a secondary market. Large holdings of SPDRs are called “creation unit size” and are redeemable in-kind only and are not redeemable for cash from the unit investment trust. The price of a SPDR is derived from and based upon the securities held by the unit investment trust. Accordingly, the level of risk involved in the purchase or sale of a SPDR is similar to the risk involved in the purchase or sale of traditional common stock, with the exception that the pricing mechanism for SPDRs is based on a basket of stocks. Disruptions in the markets for the securities underlying SPDRs purchased or sold by a Fund could result in losses on SPDRs.
Futures Contracts and Options on Futures Contracts
Futures Contracts. A futures contract sale creates an obligation by the seller to deliver the type of security or other asset called for in the contract at a specified delivery time for a stated price. A futures contract purchase creates an obligation by the purchaser to take delivery of the type of security or other asset called for in the contract at a specified delivery time for a stated price. The specific security or other asset delivered or taken at the settlement date is not determined until on or near that date. The determination is made in accordance with the rules of the exchange on which the futures contract was made. A Fund may enter into futures contracts which are traded on national or foreign futures exchanges and are standardized as to maturity date and underlying security or other asset. Futures exchanges and trading in the United States are regulated under the Commodity Exchange Act (CEA) by the Commodity Futures Trading Commission (CFTC), a U.S. Government agency.
Traders in futures contracts may be broadly classified as either “hedgers” or “speculators.” Hedgers use the futures markets primarily to offset unfavorable changes (anticipated or potential) in the value of securities or other assets currently owned or expected to be acquired by them. Speculators less often own the securities or other assets underlying the futures contracts which they trade, and generally use futures contracts with the expectation of realizing profits from fluctuations in the value of the underlying securities or other assets. Pursuant to a notice of eligibility claiming exclusion from the definition of commodity pool operator filed with the CFTC and the National Futures Association on behalf of the Funds, neither the Trust nor any of the individual Funds is deemed to be a “commodity pool operator” under the CEA, and, accordingly, they are not subject to registration or regulation as such under the CEA.
Upon entering into futures contracts, in compliance with the SEC’s requirements, cash or liquid securities, equal in value to the amount of a Fund’s obligation under the contract (less any applicable margin deposits and any assets that constitute “cover” for such obligation), will be segregated with a Fund’s custodian.
Unlike when a Fund purchases or sells a security, no price is paid or received by a Fund upon the purchase or sale of a futures contract, although a Fund is required to deposit with its custodian in a segregated account in the name of the futures broker an amount of cash and/or U.S. Government securities in order to initiate and maintain open positions in futures contracts. This amount is known as “initial margin.” The nature of initial margin in futures transactions is different from that of margin in security transactions, in that futures contract margin does not involve the borrowing of funds by a Fund to finance the transactions. Rather, initial margin is in the nature of a performance bond or good faith deposit intended to assure completion of the contract (delivery or acceptance of the underlying security or other asset) that is returned to a Fund upon termination of the futures contract, assuming all contractual obligations have been satisfied. Minimum initial margin requirements are
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established by the relevant futures exchange and may be changed. Brokers may establish deposit requirements which are higher than the exchange minimums. Futures contracts are customarily purchased and sold on margin which may range upward from less than 5% of the value of the contract being traded. Subsequent payments, called “variation margin,” to and from the broker (or the custodian) are made on a daily basis as the price of the underlying security or other asset fluctuates, a process known as “marking to market.” If the futures contract price changes to the extent that the margin on deposit does not satisfy margin requirements, payment of additional variation margin will be required. Conversely, a change in the contract value may reduce the required margin, resulting in a repayment of excess margin to the contract holder. Variation margin payments are made for as long as the contract remains open. A Fund expects to earn interest income on its margin deposits.
Although futures contracts by their terms call for actual delivery or acceptance of securities or other assets (stock index futures contracts or futures contracts that reference other intangible assets do not permit delivery of the referenced assets), the contracts usually are closed out before the settlement date without the making or taking of delivery. A Fund may elect to close some or all of its futures positions at any time prior to their expiration. The purpose of taking such action would be to reduce or eliminate the position then currently held by a Fund. Closing out an open futures position is done by taking an opposite position (“buying” a contract which has previously been “sold,” “selling” a contract previously “purchased”) in an identical contract (i.e., the same aggregate amount of the specific type of security or other asset with the same delivery date) to terminate the position. Final determinations are made as to whether the price of the initial sale of the futures contract exceeds or is below the price of the offsetting purchase, or whether the purchase price exceeds or is below the offsetting sale price. Final determinations of variation margin are then made, additional cash is required to be paid by or released to a Fund, and a Fund realizes a loss or a gain. Brokerage commissions are incurred when a futures contract is bought or sold.
Successful use of futures contracts by a Fund is subject to the Advisor’s ability to predict correctly movements in the direction of interest rates and other factors affecting securities and commodities markets. This requires different skills and techniques than those required to predict changes in the prices of individual securities. A Fund, therefore, bears the risk that future market trends will be incorrectly predicted.
The risk of loss in trading futures contracts in some strategies can be substantial, due both to the relatively low margin deposits required and the potential for an extremely high degree of leverage involved in futures contracts. As a result, a relatively small price movement in a futures contract may result in an immediate and substantial loss to the investor. For example, if at the time of purchase, 10% of the value of the futures contract is deposited as margin, a subsequent 10% decrease in the value of the futures contract would result in a total loss of the margin deposit, before any deduction for the transaction costs, if the account were then closed out. A 15% decrease would result in a loss equal to 150% of the original margin deposit if the contract were closed out. Thus, a purchase or sale of a futures contract may result in losses in excess of the amount posted as initial margin for the contract.
In the event of adverse price movements, a Fund would continue to be required to make daily cash payments in order to maintain its required margin. In such a situation, if a Fund has insufficient cash, it may have to sell portfolio securities in order to meet daily margin requirements at a time when it may be disadvantageous to do so. The inability to close the futures position also could have an adverse impact on the ability to hedge effectively.
To reduce or eliminate a hedge position held by a Fund, a Fund may seek to close out a position. The ability to establish and close out positions will be subject to the development and maintenance of a liquid secondary market. It is not certain that this market will develop or continue to exist for a particular futures contract, which may limit a Fund’s ability to realize its profits or limit its losses. Reasons for the absence of a liquid secondary market on an exchange include the following: (i) there may be insufficient trading interest in certain contracts; (ii) restrictions may be imposed by an exchange on opening transactions, closing transactions or both; (iii) trading halts, suspensions or other restrictions may be imposed with respect to particular classes or series of
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contracts, or underlying securities; (iv) unusual or unforeseen circumstances, such as volume in excess of trading or clearing capability, may interrupt normal operations on an exchange; (v) the facilities of an exchange or a clearing corporation may not at all times be adequate to handle current trading volume; or (vi) one or more exchanges could, for economic or other reasons, decide or be compelled at some future date to discontinue the trading of contracts (or a particular class or series of contracts), in which event the secondary market on that exchange (or in the class or series of contracts) would cease to exist, although outstanding contracts on the exchange that had been issued by a clearing corporation as a result of trades on that exchange would continue to be exercisable in accordance with their terms.
Interest Rate Futures Contracts. Bond prices are established in both the cash market and the futures market. In the cash market, bonds are purchased and sold with payment for the full purchase price of the bond being made in cash, generally within five business days after the trade. In the futures market, a contract is made to purchase or sell a bond in the future for a set price on a certain date. Historically, the prices for bonds established in the futures markets have tended to move generally in the aggregate in concert with the cash market prices and have maintained fairly predictable relationships. Accordingly, a Fund may use interest rate futures contracts as a defense, or hedge, against anticipated interest rate changes. A Fund presently could accomplish a similar result to that which it hopes to achieve through the use of interest rate futures contracts by selling bonds with long maturities and investing in bonds with short maturities when interest rates are expected to increase, or conversely, selling bonds with short maturities and investing in bonds with long maturities when interest rates are expected to decline. However, because of the liquidity that is often available in the futures market, the protection is more likely to be achieved, perhaps at a lower cost and without changing the rate of interest being earned by a Fund, through using futures contracts.
Interest rate futures contracts are traded in an auction environment on the floors of several exchanges—principally, the Chicago Board of Trade, the Chicago Mercantile Exchange and the New York Futures Exchange. Each exchange guarantees performance under contract provisions through a clearing corporation, a nonprofit organization managed by the exchange membership. A public market exists in futures contracts covering various financial instruments including long-term U.S. Treasury Bonds and Notes; GNMA modified pass-through mortgage backed securities; three-month U.S. Treasury Bills; and ninety-day commercial paper. A Fund may also invest in exchange-traded Eurodollar contracts, which are interest rate futures on the forward level of LIBOR. These contracts are generally considered liquid securities and trade on the Chicago Mercantile Exchange. Such Eurodollar contracts are generally used to “lock-in” or hedge the future level of short-term rates. A Fund may trade in any interest rate futures contracts for which there exists a public market, including, without limitation, the foregoing instruments.
Index Futures Contracts. An index futures contract is a contract to buy or sell units of an index at a specified future date at a price agreed upon when the contract is made. Entering into a contract to buy units of an index is commonly referred to as buying or purchasing a contract or holding a long position in the index. Entering into a contract to sell units of an index is commonly referred to as selling a contract or holding a short position in the index. A unit is the current value of the index. A Fund may enter into stock index futures contracts, debt index futures contracts, or other index futures contracts appropriate to its objective(s).
There are several risks in connection with the use by a Fund of index futures as a hedging device. One risk arises because of the imperfect correlation between movements in the prices of the index futures and movements in the prices of securities which are the subject of the hedges. The Advisor will attempt to reduce this risk by selling, to the extent possible, futures on indices the movements of which will, in its judgment, have a significant correlation with movements in the prices of a Fund’s portfolio securities sought to be hedged.
Municipal Bond Index Futures Contracts. Municipal bond index futures contracts may act as a hedge against changes in market conditions. A municipal bond index assigns values daily to the municipal bonds included in the index based on the independent assessment of dealer-to-dealer municipal bond brokers. A municipal bond index futures contract represents a firm commitment by which two parties agree to take or make
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delivery of an amount equal to a specified dollar amount multiplied by the difference between the municipal bond index value on the last trading date of the contract and the price at which the futures contract is originally struck. No physical delivery of the underlying securities in the index is made.
Options on Futures Contracts. A Fund may purchase and write call and put options on those futures contracts that it is permitted to buy or sell. A Fund may use such options on futures contracts in lieu of writing options directly on the underlying securities or other assets or purchasing and selling the underlying futures contracts. Such options generally operate in the same manner as options purchased or written directly on the underlying investments. A futures option gives the holder, in return for the premium paid, the right to buy from (call) or sell to (put) the writer of the option a futures contract at a specified price at any time during the period of the option. Upon exercise, the writer of the option is obligated to pay the difference between the cash value of the futures contract and the exercise price. Like the buyer or seller of a futures contract, the holder or writer of an option has the right to terminate its position prior to the scheduled expiration of the option by selling or purchasing an option of the same series, at which time the person entering into the closing purchase transaction will realize a gain or loss. There is no guarantee that such closing purchase transactions can be effected.
A Fund will enter into written options on futures contracts only when, in compliance with the SEC’s requirements, cash or liquid securities equal in value to the underlying security’s or other asset’s value (less any applicable margin deposits) have been deposited in a segregated account. A Fund will be required to deposit initial margin and maintenance margin with respect to put and call options on futures contracts written by it pursuant to brokers’ requirements similar to those described above.
Investments in futures options involve some of the same risks that are involved in connection with investments in futures contracts (for example, the existence of a liquid secondary market). In addition, the purchase of an option also entails the risk that changes in the value of the underlying futures contract will not be fully reflected in the value of the option purchased. There may be circumstances when the purchase of a call or put option on a futures contract would result in a loss to a Fund when the purchase or sale of a futures contract would not, such as when there is no movement in the prices of the hedged investments. In general, the market prices of options can be expected to be more volatile than the market prices on the underlying futures contracts. Compared to the purchase or sale of futures contracts, however, the purchase of call or put options on futures contracts may frequently involve less potential risk to a Fund because the maximum amount at risk is the premium paid for the options (plus transaction costs).
Successful use of index futures by a Fund is also subject to the Advisor’s ability to predict correctly movements in the direction of the market. It is possible that, for example, where a Fund has sold futures to hedge its portfolio against a decline in the market, the index on which the futures are written may advance and the value of securities held in a Fund’s portfolio may decline. If this occurred, a Fund would lose money on the futures and also experience a decline in the value of its portfolio securities, as a Fund’s ability to effectively hedge all or a portion of the securities in its portfolio, in anticipation of or during a market decline, through transactions in futures or put options on stock indices, depends on the degree to which price movements in the underlying index correlate with the price movements of the securities held by a Fund. Inasmuch as a Fund’s securities will not duplicate the components of an index, the correlation will not be perfect. Consequently, a Fund bears the risk that the prices of its securities being hedged will not move to the same extent as do the prices of its put options on the stock indices. It is also possible that, if a Fund has hedged against the possibility of a decline in the market adversely affecting securities held in its portfolio and securities prices increase instead, a Fund will lose part or all of the benefit of the increased values of those securities that it has hedged, because it will have offsetting losses in its futures positions. In addition, in such situations, if a Fund has insufficient cash, it may have to sell securities to meet daily variation margin requirements.
In addition to the possibility that there may be an imperfect correlation, or no correlation at all, between movements in the index futures and the securities of the portfolio being hedged, the prices of index futures may not correlate perfectly with movements in the underlying index due to certain market distortions. First, all
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participants in the futures markets are subject to margin deposit and maintenance requirements. Rather than meeting additional margin deposit requirements, investors may close futures contracts through offsetting transactions, which would distort the normal relationship between the index and futures markets. Second, margin requirements in the futures market are less onerous than margin requirements in the securities market, and as a result, the futures market may attract more speculators than the securities market. Increased participation by speculators in the futures market may also cause temporary price distortions. Due to the possibility of price distortions in the futures market, and also because of the imperfect correlation between movements in an index and movements in the prices of index futures, even a correct forecast of general market trends by the Advisor may still not result in a successful hedging transaction.
There is also the risk of loss by a Fund of margin deposits in the event of bankruptcy of a broker with whom a Fund has an open position in a futures contract or related option. Most futures exchanges limit the amount of fluctuation permitted in some contract prices during a single trading day. The daily limit establishes the maximum amount that the price of a futures contract may vary either up or down from the previous day’s settlement price at the end of a trading session. Once the daily limit has been reached in a particular type of contract, no trades may be made on that day at a price beyond that limit. The daily limit governs only price movement during a particular trading day and, therefore, does not limit potential losses, because the limit may prevent the liquidation of unfavorable positions. Futures contract prices have occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of futures positions and subjecting some futures traders to substantial losses.
Options on Index Futures Contracts. A Fund may also purchase and sell options on index futures contracts. Options on index futures give the purchaser the right, in return for the premium paid, to assume a position in an index futures contract (a long position if the option is a call and a short position if the option is a put), at a specified exercise price at any time during the period of the option. Upon exercise of the option, the delivery of the futures position by the writer of the option to the holder of the option will be accompanied by delivery of the accumulated balance in the writer’s futures margin account, which represents the amount by which the market price of the index futures contract, at exercise, exceeds (in the case of a call) or is less than (in the case of a put) the exercise price of the option on the index future. If an option is exercised on the last trading day prior to the expiration date of the option, the settlement will be made entirely in cash equal to the difference between the exercise price of the option and the closing level of the index on which the future is based on the expiration date. Purchasers of options who fail to exercise their options prior to the exercise date suffer a loss of the premium paid.
There are various risks in connection with the use by a Fund of index futures as a hedging device. For example, a risk arises because of the imperfect correlation between movements in the prices of the index futures and movements in the prices of securities which are the subject of the hedges. The Advisor will attempt to reduce this risk by selling, to the extent possible, futures on indices the movements of which will, in its judgment, have a significant correlation with movements in the prices of a Fund’s portfolio securities sought to be hedged; there can be no assurance that the Advisor will be successful in doing so.
Use by Tax-Exempt Funds of Interest Rate and U.S. Treasury Security Futures Contracts and Options. If a Fund invests in tax-exempt securities, it may purchase and sell futures contracts and related options on interest rate and U.S. Treasury securities when, in the opinion of the Advisor, price movements in these security futures and related options will correlate closely with price movements in the tax-exempt securities which are the subject of the hedge. Interest rate and U.S. Treasury securities futures contracts require the seller to deliver, or the purchaser to take delivery of, the type of security called for in the contract at a specified date and price. Options on interest rate and U.S. Treasury security futures contracts give the purchaser the right in return for the premium paid to assume a position in a futures contract at the specified option exercise price at any time during the period of the option.
In addition to the risks generally involved in using futures contracts, there is also a risk that price movements in interest rate and U.S. Treasury security futures contracts and related options will not correlate closely with price movements in markets for tax-exempt securities.
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Stock Options and Stock Index Options
A Fund may purchase and write (i.e., sell) put and call options. Such options may relate to particular stocks or stock indices, and may or may not be listed on a domestic or foreign securities exchange and may or may not be issued by the Options Clearing Corporation (OCC). Stock index options are put options and call options on various stock indices. In most respects, they are identical to listed options on common stocks.
There is a key difference between stock options and stock index options in connection with their exercise. In the case of stock options, the underlying security, common stock, is delivered. However, upon the exercise of an index option, settlement does not occur by delivery of the securities comprising the index. The option holder who exercises the index option receives an amount of cash if the closing level of the stock index upon which the option is based is greater than (in the case of a call) or less than (in the case of a put) the exercise price of the option. This amount of cash is equal to the difference between the closing price of the stock index and the exercise price of the option expressed in dollars times a specified multiple. A stock index fluctuates with changes in the market value of the securities included in the index. For example, some stock index options are based on a broad market index, such as the S&P 500® Index or a narrower market index, such as the S&P 100® Index. Indices may also be based on an industry or market segment.
The successful use of a Fund’s options strategies depends on the ability of the Advisor to forecast interest rate and market movements correctly. When it purchases an option, a Fund runs the risk that it will lose its entire investment in the option in a relatively short period of time, unless a Fund exercises the option or enters into a closing sale transaction for such option during the life of the option. If the price of the underlying security does not rise (in the case of a call) or fall (in the case of a put) to an extent sufficient to cover the option premium and transaction costs, a Fund will lose part or all of its investment in the option. This contrasts with an investment by a Fund in the underlying securities, since a Fund may continue to hold its investment in those securities notwithstanding the lack of a change in price of those securities.
The effective use of options also depends on a Fund’s ability to terminate option positions at times when the Advisor deems it desirable to do so. Although a Fund will take an option position only if the Advisor believes there is a liquid secondary market for the option, there is no assurance that a Fund will be able to effect closing transactions at any particular time or at an acceptable price.
If a secondary trading market in options were to become unavailable, a Fund could no longer engage in closing transactions. The writer in such circumstances would be subject to the risk of market decline or appreciation in the instrument during such period. If an option purchased by a Fund expires unexercised, a Fund will realize a loss equal to the premium paid. Reasons for the absence of a liquid secondary market on an exchange include the following: (i) there may be insufficient trading interest in certain options; (ii) restrictions may be imposed by an exchange on opening transactions or closing transactions or both; (iii) trading halts, suspensions or other restrictions may be imposed with respect to particular classes or series of options, or underlying securities; (iv) unusual or unforeseen circumstances, such as volume in excess of trading or clearing capability, may interrupt normal operations on an exchange; (v) the facilities of an exchange or a clearing corporation may not at all times be adequate to handle current trading volume; or (vi) one or more exchanges could, for economic or other reasons, decide or be compelled at some future date to discontinue the trading of options (or a particular class or series of options), in which event the secondary market on that exchange (or in the class or series of options) would cease to exist, although outstanding options on the exchange that had been issued by a clearing corporation as a result of trades on that exchange would continue to be exercisable in accordance with their terms.
Disruptions in the markets for the securities underlying options purchased or sold by a Fund could result in losses on the options. If trading is interrupted in an underlying security, the trading of options on that security is normally halted as well. As a result, a Fund as purchaser or writer of an option will be unable to close out its positions until options trading resumes, and it may be faced with losses if trading in the security reopens at a
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substantially different price. In addition, the OCC or other options markets may impose exercise restrictions. If a prohibition on exercise is imposed at a time when trading in the option has also been halted, a Fund as purchaser or writer of an option will be locked into its position until one of the two restrictions has been lifted. If a prohibition on exercise remains in effect until an option owned by a Fund has expired, a Fund could lose the entire value of its option.
Special risks are presented by internationally traded options. Because of time differences between the United States and various foreign countries, and because different holidays are observed in different countries, foreign options markets may be open for trading during hours or on days when U.S. markets are closed. As a result, option premiums may not reflect the current prices of the underlying interest in the United States.
Dealer (Over-the-Counter) Options. Dealer options are options negotiated individually through dealers rather than traded on an exchange. Certain risks are specific to dealer options. While a Fund might look to a clearing corporation to exercise exchange-traded options, if a Fund purchases a dealer option it must rely on the selling dealer to perform if a Fund exercises the option. 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. Exchange-traded options generally have a continuous liquid market while dealer options more often may not. Consequently, a Fund can realize the value of a dealer option it has purchased only by exercising or reselling the option to the issuing dealer. Similarly, when a Fund writes a dealer option, a Fund can close out the option prior to its expiration only by entering into a closing purchase transaction with the dealer. While each Fund seeks to enter into dealer options only with dealers who will agree to and can enter into closing transactions with a Fund, no assurance exists that a Fund will at any time be able to liquidate a dealer option at a favorable price at any time prior to expiration. Unless a Fund, as a covered dealer call option writer, can effect a closing purchase transaction, it will not be able to liquidate securities (or other assets) used as cover until the option expires or is exercised. In the event of insolvency of the other party, a Fund may be unable to liquidate a dealer option. With respect to options written by a Fund, the inability to enter into a closing transaction may result in material losses to a Fund. For example, because a Fund must maintain a secured position with respect to any call option on a security it writes, a Fund may not sell the assets that it has segregated to secure the position while it is obligated under the option. This requirement may impair a Fund’s ability to sell portfolio securities at a time when such sale might be advantageous.
A Fund generally will treat purchased dealer options as illiquid securities. A Fund may treat the cover used for written dealer options as liquid if the dealer agrees that a Fund may repurchase the dealer option it has written for a maximum price to be calculated by a predetermined formula. In such cases, the dealer option would be considered illiquid only to the extent the maximum purchase price under the formula exceeds the intrinsic value of the option.
Writing Covered Options. A Fund may write covered call options and covered put options on securities held in its portfolio when, in the opinion of the Advisor, such transactions are consistent with a Fund’s investment goal and policies. Call options written by a Fund give the purchaser the right to buy the underlying securities from a Fund at the stated exercise price at any time prior to the expiration date of the option, regardless of the security’s market price; put options give the purchaser the right to sell the underlying securities to a Fund at the stated exercise price at any time prior to the expiration date of the option, regardless of the security’s market price.
A Fund may write only covered options, which means that, so long as a Fund is obligated as the writer of a call option, it will own the underlying securities subject to the option (or comparable securities satisfying the cover requirements of securities exchanges). In the case of put options, a Fund will hold cash and/or high-grade short-term debt obligations equal to the price to be paid if the option is exercised. In addition, a Fund will be considered to have covered a put or call option if and to the extent that it holds an option that offsets some or all of the risk of the option it has written. A Fund may write combinations of covered puts and calls (straddles) on the same underlying security.
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A Fund will receive a premium from writing a put or call option, which increases a Fund’s return on the underlying security if the option expires unexercised or is closed out at a profit. The amount of the premium reflects, among other things, the relationship between the exercise price and the current market value of the underlying security, the volatility of the underlying security, the amount of time remaining until expiration, current interest rates, and the effect of supply and demand in the options market and in the market for the underlying security. By writing a call option, a Fund limits its opportunity to profit from any increase in the market value of the underlying security above the exercise price of the option but continues to bear the risk of a decline in the value of the underlying security. By writing a put option, a Fund assumes the risk that it may be required to purchase the underlying security for an exercise price higher than the security’s then-current market value, resulting in a potential capital loss unless the security subsequently appreciates in value.
A Fund’s obligation to sell an instrument subject to a call option written by it, or to purchase an instrument subject to a put option written by it, may be terminated prior to the expiration date of the option by a Fund’s execution of a closing purchase transaction, which is effected by purchasing on an exchange an offsetting option of the same series (i.e., same underlying instrument, exercise price and expiration date) as the option previously written. A closing purchase transaction will ordinarily be effected in order to realize a profit on an outstanding option, to prevent an underlying instrument from being called, to permit the sale of the underlying instrument or to permit the writing of a new option containing different terms on such underlying instrument. A Fund realizes a profit or loss from a closing purchase transaction if the cost of the transaction (option premium plus transaction costs) is less or more than the premium received from writing the option. Because increases in the market price of a call option generally reflect increases in the market price of the security underlying the option, any loss resulting from a closing purchase transaction may be offset in whole or in part by unrealized appreciation of the underlying security.
If a Fund writes a call option but does not own the underlying security, and when it writes a put option, a Fund may be required to deposit cash or securities with its broker as “margin” or collateral for its obligation to buy or sell the underlying security. As the value of the underlying security varies, a Fund may also have to deposit additional margin with the broker. Margin requirements are complex and are fixed by individual brokers, subject to minimum requirements currently imposed by the Federal Reserve Board and by stock exchanges and other self-regulatory organizations.
Purchasing Put Options. A Fund may purchase put options to protect its portfolio holdings in an underlying security against a decline in market value. Such hedge protection is provided during the life of the put option since a Fund, as holder of the put option, is able to sell the underlying security at the put exercise price regardless of any decline in the underlying security’s market price. For a put option to be profitable, the market price of the underlying security must decline sufficiently below the exercise price to cover the premium and transaction costs. By using put options in this manner, a Fund will reduce any profit it might otherwise have realized from appreciation of the underlying security by the premium paid for the put option and by transaction costs.
Purchasing Call Options. A Fund may purchase call options to hedge against an increase in the price of securities that a Fund wants ultimately to buy. Such hedge protection is provided during the life of the call option since a Fund, as holder of the call option, is able to buy the underlying security at the exercise price regardless of any increase in the underlying security’s market price. In order for a call option to be profitable, the market price of the underlying security must rise sufficiently above the exercise price to cover the premium and transaction costs. These costs will reduce any profit a Fund might have realized had it bought the underlying security at the time it purchased the call option.
Over-the-Counter (OTC) Options. A Fund will enter into OTC options transactions only with primary dealers in U.S. Government securities and, in the case of OTC options written by a Fund, only pursuant to agreements that will assure that a Fund will at all times have the right to repurchase the option written by it from the dealer at a specified formula price. A Fund will treat the amount by which such formula price exceeds the amount, if any, by which the option may be “in-the-money” as an illiquid investment. It is the present policy of a Fund not to enter
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into any OTC option transaction if, as a result, more than 15% (10% in some cases, refer to a Fund’s prospectuses) of a Fund’s net assets would be invested in (i) illiquid investments (determined under the foregoing formula) relating to OTC options written by a Fund, (ii) OTC options purchased by a Fund, (iii) securities which are not readily marketable, and (iv) repurchase agreements maturing in more than seven days.
Index Options. As an alternative to purchasing call and put options on index futures, a Fund may purchase call and put options on the underlying indices themselves. Such options could be used in a manner identical to the use of options on index futures. Options involving securities indices provide the holder with the right to make or receive a cash settlement upon exercise of the option based on movements in the relevant index. Such options must be listed on a national securities exchange and issued by the OCC. Such options may relate to various stock indices, except that a Fund may not write covered options on an index.
Foreign Stock Index Options. A Fund may, for the purpose of hedging its portfolio, subject to applicable securities regulations, purchase and write put and call options on foreign stock indices listed on foreign and domestic stock exchanges.
Swap Agreements
Swap agreements are derivative instruments that can be individually negotiated and structured to include exposure to a variety of different types of investments or market factors. Depending on their structure, swap agreements may increase or decrease a Fund’s exposure to long- or short-term interest rates, foreign currency values, mortgage securities, corporate borrowing rates, or other factors such as security prices or inflation rates. A Fund may enter into a variety of swap agreements, including interest rate, index, commodity, equity, credit default and currency exchange rate swap agreements, and other types of swap agreements such as caps, collars and floors. A Fund also may enter into swaptions, which are options to enter into a swap agreement.
In a typical interest rate swap, one party agrees to make regular payments equal to a floating interest rate times a “notional principal amount,” in return for payments equal to a fixed rate times the same amount, for a specified period of time. If a swap agreement provides for payments in different currencies, the parties might agree to exchange notional principal amount as well. In a total return swap agreement, the non-floating rate side of the swap is based on the total return of an individual security, a basket of securities, an index or another reference asset. Swaps may also depend on other prices or rates, such as the value of an index or mortgage prepayment rates.
In a typical cap or floor agreement, one party agrees to make payments only under specified circumstances, usually in return for payment of a fee by the other party. For example, the buyer of an interest rate cap obtains the right to receive payments to the extent that a specified interest rate exceeds an agreed-upon level, while the seller of an interest rate floor is obligated to make payments to the extent that a specified interest rate falls below an agreed-upon level. Caps and floors have an effect similar to buying or writing options. A collar combines elements of buying a cap and selling a floor.
Swap agreements will tend to shift a Fund’s investment exposure from one type of investment to another. For example, if a Fund agreed to pay fixed rates in exchange for floating rates while holding fixed-rate bonds, the swap would tend to decrease a Fund’s exposure to long-term interest rates. Another example is if a Fund agreed to exchange payments in dollars for payments in foreign currency, the swap agreement would tend to decrease a Fund’s exposure to U.S. interest rates and increase its exposure to foreign currency and interest rates.
Swap agreements are sophisticated hedging instruments that typically involve a small investment of cash relative to the magnitude of risks assumed. As a result, swaps can be highly volatile and may have a considerable impact on a Fund’s performance. Depending on how they are used, swap agreements may increase or decrease the overall volatility of a Fund’s investments and its share price and yield. Additionally, whether a Fund’s use of swap agreements will be successful in furthering its investment objective will depend on the Advisor’s ability
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correctly to predict whether certain types of investments likely are to produce greater returns than other investments. Because they are two party contracts and because they may have terms of greater than seven days, swap agreements may be considered to be illiquid. Moreover, a Fund bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap agreement counterparty. The most significant factor in the performance of swap agreements is the change in the specific interest rate, currency, or other factor that determines the amounts of payments due to and from a Fund. If a swap agreement calls for payments by a Fund, a Fund must be prepared to make such payments when due. In addition, if the counterparty’s creditworthiness declines, the value of a swap agreement likely would decline, potentially resulting in losses for a Fund. A Fund will closely monitor the credit of a swap agreement counterparty in order to attempt to minimize this risk. A Fund may also suffer losses if it is unable to terminate outstanding swap agreements (either by assignment or other disposition) or reduce its exposure through offsetting transactions (i.e., by entering into an offsetting swap agreement with the same party or a similarly creditworthy party).
Credit Default Swap Agreements. A Fund may enter into credit default swap agreements, which may have as reference obligations one or more securities or a basket of securities that are or are not currently held by a Fund. The protection “buyer” in a credit default contract is generally obligated to pay the protection “seller” an upfront or a periodic stream of payments over the term of the contract provided that no credit event, such as a default, on a reference obligation has occurred. If a credit event occurs, the seller generally must pay the buyer the “par value” (full notional value) of the swap in exchange for an equal face amount of deliverable obligations of the reference entity described in the swap, or the seller may be required to deliver the related net cash amount, if the swap is cash settled. A Fund may be either the buyer or seller in the transaction. If a Fund is a buyer and no credit event occurs, a Fund may recover nothing if the swap is held through its termination date. However, if a credit event occurs, the buyer generally may elect to receive the full notional value of the swap in exchange for an equal face amount of deliverable obligations of the reference entity whose value may have significantly decreased. As a seller, a Fund generally receives an upfront payment or a fixed rate of income throughout the term of the swap provided that there is no credit event. As the seller, a Fund would effectively add leverage to its portfolio because, in addition to its total net assets, a Fund would be subject to investment exposure on the notional amount of the swap.
Credit default swap agreements may involve greater risks than if a Fund had invested in the reference obligation directly since, in addition to risks relating to the reference obligation, credit default swaps are subject to illiquidity risk, counterparty risk and credit risk. A Fund will enter into credit default swap agreements generally with counterparties that meet certain standards of creditworthiness. A buyer generally will lose its investment and recover nothing if no credit event occurs and the swap is held to its termination date. If a credit event were to occur, the value of any deliverable obligation received by the seller, coupled with the upfront or periodic payments previously received, may be less than the full notional value it pays to the buyer, resulting in a loss of value to the seller.
Equity Swaps. A Fund may engage in equity swaps. Equity swaps allow the parties to the swap agreement to exchange components of return on one equity investment (e.g., a basket of equity securities or an index) for a component of return on another non-equity or equity investment, including an exchange of differential rates of return. Equity swaps may be used to invest in a market without owning or taking physical custody of securities in circumstances where direct investment may be restricted for legal reasons or is otherwise impractical. Equity swaps also may be used for other purposes, such as hedging or seeking to increase total return.
The values of equity swaps can be very volatile. To the extent that the Advisor does not accurately analyze and predict the potential relative fluctuation on the components swapped with the other party, a Fund may suffer a loss. The value of some components of an equity swap (such as the dividend on a common stock) may also be sensitive to changes in interest rates. Furthermore, during the period a swap is outstanding, a Fund may suffer a loss if the counterparty defaults.
Total Return Swap Agreements. Total return swap agreements are contracts in which one party agrees to make periodic payments to another party based on the change in market value of the assets underlying the
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contract, which may include a specified security, basket of securities or securities indices during the specified period, in return for periodic payments based on a fixed or variable interest rate or the total return from other underlying assets. Total return swap agreements may be used to obtain exposure to a security or market without owning or taking physical custody of such security or investing directly in such market. Total return swap agreements may effectively add leverage to a Fund’s portfolio because, in addition to its total net assets, a Fund would be subject to investment exposure on the notional amount of the swap.
Total return swap agreements are subject to the risk that a counterparty will default on its payment obligations to a Fund thereunder, and conversely, that a Fund will not be able to meet its obligation to the counterparty. Generally, a Fund will enter into total return swaps on a net basis (i.e., the two payment streams are netted against one another with a Fund receiving or paying, as the case may be, only the net amount of the two payments). The net amount of the excess, if any, of a Fund’s obligations over its entitlements with respect to each total return swap will be accrued on a daily basis, and an amount of liquid assets having an aggregate net asset value at least equal to the accrued excess will be segregated by a Fund. If the total return swap transaction is entered into on other than a net basis, the full amount of a Fund’s obligations will be accrued on a daily basis, and the full amount of a Fund’s obligations will be segregated by a Fund in an amount equal to or greater than the market value of the liabilities under the total return swap agreement or the amount it would have cost a Fund initially to make an equivalent direct investment, plus or minus any amount a Fund is obligated to pay or is to receive under the total return swap agreement.
Variance, Volatility and Correlation Swap Agreements. Variance and volatility swaps are contracts that provide exposure to increases or decreases in the volatility of certain referenced assets. Correlation swaps are contracts that provide exposure to increases or decreases in the correlation between the prices of different assets or different market rates.
Dollar Rolls
Dollar rolls involve selling securities (e.g., mortgage-backed securities or U.S. Treasury securities) and simultaneously entering into a commitment to purchase those or similar (same collateral type, coupon and maturity) securities on a specified future date and price. Mortgage dollar rolls and U.S. Treasury rolls are types of dollar rolls. A Fund foregoes principal and interest paid on the securities during the “roll” period. A Fund is compensated by the difference between the current sales price and the lower forward price for the future purchase of the securities as well as the interest earned on the cash proceeds of the initial sale.
Dollar rolls involve the risk that the market value of the securities a Fund is obligated to repurchase may decline below the repurchase price or that the transaction costs may exceed the return earned by a Fund from the transaction. Dollar rolls also involve risk to a Fund if the other party should default on its obligation and a Fund is delayed or prevented from completing the transaction. In the event that the buyer of securities under a dollar roll files for bankruptcy or becomes insolvent, a Fund’s use of proceeds of the dollar roll may be restricted pending a determination by the other party, or its trustee or receiver, whether to enforce a Fund’s obligation to repurchase the securities. In addition, the security to be delivered in the future may turn out to be inferior to the security sold upon entering into the transaction.
Foreign Currency Transactions
Foreign currency transactions may be used to protect, to some extent, against uncertainty in the level of future currency exchange rates by establishing a fixed exchange rate. Foreign currency transactions may involve the purchase or sale of foreign currencies on a “spot” (cash) basis at the prevailing exchange rate or may involve “forward contracts” that allow a Fund to purchase or sell foreign currencies at a future date. Forward contracts may be used for “transaction hedging,” “position hedging” and “cross-hedging.” A Fund may use forward sale contracts to sell an amount of a foreign currency approximating the value of a Fund’s securities denominated in the foreign security when that foreign currency suffers a substantial decline against the U.S. dollar. A Fund may
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use forward purchase contracts to purchase a foreign currency when it is believed that the U.S. dollar may suffer a substantial decline against the foreign currency. Although these transactions tend to minimize the risk of loss due to a decline in the value of the hedged currency, they also tend to limit any potential gain that might be realized if the value of the hedged currency increases.
Transaction hedging may allow a Fund to “lock in” the U.S. dollar price of a security it has agreed to purchase or sell, or the U.S. dollar equivalent of a dividend or interest rate payment in a foreign currency. A Fund may use transaction hedging to protect itself against a possible loss resulting from an adverse change in the relationship between the U.S. dollar and the applicable foreign currency during the period between the date on which the security is purchased or sold, or on which the dividend or interest payment is declared, and the date on which such payments are made or received.
Position hedging may allow a Fund to protect against an adverse change in the relationship between the U.S. dollar and the applicable foreign currencies in which its portfolio securities are denominated. A Fund may use position hedging when it is believed that the U.S. dollar may suffer a decline against the foreign currency by entering into a forward purchase contract to purchase that foreign currency for a fixed dollar amount.
Cross-hedging may allow a Fund to enter into a forward contract to sell a different foreign currency for a fixed U.S. dollar amount when it is believed that the U.S. dollar value of the currency to be sold pursuant to the forward contract will fall if there is a decline in the U.S. dollar value of the currency in which a Fund’s securities are denominated.
A Fund also may purchase exchange-listed and over-the-counter call and put options on foreign currencies and foreign currency contracts. Options on foreign currencies and foreign currency contracts give the holder a right to buy or sell the underlying foreign currencies or foreign currency contracts for a specified period of time and for a specified amount. The value of an option on foreign currencies or foreign currency contracts reflects the value of an exchange rate, which depends on the relative values of the U.S. dollar and the relevant foreign currency.
Engaging in foreign currency transactions is subject to certain risks. For example, if the value of a foreign currency were to decline against the U.S. dollar, such decline would reduce the dollar value of any securities held by a Fund denominated in that currency. It is impossible to forecast with precision the market value of portfolio securities at the expiration or maturity of a forward or futures contract, which may make it necessary for a Fund to purchase additional foreign currency on the spot market if the market value of the security being hedged is less than the amount of foreign currency a Fund is obligated to deliver at the time a Fund sells the security being hedged. The value of any currency, including the U.S. dollar, may be affected by political and economic factors applicable to the issuer’s country. The exchange rates of currencies also may be affected adversely by governmental actions. Transaction, position and cross-hedging do not eliminate fluctuations in the underlying prices of securities that a Fund owns or intends to purchase or sell and may limit the amount of potential gain that might result from the increase in value of the currency being hedged. Settlement procedures relating to a Fund’s foreign currency transactions may be more complex than those relating to investments in securities of U.S. issuers.
Foreign Securities
Foreign securities include debt, equity and derivative securities that the Advisor determines are “foreign” based on the consideration of an issuer’s domicile, its principal place of business, its primary stock exchange listing, the source of its revenue or other factors. Foreign securities may be structured as fixed-, variable- or floating-rate obligations or as zero-coupon, pay-in-kind and step-coupon securities and may be privately placed or publicly offered. See Permissible Fund Investments — Variable- and Floating-Rate Obligations, Permissible Fund Investments — Zero-Coupon, Pay-in-Kind and Step-Coupon Securities and Permissible Fund Investments — Private Placement and Other Restricted Securities for more information.
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Foreign securities may include depositary receipts, such as American Depositary Receipts (ADRs), European Depositary Receipts (EDRs) and Global Depositary Receipts (GDRs). ADRs are U.S. dollar-denominated receipts issued in registered form by a domestic bank or trust company that evidence ownership of underlying securities issued by a foreign issuer. EDRs are foreign currency-denominated receipts issued in Europe, typically by foreign banks or trust companies and foreign branches of domestic banks, that evidence ownership of foreign or domestic securities. GDRs are receipts structured similarly to ADRs and EDRs and are marketed globally. Depositary receipts will not necessarily be denominated in the same currency as their underlying securities. In general, ADRs, in registered form, are designed for use in the U.S. securities markets, and EDRs, in bearer form, are designed for use in European securities markets. GDRs are tradable both in the United States and in Europe and are designed for use throughout the world. A Fund may invest in depositary receipts through “sponsored” or “unsponsored” facilities. A sponsored facility is established jointly by the issuer of the underlying security and a depositary, whereas a depositary may establish an unsponsored facility without participation by the issuer of the deposited security. Holders of unsponsored depositary receipts generally bear all the costs of such facilities and the depositary of an unsponsored facility frequently is under no obligation to distribute interest-holder communications received from the issuer of the deposited security or to pass through voting rights to the holders of such receipts in respect of the deposited securities. The issuers of unsponsored depositary receipts are not obligated to disclose material information in the United States, and, therefore, there may be limited information available regarding such issuers and/or limited correlation between available information and the market value of the depositary receipts.
Investing in foreign securities is subject to certain risks. For example, foreign markets can be extremely volatile. Fluctuations in currency exchange rates also may impact the value of foreign securities denominated in foreign currencies or U.S. dollars, without a change in the intrinsic value of those securities. Additionally, the U.S. dollar value of a foreign security tends to decrease when the value of the U.S. dollar rises against the foreign currency in which the security is denominated and tends to increase when the value of the U.S. dollar falls against such currency. A Fund may attempt to minimize the risk from adverse changes in the relationship between the U.S. dollar and foreign currencies by purchasing and selling forward foreign currency exchange contracts and foreign currency futures contracts and related options. Foreign securities may be less liquid than domestic securities so that a Fund may, at times, be unable to sell foreign securities at desirable prices. Brokerage commissions, custodial fees and other fees also are generally higher for foreign securities. A Fund may have limited legal recourse in the event of default with respect to certain debt securities issued by foreign governments. In addition, foreign governments may impose potentially confiscatory withholding or other taxes, which would reduce a Fund’s return on these securities.
Due to the potential for foreign withholding taxes, Morgan Stanley Capital International (MSCI) publishes two versions of its indices reflecting the reinvestment of dividends using two different methodologies: gross dividends and net dividends. While both versions reflect reinvested dividends, they differ with respect to the manner in which taxes associated with dividend payments are treated. In calculating the net dividends version, MSCI incorporates reinvested dividends applying the withholding tax rate applicable to foreign non-resident institutional investors that do not benefit from double taxation treaties. The Advisor believes that the net dividends version of MSCI indices better reflects the returns U.S. investors might expect were they to invest directly in the component securities of an MSCI index.
Other risks of investing in foreign securities include: possible delays in the settlement of transactions or in the notification of income; generally less publicly available information about companies; adverse impact of political, social or diplomatic events; possible seizure, expropriation or nationalization of a company or its assets; possible imposition of currency exchange controls; and that foreign companies generally are not subject to accounting, auditing and financial reporting standards comparable to those mandated for domestic companies.
Risks associated with investments in foreign securities are increased with respect to investments in emerging market countries. Political and economic structures in many emerging market countries, especially those in Eastern Europe, the Pacific Basin and the Far East, are undergoing significant evolutionary changes and rapid development, and may lack the social, political and economic stability of more developed countries.
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Investing in emerging market securities also involves risks beyond the risks applicable to foreign investments. For example, some emerging market countries may have fixed or managed currencies that are not free-floating against the U.S. dollar. Further, certain currencies may not be traded internationally, and some countries with emerging securities markets have sustained long periods of very high inflation or rapid fluctuation in inflation rates which can have negative effects on a country’s economy and securities markets.
Guaranteed Investment Contracts (Funding Agreements)
Guaranteed investment contracts, or funding agreements, are debt instruments issued by insurance companies. Pursuant to such contracts, a Fund may make cash contributions to a deposit fund of the insurance company’s general account. The insurance company then credits to a Fund payments at negotiated, floating or fixed interest rates. A Fund will purchase guaranteed investment contracts only from issuers that, at the time of purchase, meet certain credit and quality standards.
Investing in guaranteed investment contracts is subject to certain risks. In general, guaranteed investment contracts are not assignable or transferable without the permission of the issuing insurance companies, and an active secondary market does not exist for these investments. In addition, the issuer may not be able to pay the principal amount to a Fund on seven days notice or less, at which time the investment may be considered illiquid under applicable SEC regulatory guidance and subject to certain restrictions.
Illiquid Securities
Illiquid securities are defined by a Fund consistent with SEC staff’s current guidance and interpretations which provide that an illiquid security is an asset which may not be sold or disposed of in the ordinary course of business within seven days at approximately the value at which a Fund has valued the investment on its books. Some securities, such as those not registered under U.S. securities laws, cannot be sold in public transactions. Subject to its investment policies, a Fund may invest in illiquid investments and may invest in certain restricted securities that are deemed to be illiquid securities.
Initial Public Offerings
A Fund may invest in initial public offerings (IPOs) of common stock or other primary or secondary syndicated offerings of equity or debt securities issued by a corporate issuer. A purchase of IPO securities often involves higher transaction costs than those associated with the purchase of securities already traded on exchanges or markets. IPO securities are subject to market risk and liquidity risk. The market value of recently issued IPO securities may fluctuate considerably due to factors such as the absence of a prior public market, unseasoned trading and speculation, a potentially small number of securities available for trading, limited information about the issuer, and other factors. A Fund may hold IPO securities for a period of time, or may sell them soon after the purchase. Investments in IPOs could have a magnified impact — either positive or negative — on a Fund’s performance while the Fund’s assets are relatively small. The impact of an IPO on a Fund’s performance may tend to diminish as the Fund’s assets grow. In circumstances when investments in IPOs make a significant contribution to a Fund’s performance, there can be no assurance that similar contributions from IPOs will continue in the future.
Investments in Other Investment Companies
Investing in other investment companies may be a means by which a Fund seeks to achieve its investment objective. A Fund may invest in securities issued by other investment companies within the limits prescribed by the 1940 Act, the rules and regulations thereunder and any exemptive orders currently or in the future obtained by a Fund from the SEC.
Except with respect to funds structured as funds-of-funds and so-called master/feeder funds, the 1940 Act generally requires that a Fund limit its investments in another investment company or series thereof so that, as determined at the time a securities purchase is made: (i) no more than 5% of the value of its total assets will be invested in the securities of any one investment company; (ii) no more than 10% of the value of its total assets
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will be invested in the aggregate in securities of other investment companies; and (iii) no more than 3% of the outstanding voting stock of any one investment company or series thereof will be owned by a Fund or by companies controlled by the Fund. Such other investment companies may include ETFs, which are shares of publicly traded unit investment trusts, open-end funds or depositary receipts that seek to track the performance of specific indexes or companies in related industries.
Investing in other investment companies is subject to certain risks. Although a Fund may derive certain advantages from being able to invest in shares of other investment companies, such as to be fully invested, there may be potential disadvantages. Investing in other investment companies may result in higher fees and expenses for a Fund and its shareholders. A shareholder may be charged fees not only on Fund shares held directly but also on the investment company shares that a Fund purchases.
In addition, investing in ETFs is subject to certain other risks. ETFs generally are subject to the same risks as the underlying securities the ETFs are designed to track as well as to the risks of the specific sector or industry to which the ETF relates. ETFs also are subject to the risk that their prices may not totally correlate to the prices of the underlying securities the ETFs are designed to track and the risk of possible trading halts due to market conditions or for other reasons.
Under the 1940 Act and rules and regulations thereunder, a Fund may purchase shares of other affiliated Columbia Funds, including the Money Market Funds, subject to certain conditions. Investing in affiliated Funds may present certain actual or potential conflicts of interest. For more information about such actual and potential conflicts of interest, see Investment Advisory and Other Services — Other Roles and Relationships of Bank of America and its Affiliates — Certain Conflicts of Interest.
Low and Below Investment Grade Securities
Low and below investment grade securities (below investment grade securities are also known as “junk bonds”) are debt securities with the lowest investment grade rating (e.g., BBB by S&P and Fitch or Baa by Moody’s), that are below investment grade (e.g., lower than BBB by S&P and Fitch or Baa by Moody’s) or that are unrated but determined by the Advisor to be of comparable quality. These types of securities may be issued to fund corporate transactions or restructurings, such as leveraged buyouts, mergers, acquisitions, debt reclassifications or similar events, are more speculative in nature than securities with higher ratings and tend to be more sensitive to credit risk, particularly during a downturn in the economy. These types of securities generally are issued by unseasoned companies without long track records of sales and earnings, or by companies or municipalities that have questionable credit strength. Low and below investment grade securities and comparable unrated securities: (i) likely will have some quality and protective characteristics that, in the judgment of one or more NRSROs, are outweighed by large uncertainties or major risk exposures to adverse conditions; (ii) are speculative with respect to the issuer’s capacity to pay interest and repay principal in accordance with the terms of the obligation; and (iii) may have a less liquid secondary market, potentially making it difficult to value or sell such securities. Low and below investment grade securities may be structured as fixed-, variable- or floating-rate obligations or as zero-coupon, pay-in-kind and step-coupon securities and may be privately placed or publicly offered. See Permissible Fund Investments — Variable- and Floating-Rate Obligations, Permissible Fund Investments — Zero-Coupon, Pay-in-Kind and Step-Coupon Securities and Permissible Fund Investments — Private Placement and Other Restricted Securities for more information.
Investing in low and below investment grade securities and comparable unrated securities is subject to certain risks. The rates of return on these types of securities generally are higher than the rates of return available on more highly rated securities, but generally involve greater volatility of price and risk of loss of principal and income, including the possibility of default by or insolvency of the issuers of such securities. Accordingly, a Fund may be more dependent on the Advisor’s credit analysis with respect to these types of securities than is the case for more highly rated securities.
The market values of certain low and below investment grade securities and comparable unrated securities tend to be more sensitive to individual corporate developments and changes in economic conditions than are the
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market value of more highly rated securities. In addition, issuers of low and below investment grade and comparable unrated securities often are highly leveraged and may not have more traditional methods of financing available to them, so that their ability to service their debt obligations during an economic downturn or during sustained periods of rising interest rates may be impaired.
The risk of loss due to default is greater for low and below investment grade and comparable unrated securities than it is for higher rated securities because low and below investment grade securities and comparable unrated securities generally are unsecured and frequently are subordinated to more senior indebtedness. A Fund may incur additional expenses to the extent that it is required to seek recovery upon a default in the payment of principal or interest on its holdings of such securities. The existence of limited markets for lower-rated debt securities may diminish a Fund’s ability to: (i) obtain accurate market quotations for purposes of valuing such securities and calculating portfolio net asset value; and (ii) sell the securities at fair market value either to meet redemption requests or to respond to changes in the economy or in financial markets.
Many lower-rated securities are not registered for offer and sale to the public under the 1933 Act. Investments in these restricted securities may be determined to be liquid (able to be sold within seven days at approximately the price at which they are valued by a Fund) pursuant to policies approved by the Fund’s Trustees. Investments in illiquid securities, including restricted securities that have not been determined to be liquid, may not exceed 15% of a Fund’s net assets. A Fund is not otherwise subject to any limitation on its ability to invest in restricted securities. Restricted securities may be less liquid than other lower-rated securities, potentially making it difficult to value or sell such securities.
Money Market Instruments
Money market instruments are high-quality, short-term debt obligations, which include: (i) bank obligations, including certificates of deposit, time deposits and bankers’ acceptances; (ii) funding agreements; (iii) repurchase agreements; (iv) obligations of the United States, foreign countries and supranational entities, and each of their subdivisions, agencies and instrumentalities; (v) certain corporate debt securities, such as commercial paper, short-term corporate obligations and extendible commercial notes; (vi) participation interests; and (vii) municipal securities. Money market instruments may be structured as fixed-, variable- or floating-rate obligations and may be privately placed or publicly offered. See Permissible Fund Investments — Variable- and Floating-Rate Obligations and Permissible Fund Investments — Private Placement and Other Restricted Securities for more information.
Investing in money market instruments is subject to certain risks. Money market instruments (other than certain U.S. Government obligations) are not backed or insured by the U.S. Government, its agencies or its instrumentalities. Accordingly, only the creditworthiness of an issuer, or guarantees of that issuer, support such instruments.
Mortgage-Backed Securities
Mortgage-backed securities are a type of asset-backed security and represent interests in, or debt instruments backed by, pools of underlying mortgages. In some cases, these underlying mortgages may be insured or guaranteed by the U.S. Government or its agencies. Mortgage-backed securities entitle the security holders to receive distributions that are tied to the payments made on the underlying mortgage collateral (less fees paid to the originator, servicer, or other parties, and fees paid for credit enhancement), so that the payments made on the underlying mortgage collateral effectively pass through to such security holders. Mortgage-backed securities are created when mortgage originators (or mortgage loan sellers who have purchased mortgage loans from mortgage loan originators) sell the underlying mortgages to a special purpose entity in a process called a securitization. The special purpose entity issues securities that are backed by the payments on the underlying mortgage loans, and have a minimum denomination and specific term. Mortgage-backed securities may be structured as fixed-, variable- or floating-rate obligations or as zero-coupon, pay-in-kind and step-coupon securities and may be privately placed or publicly offered. See Permissible Fund Investments — Variable- and Floating-Rate Obligations, Permissible Fund Investments — Zero-Coupon, Pay-in-Kind and Step-Coupon Securities and Permissible Fund Investments — Private Placement and Other Restricted Securities for more information.
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Mortgage-backed securities may be issued or guaranteed by GNMA (also known as Ginnie Mae), FNMA (also known as Fannie Mae), or FHLMC (also known as Freddie Mac), but also may be issued or guaranteed by other issuers, including private companies. GNMA is a government-owned corporation that is an agency of the U.S. Department of Housing and Urban Development. It guarantees, with the full faith and credit of the United States, full and timely payment of all monthly principal and interest on its mortgage-backed securities. Until recently, FNMA and FHLMC were government-sponsored corporations owned entirely by private stockholders. Both issue mortgage-related securities that contain guarantees as to timely payment of interest and principal but that are not backed by the full faith and credit of the U.S. Government. The value of the companies’ 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 FNMA and FHLMC could purchase in certain residential areas and, until 2009, to lend FNMA and FHLMC emergency funds and to purchase the companies’ stock. More recently, in September 2008, the U.S. Treasury announced that FNMA and FHLMC 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 FNMA and FHLMC. First, the U.S. Treasury has entered into “Preferred Stock Purchase Agreements” (PSPAs) under which, if the FHFA determines that FNMA’s or FHLMC’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 FNMA and FHLMC. Second, the U.S. Treasury established a new secured lending credit facility that is available to FNMA and FHLMC until December 2009. Third, the U.S. Treasury initiated a temporary program to purchase FNMA and FHLMC 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 FNMA and FHLMC will be successful.
CMOs are debt obligations issued by special-purpose trusts, collateralized by underlying mortgage assets. Principal prepayments on underlying mortgage assets may cause the CMOs to be retired substantially earlier than their stated maturities or final distribution dates, resulting in a loss of all or part of the premium if any has been paid. Interest is paid or accrues on all classes of the CMOs on a periodic basis. The principal and interest payments on the underlying mortgage assets may be allocated among the various classes of CMOs in several ways. Typically, payments of principal, including any prepayments, on the underlying mortgage assets are applied to the classes in the order of their respective stated maturities or final distribution dates, so that no payment of principal is made on CMOs of a class until all CMOs of other classes having earlier stated maturities or final distribution dates have been paid in full.
REMICs are entities that own mortgages and elect REMIC status under the Code and, like CMOs, issue debt obligations collateralized by underlying mortgage assets that have characteristics similar to those issued by CMOs.
Investing in mortgage-backed securities is subject to certain risks, including, among others, prepayment, market and credit risks. Prepayment risk reflects the risk that borrowers may prepay their mortgages more quickly than expected, which may affect the security’s average maturity and rate of return. Whether or not a mortgage loan is prepaid is almost entirely controlled by the borrower. Borrowers are most likely to exercise prepayment options at the time when it is least advantageous to investors, generally prepaying mortgages as interest rates fall, and slowing payments as interest rates rise. Besides the effect of prevailing interest rates, the rate of prepayment and refinancing of mortgages also may be affected by home value appreciation, ease of the refinancing process and local economic conditions, among other factors. Market risk reflects the risk that the price of a security may fluctuate over time. The price of mortgage-backed securities can be particularly sensitive to prevailing interest rates, the length of time the security is expected to be outstanding and the liquidity of the issue. In a period of unstable interest rates, there may be decreased demand for certain types of mortgage-backed securities, which in turn may decrease their value. Credit risk reflects the risk that a holder of mortgage-backed securities may not receive all or part of its principal because the issuer, any credit enhancer and/or the underlying mortgage borrower has defaulted on its obligations. Credit risk is increased for mortgage-backed securities that
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are backed by mortgages to so-called subprime borrowers (who may pose a greater risk of defaulting on their loans) or that are subordinated to another security (i.e., if the holder of a mortgage-backed security is entitled to receive payments only after payment obligations to holders of the other security are satisfied). The more deeply subordinated the security, the greater the credit risk associated with the security will be. Mortgage-backed securities issued by private issuers, whether or not such obligations are subject to guarantees by the private issuer, may entail greater risk than mortgage-backed securities guaranteed by the U.S. Government. The performance of mortgage-backed securities issued by private issuers generally depends on the financial health of those institutions.
Municipal Securities
Municipal securities include debt obligations issued by governmental entities to obtain funds for various public purposes, including the construction of a wide range of public facilities, the refunding of outstanding obligations, the payment of general operating expenses, and the extension of loans to public institutions and facilities. Municipal securities can be classified into two principal categories, including “general obligation” bonds and other securities and “revenue” bonds and other securities. General obligation bonds are secured by the issuer’s full faith, credit and taxing power for the payment of principal and interest. Revenue securities are payable only from the revenues derived from a particular facility or class of facilities or, in some cases, from the proceeds of a special excise tax or other specific revenue source, such as the user of the facility being financed. Municipal securities also may include “moral obligation” securities, which normally are issued by special purpose public authorities. If the issuer of moral obligation securities is unable to meet its debt service obligations from current revenues, it may draw on a reserve fund, the restoration of which is a moral commitment but not a legal obligation of the governmental entity that created the special purpose public authority. Municipal securities may be structured as fixed-, variable- or floating-rate obligations or as zero-coupon, pay-in-kind and step-coupon securities and may be privately placed or publicly offered. See Permissible Fund Investments — Variable- and Floating-Rate Obligations, Permissible Fund Investments — Zero-Coupon, Pay-in-kind and Step-Coupon Securities and Permissible Fund Investments — Private Placement and Other Restricted Securities for more information.
Municipal securities may include municipal bonds, municipal notes and municipal leases. Municipal bonds are debt obligations of a governmental entity that obligate the municipality to pay the holder a specified sum of money at specified intervals and to repay the principal amount of the loan at maturity.
Municipal notes may be issued by governmental entities and other tax-exempt issuers in order to finance short-term cash needs or, occasionally, to finance construction. Most municipal notes are general obligations of the issuing entity payable from taxes or designated revenues expected to be received within the relevant fiscal period. Municipal notes generally have maturities of one year or less. Municipal notes can be subdivided into two sub-categories: (i) municipal commercial paper and (ii) municipal demand obligations.
Municipal commercial paper typically consists of very short-term unsecured negotiable promissory notes that are sold, for example, to meet seasonal working capital or interim construction financing needs of a governmental entity or agency. While these obligations are intended to be paid from general revenues or refinanced with long-term debt, they frequently are backed by letters of credit, lending agreements, note repurchase agreements or other credit facility agreements offered by banks or institutions.
Municipal demand obligations can be subdivided into two general types: variable rate demand notes and master demand obligations. Variable rate demand notes are tax-exempt municipal obligations or participation interests that provide for a periodic adjustment in the interest rate paid on the notes. They permit the holder to demand payment of the notes, or to demand purchase of the notes at a purchase price equal to the unpaid principal balance, plus accrued interest either directly by the issuer or by drawing on a bank letter of credit or guaranty issued with respect to such note. The issuer of the municipal obligation may have a corresponding right to prepay at its discretion the outstanding principal of the note plus accrued interest upon notice comparable to that required for the holder to demand payment. The variable rate demand notes in which a Fund may invest are
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payable, or are subject to purchase, on demand usually on notice of seven calendar days or less. The terms of the notes generally provide that interest rates are adjustable at intervals ranging from daily to six months.
Master demand obligations are tax-exempt municipal obligations that provide for a periodic adjustment in the interest rate paid and permit daily changes in the amount borrowed. The interest on such obligations is, in the opinion of counsel for the borrower, excluded from gross income for federal income tax purposes (but not necessarily for alternative minimum tax purposes). Although there is no secondary market for master demand obligations, such obligations are considered by a Fund to be liquid because they are payable upon demand.
Municipal lease obligations are participations in privately arranged loans to state or local government borrowers. In general, such loans are unrated, in which case they will be determined by the Advisor to be of comparable quality at the time of purchase to rated instruments that may be acquired by a Fund. Frequently, privately arranged loans have variable interest rates and may be backed by a bank letter of credit. In other cases, they may be unsecured or may be secured by assets not easily liquidated. Moreover, such loans in most cases are not backed by the taxing authority of the issuers and may have limited marketability or may be marketable only by virtue of a provision requiring repayment following demand by the lender.
Although lease obligations do not constitute general obligations of the municipal issuer to which the government’s taxing power is pledged, a lease obligation ordinarily is backed by the government’s covenant to budget for, appropriate, and make the payments due under the lease obligation. However, certain lease obligations contain “non-appropriation” clauses that provide that the government has no obligation to make lease or installment purchase payments in future years unless money is appropriated for such purpose on a periodic basis. In the case of a “non-appropriation” lease, a Fund’s ability to recover under the lease in the event of non-appropriation or default likely will be limited to the repossession of the leased property in the event that foreclosure proves difficult.
Tender option bonds are municipal securities having relatively long maturities and bearing interest at a fixed interest rate substantially higher than prevailing short-term tax-exempt rates that is coupled with the agreement of a third party, such as a bank, broker/dealer or other financial institution, to grant the security holders the option, at periodic intervals, to tender their securities to the institution and receive the face value thereof. The financial institution receives periodic fees equal to the difference between the municipal security’s coupon rate and the rate that would cause the security to trade at face value on the date of determination.
Investing in municipal securities is subject to certain risks. There are variations in the quality of municipal securities, both within a particular classification and between classifications, and the rates of return on municipal securities can depend on a variety of factors, including general money market conditions, the financial condition of the issuer, general conditions of the municipal bond market, the size of a particular offering, the maturity of the obligation, and the rating of the issue. The ratings of NRSROs represent their opinions as to the quality of municipal securities. It should be emphasized, however, that these ratings are general and are not absolute standards of quality, and municipal securities with the same maturity, interest rate, and rating may have different rates of return while municipal securities of the same maturity and interest rate with different ratings may have the same rate of return.
The payment of principal and interest on most municipal securities purchased by a Fund will depend upon the ability of the issuers to meet their obligations. 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, such as the United States Bankruptcy Code. The power or ability of an issuer to meet its obligations for the payment of interest on and principal of its municipal securities may be materially adversely affected by litigation or other conditions.
There are particular considerations and risks relevant to investing in a portfolio of a single state’s municipal securities, such as the greater risk of the concentration of portfolio holdings.
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Participation Interests
Participation interests (also called pass-through certificates or securities) represent an interest in a pool of debt obligations, such as municipal bonds or notes, that have been “packaged” by an intermediary, such as a bank or broker/dealer. Participation interests typically are issued by partnerships or trusts through which a Fund receives principal and interest payments that are passed through to the holder of the participation interest from the payments made on the underlying debt obligations. The purchaser of a participation interest receives an undivided interest in the underlying debt obligations. The issuers of the underlying debt obligations make interest and principal payments to the intermediary, as an initial purchaser, which are passed through to purchasers in the secondary market, such as a Fund. Mortgage-backed securities are a common type of participation interest. Participation interests may be structured as fixed-, variable- or floating-rate obligations or as zero-coupon, pay-in-kind and step-coupon securities and may be privately placed or publicly offered. See Permissible Fund Investments — Variable- and Floating-Rate Obligations, Permissible Fund Investments — Zero-Coupon, Pay-in-Kind and Step-Coupon Securities and Permissible Fund Investments — Private Placement and Other Restricted Securities for more information.
Loan participations also are a type of participation interest. Loan participations are interests in loans that are administered by a lending bank or agent for a syndicate of lending banks and sold by the bank or syndicate members.
Investing in participation interests is subject to certain risks. Participation interests generally are subject to the credit risk associated with the underlying borrowers. If the underlying borrower defaults, a Fund may be subject to delays, expenses and risks that are greater than those that would have been involved if a Fund had purchased a direct obligation of the borrower. A Fund also may be deemed a creditor of the lending bank or syndicate members and be subject to the risk that the lending bank or syndicate members may become insolvent.
Preferred Stock
Preferred stock represents units of ownership of a corporation that frequently have dividends that are set at a specified rate. Preferred stock has preference over common stock in the payment of dividends and the liquidation of assets. Preferred stock shares some of the characteristics of both debt and equity. Preferred stock ordinarily does not carry voting rights. Most preferred stock is cumulative; if dividends are passed (i.e., not paid for any reason), they accumulate and must be paid before common stock dividends. Participating preferred stock entitles its holders to share in profits above and beyond the declared dividend, along with common shareholders, as distinguished from nonparticipating preferred stock, which is limited to the stipulated dividend. Convertible preferred stock is exchangeable for a given number of shares of common stock and thus tends to be more volatile than nonconvertible preferred stock, which generally behaves more like a fixed income bond. Preferred stock may be privately placed or publicly offered. See Permissible Fund Investments — Private Placement and Other Restricted Securities for more information.
Auction preferred stock (APS) is a type of adjustable-rate preferred stock with a dividend determined periodically in a Dutch auction process by corporate bidders. Shares typically are bought and sold at face values generally ranging from $100,000 to $500,000 per share.
In addition to reinvestment risk if interest rates fall, some specific risks with regard to APS include:
• | Failed auction: A breakdown in the auction process can occur; in the event that the process fails, the rate is reset at the maximum applicable rate, which is usually described in the prospectuses and typically is influenced by the issuer’s credit rating. In a failed auction, current shareholders generally are unable to sell some, or all, of the shares when the auction is completed. Typically, the liquidity for APS that have experienced a failed auction becomes very limited. If a failed auction were to occur, the shareholder generally would hold his or her shares until the next auction. Should there not be subsequent auctions that “cure” the failed process, the shareholder may: (1) hold the APS in |
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anticipation of a refinancing by the issuer that would cause the APS to be called, or (2) hold securities either indefinitely or in anticipation of the development of a secondary market. |
• | Early call risk: APS generally is redeemable at any time, usually upon notice, at the issuer’s option, at par plus accrued dividends. |
Investing in preferred stock is subject to certain risks. For example, stock market risk is the risk that the value of such stocks, like the broader stock markets, may decline over short or even extended periods. Domestic and foreign stock markets tend to be cyclical, with periods when prices generally rise and periods when prices generally decline. The value of individual stocks will rise and decline based on factors specific to each corporation, such as changes in earnings or management.
Investing in preferred stock also may involve the risks applicable to investing in a particular company. For example, stocks of smaller companies tend to have greater price fluctuations than stocks of larger companies because, among other things, they trade less frequently and in lower volumes, are more susceptible to changes in economic conditions, are more reliant on singular products or services and are more vulnerable to larger competitors. Stocks of these companies may have a higher potential for gains but also are subject to greater risk of loss.
Investing in preferred stock also may involve the risks applicable to investing in a particular industry, such as technology, financial services, consumer goods or natural resources (e.g., oil and gas). To some extent, the prices of stocks tend to move by industry sector. When market conditions favorably affect, or are expected to favorably affect, an industry, the prices of the stocks of companies in that industry tend to rise. Conversely, negative news or a poor outlook for a particular industry can cause the value of those companies’ stock to decline.
Private Placement and Other Restricted Securities
Private placement securities are securities that have been privately placed and are not registered under the 1933 Act. They are eligible for sale only to certain eligible investors. Private placements often may offer attractive opportunities for investment not otherwise available on the open market. Private placement and other “restricted” securities often cannot be sold to the public without registration under the 1933 Act or the availability of an exemption from registration (such as Rules 144 or 144A), or they are “not readily marketable” because they are subject to other legal or contractual delays in or restrictions on resale. Asset-backed securities, common stock, convertible securities, corporate debt securities, foreign securities, low and below investment grade securities, money market instruments, mortgage-backed securities, municipal securities, participation interests, preferred stock and other types of equity and debt instruments may be privately placed or restricted securities.
Private placements typically may be sold only to qualified institutional buyers (or, in the case of the initial sale of certain securities, such as those issued in collateralized debt obligations or collateralized loan obligations, to accredited investors (as defined in Rule 501(a) under the 1933 Act), or in a privately negotiated transaction or to a limited number of purchasers, or in limited quantities after they have been held for a specified period of time and other conditions are met pursuant to an exemption from registration.
Investing in private placement and other restricted securities is subject to certain risks. Private placements may be considered illiquid securities. Private placements typically are subject to restrictions on resale as a matter of contract or under federal securities laws. Because there may be relatively few potential purchasers for such securities, especially under adverse market or economic conditions or in the event of adverse changes in the financial condition of the issuer, a Fund could find it more difficult to sell such securities when it may be advisable to do so or it may be able to sell such securities only at prices lower than if such securities were more widely held. At times, it also may be more difficult to determine the fair value of such securities for purposes of computing a Fund’s net asset value due to the absence of a trading market.
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Real Estate Investment Trusts and Master Limited Partnerships
REITs are entities that either own properties or make construction or mortgage loans and also may include operating or finance companies. An equity REIT generally holds equity positions in real estate and seeks to provide its shareholders with income from the leasing of its properties and with capital gains from any sales of properties. A mortgage REIT generally specializes in lending money to owners of properties and passes through any interest income it may earn to its shareholders.
Partnership units of real estate and other types of companies sometimes are organized as master limited partnerships in which ownership interests are publicly traded. Master limited partnerships often own several properties or businesses (or directly own interests) that are related to real estate development and the oil and gas industries, but they also may finance motion pictures, research and development and other projects.
REITs are subject to certain risks associated with direct ownership of real estate, including, for example, declines in the value of real estate, risks related to general and local economic conditions, overbuilding and increased competition, increases in property taxes and operating expenses, and variations in rental income. REITs also may be subject to interest rate risk. In general, increases in interest rates will decrease the value of high-yield securities and increase the costs of obtaining financing, which could decrease the value of a REIT’s investments. In addition, 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 credit extended. Both equity and mortgage REITs are dependent upon management skills. REITs also may be subject to heavy cash flow dependency, defaults by borrowers, and the possibility of failing to qualify for preferential tax treatment under the Code, which could adversely affect dividend payments. REITs also may not be diversified.
Investing in master limited partnerships generally is subject to the risks applicable to investing in a partnership as opposed to a corporation, which may include fewer protections afforded to investors. Additional risks include those associated with the specific industries in which a master limited partnership invests, such as the risks associated with investing in the real estate or oil and gas industries.
Repurchase Agreements
Repurchase agreements are agreements under which a Fund acquires a security for a relatively short period of time subject to the obligation of a seller to repurchase and a Fund to resell such security at a fixed time and price (representing a Fund’s cost plus interest). Repurchase agreements also may be viewed as loans made by a Fund that are collateralized by the securities subject to repurchase. A Fund typically will enter into repurchase agreements only with commercial banks, registered broker/dealers and the Fixed Income Clearing Corporation. Such transactions are monitored to ensure that the value of the underlying securities will be at least equal at all times to the total amount of the repurchase obligation, including any accrued interest. Repurchase agreements generally are subject to counterparty risk.
If a counterparty defaults, a Fund could realize a loss on the sale of the underlying security to the extent that the proceeds of the sale are less than the resale price provided in the repurchase agreement including interest. In the event that a counterparty fails to perform because it is insolvent or otherwise subject to insolvency proceedings against it, a Fund’s right to take possession of the underlying securities would be subject to applicable insolvency law and procedure, including an automatic stay (which would preclude immediate enforcement of a Fund’s rights) and exemptions thereto (which would permit a Fund to take possession of the underlying securities or to void a repurchase agreement altogether). Since it is possible that an exemption from the automatic stay would not be available, a Fund might be prevented from immediately enforcing its rights against the counterparty. Accordingly, if a counterparty becomes insolvent or otherwise subject to insolvency proceedings against it, a Fund may incur delays in or be prevented from liquidating the underlying securities and could experience losses, including the possible decline in value of the underlying securities during the period in which a Fund seeks to enforce its rights thereto, possible subnormal levels of income or lack of access to income during such time, as well as the costs incurred in enforcing a Fund’s rights. For example, if a Fund enters into a
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repurchase agreement with a broker that becomes insolvent, it is possible for the Securities Investor Protection Corporation (SIPC) to institute a liquidation proceeding in federal court against the broker counterparty which could lead to a foreclosure by SIPC of the underlying securities or SIPC may stay, or preclude, a Fund’s ability under contract to terminate the repurchase agreement.
Reverse Repurchase Agreements
Reverse repurchase agreements are agreements under which a Fund sells a security subject to the obligation of a buyer to resell and a Fund to repurchase such security at a fixed time and price. Reverse repurchase agreements also may be viewed as borrowings made by a Fund.
Reverse repurchase agreements involve the risk that the market value of the securities a Fund is obligated to repurchase under the agreement may decline below the repurchase price. In the event the buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, a Fund’s use of proceeds of the agreement may be restricted pending a determination by the other party, or its trustee or receiver, whether to enforce a Fund’s obligation to repurchase the securities. In addition, reverse repurchase agreements are techniques involving leverage, and are subject to asset coverage requirements. Under the requirements of the 1940 Act, a Fund is required to maintain an asset coverage (including the proceeds of the borrowings) of at least 300% of all borrowings.
Standby Commitments
Standby commitments are securities under which a purchaser, usually a bank or broker/dealer, agrees to purchase, for a fee, an amount of a Fund’s municipal obligations. The amount payable by a bank or broker/dealer to purchase securities subject to a standby commitment typically will be substantially the same as the value of the underlying municipal securities. A Fund may pay for standby commitments either separately in cash or by paying a higher price for portfolio securities that are acquired subject to such a commitment.
Using standby commitments is subject to certain risks. Standby commitments are subject to the risk that a counterparty will not fulfill its obligation to purchase securities subject to a standby commitment.
Stripped Securities
Stripped securities are securities that evidence ownership in either the future interest or principal payments on an instrument. There are many different types and variations of stripped securities. For example, Separate Trading of Registered Interest and Principal Securities (STRIPs) can be component parts of a U.S. Treasury security where the principal and interest components are traded independently through DTC, a clearing agency registered pursuant to Section 17A of the 1934 Act and created to hold securities for its participants, and to facilitate the clearance and settlement of securities transactions between participants through electronic computerized book-entries, thereby eliminating the need for physical movement of certificates. Treasury Investor Growth Receipts (TIGERs) are U.S. Treasury securities stripped by brokers. Stripped mortgage-backed securities, or SMBS, also can be issued by the U.S. Government or its agencies. Stripped securities may be structured as fixed-, variable- or floating-rate obligations. See Permissible Fund Investments — Variable- and Floating-Rate Obligations for more information.
SMBS usually are structured with two or more classes that receive different proportions of the interest and principal distributions from a pool of mortgage-backed assets. Common types of SMBS will be structured so that one class receives some of the interest and most of the principal from the mortgage-backed assets, while another class receives most of the interest and the remainder of the principal.
Investing in stripped securities is subject to certain risks. If the underlying obligations experience greater than anticipated prepayments of principal, a Fund may fail fully to recoup its initial investment in such securities. The market value of the class consisting primarily or entirely of principal payments can be especially volatile in
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response to changes in interest rates. The rates of return on a class of SMBS that receives all or most of the interest are generally higher than prevailing market rates of return on other mortgage-backed obligations because their cash flow patterns also are volatile and there is a greater risk that the initial investment will not be recouped fully.
U.S. Government and Related Obligations
U.S. Government obligations include U.S. Treasury obligations and securities issued or guaranteed by various agencies of the U.S. Government or by various instrumentalities which have been established or sponsored by the U.S. Government. U.S. Treasury obligations and securities issued or guaranteed by various agencies of the U.S. Government differ in their interest rates, maturities and time of issuance, as well as with respect to whether they are guaranteed by the U.S. Government. U.S. Government and related obligations may be structured as fixed-, variable- or floating-rate obligations. See Permissible Fund Investments — Variable- and Floating-Rate Obligations for more information.
For Federal Securities Fund VS and Money Market Fund VS only, U.S. Government obligations also include senior unsecured debt securities issued between October 14, 2008 and June 30, 2009 by eligible issuers (including U.S. depository institutions insured by the FDIC and certain affiliates, U.S. bank holding companies and certain U.S. savings and loan holding companies) that are guaranteed by the FDIC under its Temporary Liquidity Guarantee Program (the TLGP). The FDIC’s guarantee under the TLGP will expire upon the earlier of (i) maturity of such security or (ii) June 30, 2012. It is the view of the FDIC and the staff of the Securities and Exchange Commission that any debt security that is guaranteed by the FDIC under the TLGP and that has a maturity that ends on or before June 30, 2012 would be a security exempt from registration under Section 3(a)(2) of the Securities Act of 1933 because such security would be fully and unconditionally guaranteed by the FDIC.
Investing in securities guaranteed under the TLGP is subject to certain risks. Given that there is no track record for securities guaranteed under the TLGP, it is uncertain whether such securities will continue to trade in line with recent experience in relation to treasury and government agency securities in terms of yield spread and the volatility of such spread and it is uncertain whether the secondary market for such securities will continue to be liquid. The TLGP is a new program that is subject to change. In order to collect from the FDIC under the TLGP, a claims process must be followed. Failure to follow the claims process could result in a loss to the right to payment under the guarantee. In addition, guarantee payments by the FDIC under the TLGP may be delayed.
Investing in U.S. Government and related obligations is subject to certain risks. While U.S. Treasury obligations are backed by the “full faith and credit” of the U.S. Government, securities issued or guaranteed by federal agencies and U.S. Government-sponsored instrumentalities may or may not be backed by the full faith and credit of the U.S. Government. These securities may be supported by the ability to borrow from the U.S. Treasury or only by the credit of the issuing agency or instrumentality and, as a result, may be subject to greater credit risk than securities issued or guaranteed by the U.S. Treasury. Obligations of U.S. Government agencies, authorities, instrumentalities and sponsored enterprises historically have involved limited risk of loss of principal if held to maturity. However, no assurance can be given that the U.S. Government would provide financial support to any of these entities if it is not obligated to do so by law.
Variable- and Floating-Rate Obligations
Variable- and floating-rate obligations provide for periodic adjustments in the interest rate and, under certain circumstances, varying principal amounts. Unlike a fixed interest rate, a variable, or floating, rate is one that rises and declines based on the movement of an underlying index of interest rates and may pay interest at rates that are adjusted periodically according to a specified formula. Asset-backed securities, bank obligations, convertible securities, corporate debt securities, foreign securities, low and below investment grade securities, money market instruments, mortgage-backed securities, municipal securities, participation interests, stripped securities, U.S. Government and related obligations and other types of debt instruments may be structured as variable- and floating-rate obligations.
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Investing in variable- and floating-rate obligations is subject to certain risks. Variable- and floating-rate obligations may involve direct lending arrangements between the purchaser and the issuer and there may be no active secondary market, making it difficult to resell such obligations to a third party. Variable- and floating-rate obligations also may be subject to interest rate and credit risks. Changes in interest rates can affect the rate of return on such obligations. If an issuer of a variable- or floating-rate obligation defaults, a Fund could sustain a loss to the extent of such default.
Warrants and Rights
Warrants and rights are types of securities that give a holder a right to purchase shares of common stock. Warrants usually are issued together with a bond or preferred stock and entitle a holder to purchase a specified amount of common stock at a specified price typically for a period of years. Rights usually have a specified purchase price that is lower than the current market price and entitle a holder to purchase a specified amount of common stock typically for a period of only weeks. Warrants may be used to enhance the marketability of a bond or preferred stock.
Warrants and rights may be subject to the risk that the securities could lose value. There also is the risk that the potential exercise price may exceed the market price of the warrants or rights, such as when there is no movement in the market price or the market price of such securities declines.
When-Issued, Delayed Delivery and Forward Commitment Transactions
When-issued, delayed delivery and forward commitment transactions involve the purchase or sale of securities by a Fund, with payment and delivery taking place in the future. When engaging in when-issued, delayed delivery and forward commitment transactions, a Fund typically will hold cash or liquid securities in a segregated account in an amount equal to or greater than the purchase price. The payment obligation and, if applicable, the interest rate that will be received on the securities, are fixed at the time that a Fund agrees to purchase the securities. A Fund generally will enter into when-issued, delayed delivery and forward commitment transactions only with the intention of completing such transactions. However, the Advisor may determine not to complete a transaction if it deems it appropriate. In such cases, a Fund may realize short-term gains or losses.
When-issued, delayed delivery and forward commitment transactions involve the risks that the securities purchased may fall in value by the time they actually are issued or that the other party may fail to honor the contract terms. A Fund that invests in delayed delivery securities may rely on a third party to complete the transaction. Failure by a third party to deliver a security purchased on a delayed delivery basis may result in a financial loss to a Fund or the loss of an opportunity to make an alternative investment.
Zero-Coupon, Pay-in-Kind and Step-Coupon Securities
Zero-coupon, pay-in-kind and step-coupon securities are types of debt instruments that do not necessarily make payments of interest in fixed amounts or at fixed intervals. Asset-backed securities, convertible securities, corporate debt securities, foreign securities, low and below investment grade securities, mortgage-backed securities, municipal securities, participation interests, stripped securities, U.S. Government and related obligations and other types of debt instruments may be structured as zero-coupon, pay-in-kind and step-coupon securities.
Zero-coupon securities do not pay interest on a current basis but instead accrue interest over the life of the security. These securities include, among others, zero-coupon bonds, which either may be issued at a discount by a corporation or government entity or may be created by a brokerage firm when it strips the coupons from a bond or note and then sells the bond or note and the coupon separately. This technique is used frequently with U.S. Treasury bonds, and zero-coupon securities are marketed under such names as CATS (Certificate of Accrual on Treasury Securities), TIGERs or STRIPS. Zero-coupon bonds also are issued by municipalities. Buying a
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municipal zero-coupon bond frees its purchaser of the obligation to pay regular federal income tax on imputed interest, since the interest is exempt for regular federal income tax purposes. Zero-coupon certificates of deposit and zero-coupon mortgages are generally structured in the same fashion as zero-coupon bonds; the certificate of deposit holder or mortgage holder receives face value at maturity and no payments until then.
Pay-in-kind securities normally give the issuer an option to pay cash at a coupon payment date or to give the holder of the security a similar security with the same coupon rate and a face value equal to the amount of the coupon payment that would have been made.
Step-coupon securities trade at a discount from their face value and pay coupon interest. The coupon rate is paid according to a schedule for a series of periods, typically lower for an initial period and then increasing to a higher coupon rate thereafter. The discount from the face amount or par value depends on the time remaining until cash payments begin, prevailing interest rates, liquidity of the security and the perceived credit quality of the issue.
Zero-coupon, step-coupon and pay-in-kind securities holders generally have substantially all the rights and privileges of holders of the underlying coupon obligations or principal obligations. Holders of these securities have the right upon default on the underlying coupon obligations or principal obligations to proceed directly and individually against the issuer and are not required to act in concert with other holders of such securities.
Investing in zero-coupon, pay-in-kind and step-coupon securities is subject to certain risks, including that market prices of zero-coupon, pay-in-kind and step-coupon securities generally are more volatile than the prices of securities that pay interest periodically and in cash, and are likely to respond to changes in interest rates to a greater degree than other types of debt securities.
Because zero-coupon securities bear no interest, they are volatile. Since zero-coupon bondholders do not receive interest payments, zero-coupon securities fall more dramatically than bonds paying interest on a current basis when interest rates rise. However, when interest rates fall, zero-coupon securities rise more rapidly in value than interest paying bonds.
Each Fund has a fundamental policy with respect to borrowing that can be found under the heading About the Funds’ Investments — Fundamental and Non-Fundamental Investment Policies. Specifically, each Fund may not borrow money or issue senior securities except to the extent permitted by the 1940 Act, the rules and regulations thereunder and any exemptive relief obtained by the Funds. In general, pursuant to the 1940 Act, a Fund may borrow money only from banks in an amount not exceeding 33 1/3% of its total assets (including the amount borrowed) less liabilities (other than borrowings). Any borrowings that come to exceed this amount must be reduced within three days (not including Sundays and holidays) to the extent necessary to comply with the 33 1/3% limitation.
The Funds participate in a committed line of credit (Line of Credit). Any advance under the Line of Credit is contemplated primarily for temporary or emergency purposes, including the meeting of redemption requests that otherwise might require the untimely sale of portfolio securities.
Pursuant to an exemptive order from the SEC, the Funds may, subject to certain conditions, borrow money from other funds in the Columbia Funds Family for temporary emergency purposes in order to facilitate redemption requests, or for other purposes consistent with Fund investment policies and restrictions. All loans are set at an interest rate between the rates charged on overnight repurchase agreements and short-term bank loans.
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A Fund will sometimes sell securities short when it owns an equal amount of such securities as those securities sold short. This is a technique known as selling short “against the box.” If a Fund makes a short sale “against the box,” it would not immediately deliver the securities sold and would not receive the proceeds from the sale. The seller is said to have a short position in the securities sold until it delivers the securities sold, at which time it receives the proceeds of the sale. To secure its obligation to deliver securities sold short, a Fund will deposit in escrow in a separate account with the custodian an equal amount of the securities sold short or securities convertible into or exchangeable for such securities. A Fund can close out its short position by purchasing and delivering an equal amount of the securities sold short, rather than by delivering securities already held by a Fund, because a Fund might want to continue to receive interest and dividend payments on securities in its portfolio that are convertible into the securities sold short.
Short sales “against the box” entail many of the same risks and considerations described above regarding short sales not “against the box.” However, when a Fund sells short “against the box” it typically limits the amount of securities that it has leveraged. A Fund’s decision to make a short sale “against the box” may be a technique to hedge against market risks when the Advisor believes that the price of a security may decline, causing a decline in the value of a security owned by a Fund or a security convertible into or exchangeable for such security. In such case, any future losses in a Fund’s long position would be reduced by a gain in the short position. The extent to which such gains or losses in the long position are reduced will depend upon the amount of securities sold short relative to the amount of the securities a Fund owns, either directly or indirectly, and, in the case where a Fund owns convertible securities, changes in the investment values or conversion premiums of such securities. Short sales may have adverse tax consequences to a Fund and its shareholders.
Subject to its fundamental and non-fundamental investment policies, a Fund may engage in short sales that are not “against the box,” which are sales by a Fund of securities or commodity futures contracts that it does not own in hopes of purchasing the same security at a later date at a lower price. The technique is also used to protect a profit in a long-term position in a security or commodity futures contract. To make delivery to the buyer, a Fund must borrow or purchase the security. If borrowed, a Fund is then obligated to replace the security borrowed from the third party, so a Fund must purchase the security at the market price at a later time. If the price of the security has increased during this time, then a Fund will incur a loss equal to the increase in price of the security from the time of the short sale plus any premiums and interest paid to the third party. (Until the security is replaced, a Fund is required to pay to the lender amounts equal to any dividends or interest which accrue during the period of the loan. To borrow the security, a Fund also may be required to pay a premium, which would increase the cost of the security sold. The proceeds of the short sale will be retained by the broker, to the extent necessary to meet the margin requirements, until the short position is closed out.)
Short sales by a Fund that are not made “against the box” create opportunities to increase a Fund’s return but, at the same time, involve specific risk considerations and may be considered a speculative technique. Because a Fund in effect profits from a decline in the price of the securities sold short without the need to invest the full purchase price of the securities on the date of the short sale, a Fund’s NAV per share tends to increase more when the securities it has sold short decrease in value, and to decrease more when the securities it has sold short increase in value, than if it had not engaged in such short sales. The amount of any gain will be decreased, and the amount of any loss increased, by the amount of any premium, dividends or interest a Fund may be required to pay in connection with the short sale. Short sales could potentially involve unlimited loss, as the market price of securities sold short may continually increase, although a Fund can mitigate any such losses by replacing the securities sold short. Under adverse market conditions, a Fund might have difficulty purchasing securities to meet its short sale delivery obligations, and might have to sell portfolio securities to raise the capital necessary to meet its short sale obligations at a time when fundamental investment considerations would not favor such sales. There is also the risk that the third party to the short sale may fail to honor its contract terms, causing a loss to a Fund.
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A Fund’s successful use of short sales also will be subject to the ability of the Advisor to predict movements in the directions of the relevant market. A Fund therefore bears the risk that the Advisor will incorrectly predict future price directions. In addition, if a Fund sells a security short, and that security’s price goes up, a Fund will have to make up the margin on its open position (i.e., purchase more securities on the market to cover the position). It may be unable to do so and thus its position may not be closed out. There can be no assurance that a Fund will not incur significant losses in such a case.
In the view of the SEC, a short sale involves the creation of a “senior security” as such term is defined in the 1940 Act, unless the sale is “against the box” and the securities sold short are placed in a segregated account (not with the broker), or unless a Fund’s obligation to deliver the securities sold short is “covered” by placing in a segregated account (not with the broker) cash, U.S. Government securities or other liquid debt or equity securities in an amount equal to the difference between the market value of the securities sold short at the time of the short sale and any such collateral required to be deposited with a broker in connection with the sale (not including the proceeds from the short sale), which difference is adjusted daily for changes in the value of the securities sold short. The total value of the cash, U.S. Government securities or other liquid debt or equity securities deposited with the broker and otherwise segregated may not at any time be less than the market value of the securities sold short at the time of the short sale.
Securities lending refers to the lending of a Fund’s portfolio securities. Subject to its investment policies described above and in the prospectuses, a Fund may make secured loans of its portfolio securities to broker/dealers and other institutional investors. Securities loans by a Fund are made pursuant to agreements that require that loans be secured continuously by collateral in cash. A Fund retains all or a portion of the income received on investment of cash collateral. A borrower will pay to a Fund an amount equal to any dividends or interest received on securities loaned, but the borrower typically will receive a portion of the income earned on investments of cash collateral. Although voting rights, or rights to consent, with respect to loaned securities pass to a borrower, a Fund retains the right to call the loans at any time on reasonable notice, and may do so in order to vote upon matters affecting, or to sell, the loaned securities.
A Fund typically invests the cash collateral it receives in connection with its securities lending program directly or indirectly in high quality, short-term investments. A Fund may invest some or all of the cash collateral in one or more pooled investment vehicles, including, among other vehicles, money market funds managed by a Fund’s securities lending agent or its affiliates. The securities lending agent shares in any income resulting from the investment of cash collateral, and an affiliate of the securities lending agent receives asset-based fees for the management of such pooled investment vehicles, which may create a conflict of interest between the securities lending agent (or its affiliate) and a Fund with respect to the management of such cash collateral.
Engaging in securities lending is subject to certain risks, including counterparty risk, which is the risk that the counterparty to a transaction could default. There also is a risk of possible delay in the recovery of loaned securities or possible loss of rights in the collateral if a borrower fails financially.
A change in the securities held by a Fund is known as “portfolio turnover.” High portfolio turnover (e.g., over 100%) involves correspondingly greater expenses to the Fund, including brokerage commissions or dealer mark-ups and other transaction costs on the sale of securities and reinvestments in other securities. Such sales may also result in adverse tax consequences to a Fund’s shareholders. The trading costs and tax effects associated with portfolio turnover may adversely affect a Fund’s performance.
For each Fund’s portfolio turnover rate, see the Fees and Expenses of the Fund — Portfolio Turnover section in the prospectuses for that Fund.
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Disclosure of Portfolio Information
The Board has adopted policies and procedures with respect to the disclosure of the Columbia Funds’ portfolio holdings. These policies and procedures are designed to ensure that disclosure of information regarding the Columbia Funds’ portfolio securities is in the best interests of Columbia Fund shareholders and to address conflicts between the interests of Columbia Fund shareholders, on the one hand, and those of the Advisor, the Distributor or any affiliated person of a Columbia Fund, on the other. These policies and procedures provide that Columbia Funds portfolio holdings information generally may not be disclosed to any party prior to the earlier of: (i) the business day next following the posting of such information on the Columbia Funds’ website, if applicable, or (ii) the time a Columbia Fund discloses the information in a publicly available SEC filing required to include such information. Certain limited exceptions that have been approved consistent with the policies and procedures are described below. The Board is updated as needed regarding compliance with these policies and procedures. The policies and procedures prohibit the Advisor and the Columbia Funds’ other service providers from entering into any agreement to disclose Columbia Fund portfolio holdings information in exchange for any form of consideration. These policies and procedures apply to all categories of Columbia Funds and include some variations tailored to the different categories of Columbia Funds. Accordingly, some of the provisions described below do not apply to the Columbia Fund(s) covered by this SAI. The Advisor also has adopted policies and procedures to monitor for compliance with these portfolio holdings disclosure policies and procedures.
Public Disclosures
The Columbia Funds’ portfolio holdings are currently disclosed to the public through required filings with the SEC and on the Columbia Funds’ website. This information is available on the Columbia Funds’ website as described below.
• | For equity, convertible, balanced and asset allocation funds, other than small-cap and specialty Columbia Funds, a complete list of portfolio holdings as of a month-end is posted approximately 15 calendar days after such month-end. |
• | For small-cap and specialty Columbia Funds and those Columbia Funds that are sub-advised by Marsico and Brandes, sub-advisors for certain Columbia Funds, a complete list of portfolio holdings as of a month-end is posted approximately 30 calendar days after such month-end. |
• | For fixed income funds, a complete list of portfolio holdings as of a fiscal quarter-end is posted approximately 60 calendar days after such quarter-end. |
• | For Columbia Money Market Funds, a complete list of portfolio holdings as of a month-end is posted approximately 5 business days after such month-end. |
Certain Columbia Funds also disclose their largest holdings, as a percent of the market values of the Columbia Funds’ portfolios, as of a month-end on their website, generally within 15 calendar days after such month-end. In general, the equity Columbia Funds post their largest 10-15 holdings, the balanced Columbia Funds post their largest 5 equity holdings, and certain fixed income Columbia Funds post their largest 5-15 holdings (by security or issuer).
The Advisor may also disclose more current portfolio holdings information as of specified dates on the Columbia Funds’ website.
The scope of the information that is made available on the Columbia Funds’ website pursuant to the Columbia Funds’ policies relating to a Columbia Fund’s portfolio may change from time to time without prior notice.
The Columbia Funds file their portfolio holdings with the SEC for each fiscal quarter on Form N-CSR (with respect to each annual period and semi-annual period) and Form N-Q (with respect to the first and third quarters of each Columbia Fund’s fiscal year). Shareholders may obtain each Columbia Fund’s Form N-CSR and N-Q
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filings on the SEC’s website at www.sec.gov, a link to which is provided on the Columbia Funds’ website. In addition, each Columbia Fund’s Form N-CSR and N-Q filings may be reviewed and copied at the SEC’s public reference room in Washington, D.C. You may call the SEC at 202.551.8090 for information about the SEC’s website or the operation of the public reference room.
The Columbia Funds, the Advisor and their affiliates may include portfolio holdings information that already has been made public through a website posting or SEC filing in marketing literature and other communications to shareholders, advisors or other parties, provided that the information is disclosed no earlier than the business day after the date the information is disclosed publicly on the Columbia Funds’ website or no earlier than the time a Columbia Fund files such information in a publicly available SEC filing required to include such information.
Other Disclosures
The Columbia Funds’ policies and procedures provide that no disclosures of the Columbia Funds’ portfolio holdings may be made prior to the portfolio holdings information being made public unless (i) the Columbia Funds have a legitimate business purpose for making such disclosure, (ii) the Columbia Funds’ President authorizes such non-public disclosure of information, and (iii) the party receiving the non-public information enters into an appropriate confidentiality agreement or is otherwise subject to a confidentiality obligation.
In determining the existence of a legitimate business purpose for making portfolio disclosures, the following factors, among others, are considered: (i) any prior disclosure must be consistent with the anti-fraud provisions of the federal securities laws and the fiduciary duties of the Advisor; (ii) any conflicts of interest between the interests of Columbia Fund shareholders, on the one hand, and those of the Advisor, the Distributor or any affiliated person of a Columbia Fund, on the other; and (iii) any prior disclosure to a third party, although subject to a confidentiality agreement, would not make conduct lawful that otherwise is unlawful.
In addition, the Columbia Funds periodically disclose their portfolio information on a confidential basis to various service providers that require such information to assist the Columbia Funds with their day-to-day business affairs. In addition to the Advisor and its affiliates, these service providers include each Columbia Fund’s sub-advisor(s) (if any), the Columbia Funds’ custodian, sub-custodians, independent registered public accounting firm, legal counsel, financial printers, proxy solicitor and proxy voting service provider, as well as ratings agencies that maintain ratings on certain Columbia Funds. These service providers are required to keep such information confidential, and are prohibited from trading based on the information or otherwise using the information except as necessary in providing services to the Columbia Funds. The Columbia Funds also may disclose portfolio holdings information to broker/dealers and certain other entities in connection with potential transactions and management of the Columbia Funds, provided that reasonable precautions, including limitations on the scope of the portfolio holdings information disclosed, are taken to avoid any potential misuse of the disclosed information.
The Columbia Funds currently have ongoing arrangements with certain approved recipients with respect to the disclosure of portfolio holdings information prior to such information being made public. Portfolio holdings information disclosed to such recipients is current as of the time of its disclosure, is disclosed to each recipient solely for purposes consistent with the services described below and has been authorized by the Columbia Funds’ President. These special arrangements are described in the table below.
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Ongoing Portfolio Holdings Disclosure Arrangements
IDENTITY OF RECIPIENT | COMPENSATION/ | CONDITIONS/RESTRICTIONS ON USE OF INFORMATION | FREQUENCY OF | |||
Standard & Poor’s | None | Use to maintain ratings for certain Money Market Funds. | Weekly | |||
InvestorTools, Inc. | None | Access granted solely for the purpose of testing back office conversion of trading systems. | Real time | |||
ING Insurance Company | None | Access granted for specific Columbia Funds for ING’s creation of client/shareholder materials. ING may not distribute materials until the holdings information is made public. | Quarterly | |||
Glass-Lewis & Co. | None | Access in connection with testing the firm’s proxy services. | Daily | |||
CMS Bondedge | None | Access when assisting in resolving technical difficulties with application used by the Advisor’s Fixed Income Portfolio Management team as an analytical and trading tool. | Ad hoc | |||
Linedata Services, Inc. | None | Access when assisting in resolving technical difficulties with the software for the LongView Trade Order Management System. | Ad hoc | |||
JP Morgan | None | Access to provide the Advisor’s High Yield portfolio management team with peer group analysis reports for purposes of analyzing the portfolio. | Monthly | |||
Malaspina Communications | None | Use to facilitate writing, publishing and mailing of Columbia Fund shareholder reports and communications including shareholder letters and management’s discussion of Columbia Fund performance. | Quarterly |
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IDENTITY OF RECIPIENT | COMPENSATION/ | CONDITIONS/RESTRICTIONS ON USE OF INFORMATION | FREQUENCY OF | |||
Evare LLP | None | Use for standardizing and reformatting data according to the Advisor’s specifications for use in the reconciliation process. | Daily | |||
Factset Research Data Systems, Inc. | None | Use for provision of quantitative analytics, charting and fundamental data to the Advisor, and Marsico, sub-advisor to certain Columbia Funds. | Daily | |||
RR Donnelley/WE Andrews | None | Access as printers for the Columbia Funds’ prospectuses, supplements, SAIs, fact sheets and brochures. | Monthly | |||
Merrill Corporation | None | Use to provide fulfillment of the Columbia Funds’ prospectuses, supplements, SAIs and sales materials. | Monthly | |||
Citigroup | None | Access when assisting in resolving technical difficulties with Yield Book, an analytic software program that the Advisor uses to perform ongoing risk analysis and management of certain fixed income Columbia Funds and fixed income separately managed accounts. | Daily | |||
Institutional Shareholder Services (ISS) | None | Proxy voting administration and research on proxy matters utilized by MacKay Shields LLC, sub-advisor to certain Columbia Funds. | Daily | |||
Cogent Consulting LLC | None | Utilized by Marsico, sub-advisor for certain Columbia Funds, to facilitate the evaluation of commission rates and to provide flexible commission reporting. | Daily | |||
Moody’s | None | Ongoing portfolio surveillance for ratings it maintains on the Money Market Funds. | Monthly |
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IDENTITY OF RECIPIENT | COMPENSATION/ | CONDITIONS/RESTRICTIONS ON USE OF INFORMATION | FREQUENCY OF | |||
Kynex | None | Use to provide portfolio attribution reports. | Daily | |||
Bowne & Co. | None | Use for printing of the following materials: prospectuses, supplements and SAIs. | Monthly/ quarterly | |||
Bloomberg | None | Use for portfolio analytics. | Daily | |||
Barclays Point | None | Use for analytics including risk and attribution assessment. | Daily | |||
Broadridge Financial Solutions, Inc. | None | Proxy voting and research utilized by Marsico, sub-advisor to certain Columbia Funds. | Daily | |||
Investment Technology Group, Inc. (ITG, formerly known as Macgregor) | None | Order management system utilized by Marsico, sub-advisor for certain Columbia Funds that stores trading data and is used for trading and compliance purposes. | Ad hoc | |||
Advent/AXP | None | Portfolio accounting system utilized by Marsico, sub-advisor to certain Columbia Funds, for both portfolio accounting and internal recordkeeping purposes. | Ad hoc | |||
Investment Technology Group, Inc. (ITG, formerly known as Plexus Group) | None | Evaluation and assessment of trading activity, execution and practices by the Advisor. | Five days after quarter-end | |||
BANA and State Street | None | Credit analysis performed by lenders. | Ad hoc | |||
State Street | None | Use to provide custodian services. | Real time | |||
Lipper, Inc. | None | Use to create metrics for board and executive management reporting, product and marketing analysis, and fund performance. | Daily | |||
Morningstar, Inc. | None | Use for independent research and ranking of Columbia Funds. | Daily |
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INVESTMENT ADVISORY AND OTHER SERVICES
The Advisor and Investment Advisory Services
The Advisor (which is also the Administrator) has been a registered investment advisor since 1995. The Advisor is a wholly owned subsidiary of Columbia Management Group, LLC, which is the primary investment division of Bank of America. The Advisor and Columbia Management Group, LLC are located at 100 Federal Street, Boston MA 02110.
Services Provided
Under the Investment Advisory Agreements, the Advisor has contracted to furnish each Fund with investment research and recommendations or fund management, respectively, and accounting and administrative personnel and services, and with office space, equipment and other facilities. For these services and facilities, each Fund pays a monthly fee based on the average of the daily closing value of the total net assets of each Fund for such month. Under the Investment Advisory Agreements, any liability of the Advisor to the Trust, a Fund and/or its shareholders is limited to situations involving the Advisor’s own willful misfeasance, bad faith, gross negligence or reckless disregard of its duties.
In rendering investment advisory services for all funds except Federal Securities Fund VS, the Advisor may use the portfolio management and research resources of Columbia Management Pte. Ltd., an affiliate of the Advisor. Columbia Management Pte. Ltd. is not registered with the SEC as an investment advisor under the Investment Advisers Act of 1940, as amended. Columbia Management Pte. Ltd. has entered into a Memorandum of Understanding (MOU) with the Advisor pursuant to which Columbia Management Pte. Ltd. is considered a “participating affiliate” of the Advisor as that term is used in relief granted by the staff of the SEC allowing U.S. registered investment advisors to use portfolio management or research resources of advisory affiliates subject to the supervision of a registered investment advisor. Investment professionals from Columbia Management Pte. Ltd. may render portfolio management or research services to clients of the Advisor, including the Funds, under the MOU, and are subject to supervision by the Advisor.
The Investment Advisory Agreements may be terminated with respect to a Fund at any time on 60 days’ written notice by the Advisor or by the Trustees of the Trust or by a vote of a majority of the outstanding voting securities of the Fund. The Investment Advisory Agreements will automatically terminate upon any assignment thereof and shall continue in effect from year to year only so long as such continuance is approved at least annually (i) by the Trustees of the Trust or by a vote of a majority of the outstanding voting securities of the Fund and (ii) by vote of a majority of the Trustees who are not interested persons (as such term is defined in the 1940 Act) of the Advisor or the Trust, cast in person at a meeting called for the purpose of voting on such approval.
The Advisor pays all salaries of officers of the Trust, except for the Chief Compliance Officer, a portion of whose salary is paid by the Columbia Funds. The Trust pays all expenses not assumed by the Advisor including, but not limited to, auditing, legal, custodial, investor servicing and shareholder reporting expenses. The Trust pays the cost of printing and mailing Fund prospectuses to shareholders. The Distributor pays the cost of printing and distributing all other prospectuses.
The Advisor, at its own expense, provides office space, facilities and supplies, equipment and personnel for the performance of its functions under each Fund’s Investment Advisory Agreement and pays all compensation of the Trustees, officers and employees who are employees of the Advisor.
Each Fund’s Investment Advisory Agreement provides that neither the Advisor nor any of its directors, officers, stockholders (or partners of stockholders), agents, or employees shall have any liability to the Trust or any shareholder of the Fund for any error of judgment, mistake of law or any loss arising out of any investment, or for any other act or omission in the performance by the Advisor of its duties under the Investment Advisory
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Agreement, except for liability resulting from willful misfeasance, bad faith or gross negligence on the part of the Advisor in the performance of its duties or from reckless disregard by the Advisor of its obligations and duties under the Investment Advisory Agreement.
Under the Investment Advisory Agreements, or in the case of the Asset Allocation Fund VS, Federal Securities Fund VS, Large Cap Growth Fund VS, Money Market Fund VS, Select Large Cap Growth Fund VS, Small Company Growth Fund VS and Value and Restructuring Fund VS an Administration Agreement, with the Trust, the Advisor provides each Fund with administrative services, excluding investment advisory services. Specifically, the Advisor is responsible for preparing financial statements, providing office space and equipment in connection with the maintenance of the headquarters of the Trust, preparing and filing required reports and tax returns, arrangements for meetings, maintenance of the Trust’s corporate books and records, communication with shareholders, providing internal legal services and oversight of custodial, accounting and other services provided to the Funds by others. The Investment Advisory Agreements or Administration Agreement provides that the Advisor may, in its discretion, arrange for administrative services to be provided to the Trust by any of its affiliates.
The overall investment activities of the Advisor and its affiliates may limit the investment opportunities for a Fund in certain markets in which limitations are imposed by regulators upon the amount of investment by affiliated investors, in the aggregate or in individual issuers. From time to time, a Fund’s activities also may be restricted because of regulatory restrictions applicable to the Advisor and its affiliates, and/or their internal policies. Nordea Investment Management North America, Inc. (NIMNAI), which is located at 437 Madison Avenue, 22nd Floor, New York, New York 10022, serves as an investment sub-advisor for Asset Allocation Fund VS. NIMNAI, a registered investment advisor since 2001, is an indirect, wholly owned subsidiary of Nordea Bank AB, one of Scandinavia’s leading financial institutions. NIMNAI’s investment decisions for the Asset Allocation Fund VS are made by an investment team. NIMNAI offers a range of equity investment products and services to institutional clients, including private and public retirement funds, unions, endowments, foundations, and insurance companies, as well as to mutual fund sponsors on a sub-advisory basis.
Under the sub-advisory agreement with the Advisor and the Trust, on behalf of Asset Allocation Fund VS, NIMNAI manages the portion of the Fund’s assets allocated to foreign securities, as determined by the Advisor, in accordance with the investment goal, policies and limitations of the Fund. For the services rendered by NIMNAI under the sub-advisory agreement, the Advisor pays NIMNAI a monthly fee at the annual rate of 0.40% of the average daily net asset value of the portion of the Fund’s assets managed by NIMNAI. Any liability of NIMNAI to the Trust, Asset Allocation Fund VS and/or Asset Allocation Fund VS shareholders is limited to situations involving NIMNAI’s own willful misfeasance, bad faith or gross negligence in the performance of its duties. In addition to the services provided by NIMNAI to Asset Allocation Fund VS, NIMNAI also provides sub-advisory and other services and facilities to other investment companies.
Advisory Fee Rates and Fees Paid
Each Fund pays the Advisor an annual fee for its investment advisory services, as set forth in the Investment Advisory Agreement, and as shown in the section entitled Fees and Expenses of the Fund — Annual Fund Operating Expenses in each Fund’s prospectuses. The fee is calculated as a percentage of the average daily net assets of each Fund and is paid monthly. The Advisor also may pay amounts from its own assets to the Distributor and/or to selling and/or servicing agents for services they provide.
The Advisor received fees from each Fund for its services as reflected in the following chart, which shows the advisory fees paid to the Advisor and the advisory fees waived/reimbursed by the Advisor, where applicable, for the three most recently completed fiscal years.
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Advisory Fees Paid by the Funds
Fund | Fiscal Year Ended December 31, 2009 | Fiscal Year Ended December 31, 2008 | Fiscal Year Ended December 31, 2007 | |||||||||
Asset Allocation Fund VS | ||||||||||||
Advisory Fee Paid | $ | 537,790 | $ | 775,428 | $ | 1,039,334 | ||||||
Amount Waived/Reimbursed by the Advisor | 237,344 | 198,231 | 195,774 | |||||||||
Federal Securities Fund VS | ||||||||||||
Advisory Fee Paid | $ | 326,611 | $ | 446,968 | $ | 538,837 | ||||||
Amount Waived/Reimbursed by the Advisor | 121,108 | 16,322 | — | |||||||||
International Fund VS | ||||||||||||
Advisory Fee Paid | $ | 192,168 | $ | 327,421 | $ | 527,170 | ||||||
Amount Waived/Reimbursed by the Advisor | 193,696 | 201,414 | 223,141 | |||||||||
Large Cap Growth Fund VS | ||||||||||||
Advisory Fee Paid | $ | 275,301 | $ | 410,091 | $ | 564,072 | ||||||
Amount Waived/Reimbursed by the Advisor | 77,195 | 66,363 | 37,750 | |||||||||
Large Cap Value Fund VS | ||||||||||||
Advisory Fee Paid | $ | 780,942 | $ | 1,253,887 | $ | 1,962,574 | ||||||
Amount Waived/Reimbursed by the Advisor | 151,668 | 133,770 | 182,160 | |||||||||
Mid Cap Value Fund VS | ||||||||||||
Advisory Fee Paid | $ | 116,569 | $ | 200,899 | $ | 306,992 | ||||||
Amount Waived/Reimbursed by the Advisor | 118,162 | 34,397 | — | |||||||||
Money Market Fund VS | ||||||||||||
Advisory Fee Paid | $ | 516,806 | $ | 625,864 | $ | 694,498 | ||||||
Amount Waived/Reimbursed by the Advisor | 352,146 | 312,740 | 307,255 | |||||||||
500 Index Fund VS | ||||||||||||
Advisory Fee Paid | $ | 44,766 | $ | 69,876 | $ | 100,135 | ||||||
Amount Waived/Reimbursed by the Advisor | 154,464 | 118,431 | 59,022 | |||||||||
Select Large Cap Growth Fund VS(a) | ||||||||||||
Advisory Fee Paid | $ | 27,681 | $ | 8,687 | N/A | |||||||
Amount Waived/Reimbursed by the Advisor | 137,152 | 77,742 | N/A | |||||||||
Small Cap Value Fund VS | ||||||||||||
Advisory Fee Paid | $ | 2,971,191 | $ | 3,348,779 | $ | 3,669,622 | ||||||
Amount Waived/Reimbursed by the Advisor | 0 | 0 | — | |||||||||
Small Company Growth Fund VS | ||||||||||||
Advisory Fee Paid | $ | 211,514 | $ | 328,042 | $ | 457,017 | ||||||
Amount Waived/Reimbursed by the Advisor | 121,222 | 70,828 | 87,029 |
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Fund | Fiscal Year Ended December 31, 2009 | Fiscal Year Ended December 31, 2008 | Fiscal Year Ended December 31, 2007 | |||||||||
Strategic Income Fund VS | ||||||||||||
Advisory Fee Paid | $ | 420,447 | $ | 555,924 | $ | 683,455 | ||||||
Amount Waived/Reimbursed by the Advisor | 172,029 | 0 | — | |||||||||
Value and Restructuring Fund VS(a) | ||||||||||||
Advisory Fee Paid | $ | 20,547 | $ | 6,637 | N/A | |||||||
Amount Waived/Reimbursed by the Advisor | 141,688 | 70,872 | N/A |
(a) | The Fund commenced operations on September 2, 2008. |
Portfolio Manager(s)
The following provides additional information about the portfolio manager(s) of the Advisor who are responsible for making the day-to-day investment decisions for the Funds. As described in the Management of the Fund — Primary Service Providers section of each Fund’s prospectuses, the portfolio manager(s) of the Advisor who are responsible for the Funds are:
Portfolio Manager(s) of the Advisor
Portfolio Manager | Fund | |
Alfred F. Alley, III | 500 Index Fund VS | |
Anwiti Bahuguna | Asset Allocation Fund VS | |
Stephen D. Barbaro | Small Cap Value Fund VS | |
Jonathan P. Carlson | Federal Securities Fund VS | |
Richard A. Carter | Select Large Cap Growth Fund VS | |
Fred Copper | International Fund VS | |
Kevin L. Cronk | Strategic Income Fund VS | |
Cheryl D’Hollander | 500 Index Fund VS | |
Paul J. DiGiacomo | International Fund VS | |
Daniele M. Donahoe | Small Company Growth Fund VS | |
Lori J. Ensinger | Large Cap Value Fund VS Mid Cap Value Fund VS | |
Thomas M. Galvin | Select Large Cap Growth Fund VS | |
Todd D. Herget | Select Large Cap Growth Fund VS | |
David I. Hoffman | Large Cap Value Fund VS Mid Cap Value Fund VS | |
Jasmine (Weili) Huang | International Fund VS | |
Jeremy Javidi | Small Cap Value Fund VS | |
Colin Moore | Asset Allocation Fund VS | |
Jon Michael Morgan | Small Company Growth Fund VS | |
Daisuke Nomoto | International Fund VS | |
Laura A. Ostrander | Strategic Income Fund VS | |
Kent M. Peterson | Asset Allocation Fund VS | |
Guy W. Pope | Value and Restructuring Fund VS | |
Noah J. Petrucci | Large Cap Value Fund VS Mid Cap Value Fund VS | |
Christian Pineno | Small Company Growth Fund VS |
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Portfolio Manager | Fund | |
Marie M. Schofield | Asset Allocation Fund VS | |
J. Nicholas Smith | Value and Restructuring Fund VS | |
Diane L. Sobin | Large Cap Value Fund VS Mid Cap Value Fund VS | |
Roger R. Sullivan | Large Cap Growth Fund VS | |
David J. Williams | Value and Restructuring Fund VS | |
John T. Wilson | Large Cap Growth Fund VS |
Compensation
As of the Funds’ most recent fiscal year end, the Advisor’s portfolio managers received all of their compensation from the Advisor and its parent company, Columbia Management Group, LLC, in the form of salary, bonus, stock options, restricted stock, and notional investments through an incentive plan, the value of which is measured by reference to the performance of the Columbia Funds in which the account is invested. A portfolio manager’s bonus is variable and generally is based on (1) an evaluation of the portfolio manager’s investment performance and (2) the results of a peer and/or management review of the portfolio manager, which takes into account skills and attributes such as team participation, investment process, communication and professionalism. In evaluating investment performance, the Advisor generally considers the one, three and five year performance of mutual funds and other accounts managed by the portfolio manager relative to the benchmarks and peer groups noted below, emphasizing the portfolio manager’s three and five year performance. The Advisor also may consider a portfolio manager’s performance in managing client assets in sectors and industries assigned to the portfolio manager as part of his/her investment team responsibilities, where applicable. For portfolio managers who also have group management responsibilities, another factor in their evaluation is an assessment of the group’s overall investment performance.
Performance Benchmarks
Asset Allocation Fund VS
Portfolio Managers | Performance Benchmarks | Peer Group | ||
Anwiti Bahuguna | Standard & Poor’s 500® Index Barclays Capital U.S. Aggregate Bond Index | Lipper Mixed-Asset Target Allocation Moderate Funds Variable Underlying Funds (VUF) Classification | ||
Colin Moore | Standard & Poor’s 500® Index Barclays Capital U.S. Aggregate Bond Index | Lipper Mixed-Asset Target Allocation Moderate Funds Variable Underlying Funds (VUF) Classification | ||
Kent M. Peterson | Standard & Poor’s 500® Index Barclays Capital U.S. Aggregate Bond Index | Lipper Mixed-Asset Target Allocation Moderate Funds Variable Underlying Funds (VUF) Classification | ||
Marie M. Schofield | Standard & Poor’s 500® Index Barclays Capital U.S. Aggregate Bond Index | Lipper Mixed-Asset Target Allocation Moderate Funds Variable Underlying Funds (VUF) Classification |
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Federal Securities Fund VS
Portfolio Manager | Performance Benchmark | Peer Group | ||
Jonathan P. Carlson | Citigroup Government/Mortgage Bond Index | Lipper General U.S. Government Variable Underlying Funds (VUF) Classification |
International Fund VS
Portfolio Managers | Performance Benchmark | Peer Group | ||
Fred Copper | Morgan Stanley Capital International (MSCI) Europe, Australasia, Far East (EAFE) Index | Lipper International Core Funds Variable Underlying Funds (VUF) Classification | ||
Paul J. DiGiacomo | Morgan Stanley Capital International (MSCI) Europe, Australasia, Far East (EAFE) Index | Lipper International Core Funds Variable Underlying Funds (VUF) Classification | ||
Jasmine (Weili) Huang | Morgan Stanley Capital International (MSCI) Europe, Australasia, Far East (EAFE) Index | Lipper International Core Funds Variable Underlying Funds (VUF) Classification | ||
Daisuke Nomoto | Morgan Stanley Capital International (MSCI) Europe, Australasia, Far East (EAFE) Index | Lipper International Core Funds Variable Underlying Funds (VUF) Classification |
Large Cap Growth Fund VS
Portfolio Managers | Performance Benchmark | Peer Group | ||
Roger R. Sullivan | Russell 1000 Growth Index | Lipper Large Cap Growth Funds Variable Underlying Funds (VUF) Classification | ||
John T. Wilson | Russell 1000 Growth Index | Lipper Large Cap Growth Funds Variable Underlying Funds (VUF) Classification |
Large Cap Value Fund VS
Portfolio Managers | Performance Benchmark | Peer Group | ||
Lori J. Ensinger | Russell 1000 Value Index | Lipper Large-Cap Value Funds Variable Underlying Funds (VUF) Classification | ||
David I. Hoffman | Russell 1000 Value Index | Lipper Large-Cap Value Funds Variable Underlying Funds (VUF) Classification | ||
Noah J. Petrucci | Russell 1000 Value Index | Lipper Large-Cap Value Funds Variable Underlying Funds (VUF) Classification | ||
Diane L. Sobin | Russell 1000 Value Index | Lipper Large-Cap Value Funds Variable Underlying Funds (VUF) Classification |
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Mid Cap Value Fund VS
Portfolio Managers | Performance Benchmark | Peer Group | ||
Lori J. Ensinger | Russell Midcap Value Index | Lipper Mid-Cap Value Funds Variable Underlying Funds (VUF) Classification | ||
David I. Hoffman | Russell Midcap Value Index | Lipper Mid-Cap Value Funds Variable Underlying Funds (VUF) Classification | ||
Noah J. Petrucci | Russell Midcap Value Index | Lipper Mid-Cap Value Funds Variable Underlying Funds (VUF) Classification | ||
Diane L. Sobin | Russell Midcap Value Index | Lipper Mid-Cap Value Funds Variable Underlying Funds (VUF) Classification |
500 Index Fund VS
Portfolio Managers | Performance Benchmark | Peer Group | ||
Cheryl D’Hollander | Standard & Poor’s 500® Index | Lipper S&P 500® Index Objective Funds Variable Underlying Funds (VUF) Classification | ||
Alfred F. Alley, III | Standard & Poor’s 500® Index | Lipper S&P 500® Index Objective Funds Variable Underlying Funds (VUF) Classification |
Select Large Cap Growth Fund VS
Portfolio Managers | Performance Benchmark | Peer Group | ||
Thomas M. Galvin | Russell 1000 Growth Index | Lipper Large-Cap Growth Funds Variable Underlying Funds (VUF) Classification | ||
Richard A. Carter | Russell 1000 Growth Index | Lipper Large-Cap Growth Funds Variable Underlying Funds (VUF) Classification | ||
Todd D. Herget | Russell 1000 Growth Index | Lipper Large-Cap Growth Funds Variable Underlying Funds (VUF) Classification |
Small Cap Value Fund VS
Portfolio Managers | Performance Benchmark | Peer Group | ||
Stephen D. Barbaro | Russell 2000 Value Index | Lipper Small-Cap Value Funds Variable Underlying Funds (VUF) Classification | ||
Jeremy Javidi | Russell 2000 Value Index | Lipper Small-Cap Value Funds Variable Underlying Funds (VUF) Classification |
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Small Company Growth Fund VS
Portfolio Managers | Performance Benchmark | Peer Group | ||
Christian Pineno | Russell 2000 Growth Index | Lipper Small-Cap Growth Funds Variable Underlying Funds (VUF) Classification | ||
Daniele M. Donahoe | Russell 2000 Growth Index | Lipper Small-Cap Growth Funds Variable Underlying Funds (VUF) Classification | ||
Jon Michael Morgan | Russell 2000 Growth Index | Lipper Small-Cap Growth Funds Variable Underlying Funds (VUF) Classification |
Strategic Income Fund VS
Portfolio Managers | Performance Benchmark | Peer Group | ||
Kevin L. Cronk | Barclays Capital Government/Credit Bond Index Blended Benchmark* | Lipper General Bond Funds Variable Underlying Funds (VUF) Classification | ||
Laura A. Ostrander | Barclays Capital Government/Credit Bond Index Blended Benchmark* | Lipper General Bond Funds Variable Underlying Funds (VUF) Classification |
* | A custom composite established by the Advisor, consisting of a 35% weighting of the Barclays Capital Aggregate Bond Index, a 35% weighting of the JPMorgan Global High Yield Index, a 15% weighting of the Citigroup Non-U.S. World Government Bond Index -Unhedged and a 15% weighting of the JPMorgan EMBI Global Diversified Index. |
Value and Restructuring Fund VS
Portfolio Managers | Performance Benchmark | Peer Group | ||
David J. Williams | Russell 1000 Value Index S&P 500® Index | Lipper Multi-Cap Value Funds Variable Underlying Funds (VUF) Classification | ||
Guy W. Pope | Russell 1000 Value Index S&P 500® Index | Lipper Multi-Cap Value Funds Variable Underlying Funds (VUF) Classification | ||
J. Nicholas Smith | Russell 1000 Value Index S&P 500® Index | Lipper Multi-Cap Value Funds Variable Underlying Funds (VUF) Classification |
The size of the overall bonus pool each year is determined by Columbia Management Group, LLC and depends on, among other factors, the levels of compensation generally in the investment management industry (based on market compensation data) and the Advisor’s profitability for the year, which is largely determined by assets under management.
Other Accounts
The following table shows the number and assets of other investment accounts (or portions of investment accounts) that the portfolio manager(s) of the Advisor managed, as of December 31, 2009.
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Other Accounts Managed by the Portfolio Manager(s)
Asset Allocation Fund VS
Other SEC-registered open-end and closed-end funds | Other pooled investment vehicles | Other accounts | ||||||||||||||||||||||
Portfolio Managers | Number of accounts | Assets | Number of accounts | Assets | Number of accounts | Assets | ||||||||||||||||||
Anwiti Bahuguna | 16 | $ | 2.0 billion | 26 | $ | 2.2 billion | 22 | $ | 288.7 million | |||||||||||||||
Colin Moore | 18 | $ | 3.54 billion | 26 | $ | 2.2 billion | 21 | $ | 292 million | |||||||||||||||
Kent M. Peterson | 16 | $ | 2.0 billion | 26 | $ | 2.2 billion | 19 | $ | 288 million | |||||||||||||||
Marie M. Schofield | 16 | $ | 2.0 billion | 26 | $ | 2.2 billion | 16 | $ | 288 million |
Federal Securities Fund VS | ||||||||||||||||||||||||
Other SEC-registered open-end and closed-end funds | Other pooled investment vehicles | Other accounts | ||||||||||||||||||||||
Portfolio Manager | Number of accounts | Assets | Number of accounts | Assets | Number of accounts | Assets | ||||||||||||||||||
Jonathan P. Carlson | 4 | $ | 3.82 billion | 11 | $ | 2.94 billion | 131 | $ | 2.13 billion |
International Fund VS
Other SEC-registered open-end and closed-end funds | Other pooled investment vehicles | Other accounts | ||||||||||||||||||||||
Portfolio Managers | Number of accounts | Assets | Number of accounts | Assets | Number of accounts | Assets | ||||||||||||||||||
Fred Copper | 9 | $ | 2.2 billion | 4 | $ | 674.2 million | 26 | $ | 86.5 million | |||||||||||||||
Paul J. DiGiacomo | 5 | $ | 754.9 million | 2 | $ | 587.9 million | 15 | $ | 430,000 | |||||||||||||||
Jasmine (Weili) Huang | 8 | $ | 1.4 billion | 4 | $ | 674.2 million | 4 | $ | 200,000 | |||||||||||||||
Daisuke Nomoto | 6 | $ | 782.7 million | 3 | $ | 613.3 million | 2 | $ | 200,000 |
Large Cap Growth Fund VS
Other SEC-registered open-end and closed-end funds | Other pooled investment vehicles | Other accounts | ||||||||||||||||||||||
Portfolio Managers | Number of accounts | Assets | Number of accounts | Assets | Number of accounts | Assets | ||||||||||||||||||
Roger R. Sullivan | 4 | $ | 1.5 billion | 1 | $ | 300 million | 19 | $ | 350 million | |||||||||||||||
John T. Wilson | 4 | $ | 1.5 billion | 1 | $ | 300 million | 19 | $ | 350 million |
Large Cap Value Fund VS
Other SEC-registered open-end and closed-end funds | Other pooled investment vehicles | Other accounts | ||||||||||||||||||||||
Portfolio Managers | Number of accounts | Assets | Number of accounts | Assets | Number of accounts | Assets | ||||||||||||||||||
Lori J. Ensinger | 11 | $ | 7.52 billion | 2 | $ | 388.6 million | 4,735 | $ | 2.6 billion | |||||||||||||||
David I. Hoffman | 11 | $ | 7.52 billion | 2 | $ | 388.6 million | 4,741 | $ | 2.6 billion | |||||||||||||||
Noah J. Petrucci | 11 | $ | 7.52 billion | 2 | $ | 388.6 million | 4,741 | $ | 2.6 billion | |||||||||||||||
Diane L. Sobin | 11 | $ | 7.52 billion | 2 | $ | 388.6 million | 4,746 | $ | 2.6 billion |
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Mid Cap Value Fund VS
Other SEC-registered open-end and closed-end funds | Other pooled investment vehicles | Other accounts | ||||||||||||||||||||||
Portfolio Managers | Number of accounts | Assets | Number of accounts | Assets | Number of accounts | Assets | ||||||||||||||||||
Lori J. Ensinger | 11 | $ | 7.61 billion | 2 | $ | 388.6 million | 4,735 | $ | 2.6 billion | |||||||||||||||
David I. Hoffman | 11 | $ | 7.61 billion | 2 | $ | 388.6 million | 4,741 | $ | 2.6 billion | |||||||||||||||
Noah J. Petrucci | 11 | $ | 7.61 billion | 2 | $ | 388.6 million | 4,741 | $ | 2.6 billion | |||||||||||||||
Diane L. Sobin | 11 | $ | 7.61 billion | 2 | $ | 388.6 million | 4,746 | $ | 2.6 billion |
500 Index Fund VS
Other SEC-registered open-end and closed-end funds | Other pooled investment vehicles | Other accounts | ||||||||||||||||||||||
Portfolio Managers | Number of accounts | Assets | Number of accounts | Assets | Number of accounts | Assets | ||||||||||||||||||
Cheryl D’Hollander | 3 | $ | 5.9 billion | 1 | $ | 115 million | 11 | $ | 3.7 billion | |||||||||||||||
Alfred F. Alley, III | 3 | $ | 5.9 billion | 3 | $ | 111.18 million | 7 | $ | 93.81 million |
Select Large Cap Growth Fund VS
Other SEC-registered open-end and closed-end funds | Other pooled investment vehicles | Other accounts | ||||||||||||||||||||||
Portfolio Managers | Number of accounts | Assets | Number of accounts | Assets | Number of accounts | Assets | ||||||||||||||||||
Thomas M. Galvin | 1 | $ | 1.9 billion | 1 | $ | 40 million | 2,300 | $ | 1.0 billion | |||||||||||||||
Richard A. Carter | 1 | $ | 1.9 billion | 1 | $ | 43 million | 2,294 | $ | 1.3 billion | |||||||||||||||
Todd D. Herget | 1 | $ | 2.15 billion | 1 | $ | 43 million | 2,035 | $ | 850 million |
Small Cap Value Fund VS
Other SEC-registered open-end and closed-end funds | Other pooled investment vehicles | Other accounts | ||||||||||||||||||||||
Portfolio Managers | Number of accounts | Assets | Number of accounts | Assets | Number of accounts | Assets | ||||||||||||||||||
Stephen D. Barbaro | 5 | $ | 1.38 billion | 1 | $ | 33 million | 16 | $ | 70 million | |||||||||||||||
Jeremy Javidi | 5 | $ | 1.38 billion | 1 | $ | 33 million | 12 | $ | 60 million |
Small Company Growth Fund VS
Other SEC-registered open-end and closed-end funds | Other pooled investment vehicles | Other accounts | ||||||||||||||||||||||
Portfolio Managers | Number of accounts | Assets | Number of accounts | Assets | Number of accounts | Assets | ||||||||||||||||||
Christian Pineno | 3 | $ | 363 million | 3 | $ | 110 million | 23 | $ | 31 million | |||||||||||||||
Daniele M. Donahoe | 3 | $ | 363 million | 3 | $ | 110 million | 18 | $ | 29.4 million | |||||||||||||||
Jon Michael Morgan | 3 | $ | 363 million | 3 | $ | 110 million | 25 | $ | 30 million |
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Strategic Income Fund VS
Other SEC-registered open-end and closed-end funds | Other pooled investment vehicles | Other accounts | ||||||||||||||||||||||
Portfolio Managers | Number of accounts | Assets | Number of accounts | Assets | Number of accounts | Assets | ||||||||||||||||||
Kevin L. Cronk | 9 | $ | 7.56 billion | 2 | $ | 30 million | 3 | $ | 254 million | |||||||||||||||
Laura A. Ostrander | 3 | $ | 2.2 billion | 0 | $ | 0 | 10 | $ | 1.6 million |
Value and Restructuring Fund VS
Other SEC-registered open-end and closed-end funds | Other pooled investment vehicles | Other accounts | ||||||||||||||||||||||
Portfolio Managers | Number of accounts | Assets | Number of accounts | Assets | Number of accounts | Assets | ||||||||||||||||||
David J. Williams | 3 | $ | 7.97 billion | 0 | $ | 0 | 1,909 | $ | 2.09 billion | |||||||||||||||
Guy W. Pope | 5 | $ | 8.69 billion | 0 | $ | 0 | 1,902 | $ | 2.04 billion | |||||||||||||||
J. Nicholas Smith | 3 | $ | 7.97 billion | 0 | $ | 0 | 1,906 | $ | 2.01 billion |
The following table shows the number and assets of the above accounts (or portions of such accounts) for which the advisory fee is based on performance, as of December 31, 2009.
Other Accounts Managed by the Portfolio Manager(s) for which the Advisory Fee is Based on Performance
Asset Allocation Fund VS
Other SEC-registered open-end and closed-end funds | Other pooled investment vehicles | Other accounts | ||||||||||||||||||||||
Portfolio Managers | Number of accounts | Assets | Number of accounts | Assets | Number of accounts | Assets | ||||||||||||||||||
Anwiti Bahuguna | 0 | $ | 0 | 0 | $ | 0 | 0 | $ | 0 | |||||||||||||||
Colin Moore | 0 | $ | 0 | 0 | $ | 0 | 0 | $ | 0 | |||||||||||||||
Kent M. Peterson | 0 | $ | 0 | 0 | $ | 0 | 0 | $ | 0 | |||||||||||||||
Marie M. Schofield | 0 | $ | 0 | 0 | $ | 0 | 0 | $ | 0 |
Federal Securities Fund VS
Other SEC-registered open-end and closed-end funds | Other pooled investment vehicles | Other accounts | ||||||||||||||||||||||
Portfolio Managers | Number of accounts | Assets | Number of accounts | Assets | Number of accounts | Assets | ||||||||||||||||||
Jonathan P. Carlson | 0 | $ | 0 | 0 | $ | 0 | 0 | $ | 0 |
International Fund VS
Other SEC-registered open-end and closed-end funds | Other pooled investment vehicles | Other accounts | ||||||||||||||||||||||
Portfolio Managers | Number of accounts | Assets | Number of accounts | Assets | Number of accounts | Assets | ||||||||||||||||||
Fred Copper | 0 | $ | 0 | 0 | $ | 0 | 0 | $ | 0 | |||||||||||||||
Paul J. DiGiacomo | 0 | $ | 0 | 0 | $ | 0 | 0 | $ | 0 | |||||||||||||||
Jasmine (Weili) Huang | 0 | $ | 0 | 0 | $ | 0 | 0 | $ | 0 | |||||||||||||||
Daisuke Nomoto | 0 | $ | 0 | 0 | $ | 0 | 0 | $ | 0 |
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Large Cap Growth Fund VS
Other SEC-registered open-end and closed-end funds | Other pooled investment vehicles | Other accounts | ||||||||||||||||||||||
Portfolio Managers | Number of accounts | Assets | Number of accounts | Assets | Number of accounts | Assets | ||||||||||||||||||
Roger R. Sullivan | 0 | $ | 0 | 0 | $ | 0 | 0 | $ | 0 | |||||||||||||||
John T. Wilson | 0 | $ | 0 | 0 | $ | 0 | 0 | $ | 0 |
Large Cap Value Fund VS
Other SEC-registered open-end and closed-end funds | Other pooled investment vehicles | Other accounts | ||||||||||||||||||||||
Portfolio Managers | Number of accounts | Assets | Number of accounts | Assets | Number of accounts | Assets | ||||||||||||||||||
Lori J. Ensinger | 0 | $ | 0 | 0 | $ | 0 | 0 | $ | 0 | |||||||||||||||
David I. Hoffman | 0 | $ | 0 | 0 | $ | 0 | 0 | $ | 0 | |||||||||||||||
Noah J. Petrucci | 0 | $ | 0 | 0 | $ | 0 | 0 | $ | 0 | |||||||||||||||
Diane L. Sobin | 0 | $ | 0 | 0 | $ | 0 | 0 | $ | 0 |
Mid Cap Value Fund VS
Other SEC-registered open-end and closed-end funds | Other pooled investment vehicles | Other accounts | ||||||||||||||||||||||
Portfolio Managers | Number of accounts | Assets | Number of accounts | Assets | Number of accounts | Assets | ||||||||||||||||||
Lori J. Ensinger | 0 | $ | 0 | 0 | $ | 0 | 0 | $ | 0 | |||||||||||||||
David I. Hoffman | 0 | $ | 0 | 0 | $ | 0 | 0 | $ | 0 | |||||||||||||||
Noah J. Petrucci | 0 | $ | 0 | 0 | $ | 0 | 0 | $ | 0 | |||||||||||||||
Diane L. Sobin | 0 | $ | 0 | 0 | $ | 0 | 0 | $ | 0 |
500 Index Fund VS
Other SEC-registered open-end and closed-end funds | Other pooled investment vehicles | Other accounts | ||||||||||||||||||||||
Portfolio Managers | Number of accounts | Assets | Number of accounts | Assets | Number of accounts | Assets | ||||||||||||||||||
Cheryl D’Hollander | 0 | $ | 0 | 0 | $ | 0 | 0 | $ | 0 | |||||||||||||||
Alfred F. Alley, III | 0 | $ | 0 | 0 | $ | 0 | 0 | $ | 0 |
Select Large Cap Growth Fund VS
Other SEC-registered open-end and closed-end funds | Other pooled investment vehicles | Other accounts | ||||||||||||||||||||||
Portfolio Managers | Number of accounts | Assets | Number of accounts | Assets | Number of accounts | Assets | ||||||||||||||||||
Thomas M. Galvin | 0 | $ | 0 | 0 | $ | 0 | 1 | $ | 160 million | |||||||||||||||
Richard A. Carter | 0 | $ | 0 | 0 | $ | 0 | 1 | $ | 175 million | |||||||||||||||
Todd D. Herget | 0 | $ | 0 | 0 | $ | 0 | 1 | $ | 180 million |
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Small Cap Value Fund VS
Other SEC-registered open-end and closed-end funds | Other pooled investment vehicles | Other accounts | ||||||||||||||||||||||
Portfolio Managers | Number of accounts | Assets | Number of accounts | Assets | Number of accounts | Assets | ||||||||||||||||||
Stephen D. Barbaro | 0 | $ | 0 | 0 | $ | 0 | 0 | $ | 0 | |||||||||||||||
Jeremy Javidi | 0 | $ | 0 | 0 | $ | 0 | 0 | $ | 0 |
Small Company Growth Fund VS
Other SEC-registered open-end and closed-end funds | Other pooled investment vehicles | Other accounts | ||||||||||||||||||||||
Portfolio Managers | Number of accounts | Assets | Number of accounts | Assets | Number of accounts | Assets | ||||||||||||||||||
Christian Pineno | 0 | $ | 0 | 0 | $ | 0 | 0 | $ | 0 | |||||||||||||||
Daniele M. Donahoe | 0 | $ | 0 | 0 | $ | 0 | 0 | $ | 0 | |||||||||||||||
Jon Michael Morgan | 0 | $ | 0 | 0 | $ | 0 | 0 | $ | 0 |
Strategic Income Fund VS
Other SEC-registered open-end and closed-end funds | Other pooled investment vehicles | Other accounts | ||||||||||||||||||||||
Portfolio Managers | Number of accounts | Assets | Number of accounts | Assets | Number of accounts | Assets | ||||||||||||||||||
Kevin L. Cronk | 0 | $ | 0 | 0 | $ | 0 | 0 | $ | 0 | |||||||||||||||
Laura A. Ostrander | 0 | $ | 0 | 0 | $ | 0 | 0 | $ | 0 |
Value and Restructuring Fund VS
Other SEC-registered open-end and closed-end funds | Other pooled investment vehicles | Other accounts | ||||||||||||||||||||||
Portfolio Managers | Number of accounts | Assets | Number of accounts | Assets | Number of accounts | Assets | ||||||||||||||||||
David J. Williams | 0 | $ | 0 | 0 | $ | 0 | 0 | $ | 0 | |||||||||||||||
Guy W. Pope | 0 | $ | 0 | 0 | $ | 0 | 0 | $ | 0 | |||||||||||||||
J. Nicholas Smith | 0 | $ | 0 | 0 | $ | 0 | 0 | $ | 0 |
Ownership of Securities
The table below shows the dollar ranges of shares of each Fund beneficially owned (as determined pursuant to Rule 16a-1(a)(2) under the 1934 Act) by each Fund’s portfolio manager(s), as of December 31, 2009.
Portfolio Manager Ownership of the Funds as of December 31, 2009
Asset Allocation Fund VS
Portfolio Managers | Dollar Range of Equity Securities in the Fund Beneficially Owned | |
Anwiti Bahuguna | None | |
Colin Moore | None | |
Kent M. Peterson | None | |
Marie M. Schofield | None |
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Federal Securities Fund VS
Portfolio Manager | Dollar Range of Equity Securities in the Fund Beneficially Owned | |
Jonathan P. Carlson | None |
International Fund VS
Portfolio Managers | Dollar Range of Equity Securities in the Fund Beneficially Owned | |
Fred Copper | None | |
Paul J. DiGiacomo | None | |
Jasmine (Weili) Huang | None | |
Daisuke Nomoto | None |
Large Cap Growth Fund VS
Portfolio Managers | Dollar Range of Equity Securities in the Fund Beneficially Owned | |
Roger R. Sullivan | None | |
John T. Wilson | None |
Large Cap Value Fund VS
Portfolio Managers | Dollar Range of Equity Securities in the Fund Beneficially Owned | |
Lori J. Ensinger | None | |
David I. Hoffman | None | |
Noah J. Petrucci | None | |
Diane L. Sobin | None |
Mid Cap Value Fund VS
Portfolio Managers | Dollar Range of Equity Securities in the Fund Beneficially Owned | |
Lori J. Ensinger | None | |
David I. Hoffman | None | |
Noah J. Petrucci | None | |
Diane L. Sobin | None |
500 Index Fund VS
Portfolio Manager | Dollar Range of Equity Securities in the Fund Beneficially Owned | |
Cheryl D’Hollander | None | |
Alfred F. Alley, III | None |
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Select Large Cap Growth Fund VS
Portfolio Manager | Dollar Range of Equity Securities in the Fund Beneficially Owned | |
Thomas M. Galvin | None | |
Richard A. Carter | None | |
Todd D. Herget | None |
Small Cap Value Fund VS
Portfolio Managers | Dollar Range of Equity Securities in the Fund Beneficially Owned | |
Stephen D. Barbaro | None | |
Jeremy Javidi | None |
Small Company Growth Fund VS
Portfolio Managers | Dollar Range of Equity Securities in the Fund Beneficially Owned | |
Christian Pineno | None | |
Daniele M. Donahoe | None | |
Jon Michael Morgan | None |
Strategic Income Fund VS
Portfolio Managers | Dollar Range of Equity Securities in the Fund Beneficially Owned | |
Kevin Cronk | None | |
Laura A. Ostrander | None |
Value and Restructuring Fund VS
Portfolio Managers | Dollar Range of Equity Securities in the Fund Beneficially Owned | |
David J. Williams | None | |
Guy W. Pope | None | |
J. Nicholas Smith | None |
The Advisor’s Portfolio Managers and Potential Conflicts of Interests
Like other investment professionals with multiple clients, a Fund’s portfolio manager(s) may face certain potential conflicts of interest in connection with managing both the Fund and other accounts at the same time. The Advisor and the Funds have adopted compliance policies and procedures that attempt to address certain of the potential conflicts that portfolio managers face in this regard. Certain of these conflicts of interest are summarized below.
The management of accounts with different advisory fee rates and/or fee structures, including accounts that pay advisory fees based on account performance (performance fee accounts), may raise potential conflicts of interest for a portfolio manager by creating an incentive to favor higher fee accounts.
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Potential conflicts of interest also may arise when a portfolio manager has personal investments in other accounts that may create an incentive to favor those accounts. As a general matter and subject to the Advisor’s Code of Ethics and certain limited exceptions, the Advisor’s investment professionals do not have the opportunity to invest in client accounts, other than the Funds.
A portfolio manager who is responsible for managing multiple funds and/or accounts may devote unequal time and attention to the management of those funds and/or accounts. The effects of this potential conflict may be more pronounced where funds and/or accounts managed by a particular portfolio manager have different investment strategies.
A portfolio manager may be able to select or influence the selection of the broker/dealers that are used to execute securities transactions for the Funds. A portfolio manager’s decision as to the selection of broker/dealers could produce disproportionate costs and benefits among the Funds and the other accounts the portfolio manager manages.
A potential conflict of interest may arise when a portfolio manager buys or sells the same securities for a Fund and other accounts. On occasions when a portfolio manager considers the purchase or sale of a security to be in the best interests of a Fund as well as other accounts, the Advisor’s trading desk may, to the extent consistent with applicable laws and regulations, aggregate the securities to be sold or bought in order to obtain the best execution and lower brokerage commissions, if any. Aggregation of trades may create the potential for unfairness to a Fund or another account if a portfolio manager favors one account over another in allocating the securities bought or sold.
“Cross trades,” in which a portfolio manager sells a particular security held by a Fund to another account (potentially saving transaction costs for both accounts), could involve a potential conflict of interest if, for example, a portfolio manager is permitted to sell a security from one account to another account at a higher price than an independent third party would pay. The Advisor and the Funds have adopted compliance procedures that provide that any transactions between a Fund and another account managed by the Advisor are to be made at a current market price, consistent with applicable laws and regulations.
Another potential conflict of interest may arise based on the different investment objectives and strategies of a Fund and other accounts managed by its portfolio manager(s). Depending on another account’s objectives and other factors, a portfolio manager may give advice to and make decisions for a Fund that may differ from advice given, or the timing or nature of decisions made, with respect to another account. A portfolio manager’s investment decisions are the product of many factors in addition to basic suitability for the particular account involved. Thus, a portfolio manager may buy or sell a particular security for certain accounts, and not for a Fund, even though it could have been bought or sold for the Fund at the same time. A portfolio manager also may buy a particular security for one or more accounts when one or more other accounts are selling the security (including short sales). There may be circumstances when a portfolio manager’s purchases or sales of portfolio securities for one or more accounts may have an adverse effect on other accounts, including the Funds.
A Fund’s portfolio manager(s) also may have other potential conflicts of interest in managing the Fund, and the description above is not a complete description of every conflict that could exist in managing the Fund and other accounts. Many of the potential conflicts of interest to which the Advisor’s portfolio managers are subject are essentially the same or similar to the potential conflicts of interest related to the investment management activities of the Advisor and its affiliates. See Investment Advisory and Other Services — Other Roles and Relationships of Bank of America and its Affiliates — Certain Conflicts of Interest for more information about conflicts of interest, including those that relate to the Advisor and its affiliates.
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Columbia Management Advisors, LLC (which is also the Advisor) serves as Administrator of the Funds.
Services Provided
Pursuant to the terms of the Administration Agreement, the Administrator has agreed to, among other things, (i) provide office space, equipment and clerical personnel; (ii) arrange, if desired by the Trust, for its directors, officers and employees to serve as Trustees, officers or agents of certain Funds; (iii) prepare and, if applicable, file all documents required for compliance by certain Funds with applicable laws and regulations; (iv) prepare agendas and supporting documents for and minutes of meetings of Trustees, committees of Trustees and shareholders; (v) coordinate and oversee the activities of certain Funds’ other third party service providers; and (vi) maintain certain books and records of certain Funds.
Administration Fee Rate and Fees Paid
Each Fund listed below pays the Advisor an annual administrative fee. Fees are computed and accrued daily and paid monthly at an annual rate of 0.15% of average net assets. During each year in the three-year period ended December 31, 2009, pursuant to the Administration Agreement, each Fund listed below paid the Advisor or an affiliate thereof administrative fees as follows:
Administration Fees Paid by the Funds
Fund | Fiscal Year Ended December 31, 2009 | Fiscal Year Ended December 31, 2008 | Fiscal Year Ended December 31, 2007 | |||||||||
Asset Allocation Fund VS | $ | 179,263 | $ | 258,476 | $ | 346,445 | ||||||
Federal Securities Fund VS | 128,966 | 176,435 | 212,699 | |||||||||
Large Cap Growth Fund VS | 82,567 | 123,084 | 169,319 | |||||||||
Money Market Fund VS | 221,487 | 268,228 | 297,642 | |||||||||
Select Large Cap Growth Fund VS(a) | 5,536 | 1,737 | N/A | |||||||||
Small Company Growth Fund VS | 63,310 | 98,539 | 137,250 | |||||||||
Value and Restructuring Fund VS(a) | 5,137 | 1,659 | N/A |
(a) | The Fund commenced operations on September 2, 2008. |
Pricing and Bookkeeping Services
State Street Bank and Trust Company is responsible for providing certain pricing and bookkeeping services to the Funds. Columbia Management Advisors, LLC is responsible for overseeing the performance of these services and for certain other services.
Services Provided
Effective December 15, 2006, the Trust entered into a Financial Reporting Services Agreement with State Street Bank and Trust Company and Columbia Management Advisors, LLC (the Financial Reporting Services Agreement) pursuant to which State Street Bank and Trust Company provides financial reporting services to the Funds. Also effective December 15, 2006, the Trust entered into an Accounting Services Agreement with State Street Bank and Trust Company and Columbia Management Advisors, LLC (collectively with the Financial Reporting Services Agreement, the State Street Agreements) pursuant to which State Street Bank and Trust Company provides accounting services to the Funds. Under the State Street Agreements, each Fund pays State Street Bank and Trust Company an annual fee of $38,000 paid monthly plus a monthly fee based on an
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annualized percentage rate of average daily net assets of the Fund for the month. The aggregate fee for a Fund during any year shall not exceed $140,000 annually (exclusive of out-of-pocket expenses and charges). The Funds also reimburse State Street Bank and Trust Company for certain out-of-pocket expenses and charges.
Effective December 15, 2006, the Trust entered into a Pricing and Bookkeeping Oversight and Services Agreement (the Services Agreement) with Columbia Management Advisors, LLC. Under the Services Agreement, Columbia Management Advisors, LLC provides services related to Fund expenses and the requirements of the Sarbanes-Oxley Act of 2002, and provides oversight of the accounting and financial reporting services provided by State Street Bank and Trust Company. Under the Services Agreement, each Fund reimburses Columbia Management Advisors, LLC for out-of-pocket expenses and charges, including fees payable to third parties, such as for pricing the Funds’ portfolio securities, incurred by Columbia Management Advisors, LLC in the performance of services under the Services Agreement. Prior to January 1, 2008, the Funds also reimbursed Columbia Management Advisors, LLC for accounting oversight services, services related to Fund expenses and the requirements of the Sarbanes-Oxley Act of 2002.
Prior to December 15, 2006, each Fund had entered into an Administrative Agreement and a Pricing and Bookkeeping Agreement with the Advisor, pursuant to which the Advisor performed certain administrative and pricing and bookkeeping services for the Funds. The Advisor delegated responsibility for certain of these administrative and pricing and bookkeeping services to State Street.
For services provided under the Pricing and Bookkeeping Agreement, each Fund paid to the Advisor, or to such other person(s) as the Advisor directed, an annual fee, payable monthly, consisting of: (i) for Fund accounting services, $25,000 plus an additional monthly fee based on the Fund’s net asset value (Fund Accounting Fee); and (ii) for financial reporting services, $13,000 (Financial Reporting Fee). Additionally, the Funds bore certain reimbursable costs and expenses as provided in the Administrative Agreement and the Pricing and Bookkeeping Agreement. The aggregate Fund Accounting Fee and Financial Reporting Fee payable pursuant to the Pricing and Bookkeeping Agreement could not exceed $140,000 annually for any Fund.
Pricing and Bookkeeping Fees Paid
Columbia Management Advisors, LLC and State Street Bank and Trust Company received fees from the Funds for their services as reflected in the following chart, which shows the net pricing and bookkeeping fees paid to State Street Bank and Trust Company and to Columbia Management Advisors, LLC for the three most recently completed fiscal years.
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Pricing and Bookkeeping Fees Paid by the Funds
Fund | Fiscal Year Ended December 31, 2009 | Fiscal Year Ended December 31, 2008 | Fiscal Year Ended December 31, 2007 | |||||||||
Asset Allocation Fund VS | $ | 120,008 | $ | 134,088 | $ | 160,805 | ||||||
Amount Paid to Columbia Management Advisors, LLC | 0 | 0 | 14,856 | |||||||||
Amount Paid to State Street Bank and Trust Company | 120,008 | 134,088 | 145,949 | |||||||||
Federal Securities Fund VS | $ | 59,744 | $ | 69,147 | $ | 86,113 | ||||||
Amount Paid to Columbia Management Advisors, LLC | 0 | 0 | 14,856 | |||||||||
Amount Paid to State Street Bank and Trust Company | 59,744 | 69,147 | 71,257 | |||||||||
International Fund VS | $ | 53,412 | $ | 54,547 | $ | 75,205 | ||||||
Amount Paid to Columbia Management Advisors, LLC | 0 | 0 | 14,856 | |||||||||
Amount Paid to State Street Bank and Trust Company | 53,412 | 54,547 | 60,349 | |||||||||
Large Cap Growth Fund VS | $ | 47,605 | $ | 51,383 | $ | 70,690 | ||||||
Amount Paid to Columbia Management Advisors, LLC | 0 | 0 | 14,856 | |||||||||
Amount Paid to State Street Bank and Trust Company | 47,605 | 51,383 | 55,834 | |||||||||
Large Cap Value Fund VS | $ | 54,447 | $ | 63,504 | $ | 91,615 | ||||||
Amount Paid to Columbia Management Advisors, LLC | 0 | 0 | 14,856 | |||||||||
Amount Paid to State Street Bank and Trust Company | 54,447 | 63,504 | 76,759 | |||||||||
Mid Cap Value Fund VS | $ | 41,937 | $ | 43,556 | $ | 60,347 | ||||||
Amount Paid to Columbia Management Advisors, LLC | 0 | 0 | 14,856 | |||||||||
Amount Paid to State Street Bank and Trust Company | 41,937 | 43,556 | 45,491 | |||||||||
Money Market Fund VS | $ | 78,034 | $ | 74,951 | $ | 86,458 | ||||||
Amount Paid to Columbia Management Advisors, LLC | 0 | 0 | 14,856 | |||||||||
Amount Paid to State Street Bank and Trust Company | 78,034 | 74,951 | 71,602 | |||||||||
500 Index Fund VS | $ | 47,827 | $ | 49,147 | $ | 66,110 | ||||||
Amount Paid to Columbia Management Advisors, LLC | 0 | 0 | 14,856 | |||||||||
Amount Paid to State Street Bank and Trust Company | 47,827 | 49,147 | 51,254 | |||||||||
Select Large Cap Growth Fund VS(a) | $ | 32,341 | $ | 19,995 | N/A | |||||||
Amount Paid to Columbia Management Advisors, LLC | 0 | 0 | N/A | |||||||||
Amount Paid to State Street Bank and Trust Company | 32,341 | 19,995 | N/A | |||||||||
Small Cap Value Fund VS | $ | 99,952 | $ | 105,579 | $ | 123,507 | ||||||
Amount Paid to Columbia Management Advisors, LLC | 0 | 0 | 14,856 | |||||||||
Amount Paid to State Street Bank and Trust Company | 99,952 | 105,579 | 108,651 | |||||||||
Small Company Growth Fund VS | $ | 46,205 | $ | 50,205 | $ | 67,820 | ||||||
Amount Paid to Columbia Management Advisors, LLC | 0 | 0 | 14,856 | |||||||||
Amount Paid to State Street Bank and Trust Company | 46,205 | 50,205 | 52,964 | |||||||||
Strategic Income Fund VS | $ | 81,972 | $ | 79,548 | $ | 101,665 | ||||||
Amount Paid to Columbia Management Advisors, LLC | 0 | 0 | 14,856 | |||||||||
Amount Paid to State Street Bank and Trust Company | 81,972 | 79,548 | 86,809 | |||||||||
Value and Restructuring Fund VS(a) | $ | 42,014 | $ | 14,643 | N/A | |||||||
Amount Paid to Columbia Management Advisors, LLC | 0 | 0 | N/A | |||||||||
Amount Paid to State Street Bank and Trust Company | 42,014 | 14,643 | N/A |
(a) | The Fund commenced operations on September 2, 2008. |
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The Principal Underwriter/Distributor
Columbia Management Distributors, Inc. serves as the principal underwriter and distributor for the continuous offering of shares of the Funds pursuant to a Distribution Agreement. The Distribution Agreement obligates the Distributor to use appropriate efforts to find purchasers for the shares of the Funds. The Distributor’s address is: One Financial Center, Boston, MA 02111.
Distribution Obligations
The Trustees have approved a Distribution Plan and Agreement (the Plan) pursuant to Rule 12b-1 under the 1940 Act for the Class B shares of the Funds. Under the Plan, the Funds, except for the Money Market Fund VS, pay the Distributor a monthly distribution fee at the aggregate annual rate of up to 0.25% of each Fund’s Class B share average daily net assets. The Distributor has voluntarily agreed to waive a portion of the fee for some of the Funds to an amount so that the expenses of these Funds do not exceed the limits as described below under Expense Limitations. The Distributor may use the entire amount of such fees to defray the cost of commissions and service fees paid to FSFs and for certain other purposes. Since the distribution fees are payable regardless of the amount of the Distributor’s expenses, the distributor may realize a profit from the fees.
The Plan authorizes any other payments by the Funds to the Distributor and its affiliates (including the Advisor) to the extent that such payments might be construed to be indirect financing of the distribution of Fund shares.
The Trustees believe the Plan could be a significant factor in the growth and retention of Fund assets resulting in a more advantageous expense ratio and increased investment flexibility which could benefit each Fund’s shareholders. The Plan will continue in effect from year to year so long as continuance is specifically approved at least annually by a vote of the Trustees, including the Independent Trustees, cast in person at a meeting called for the purpose of voting on the Plan. The Plan may not be amended to increase the fee materially without approval by vote of a majority of the outstanding voting securities of the relevant class of shares, and all material amendments of the Plan must be approved by the Trustees in the manner provided in the foregoing sentence. The Plan may be terminated at any time by vote of a majority of the Independent Trustees or by vote of a majority of the outstanding voting securities of the relevant Fund’s shares, on 60 days’ written notice to the Distributor. The continuance of the Plan will only be effective if the selection and nomination of the Independent Trustees is effected by such disinterested Trustees.
Underwriting Commissions
The following table shows all commissions and other compensation received by the Distributor, as well as amounts the Distributor retained for the Funds’ three most recent fiscal years.
Underwriting Commissions Paid by the Funds and Retained by the Distributor
The Funds paid no underwriting commissions retained by the Distributor for the fiscal years ended December 31, 2007, 2008 or 2009.
Distribution and Service Fees
During the most recently completed fiscal year, the Distributor received distribution fees from the Funds for its services as reflected in the following table. The Trust is not aware as to what amount, if any, of the distribution and service fees paid to the Distributor were, on a Fund-by-Fund basis, used for advertising, printing and mailing of prospectuses to other than current shareholders; compensation to broker/dealers; compensation to sales personnel; or interest, carrying of other finance charges.
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Distribution Fees Paid by the Funds for the Fiscal Year Ended December 31, 2009 — Class B Shares
Fund | Fiscal Year Ended December 31, 2009 | |||
Asset Allocation Fund VS | $ | 67,850 | ||
Federal Securities Fund VS | 124,028 | |||
International Fund VS | 4,645 | |||
Large Cap Growth Fund VS | 18,505 | |||
Large Cap Value Fund VS | 38,324 | |||
Mid Cap Value Fund VS | 39,806 | |||
500 Index Fund VS | 55,765 | |||
Select Large Cap Growth Fund VS | 4,609 | |||
Small Cap Value Fund VS | 879,546 | |||
Small Company Growth Fund VS | 1,454 | |||
Strategic Income Fund VS | 77,946 | |||
Value and Restructuring Fund VS | 4,276 |
Other Roles and Relationships of Bank of America and its Affiliates — Certain Conflicts of Interest
As described above in the Investment Advisory and Other Services section of this SAI, and in the Management of the Fund — Primary Service Providers section of each Fund’s prospectus, the Advisor, Administrator, Distributor and Transfer Agent, all affiliates of Bank of America, receive compensation from the Funds for the various services they provide to the Funds. Additional information as to the specific terms regarding such compensation is set forth in these affiliated service providers’ contracts with the Funds, each of which typically is included as an exhibit to Part C of each Fund’s registration statement.
In many instances, the compensation paid to the Advisor and other Bank of America affiliates for the services they provide to the Funds is based, in some manner, on the size of the Funds’ assets under management. As the size of the Funds’ assets under management grows, so does the amount of compensation paid to the Advisor and other Bank of America affiliates for providing services to the Funds. This relationship between Fund assets and affiliated service provider compensation may create economic and other conflicts of interests of which Fund investors should be aware. These potential conflicts of interest, as well as additional ones, are discussed in detail below and also are addressed in other disclosure materials, including the Funds’ prospectuses. These conflicts of interest also are highlighted in account documentation and other disclosure materials of Bank of America affiliates that make available or offer the Columbia Funds as investments in connection with their respective products and services. In addition, Part 1A of the Advisor’s Form ADV, which it must file with the SEC as an investment advisor registered under the Investment Advisers Act of 1940, provides information about the Advisor’s business, assets under management, affiliates and potential conflicts of interest. Part 1A of the Advisor’s Form ADV is available online through the SEC’s website at www.adviserinfo.sec.gov.
Additional actual or potential conflicts of interest and certain investment activity limitations that could affect the Funds may arise from the financial services activities of Bank of America and its affiliates, including, for example, the investment advisory/management services provided for clients and customers other than the Funds. In this regard, Bank of America is a major financial services company. Bank of America and its affiliates, including, for example, BANA (including its U.S. Trust, Bank of America Private Wealth Management division), BAS, Merrill Lynch, MLPF&S and the First Republic division of Merrill Lynch Bank & Trust Co., are engaged in a wide range of financial activities beyond the mutual fund-related activities of the Advisor, including, among others, commercial banking, investment banking, broker/dealer (sales and trading), asset management, insurance and other financial activities. The broad range of financial services activities of Bank of America and its affiliates may involve multiple advisory, transactional, lending, financial and other interests in securities and other instruments, and in companies, that may be bought, sold or held by the Funds. The following describes certain actual and potential conflicts of interest that may be presented.
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Actual and Potential Conflicts of Interest Related to the Investment Advisory/Management Activities of Bank of America and its Affiliates in Connection With Other Advised/Managed Funds and Accounts
The Advisor and other affiliates of Bank of America may advise or manage funds and accounts other than the Funds. In this regard, Bank of America and its affiliates may provide investment advisory/management and other services to other advised/managed funds and accounts that are similar to those provided to the Funds. The Advisor and Bank of America’s other investment advisor affiliates (including, for example, Columbia Wanger Asset Management, L.P.) will give advice to and make decisions for all advised/managed funds and accounts, including the Funds, as they believe to be in that fund’s and/or account’s best interests, consistent with their fiduciary duties. The Funds and the other advised/managed funds and accounts of Bank of America and its affiliates are separately and potentially divergently managed, and there is no assurance that any investment advice Bank of America and its affiliates give to other advised/managed funds and accounts will also be given simultaneously or otherwise to the Funds.
A variety of other actual and potential conflicts of interest may arise from the advisory relationships of the Advisor and other Bank of America affiliates with other clients and customers. Advice given to the Funds and/or investment decisions made for the Funds by the Advisor or other Bank of America affiliates may differ from, or may conflict with, advice given to and/or investment decisions made for other advised/managed funds and accounts. As a result, the performance of the Funds may differ from the performance of other funds or accounts advised/managed by the Advisor or other Bank of America affiliates. Similarly, a position taken by Bank of America and its affiliates, including the Advisor, on behalf of other funds or accounts may be contrary to a position taken on behalf of the Funds. Moreover, Bank of America and its affiliates, including the Advisor, may take a position on behalf of other advised/managed funds and accounts, or for their own proprietary accounts, that is adverse to companies or other issuers in which the Funds are invested. For example, the Funds may hold equity securities of a company while another advised/managed fund or account may hold debt securities of the same company. If the portfolio company were to experience financial difficulties, it might be in the best interest of the Funds for the company to reorganize while the interests of the other advised/managed fund or account might be better served by the liquidation of the company. This type of conflict of interest could arise as the result of circumstances that cannot be generally foreseen within the broad range of investment advisory/management activities in which Bank of America and its affiliates engage.
Investment transactions made on behalf of other funds or accounts advised/managed by the Advisor or other Bank of America affiliates also may have a negative effect on the value, price or investment strategies of the Funds. For example, this could occur if another advised/managed fund or account implements an investment decision ahead of, or at the same time as, the Funds and causes the Funds to experience less favorable trading results than they otherwise would have experienced based on market liquidity factors. In addition, the other funds and accounts advised/managed by the Advisor and other Bank of America affiliates, including the other Columbia Funds, may have the same or very similar investment objective and strategies as the Funds. In this situation, the allocation of, and competition for, investment opportunities among the Funds and other funds and/or accounts advised/managed by the Advisor or other Bank of America affiliates may create conflicts of interest especially where, for example, limited investment availability is involved. The Advisor has adopted policies and procedures addressing the allocation of investment opportunities among the Funds and other funds and accounts advised by the Advisor and other affiliates of Bank of America. For more information, see Investment Advisory and Other Services — The Advisor and Investment Advisory Services — Portfolio Manager(s) — The Advisor’s Portfolio Managers and Potential Conflicts of Interests.
Sharing of Information among Advised/Managed Accounts
Bank of America and its affiliates also may possess information that could be material to the management of a Fund and may not be able to, or may determine not to, share that information with the Fund, even though the information might be beneficial to the Fund. This information may include actual knowledge regarding the particular investments and transactions of other advised/managed funds and accounts, as well as proprietary
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investment, trading and other market research, analytical and technical models, and new investment techniques, strategies and opportunities. Depending on the context, Bank of America and its affiliates generally will have no obligation to share any such information with the Funds. In general, employees of Bank of America and its affiliates, including the portfolio managers of the Advisor, will make investment decisions without regard to information otherwise known by other employees of Bank of America and its affiliates, and generally will have no obligation to access any such information and may, in some instances, not be able to access such information because of legal and regulatory constraints or the internal policies and procedures of Bank of America and its affiliates. For example, if the Advisor or another Bank of America affiliate, or their respective employees, come into possession of non-public information regarding another advised/managed fund or account, they may be prohibited by legal and regulatory constraints, or internal policies and procedures, from using that information in connection with transactions made on behalf of the Funds. For more information, see Investment Advisory and Other Services — The Advisor and Investment Advisory Services — Portfolio Manager(s) — The Advisor’s Portfolio Managers and Potential Conflicts of Interests.
Soft Dollar Benefits
Certain products and services, commonly referred to as “soft dollar services” (including, to the extent permitted by law, research reports, economic and financial data, financial publications, proxy analysis, computer databases and other research-oriented materials), that the Advisor may receive in connection with brokerage services provided to a Fund may have the inadvertent effect of disproportionately benefiting other advised/managed funds or accounts. This could happen because of the relative amount of brokerage services provided to a Fund as compared to other advised/managed funds or accounts, as well as the relative compensation paid by a Fund.
Services Provided to Other Advised/Managed Accounts
Bank of America and its affiliates also may act as an investment advisor, investment manager, administrator, transfer agent, custodian, trustee, broker/dealer, agent, or in another capacity, for advised/managed funds and accounts other than the Funds, and may receive compensation for acting in such capacity. This compensation that the Advisor, Distributor and Transfer Agent and other Bank of America affiliates receive could be greater than the compensation Bank of America and its affiliates receive for acting in the same or similar capacity for the Funds. In addition, the Advisor, Distributor and Transfer Agent and other Bank of America affiliates may receive other benefits, including enhancement of new or existing business relationships. This compensation and/or the benefits that Bank of America and its affiliates may receive from other advised/managed funds and accounts and other relationships could potentially create incentives to favor other advised/ managed funds and accounts over the Funds. Trades made by Bank of America and its affiliates for the Funds may be, but are not required to be, aggregated with trades made for other funds and accounts advised/managed by the Advisor and other Bank of America affiliates. If trades are aggregated among the Funds and those other funds and accounts, the various prices of the securities being traded may be averaged, which could have the potential effect of disadvantaging the Funds as compared to the other funds and accounts with which trades were aggregated.
Proxy Voting
Although the Advisor endeavors to make all proxy voting decisions with respect to the interests of the Funds for which it is responsible in accordance with its proxy voting policies and procedures, the Advisor’s proxy voting decisions with respect to a Fund’s portfolio securities may nonetheless benefit other advised/managed funds and accounts, and/or clients, of Bank of America and its affiliates. The Advisor has adopted proxy voting policies and procedures that are designed to provide that all proxy voting is done in the best interests of its clients, including the Funds, without any resulting benefit or detriment to the Advisor and/or its affiliates, including Bank of America and its affiliates. For more information about the Advisor’s proxy voting policies and procedures, see Investment Advisory and Other Services — Proxy Voting Policies and Procedures.
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Certain Trading Activities
The directors/trustees, officers and employees of Bank of America and its affiliates may buy and sell securities or other investments for their own accounts, and in doing so may take a position that is adverse to the Funds. In order to reduce the possibility that such personal investment activities of the directors/trustees, officers and employees of Bank of America and its affiliates will materially adversely affect the Funds, Bank of America and its affiliates have adopted policies and procedures, and the Funds, the Board, the Advisor and the Distributor have each adopted a Code of Ethics that addresses such personal investment activities. For more information, see Investment Advisory and Other Services — Codes of Ethics.
Affiliate Transactions
Subject to applicable legal and regulatory requirements, the Funds may enter into transactions in which Bank of America and/or its affiliates may have an interest that potentially conflicts with the interests of the Funds. For example, BAS or MLPF&S may sell securities to the Funds from an offering in which it is an underwriter or from securities that it owns as a dealer, subject to applicable legal and regulatory requirements.
Investment Limitations Arising from Bank of America Activities
Regulatory restrictions applicable to Bank of America and its affiliates may limit the Funds’ investment activities in various ways. For example, regulations regarding certain industries and markets, such as those in emerging or international markets, and certain transactions, such as those involving certain futures and derivatives, may impose a cap on the aggregate amount of investments that may be made by affiliated investors, including accounts managed by the same affiliated manager, in the aggregate or in individual issuers. At certain times, Bank of America and its affiliates also may be restricted in the securities that can be bought or sold for the Funds and other advised/managed funds and accounts because of the investment banking, lending or other relationships Bank of America and its affiliates have with the issuers of securities. This could happen, for example, if the Funds and/or other advised/managed funds and accounts desired to buy a security issued by a company for which Bank of America or its affiliates served as underwriter. The internal policies and procedures of Bank of America and its affiliates covering these types of regulatory restrictions and addressing similar issues also may at times restrict the Funds’ investment activities. A client not advised by Bank of America and its affiliates would not be subject to many of these restrictions. See also About the Funds’ Investments — Certain Investment Activity Limits.
Actual and Potential Conflicts of Interest Related to Bank of America and its Affiliates’ Non-Advisory Relationships with Clients and Customers other than the Funds
The lending, investment banking and other relationships that Bank of America and its affiliates may have with companies and other entities in which a Fund may invest can give rise to actual and potential conflicts of interest. Subject to applicable legal and regulatory requirements, a Fund may invest (a) in the securities of Bank of America and/or its affiliates and/or in companies in which Bank of America and its affiliates (including, for example, BANA, BAS, and affiliates of Merrill Lynch) have a lending, investment banking, equity, debt or other interest, and/or (b) in the securities of companies held by other Columbia Funds. The purchase, holding and sale of such securities by a Fund may enhance the profitability and the business interests of Bank of America and/or its affiliates and/or other Columbia Funds. There also may be limitations as to the sharing with the Advisor of information derived from the non-investment advisory/management activities of Bank of America and its affiliates because of legal and regulatory constraints and internal policies and procedures (such as information barriers and ethical walls). Because of these limitations, Bank of America and its affiliates generally will not share information derived from its non-investment advisory/management activities with the Advisor.
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Actual and Potential Conflicts of Interest Related to Bank of America Affiliates’ Marketing and Use of the Columbia Funds as Investment Options
Bank of America and its affiliates also provide a variety of products and services that, in some manner, may utilize the Columbia Funds as investment options. For example, the Columbia Funds may be offered as investments in connection with brokerage and other securities products offered by MLPF&S, and may be utilized as investments in connection with fiduciary, investment management and other accounts offered by U.S. Trust, Bank of America Private Wealth Management or the First Republic division of Merrill Lynch Bank & Trust Co., as well as for other Columbia Funds structured as “funds of funds.” In addition, the Columbia Money Market Funds are offered as an investment option for a variety of cash management and “sweep” account programs offered by Bank of America and its affiliates. The Columbia Funds also may use the Columbia Money Market Funds for cash investment purposes. The use of the Columbia Funds in connection with other products and services offered by Bank of America and its affiliates may introduce economic and other conflicts of interest. These conflicts of interest are highlighted in account documentation and other disclosure materials for the other products and services offered by Bank of America and its affiliates.
Bank of America and its affiliates, including the Advisor, may make payments to their affiliates in connection with the promotion and sale of the Funds’ shares, in addition to the sales-related and other compensation that these parties may receive from the Funds. As a general matter, personnel of Bank of America and its affiliates, including MLPF&S, do not receive compensation in connection with their sales or use of the Funds that is greater than that paid in connection with their sales of other comparable products and services. Nonetheless, because the compensation that the Advisor and other affiliates of Bank of America may receive for providing services to the Funds is generally based on the Funds’ assets under management and those assets will grow as shares of the Funds are sold, potential conflicts of interest may exist. See Brokerage Allocation and Other Practices — Additional Financial Intermediary Payments for more information.
The Transfer Agent
Columbia Management Services, Inc. acts as Transfer Agent for each Fund’s shares and can be contacted at P.O. Box 8081, Boston, MA 02266-8081. Under the Transfer Agency Agreement, the Transfer Agent provides transfer agency, dividend disbursing agency and shareholder servicing agency services to the Funds. Effective November 1, 2009, the Funds pay the Transfer Agent an annual transfer agency fee of $22.36 per account, payable monthly. In addition, effective November 1, 2009, the Funds may reimburse the Transfer Agent for the fees and expenses the Transfer Agent pays to financial intermediaries that maintain omnibus accounts with the Funds, subject to a cap up to $22.36 per account for financial intermediaries that seek payment by the Transfer Agent on a per account basis and a cap equal to 0.15% of a Fund’s net assets represented by the account for financial intermediaries that seek payment by the Transfer Agent based on a percentage of net assets. The Funds also pay certain reimbursable out-of-pocket expenses to the Transfer Agent. The Transfer Agent also may retain as additional compensation for its services revenues for fees for wire, telephone and redemption orders, IRA trustee agent fees and account transcripts due the Transfer Agent from Fund shareholders and credits (net of bank charges) earned with respect to balances in accounts the Transfer Agent maintains in connection with its services to the Funds. For the period November 1, 2007 through October 31, 2009, the Funds paid the Transfer Agent an annual transfer agency fee of $17.34 per account, payable monthly. In addition, the Funds paid the Transfer Agent for the fees and expenses the Transfer Agent paid to third party dealer firms that maintain omnibus accounts with the Funds, subject to a cap equal to 0.15% of a Fund’s net assets represented by the account. For the period April 1, 2006 through October 31, 2007, the Funds paid the Transfer Agent an annual fee of $17.00 per account, payable monthly.
The Transfer Agent retains BFDS/DST, 2 Heritage Drive, North Quincy, MA 02171 as the Funds’ sub-transfer agent. BFDS/DST assists the Transfer Agent in carrying out its duties.
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The Custodian
State Street, which is located at State Street Financial Center, One Lincoln Street, Boston, MA 02111, is the Funds’ custodian. As custodian, State Street is responsible for safeguarding and controlling the Funds’ cash and securities, receiving and delivering securities, collecting the Funds’ interest and dividends, making all payments covering expenses of the Trust, and performing other administrative duties, all as directed by authorized persons. State Street does not exercise any supervisory function in such matters as purchase and sale of portfolio securities, payment of dividends or payment of expenses of the Funds. Portfolio securities purchased in the U.S. are maintained in the custody of State Street or other domestic banks or depositories. Portfolio securities purchased outside of the U.S. are maintained in the custody of foreign banks and trust companies who are members of State Street’s Global Custody Network and foreign depositories (foreign sub-custodians).
With respect to foreign sub-custodians, there can be no assurance that a Fund, and the value of its shares, will not be adversely affected by acts of foreign governments, financial or operational difficulties of the foreign sub-custodians, difficulties and costs of obtaining jurisdiction over, or enforcing judgments against, the foreign sub-custodians or application of foreign law to a Fund’s foreign sub-custodial arrangements. Accordingly, an investor should recognize that the non-investment risks involved in holding assets abroad are greater than those associated with investing in the U.S.
The Funds may invest in obligations of State Street and may purchase or sell securities from or to State Street.
Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP, which is located at 125 High Street, Boston, MA 02110, is the Funds’ independent registered public accounting firm. The Funds issue unaudited financial statements semi-annually and audited financial statements annually. The annual financial statements for the Funds’ fiscal year ended December 31, 2009 have been audited by PricewaterhouseCoopers LLP. The Board has selected PricewaterhouseCoopers LLP as the independent registered public accounting firm to audit the Funds’ books and review their tax returns for the fiscal year ended December 31, 2010.
The Reports of the Independent Registered Public Accounting Firm and the audited financial statements included in the Annual Reports to Shareholders of the Funds dated December 31, 2009 are incorporated herein by reference. No other parts of the annual reports or semi-annual reports to shareholders are incorporated by reference herein. The financial statements incorporated by reference into the Funds’ prospectuses and this SAI have been so incorporated in reliance upon the report of the independent registered public accounting firm, given on its authority as an expert in auditing and accounting.
Counsel
Ropes & Gray LLP serves as legal counsel to the Trust. Its address is One International Place, Boston, Massachusetts 02110. K&L Gates LLP serves as co-counsel. Its address is 1601 K Street N.W. Washington, D.C. 2006-1600.
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The Advisor has voluntarily agreed to reimburse a portion of the expenses of the following Funds so that the ordinary operating expenses (excluding any distribution fees, brokerage commissions, interest, taxes and extraordinary expenses, but including custodian charges relating to overdrafts, if any) will not exceed the following percentages:
Fund | Expenses as a percent of average | |
Asset Allocation Fund VS | 0.80% | |
Federal Securities Fund VS | 0.55% | |
International Fund VS | 1.00% | |
Large Cap Growth Fund VS | 0.80% | |
Large Cap Value Fund VS | 0.80% | |
Mid Cap Value Fund VS | 0.90% | |
Money Market Fund VS | 0.45% | |
Small Company Growth Fund VS | 0.80% | |
500 Index Fund VS | 0.15% | |
Small Cap Value Fund VS | 0.95% | |
Strategic Income Fund VS | 0.65% |
These arrangements may be modified or terminated by the Advisor at any time.
The Advisor has voluntarily undertaken to waive its receipt of certain Fund expenses (consisting of advisory and administration fees) to the extent necessary in order to maintain a minimum annualized net yield for Money Market Fund VS of 0.00%.
This waiver may be modified or discontinued by the Advisor at any time.
Prior to April 29, 2010, the Advisor waived fees and/or reimbursed expenses pursuant to a contractual waiver for Select Large Cap Value Fund VS and Value and Restructuring Fund VS. The Advisor is entitled to recover from each such Fund any fees waived and/or expenses reimbursed for a three year period following the date of such waiver and/or expense reimbursement under this arrangement if such recovery does not cause the Fund’s expenses to exceed the expense limitations in effect at the time of recovery, if any.
The Distributor has voluntarily agreed to reimburse the Funds listed below for the amount each such Fund pays as distribution (Rule 12b-1) fees attributable to Class B shares in excess of 0.15% of net assets if the total annual Fund operating expenses of such Fund attributable to Class B shares exceed the amount set forth below opposite such Fund.
Fund | Class B expense limit: | |||
Asset Allocation Fund VS | 0.95 | % | ||
Large Cap Growth Fund VS | 0.95 | % | ||
Small Cap Value Fund VS | 1.10 | % |
These arrangements may be modified or terminated by the Distributor at any time.
The Distributor has voluntarily agreed to waive the distribution fee for Class B shares of the Large Cap Value Fund VS at the annual rate of 0.02% of the Class B shares’ average daily net assets.
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This arrangement may be terminated or modified by the Distributor at any time.
Fees or Expenses Waived or Borne by the Distributor
The following table shows the fees or expenses waived or borne by the Distributor during the Funds’ three most recent fiscal years.
Fees or Expenses Waived or Borne by the Distributor
Fund | Fiscal Year Ended December 31, 2009 | Fiscal Year Ended December 31, 2008 | Fiscal Year Ended December 31, 2007 | |||||||||
Asset Allocation Fund VS | $ | 27,398 | $ | 42,506 | $ | 56,910 | ||||||
Federal Securities Fund VS | — | 34,239 | — | |||||||||
Large Cap Growth Fund VS | 7,403 | 12,194 | 17,620 | |||||||||
Large Cap Value Fund VS | 3,066 | 5,319 | 8,215 | |||||||||
Mid Cap Value Fund VS | — | 68,084 | 89,802 | |||||||||
500 Index Fund VS | — | — | — | |||||||||
Small Cap Value Fund VS | 230,925 | 172,861 | 186,953 | |||||||||
Strategic Income Fund VS | — | 41,195 | 36,753 |
The Funds, the Advisor, NIMNAI and the Distributor have adopted Codes of Ethics pursuant to the requirements of the 1940 Act, including Rule 17j-1 under the 1940 Act. These Codes of Ethics permit personnel subject to the Codes of Ethics to invest in securities, including securities that may be bought or held by the Funds. These Codes of Ethics are included as exhibits to Part C of the Funds’ registration statement. These Codes of Ethics can be reviewed and copied at the SEC’s Public Reference Room and may be obtained by calling the SEC at 202.551.8090; they also are available on the SEC’s website at www.sec.gov, and may be obtained, after paying a duplicating fee, by electronic request to publicinfo@sec.gov or by writing to the SEC’s Public Reference Section, Washington, D.C. 20549-1520.
Proxy Voting Policies and Procedures
The Funds have delegated to the Advisor or, as applicable, a sub-advisor, the responsibility to vote proxies relating to portfolio securities held by the Funds. In deciding to delegate this responsibility to the Advisor, the Board reviewed and approved the policies and procedures adopted by the Advisor and, as applicable, a sub-advisor. These included the procedures that the Advisor follows when a vote presents a conflict between the interests of the Funds and its shareholders and the Advisor, its affiliates, its other clients or other persons.
The Advisor’s policy is to vote all proxies for Fund securities in a manner considered by the Advisor to be in the best interest of the Funds and their shareholders without regard to any benefit to the Advisor, its affiliates, its other clients or other persons. The Advisor examines each proposal and votes against the proposal, if, in its judgment, approval or adoption of the proposal would be expected to have an adverse impact on the current or potential market value of the issuer’s securities. The Advisor also examines each proposal and votes the proxies against the proposal, if, in its judgment, the proposal would be expected to affect adversely the best interest of the Funds. The Advisor determines the best interest of the Funds in light of the potential economic return on the Funds’ investment.
The Advisor seeks to address potential material conflicts of interest by having predetermined voting guidelines. For those proposals that require special consideration or in instances where special circumstances may require varying from the predetermined guideline, the Advisor’s Proxy Voting Committee determines the vote in the best interest of the Funds, without consideration of any benefit to the Advisor, its affiliates, its other
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clients or other persons. The Advisor’s Proxy Voting Committee is composed of representatives of the Advisor’s equity investments, equity research, compliance, legal and operations functions. In addition to the responsibilities described above, the Proxy Voting Committee has the responsibility to review, at least annually, the Advisor’s proxy voting policies to ensure consistency with internal policies and regulatory requirements and to develop additional predetermined voting guidelines to assist in the review of proxy proposals.
The Proxy Voting Committee may vary from a predetermined guideline if it determines that voting on the proposal according to the predetermined guideline would be expected to have an adverse impact on the current or potential market value of the issuer’s securities or to affect adversely the best interest of the Funds. References to the best interests of the Funds refer to the interest of the Funds in terms of the potential economic return on the client’s investment. In determining the vote on any proposal, the Proxy Voting Committee does not consider any benefit other than benefits to the Funds. A member of the Proxy Voting Committee is prohibited from voting on any proposal for which he or she has a conflict of interest by reason of a direct relationship with the issuer or other party affected by a given proposal. Persons making recommendations to the Proxy Voting Committee or its members are required to disclose to the Committee any relationship with a party making a proposal or other matter known to the person that would create a potential conflict of interest.
The Advisor has retained Glass-Lewis & Co., a third-party vendor, to implement its proxy voting process. Glass-Lewis & Co. provides proxy analysis, record keeping services and vote disclosure services.
Information regarding how the Columbia Funds (except certain Columbia Funds that do not invest in voting securities) voted proxies relating to portfolio securities during the most recent twelve month period ended June 30 will be available by August 31 of this year free of charge: (i) through the Columbia Funds’ website at www.columbiafunds.com and (ii) on the SEC’s website at www.sec.gov. For a copy of the Advisor’s policies and procedures that are used to determine how to vote proxies relating to portfolio securities held by the Columbia Funds, see Appendix B to this SAI.
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Leadership Structure and Risk Oversight
The Board oversees the Trust and the Funds. The Trustees are responsible for overseeing the management and operations of the Trust. The Board consists of ten Trustees who have varied experience and skills. Nine of the Trustees, including the Chairman of the Board, are Independent Trustees. Each Fund currently treats the remaining Trustee, Mr. William E. Mayer, as an “interested person” (as defined in the 1940 Act) of the Columbia Funds by reason of his affiliation with WR Hambrecht + Co., a registered broker/dealer that may execute portfolio transactions for or engage in principal transactions with a Fund or other funds or accounts advised/managed by the Advisor. Further information about the backgrounds and qualifications of the Trustees can be found in the section Trustee Biographical Information and Qualifications. The Board has several standing committees, which are an integral part of the Fund’s overall governance and risk oversight structure. The committees include the Audit Committee, the Governance Committee, the Advisory Fees & Expenses Committee, the Compliance Committee and the Investment Oversight Committees. A majority of the members of each of the committees are Independent Trustees. The roles of each committee are more fully described in the section Standing Committees below.
The Funds have retained the Advisor as the Funds’ investment adviser and administrator. The Advisor provides the Funds with investment advisory services, and is responsible for day-to-day administration of the Funds and management of the risks that arise from the Funds’ investments and operations. The Board provides oversight of the services provided by the Advisor, including risk management services. In addition, each committee of the Board provides oversight of the Advisor’s risk management services with respect to the particular activities within the committee’s purview. In the course of providing oversight, the Board and the committees receive a wide range of reports with respect to the Funds’ activities, including reports regarding each Fund’s investment portfolio, the compliance of the Funds with applicable laws, and the Funds’ financial accounting and reporting. The Board and the relevant committees meet periodically with officers of the Funds and the Advisor, with independent consultants hired by the Board, and with representatives of various of the Funds’ service providers. The Board and certain committees also meet periodically with the Funds’ chief compliance officer, who also serves as chief compliance officer of the Advisor, to receive reports regarding the compliance of the Funds and the Advisor with the federal securities laws and their internal compliance policies and procedures. In addition, the Board meets periodically with the portfolio managers of the Funds to receive reports regarding the management of the Funds, including their investment risks.
The Board reviews its leadership structure periodically and believes that its structure is appropriate, in light of the size of the Trust and the nature of its business, to enable the Board to exercise its oversight of the Funds and the other investment companies overseen by the Trustees. In particular, the Board believes that having an Independent Trustee serve as the chair of the Board and having other Independent Trustees serve as chairs of each committee promotes independence from the Advisor in setting agendas and conducting meetings. The Board believes that its committee structure makes the oversight process more efficient and more effective by allowing, among other things, smaller groups of Trustees to bring increased focus to matters within the purview of each committee.
Standing Committees
Ms. Verville and Messrs. Collins, Hacker and Nelson are members of the Audit Committee. The Audit Committee’s functions include making recommendations to the Board regarding the selection and performance of the independent registered public accounting firm, and reviewing matters relating to accounting and auditing practices and procedures, accounting records and the internal accounting controls of the Funds and certain service providers. During the fiscal year ended December 31, 2009, the Audit Committee met seven times.
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Messrs. Drake, Hacker, Mayer and Simpson are members of the Governance Committee. The Governance Committee’s functions include recommending to the Board nominees for Independent Trustee positions and for appointments to various committees, overseeing the Board’s periodic evaluations of the effectiveness of the Board, reviewing and recommending to the Board governance and other policies and practices to be followed in carrying out the Trustees’ duties and responsibilities and reviewing and making recommendations to the Board regarding the compensation of the Trustees who are not affiliated with the Advisor. During the fiscal year ended December 31, 2009, the Governance Committee met six times.
The Governance Committee will consider nominees for Trustee recommended by shareholders provided that such recommendations are submitted by the date disclosed in the Fund’s proxy statement and otherwise comply with applicable securities laws, including Rule 14a-8 under the 1934 Act. Such shareholder recommendations must be in writing and should be sent to the attention of the Governance Committee in care of the Fund at One Financial Center, Boston, MA 02111-2621. Shareholder recommendations should include the proposed nominee’s biographical information (including business experience for the past ten years) and a description of the qualifications of the proposed nominee, along with a statement from the proposed nominee that he or she is willing to serve and meets the requirements to be a disinterested Trustee, if applicable.
Ms. Kelly and Messrs. Hacker, Mayer, Nelson, Neuhauser and Piel are members of the Advisory Fees & Expenses Committee. The Advisory Fees & Expenses Committee’s functions include reviewing and making recommendations to the Board as to contracts requiring approval of a majority of the Independent Trustees and as to any other contracts that may be referred to the Advisory Fees & Expenses Committee by the Board. During the fiscal year ended December 31, 2009, the Advisory Fees & Expenses Committee met eight times.
Mses. Kelly and Verville and Messrs. Nelson and Simpson are members of the Compliance Committee. The Compliance Committee’s functions include, among other things, monitoring, supervising and assessing the performance of the Fund’s Chief Compliance Officer and reviewing her compensation, reviewing periodically and recommending changes to the codes of ethics and compliance policies of the Fund and its service providers, and reviewing the Fund’s portfolio execution. During the fiscal year ended December 31, 2009, the Compliance Committee met eight times.
Each Trustee also serves on an Investment Oversight Committee (IOC). Each IOC is responsible for monitoring, on an ongoing basis, a select group of funds in the Columbia Funds Complex and gives particular consideration to such matters as each Fund’s adherence to its investment mandates, historical performance, changes in investment processes and personnel, and proposed changes to investment objectives. Investment personnel who manage the Funds attend IOC meetings from time to time to assist each IOC in its review of the Funds. Each IOC meets four times a year, as the applicable IOC did for the Fund’s most recently completed fiscal year. The below are members of the respective IOCs and the general categories of funds in the Columbia Funds Complex which they review. These asset categories may be reassigned among the IOCs from time to time.
IOC #1: Mr. Neuhauser and Ms. Verville are responsible for reviewing funds in the following asset categories: Global Stock, International Stock, Large Growth, Mid Value; Fixed Income — Core and Municipal.
IOC #2: Messrs. Collins, Hacker and Mayer are responsible for reviewing funds in the following asset categories: Large Value, Small Growth, Specialty; Fixed Income — High Yield, Multi-Sector and Municipal.
IOC #3: Mr. Piel and Ms. Kelly are responsible for reviewing funds in the following asset categories: Asset Allocation, Index, Large Value, Mid Value, Small Core, Small Value, Money Market; Fixed Income — Municipal and Short Duration.
IOC #4: Messrs. Drake, Nelson and Simpson are responsible for reviewing funds in the following asset categories: Asset Allocation, Large Blend, Mid Growth, Multi Blend, Small Growth, Specialty; Fixed Income — Core, Municipal and Short Duration.
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Trustee Biographical Information and Qualifications
The following provides an overview of the considerations that led the Board to conclude that each individual serving as a Trustee should so serve. Generally, no one factor was decisive in the selection of an individual to join the Board. Among the factors the Board considered when concluding that an individual should serve on the Board were the following: (i) the individual’s business and professional experience and accomplishments; (ii) the individual’s ability to work effectively with the other Trustees; (iii) the individual’s prior experience, if any, serving on the boards of public companies (including, where relevant, other investment companies) and other complex enterprises and organizations; and (iv) how the individual’s skills, experience and attributes would contribute to an appropriate mix of relevant skills and experience on the Board.
In respect of each current Trustee, the individual’s substantial professional accomplishments and experience, including in fields related to the operations of the Fund, were a significant factor in the determination that, in light of the business and structure of the Trust, the individual should serve as a Trustee. Following is a summary of each Trustee’s particular professional experience and additional considerations that contributed to the Board’s conclusion that an individual should serve as a Trustee:
Rodman L. Drake — Mr. Drake has significant experience serving on boards of directors for public companies, including investment companies. This experience includes holding such positions with the various boards as lead independent director, chairman of the nominating and compensation committee and member of the audit committee. Mr. Drake is currently the CEO of Crystal River Capital, Inc., a hybrid REIT, and was previously the president of a private equity firm and the CEO of a leading management consulting firm.
John D. Collins — Mr. Collins was a partner at KPMG, LLP, where he worked for 37 years until his retirement in 1999. Mr. Collins has served on the board of directors for multiple companies. While with KPMG, Mr. Collins was a senior audit partner. He also served on the International Auditing Procedures Committee.
Douglas A. Hacker — Mr. Hacker has extensive executive experience, having served in various executive roles with United Airlines and more recently as an independent business executive. Mr. Hacker also has experience on other boards of directors. As former chief financial officer of United Airlines, Mr. Hacker has significant experience in accounting and financial management, including in a public company setting.
Janet Langford Kelly — Ms. Kelly is Senior Vice President, General Counsel and Corporate Secretary for ConocoPhillips. Prior to joining ConocoPhillips Ms. Kelly held senior legal and leadership roles in other large corporations and law firms, including as a partner at the law firms Sidley & Austin and at Zelle, Hoffman, Voelbel, Mason and Gette. Ms. Kelly has previously served on the board of directors for a public company and various industry groups and non-profit organizations.
Charles R. Nelson — Dr. Nelson is an experienced investment company trustee, having served on the Board, and the boards of predecessor funds, since 1981. Professor of Economics at the University of Washington since 1976, he has written several books, authored numerous articles in economics and finance, and served on editorial boards of professional journals. He is a Fellow of the Econometric Society and his contributions were the subject of a conference at the Federal Reserve Bank of Atlanta in 2006. Additionally, he is an experienced consultant on economic and statistical matters.
John J. Neuhauser — Dr. Neuhauser is an experienced investment company trustee, having served on the Board since 1985 and on the boards of other investment companies. In addition to his board experience, Dr. Neuhauser has extensive executive experience. He is currently the President of Saint Michael’s College and has served in a variety of other leadership roles in higher education.
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Jonathan Piel — Mr. Piel has served since 1994 as a trustee of mutual funds advised successively by U.S. Trust, Charles Schwab and the Advisor. In addition to this significant oversight experience he was the Editor of Scientific American and a vice president of Scientific American, Inc. He is also a member of the board of several not-for-profit organizations.
Patrick J. Simpson — Mr. Simpson is a partner at the law firm Perkins Coie L.L.P. Mr. Simpson’s practice includes such relevant areas as corporate governance and securities compliance.
Anne-Lee Verville — Ms. Verville has significant executive experience. Prior to her retirement in 1997, she held various leadership and executive roles with IBM Corporation. Ms. Verville has previously served on the board of directors for a public company and non-profit organizations.
William E. Mayer — Mr. Mayer has significant executive and board experience with financial services and investment companies. Mr. Mayer, currently a partner at a private equity firm, also has significant executive experience and experience working in finance. Previously, Mr. Mayer was a professor and Dean of the College of Business and Management at the University of Maryland and was President and CEO of The First Boston Corporation.
The following table provides additional biographical information about the Trustees as of the date of this SAI, including their principal occupations during the past five years, although their specific titles may have varied over the period. The mailing address of each Trustee is: c/o Columbia Management Advisors, LLC, One Financial Center, Mail Stop MA5-515-11-05, Boston, MA 02111.
Independent Trustee Biographical Information
Name, Year of Birth | Year First | Principal Occupation(s) | Number of | Other Directorships | ||||
Rodman L. Drake (Born 1943) Trustee and Chairman of the Board* | 1994 | Co-Founder of Baringo Capital LLC (private equity) since 2002; CEO of Crystal River Capital, Inc. (real estate investment trust) since 2003; President, Continuation Investments Group, Inc. from 1997 to 2001 | 65 | Jackson Hewitt Tax Service Inc. (tax preparation services); Crystal River Capital, Inc. (real estate investment trust); Student Loan Corporation (student loan provider); Celgene Corporation (global biotechnology company); and The Helios Funds (exchange-traded funds); Apex Silver Mines Ltd. from 2007 to 2009 | ||||
John D. Collins Trustee | 2005 | Retired. Consultant, KPMG, LLP (accounting and tax firm) from July 1999 to June 2000; Partner, KPMG, LLP (accounting and tax firm) from March 1962 to June 1999 | 65 | Mrs. Fields Famous Brands LLC (consumer products); Suburban Propane Partners, L.P.; and Montpelier Re (insurance underwriting firm) |
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Name, Year of Birth | Year First | Principal Occupation(s) | Number of | Other Directorships | ||||
Douglas A. Hacker (Born 1955) Trustee | 1996 | Independent business executive since May 2006; Executive Vice President — Strategy of United Airlines from December 2002 to May 2006; President of UAL Loyalty Services (airline marketing company) from September 2001 to December 2002; Executive Vice President and Chief Financial Officer of United Airlines from July 1999 to September 2001 | 65 | Nash Finch Company (food distributor) and Aircastle Limited (aircraft leasing) | ||||
Janet Langford Kelly (Born 1957) Trustee | 1996 | Senior Vice President, General Counsel and Corporate Secretary, ConocoPhillips (integrated energy company) since September 2007; Deputy General Counsel — Corporate Legal Services, ConocoPhillips from August 2006 to August 2007; Partner, Zelle, Hofmann, Voelbel, Mason & Gette LLP (law firm) from March 2005 to July 2006; Adjunct Professor of Law, Northwestern University from September 2004 to June 2006; Director, UAL Corporation (airline) from February 2006 to July 2006; Chief Administrative Officer and Senior Vice President, Kmart Holding Corporation (consumer goods) from September 2003 to March 2004 | 65 | None |
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Name, Year of Birth | Year First | Principal Occupation(s) | Number of | Other Directorships | ||||
Charles R. Nelson (Born 1942) Trustee | 1981 | Professor of Economics, University of Washington since January 1976; Ford and Louisa Van Voorhis Professor of Political Economy, University of Washington since September 1993; Adjunct Professor of Statistics, University of Washington since September 1980; Associate Editor, Journal of Money, Credit and Banking from September 1993 to 2008; consultant on econometric and statistical matters | 65 | None | ||||
John J. Neuhauser (Born 1943) Trustee | 1984 | President, Saint Michael’s College, since August 2007; University Professor, Boston College from November 2005 to August 2007; Academic Vice President and Dean of Faculties, Boston College from August 1999 to October 2005 | 65 | Liberty All-Star Equity Fund and Liberty All-Star Growth Fund, Inc. (closed-end funds) |
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Name, Year of Birth | Year First | Principal Occupation(s) | Number of | Other Directorships | ||||
Jonathan Piel (Born 1938) Trustee | 1994 | Cable television producer and web site designer; The Editor, Scientific American from 1984 to 1994; Vice President, Scientific American, Inc. from 1984 to 1994; Member, Advisory Board, Stone Age Institute, Bloomington, Indiana (research institute that explores the effect of technology on human evolution); Member, Board of Directors of the National Institute of Social Sciences, New York City; Member, Board of Trustees of the William Alanson White Institute, New York City (institution for training psychoanalysts); Member, Advisory Board, Mount Sinai Children’s Environmental Health Center, New York | 65 | None | ||||
Patrick J. Simpson (Born 1944) Trustee | 2000 | Partner, Perkins Coie L.L.P. (law firm) | 65 | None | ||||
Anne-Lee Verville (Born 1945) Trustee | 1998 | Retired since 1997 (formerly, General Manager, Global Education Industry from 1994 to 1997; President — Application Systems Division from 1991 to 1994; Chief Financial Officer — US Marketing & Services from 1988 to 1991; and Chief Information Officer from 1987 to 1988, IBM Corporation (computer and technology)) | 65 | Enesco Group, Inc. (producer of giftware and home and garden decor products) from 2001 to 2006 |
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Interested Trustee Biographical Information
Name, Year of Birth | Year First | Principal Occupation(s) | Number of | Other Directorships | ||||
William E. Mayer ** (Born 1940) Trustee | 1994 | Partner, Park Avenue Equity Partners (private equity) since February 1999; Dean and Professor, College of Business, University of Maryland from 1992 to 1997 | 65 | Lee Enterprises (print media); WR Hambrecht + Co. (financial service provider); and BlackRock Kelso Capital Corporation (investment company) |
* | Effective June 12, 2009, the Board elected Mr. Drake as Chairman of the Board. |
** | The Fund currently treats Mr. Mayer as an “interested person” (as defined in the 1940 Act) of the Columbia Funds by reason of his affiliation with WR Hambrecht + Co., a registered broker/dealer that may execute portfolio transactions for or engage in principal transactions with the Fund or other funds or accounts advised/managed by the Advisor or other Bank of America affiliates. |
Compensation
Trustees are compensated for their services to the Columbia Funds Family on a complex-wide basis, as shown in the table below.
Independent Trustee Compensation for the Fiscal Year Ended December 31, 2009
Name of Trustee | Aggregate Compensation from Asset Allocation Fund VS for the Fiscal Year ended December 31, 2009(a) | Aggregate Compensation from Federal Securities Fund VS for the Fiscal Year ended December 31, 2009(a) | Aggregate Compensation from International Fund VS for the Fiscal Year ended December 31, 2009(a) | Aggregate Compensation from Large Cap Growth Fund VS for the Fiscal Year ended December 31, 2009(a) | ||||||||||||
John D. Collins(b) | $ | 1,597 | $ | 1,461 | $ | 1,147 | $ | 1,295 | ||||||||
Rodman L. Drake(c) | $ | 1,936 | $ | 1,774 | $ | 1,390 | $ | 1,568 | ||||||||
Douglas A. Hacker | $ | 1,770 | $ | 1,617 | $ | 1,273 | $ | 1,436 | ||||||||
Janet Langford Kelly | $ | 1,650 | $ | 1,509 | $ | 1,186 | $ | 1,338 | ||||||||
Charles R. Nelson | $ | 1,758 | $ | 1,601 | $ | 1,266 | $ | 1,427 | ||||||||
John J. Neuhauser | $ | 1,640 | $ | 1,495 | $ | 1,178 | $ | 1,330 | ||||||||
Jonathan Piel | $ | 1,537 | $ | 1,401 | $ | 1,105 | $ | 1,246 | ||||||||
Patrick J. Simpson(d) | $ | 1,661 | $ | 1,516 | $ | 1,195 | $ | 1,348 | ||||||||
Thomas C. Theobald(e)(f) | $ | 1,733 | $ | 1,578 | $ | 1,236 | $ | 1,398 | ||||||||
Anne-Lee Verville(g) | $ | 1,716 | $ | 1,564 | $ | 1,234 | $ | 1,392 |
(a) | All Trustees receive reimbursements for reasonable expenses related to their attendance at meetings of the Board, which are not included in the amounts shown. |
(b) | During the fiscal year ended December 31, 2009, Mr. Collins deferred $832 of his compensation from Asset Allocation Fund VS, $760 of his compensation from Federal Securities Fund VS, $603 of his compensation from International Fund VS, and $678 of his compensation from Large Cap Growth Fund VS. During the calendar year ended December 31, 2009, Mr. Collins deferred $116,000 of his total compensation from the Columbia Funds Complex pursuant to the deferred compensation plan. At December 31, 2009, the value of Mr. Collins’ account under that plan was $205,097. |
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(c) | During the fiscal year ended December 31, 2009, Mr. Drake deferred $834 of his compensation from Asset Allocation Fund VS, $763 of his compensation from Federal Securities Fund VS, $604 of his compensation from International Fund VS, and $679 of his compensation from Large Cap Growth Fund VS. During the calendar year ended December 31, 2009, Mr. Drake deferred $116,500 of his total compensation from the Columbia Funds Complex pursuant to the deferred compensation plan. At December 31, 2009, the value of Mr. Drake’s account under that plan was $223,507. |
(d) | During the fiscal year ended December 31, 2009, Mr. Simpson deferred $1,661 of his compensation from Asset Allocation Fund VS, $1,516 of his compensation from Federal Securities Fund VS, $1,195 of his compensation from International Fund VS, and $1,348 of his compensation from Large Cap Growth Fund VS. During the calendar year ended December 31, 2009, Mr. Simpson deferred $236,000 of his total compensation from the Columbia Funds Complex pursuant to the deferred compensation plan. At December 31, 2009, the value of Mr. Simpson’s account under that plan was $1,051,968. |
(e) | At December 31, 2009, the value of Mr. Theobald’s account under the deferred compensation plan was $600,183. |
(f) | Mr. Theobald served as a Trustee of the Trust until February 2010. |
(g) | At December 31, 2009, the value of Ms. Verville’s account under the deferred compensation plan was $679,903. |
Independent Trustee Compensation for the Fiscal Year Ended December 31, 2009
Name of Trustee | Aggregate Compensation from Large Cap Value Fund VS for the Fiscal Year ended December 31, 2009(a) | Aggregate Compensation from Mid Cap Value Fund VS for the Fiscal Year ended December 31, 2009(a) | Aggregate Compensation from Money Market Fund VS for the Fiscal Year ended December 31, 2009(a) | Aggregate Compensation from 500 Index Fund VS for the Fiscal Year ended December 31, 2009(a) | ||||||||||||
John D. Collins(b) | $ | 1,523 | $ | 1,124 | $ | 1,745 | $ | 1,149 | ||||||||
Rodman L. Drake(c) | $ | 1,843 | $ | 1,363 | $ | 2,126 | $ | 1,393 | ||||||||
Douglas A. Hacker | $ | 1,688 | $ | 1,247 | $ | 1,931 | $ | 1,275 | ||||||||
Janet Langford Kelly | $ | 1,574 | $ | 1,045 | $ | 1,801 | $ | 1,188 | ||||||||
Charles R. Nelson | $ | 1,679 | $ | 1,240 | $ | 1,910 | $ | 1,267 | ||||||||
John J. Neuhauser | $ | 1,565 | $ | 1,155 | $ | 1,786 | $ | 1,180 | ||||||||
Jonathan Piel | $ | 1,467 | $ | 1,083 | $ | 1,672 | $ | 1,106 | ||||||||
Patrick J. Simpson(d) | $ | 1,586 | $ | 1,083 | $ | 1,809 | $ | 1,197 | ||||||||
Thomas C. Theobald(e)(f) | $ | 1,656 | $ | 1,211 | $ | 1,884 | $ | 1,237 | ||||||||
Anne-Lee Verville(g) | $ | 1,638 | $ | 1,209 | $ | 1,867 | $ | 1,236 |
(a) | All Trustees receive reimbursements for reasonable expenses related to their attendance at meetings of the Board, which are not included in the amounts shown. |
(b) | During the fiscal year ended December 31, 2009, Mr. Collins deferred $794 of his compensation from Large Cap Value Fund VS, $591 of his compensation from Mid Cap Value Fund VS, $902 of his compensation from Money Market Fund VS, and $603 of his compensation from 500 Index Fund VS. During the calendar year ended December 31, 2009, Mr. Collins deferred $116,000 of his total compensation from the Columbia Funds Complex pursuant to the deferred compensation plan. At December 31, 2009, the value of Mr. Collins’ account under that plan was $205,097. |
(c) | During the fiscal year ended December 31, 2009, Mr. Drake deferred $796 of his compensation from Large Cap Value Fund VS, $591 of his compensation from Mid Cap Value Fund VS, $906 of his compensation from Money Market Fund VS, and $604 of his compensation from 500 Index Fund VS. During the calendar year ended December 31, 2009, Mr. Drake deferred $116,500 of his total compensation from the Columbia Funds Complex pursuant to the deferred compensation plan. At December 31, 2009, the value of Mr. Drake’s account under that plan was $223,507. |
(d) | During the fiscal year ended December 31, 2009, Mr. Simpson deferred $1,586 of his compensation from Large Cap Value Fund VS, $1,083 of his compensation from Mid Cap Value Fund VS, $1,809 of his |
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compensation from Money Market Fund VS, and $1,197 of his compensation from 500 Index Fund VS. During the calendar year ended December 31, 2009, Mr. Simpson deferred $236,000 of his total compensation from the Columbia Funds Complex pursuant to the deferred compensation plan. At December 31, 2009, the value of Mr. Simpson’s account under that plan was $1,051,968. |
(e) | At December 31, 2009, the value of Mr. Theobald’s account under the deferred compensation plan was $600,183. |
(f) | Mr. Theobald served as a Trustee of the Trust until February 2010. |
(g) | At December 31, 2009, the value of Ms. Verville’s account under the deferred compensation plan was $679,903. |
Independent Trustee Compensation for the Fiscal Year Ended December 31, 2009
Name of Trustee | Aggregate Compensation from Select Large Cap Growth Fund VS for the Fiscal Year ended December 31, 2009(a) | Aggregate Compensation from Small Cap Value Fund VS for the Fiscal Year ended December 31, 2009(a) | Aggregate Compensation from Small Company Growth Fund VS for the Fiscal Year ended December 31, 2009(a) | |||||||
John D. Collins(b) | $1,058 | $ | 2,359 | $ | 1,241 | |||||
Rodman L. Drake(c) | $1,283 | $ | 3,076 | $ | 1,503 | |||||
Douglas A. Hacker | $1,173 | $ | 2,816 | $ | 1,377 | |||||
Janet Langford Kelly | $1,093 | $ | 2,623 | $ | 1,283 | |||||
Charles R. Nelson | $1,166 | $ | 2,808 | $ | 1,368 | |||||
John J. Neuhauser | $1,086 | $ | 2,619 | $ | 1,275 | |||||
Jonathan Piel | $1,018 | $ | 2,455 | $ | 1,195 | |||||
Patrick J. Simpson(d) | $1,102 | $ | 2,653 | $ | 1,292 | |||||
Thomas C. Theobald(e)(f) | $1,134 | $ | 2,759 | $ | 1,341 | |||||
Anne-Lee Verville(g) | $1,137 | $ | 2,741 | $ | 1,335 |
(a) | All Trustees receive reimbursements for reasonable expenses related to their attendance at meetings of the Board, which are not included in the amounts shown. |
(b) | During the fiscal year ended December 31, 2009, Mr. Collins deferred $557 of his compensation from Select Large Cap Growth Fund VS, $1,322 of his compensation from Small Cap Value Fund VS, and $ 650 of his compensation from Small Company Growth Fund VS. During the calendar year ended December 31, 2009, Mr. Collins deferred $116,000 of his total compensation from the Columbia Funds Complex pursuant to the deferred compensation plan. At December 31, 2009, the value of Mr. Collins’ account under that plan was $205,097. |
(c) | During the fiscal year ended December 31, 2009, Mr. Drake deferred $558 of his compensation from Select Large Cap Growth Fund VS, $1,326 of his compensation from Small Cap Value Fund VS, and $651 of his compensation from Small Company Growth Fund VS. During the calendar year ended December 31, 2009, Mr. Drake deferred $116,500 of his total compensation from the Columbia Funds Complex pursuant to the deferred compensation plan. At December 31, 2009, the value of Mr. Drake’s account under that plan was $223,507. |
(d) | During the fiscal year ended December 31, 2009, Mr. Simpson deferred $1,102 of his compensation from Select Large Cap Growth Fund VS, $2,653 of his compensation from Small Cap Value Fund VS, and $1,292 of his compensation from Small Company Growth Fund VS. During the calendar year ended December 31, 2009, Mr. Simpson deferred $236,000 of his total compensation from the Columbia Funds Complex pursuant to the deferred compensation plan. At December 31, 2009, the value of Mr. Simpson’s account under that plan was $1,051,968. |
(e) | At December 31, 2009, the value of Mr. Theobald’s account under the deferred compensation plan was $600,183. |
(f) | Mr. Theobald served as a Trustee of the Trust until February 2010. |
(g) | At December 31, 2009, the value of Ms. Verville’s account under the deferred compensation plan was $679,903. |
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Independent Trustee Compensation for the Fiscal Year Ended December 31, 2009
Name of Trustee | Aggregate Compensation from Strategic Income Fund VS for the Fiscal Year ended December 31, 2009(a) | Aggregate Compensation from Value and Restructuring Fund VS for the Fiscal Year ended December 31, 2009(a) | Total Compensation from the Columbia Funds Complex Paid to Independent Trustees for the Calendar Year ended December 31, 2009(a) | |||||||||
John D. Collins(b) | $ | 1,367 | $ | 1,057 | $ | 226,990 | ||||||
Rodman L. Drake(c) | $ | 1,659 | $ | 1,281 | $ | 275,955 | ||||||
Douglas A. Hacker | $ | 1,515 | $ | 1,172 | $ | 251,005 | ||||||
Janet Langford Kelly | $ | 1,412 | $ | 1,092 | $ | 234,000 | ||||||
Charles R. Nelson | $ | 1,503 | $ | 1,165 | $ | 249,500 | ||||||
John J. Neuhauser | $ | 1,402 | $ | 1,085 | $ | 233,500 | ||||||
Jonathan Piel | $ | 1,314 | $ | 1,017 | $ | 218,500 | ||||||
Patrick J. Simpson(d) | $ | 1,421 | $ | 1,101 | $ | 236,000 | ||||||
Thomas C. Theobald(e)(f) | $ | 1,474 | $ | 1,133 | $ | 248,550 | ||||||
Anne-Lee Verville(g) | $ | 1,467 | $ | 1,136 | $ | 244,000 |
(a) | All Trustees receive reimbursements for reasonable expenses related to their attendance at meetings of the Board, which are not included in the amounts shown. |
(b) | During the fiscal year ended December 31, 2009, Mr. Collins deferred $713 of his compensation from Strategic Income Fund VS, and $557 of his compensation from Value and Restructuring Fund VS. During the calendar year ended December 31, 2009, Mr. Collins deferred $116,000 of his total compensation from the Columbia Funds Complex pursuant to the deferred compensation plan. At December 31, 2009, the value of Mr. Collins’ account under that plan was $205,097. |
(c) | During the fiscal year ended December 31, 2009, Mr. Drake deferred $715 of his compensation from Strategic Income Fund VS, and $557 of his compensation from Value and Restructuring Fund VS. During the calendar year ended December 31, 2009, Mr. Drake deferred $116,500 of his total compensation from the Columbia Funds Complex pursuant to the deferred compensation plan. At December 31, 2009, the value of Mr. Drake’s account under that plan was $223,507. |
(d) | During the fiscal year ended December 31, 2009, Mr. Simpson deferred $1,421 of his compensation from Strategic Income Fund VS, and $1,101 of his compensation from Value and Restructuring Fund VS. During the calendar year ended December 31, 2009, Mr. Simpson deferred $236,000 of his total compensation from the Columbia Funds Complex pursuant to the deferred compensation plan. At December 31, 2009, the value of Mr. Simpson’s account under that plan was $1,051,968. |
(e) | At December 31, 2009, the value of Mr. Theobald’s account under the deferred compensation plan was $600,183. |
(f) | Mr. Theobald served as a Trustee of the Trust until February 2010. |
(g) | At December 31, 2009, the value of Ms. Verville’s account under the deferred compensation plan was $679,903. |
Interested Trustee Compensation for the Fiscal Year Ended December 31, 2009
Name of Trustee | Aggregate Compensation from Asset Allocation Fund VS for the Fiscal Year ended December 31, 2009(a) | Aggregate Compensation from Federal Securities Fund VS for the Fiscal Year ended December 31, 2009(a) | Aggregate Compensation from International Fund VS for the Fiscal Year ended December 31, 2009(a) | Aggregate Compensation from Large Cap Growth Fund VS for the Fiscal Year ended December 31, 2009(a) | ||||||||||||
William E. Mayer | $ | 1,643 | $ | 1,498 | $ | 1,182 | $ | 1,333 |
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Interested Trustee Compensation for the Fiscal Year Ended December 31, 2009
Name of Trustee | Aggregate Compensation from Large Cap Value Fund VS for the Fiscal Year ended December 31, 2009(a) | Aggregate Compensation from Mid Cap Value Fund VS for the Fiscal Year ended December 31, 2009(a) | Aggregate Compensation from Money Market Fund VS for the Fiscal Year ended December 31, 2009(a) | Aggregate Compensation from 500 Index Fund VS for the Fiscal Year ended December 31, 2009(a) | ||||||||||||
William E. Mayer | $ | 1,568 | $ | 1,158 | $ | 1,787 | $ | 1,183 |
Interested Trustee Compensation for the Fiscal Year Ended December 31, 2009
Name of Trustee | Aggregate Compensation from Select Large Cap Growth Fund VS for the Fiscal Year Ended December 31, 2009(a) | Aggregate Compensation from Small Cap Value Fund VS for the Fiscal Year Ended December 31, 2009(a) | Aggregate Compensation from Small Company Growth Fund VS for the Fiscal Year ended December 31, 2009(a) | |||||||||
William E. Mayer | $ | 1,089 | $ | 2,625 | $ | 1,278 |
Interested Trustee Compensation for the Fiscal Year Ended December 31, 2009
Name of Trustee | Aggregate Compensation from Strategic Income Fund VS for the Fiscal Year ended December 31, 2009(a) | Aggregate Compensation from Value and Restructuring Fund VS for the Fiscal Year Ended December 31, 2009(a) | Total Compensation from the Columbia Funds Complex Paid to Interested Trustees for the Calendar Year ended December 31, 2009(a) | |||||||||
William E. Mayer | $ | 1,404 | $ | 1,088 | $ | 233,500 |
(a) | Mr. Mayer receives reimbursements for reasonable expenses related to his attendance at meetings of the Board or standing committees, which are not included in the amounts shown. |
Columbia Funds Deferred Compensation Plan
Under the terms of the Deferred Fee Agreement (the Deferred Compensation Plan), each eligible Trustee may elect, on an annual basis, to defer receipt of all or a portion of compensation payable to him or her for service as Trustee for that calendar year (expressly, a Trustee may elect to defer his/her annual retainer, his/her attendance fees, or both components, which together comprise total compensation for service). Fees deferred by a Trustee are credited to a book reserve account (the Deferral Account) established by the Columbia Funds, the value of which is derived from the rate of return of one or more Columbia Funds selected by the Trustee (with accruals to the Deferral Account beginning at such time as a Trustee’s fund elections having been established, and proceeds for service having been paid into such account, and terminating at such time as when proceeds have been fully paid to such Trustee under the Deferred Compensation Plan). Trustees may change their fund elections only in accordance with the provisions of the Deferred Compensation Plan.
Distributions from a Trustee’s Deferral Account will be paid by check, either in a lump sum or in annual installments. Payments made in annual installments are disbursed over a period of up to ten years, following such time as a Trustee may qualify to receive such payments. If a deferring Trustee dies prior to or after the commencement of the disbursement of amounts accrued in his/her Deferral Account, the balance of the account will be distributed to his/her designated beneficiary either in lump sum or in annual payments as established by such Trustee himself/herself, his/her beneficiary or his/her estate. Amounts payable under the Deferred Compensation Plan are not funded or secured in any way, and each deferring Trustee has the status of an unsecured creditor of the Columbia Fund(s) from which compensation has been deferred.
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Beneficial Equity Ownership
As of the date of this SAI, the Trustees and Officers of the Trust, as a group, beneficially owned less than 1% of each class of shares of each Fund. The table below shows, for each Trustee, the amount of Fund equity securities beneficially owned by the Trustee and the aggregate value of all investments in equity securities of the Columbia Funds Family, stated as one of the following ranges: A = $0; B = $1-$10,000; C = $10,001-$50,000; D = $50,001-$100,000; and E = over $100,000.
Independent Trustee Ownership for the Calendar Year Ended December 31, 2009
Trustee | Dollar Range of Equity Securities in Asset Allocation Fund VS | Dollar Range of Equity Securities in Federal Securities Fund VS | Dollar Range of Equity Securities in International Fund VS | Dollar Range of Equity Securities in Large Cap Growth Fund VS | ||||||||||||
John D. Collins | A | A | A | A | ||||||||||||
Rodman L. Drake | A | A | A | A | ||||||||||||
Douglas A. Hacker | A | A | A | A | ||||||||||||
Janet Langford Kelly | A | A | A | A | ||||||||||||
Charles R. Nelson | A | A | A | A | ||||||||||||
John J. Neuhauser | A | A | A | A | ||||||||||||
Jonathan Piel | A | A | A | A | ||||||||||||
Patrick J. Simpson | A | A | A | A | ||||||||||||
Anne-Lee Verville | A | A | A | A |
Independent Trustee Ownership for the Calendar Year Ended December 31, 2009
Trustee | Dollar Range of Equity Securities in Large Cap Value Fund VS | Dollar Range of Equity Securities in Mid Cap Value Fund VS | Dollar Range of Equity Securities in Money Market Fund VS | Dollar Range of Equity Securities in 500 Index Fund VS | ||||||||||||
John D. Collins | A | A | A | A | ||||||||||||
Rodman L. Drake | A | A | A | A | ||||||||||||
Douglas A. Hacker | A | A | A | A | ||||||||||||
Janet Langford Kelly | A | A | A | A | ||||||||||||
Charles R. Nelson | A | A | A | A | ||||||||||||
John J. Neuhauser | A | A | A | A | ||||||||||||
Jonathan Piel | A | A | A | A | ||||||||||||
Patrick J. Simpson | A | A | A | A | ||||||||||||
Anne-Lee Verville | A | A | A | A |
Independent Trustee Ownership for the Calendar Year Ended December 31, 2009
Trustee | Dollar Range of Equity Securities in Select Large Cap Growth Fund VS | Dollar Range of Equity Securities in Small Cap Value Fund VS | Dollar Range of Equity Securities in Small Company Growth Fund VS | |||||||||
John D. Collins | A | A | A | |||||||||
Rodman L. Drake | A | A | A | |||||||||
Douglas A. Hacker | A | A | A | |||||||||
Janet Langford Kelly | A | A | A | |||||||||
Charles R. Nelson | A | A | A | |||||||||
John J. Neuhauser | A | A | A | |||||||||
Jonathan Piel | A | A | A | |||||||||
Patrick J. Simpson | A | A | A | |||||||||
Anne-Lee Verville | A | A | A |
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Independent Trustee Ownership for the Calendar Year Ended December 31, 2009
Trustee | Dollar Range of Equity Securities in Strategic Income Fund VS | Dollar Range of Equity Securities in Value and Restructuring Fund VS | Aggregate Dollar Range of Equity Securities in all Funds in the Columbia Funds Family Overseen by the Trustee | |||||||||
John D. Collins | A | A | E | * | ||||||||
Rodman L. Drake | A | A | E | * | ||||||||
Douglas A. Hacker | A | A | E | |||||||||
Janet Langford Kelly | A | A | E | |||||||||
Charles R. Nelson | A | A | E | |||||||||
John J. Neuhauser | A | A | E | |||||||||
Jonathan Piel | A | A | A | |||||||||
Patrick J. Simpson | A | A | E | * | ||||||||
Anne-Lee Verville | A | A | E | * |
* | Includes the value of compensation payable under the Deferred Compensation Plan that is determined as if the amount deferred had been invested, as of the date of deferral, in shares of one or more funds in the Columbia Funds Complex as specified by each Trustee. |
Interested Trustee Ownership for the Calendar Year Ended December 31, 2009
Trustee | Dollar Range of Equity Securities in Asset Allocation Fund VS | Dollar Range of Equity Securities in Federal Securities Fund VS | Dollar Range of Equity Securities in International Fund VS | Dollar Range of Equity Securities in Large Cap Growth Fund VS | ||||||||||||
William E. Mayer | A | A | A | A |
Interested Trustee Ownership for the Calendar Year Ended December 31, 2009
Trustee | Dollar Range of Equity Securities in Large Cap Value Fund VS | Dollar Range of Equity Securities in Mid Cap Value Fund VS | Dollar Range of Equity Securities in Money Market Fund VS | Dollar Range of Equity Securities in 500 Index Fund VS | ||||||||||||
William E. Mayer | A | A | A | A |
Interested Trustee Ownership for the Calendar Year Ended December 31, 2009
Trustee | Dollar Range of Equity Securities in Select Large Cap Growth Fund VS | Dollar Range of Equity Securities in Small Cap Value Fund VS | Dollar Range of Equity Securities in Small Company Growth Fund VS | |||||||||
William E. Mayer | A | A | A |
Interested Trustee Ownership for the Calendar Year Ended December 31, 2009
Trustee | Dollar Range of Equity Securities in Strategic Income Fund VS | Dollar Range of Equity Securities in Value and Restructuring Fund VS | Aggregate Dollar Range of Equity Securities in all Funds in the Columbia Funds Family Overseen by the Trustee | |||||||||
William E. Mayer | A | A | A |
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The following table provides basic information about the Officers of the Trust as of the date of this SAI, including their principal occupations during the past five years, although their specific titles may have varied over the period. The mailing address of each Officer is: c/o Columbia Management Advisors, LLC, One Financial Center, Mail Stop MA5-515-11-05, Boston, MA 02111.
Officer Biographical Information
Name, Year of Birth and Address | Position with the Trust | Year First Elected or | Principal Occupation(s) During the Past Five Years | |||
J. Kevin Connaughton (Born 1964) | President | 2009 | Managing Director of the Advisor since December 2004; Senior Vice President and Chief Financial Officer, Columbia Funds, from June 2008 to January 2009; Treasurer, Columbia Funds, from October 2003 to May 2008; Treasurer, the Liberty Funds, Stein Roe Funds and Liberty All-Star Funds, from December 2000 to December 2006; Senior Vice President of the Advisor, from April 2003 to December 2004; President, Columbia Funds, Liberty Funds and Stein Roe Funds, from February 2004 to October 2004; Treasurer, Galaxy Funds, from September 2002 to December 2005; Treasurer, from December 2002 to December 2004, and President, from February 2004 to December 2004, Columbia Management Multi-Strategy Hedge Fund, LLC; and a senior officer or director of various other Bank of America-affiliated entities, including other registered and unregistered funds. | |||
James R. Bordewick, Jr. (Born 1959) | Senior Vice President, Secretary and Chief Legal Officer | 2006 | Associate General Counsel, Bank of America since April 2005. | |||
Linda J. Wondrack (Born 1964) | Senior Vice President and Chief Compliance Officer | 2007 | Director (Columbia Management Group, LLC and Investment Product Group Compliance), Bank of America since June 2005; Director of Corporate Compliance and Conflicts Officer, MFS Investment Management (investment management), from August 2004 to May 2005. |
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Name, Year of Birth and Address | Position with the Trust | Year First Elected or | Principal Occupation(s) During the Past Five Years | |||
Michael G. Clarke (Born 1969) | Senior Vice President and Chief Financial Officer | 2009 | Director of Fund Administration of the Advisor since January 2006; Managing Director of the Advisor, from September 2004 to December 2005. | |||
Joseph F. DiMaria (Born 1968) | Treasurer and Chief Accounting Officer | 2008 | Director of Fund Administration of the Advisor since January 2006; Head of Tax/Compliance and Assistant Treasurer of the Advisor from November 2004 to December 2005. | |||
Stephen T. Welsh (Born 1957) | Vice President | 1996 | President and Director, Columbia Management Services, Inc. since July 2004; Managing Director, Columbia Management Distributors, Inc. since August 2007. | |||
Julie B. Lyman (Born 1970) | Vice President | 2009 | Assistant General Counsel, Bank of America since October 2009 and from October 2006 through May 2009; Managing Director of the Advisor from May 2009 through October 2009; Associate, Kirkpatrick & Lockhart Nicholson Graham LLP (law firm) from April 2004 through October 2006. | |||
Jeffrey R. Coleman (Born 1969) | Deputy Treasurer | 2008 | Director of Fund Administration of the Advisor since January 2006; Fund Controller from October 2004 to January 2006. | |||
Julian Quero (Born 1967) | Deputy Treasurer | 2003 | Senior Tax Manager of the Advisor since August 2006; Senior Compliance Manager of the Advisor from April 2002 to August 2006. | |||
Timothy P. Kane (Born 1974) | Assistant Treasurer | 2008 | Head of Valuation of the Advisor since July 2007; Manager, Accounting Oversight Department of the Advisor since September 2004. | |||
Kenneth E. O’Connor (Born 1970) | Assistant Treasurer | 2008 | Head of Mutual Fund Performance of the Advisor since September 2006; Senior Manager, Mutual Fund Performance of the Advisor from 2003 to September 2006. |
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Name, Year of Birth and Address | Position with the Trust | Year First Elected or | Principal Occupation(s) During the Past Five Years | |||
Kathryn Thompson (Born 1967) | Assistant Treasurer | 2006 | Vice President, Mutual Fund Accounting Oversight of the Advisor since December 2004. | |||
Philip N. Prefontaine (Born 1948) | Assistant Treasurer | 2006 | Vice President, Mutual Fund Reporting of the Advisor since November 2004. | |||
Keith E. Stone (Born 1974) | Assistant Treasurer | 2006 | Vice President, Trustee Reporting of the Advisor since September 2003. | |||
Barry S. Vallan (Born 1969) | Controller | 2006 | Vice President, Fund Treasury of the Advisor since October 2004. | |||
Peter T. Fariel (Born 1957) | Assistant Secretary | 2006 | Associate General Counsel, Bank of America since April 2005. | |||
Ryan C. Larrenaga (Born 1970) | Assistant Secretary | 2005 | Assistant General Counsel, Bank of America since March 2005. |
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BROKERAGE ALLOCATION AND OTHER PRACTICES
General Brokerage Policy, Brokerage Transactions and Broker Selection
Subject to policies established by the Board, the Advisor (or the investment sub-advisor(s) who make(s) the day-to-day investment decisions for a Fund, as applicable) is responsible for decisions to buy and sell securities for each Fund, for the selection of broker/dealers, for the execution of a Fund’s securities transactions and for the allocation of brokerage commissions in connection with such transactions. The Advisor’s primary consideration in effecting a security transaction is to obtain the best net price and the most favorable execution of the order. Purchases and sales of securities on a securities exchange are effected through brokers who charge negotiated commissions for their services. Orders may be directed to any broker to the extent and in the manner permitted by applicable law.
In the over-the-counter market, securities generally are traded on a “net” basis with dealers acting as principals for their own accounts without stated commissions, although the price of a security usually includes a profit to the dealer. In underwritten offerings, securities are bought at a fixed price that includes an amount of compensation to the underwriter, generally referred to as the underwriter’s “concession” or “discount.” On occasion, certain money market instruments may be bought directly from an issuer, in which case no commissions or discounts are paid.
The Funds are affiliated with the NYSE specialist firm Banc of America Specialist, Inc. In order to ensure that markets are fair, orderly and competitive, NYSE specialist firms are responsible for maintaining a liquid and continuous two-sided auction market by acting as both an agent and a principal. Specialists are entrusted to hold the interests of customer orders above the specialist’s own interests, and will buy and sell securities as principal when such transactions are necessary to minimize imbalances between supply and demand. Banc of America Specialist, Inc. may make a market in certain securities held by the Funds.
In placing orders for portfolio securities of the Funds, the Advisor gives primary consideration to obtaining the best net prices and most favorable execution. This means that the Advisor will seek to execute each transaction at a price and commission, if any, which provides the most favorable total cost or proceeds reasonably attainable in the circumstances. In seeking such execution, the Advisor will use its best judgment in evaluating the terms of a transaction, and will give consideration to various relevant factors, including, without limitation, the size and type of the transaction, the nature and character of the market for the security, the confidentiality, speed and certainty of effective execution required for the transaction, the general execution and operational capabilities of the broker/dealer, the reputation, reliability, experience and financial condition of the broker/dealer, the value and quality of the services rendered by the broker/dealer in this instance and other transactions and the reasonableness of the spread or commission, if any. Research services received from broker/dealers supplement the Advisor’s own research and may include the following types of information: statistical and background information on industry groups and individual companies; forecasts and interpretations with respect to U.S. and foreign economies, securities, markets, specific industry groups and individual companies; information on political developments; Fund management strategies; performance information on securities and information concerning prices of securities; and information supplied by specialized services to the Advisor and to the Board with respect to the performance, investment activities and fees and expenses of other mutual funds. Such information may be communicated electronically, orally or in written form. Research services also may include the arranging of meetings with management of companies and the provision of access to consultants who supply research information.
The outside research is useful to the Advisor since, in certain instances, the broker/dealers utilized by the Advisor may follow a different universe of securities issuers and other matters than those that the Advisor’s staff can follow. In addition, this research provides the Advisor with a different perspective on financial markets, even if the securities research obtained relates to issues followed by the Advisor. Research services that are provided to the Advisor by broker/dealers are available for the benefit of all accounts managed or advised by the Advisor. In some cases, the research services are available only from the broker/dealer providing such services. In other
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cases, the research services may be obtainable from alternative sources. The Advisor is of the opinion that because the broker/dealer research supplements rather than replaces the Advisor’s own research, the receipt of such research does not tend to decrease the Advisor’s expenses, but tends to improve the quality of its investment advice. However, to the extent that the Advisor would have bought any such research services had such services not been provided by broker/dealers, the expenses of such services to the Advisor could be considered to have been reduced accordingly. Certain research services furnished by broker/dealers may be useful to the clients of the Advisor other than the Funds. Conversely, any research services received by the Advisor through the placement of transactions of other clients may be of value to the Advisor in fulfilling its obligations to the Funds. The Advisor is of the opinion that this material is beneficial in supplementing its research and analysis; and, therefore, it may benefit the Trust by improving the quality of the Advisor’s investment advice. The advisory fees paid by the Trust are not reduced because the Advisor receives such services.
Under Section 28(e) of the 1934 Act, the Advisor shall not be “deemed to have acted unlawfully or to have breached its fiduciary duty” solely because under certain circumstances it has caused the account to pay a higher commission than the lowest available. To obtain the benefit of Section 28(e), the Advisor must make a good faith determination that the commissions paid are “reasonable in relation to the value of the brokerage and research services provided by such member, broker, or dealer, viewed in terms of either that particular transaction or his overall responsibilities with respect to the accounts as to which he exercises investment discretion.” Accordingly, the price to the Funds in any transaction may be less favorable than that available from another broker/dealer if the difference is reasonably justified by other aspects of the portfolio execution services offered. Some broker/dealers may indicate that the provision of research services is dependent upon the generation of certain specified levels of commissions and underwriting concessions by the Advisor’s clients, including the Funds.
Commission rates are established pursuant to negotiations with broker/dealers based on the quality and quantity of execution services provided by broker/dealers in light of generally prevailing rates. On exchanges on which commissions are negotiated, the cost of transactions may vary among different broker/dealers. Transactions on foreign stock exchanges involve payment of brokerage commissions that generally are fixed. Transactions in both foreign and domestic over-the-counter markets generally are principal transactions with dealers, and the costs of such transactions involve dealer spreads rather than brokerage commissions. With respect to over-the-counter transactions, the Advisor, where possible, will deal directly with dealers who make a market in the securities involved, except in those circumstances in which better prices and execution are available elsewhere.
In certain instances there may be securities that are suitable for more than one Fund as well as for one or more of the other clients of the Advisor. Investment decisions for the Funds and for the Advisor’s other clients are made with the goal of achieving their respective investment objectives. A particular security may be bought or sold for only one client even though it may be held by, or bought or sold for, other clients. Likewise, a particular security may be bought for one or more clients when one or more other clients are selling that same security. Some simultaneous transactions are inevitable when a number of accounts receive investment advice from the same investment advisor, particularly when the same security is suitable for the investment objectives of more than one client. When two or more clients are engaged simultaneously in the purchase or sale of the same security, the securities are allocated among clients in a manner believed to be equitable to each. In some cases, this policy could have a detrimental effect on the price or volume of the security in a particular transaction that may affect the Funds.
The Funds may participate, if and when practicable, in bidding for the purchase of portfolio securities directly from an issuer in order to take advantage of the lower purchase price available to members of a bidding group. The Funds will engage in this practice, however, only when the Advisor, in its sole discretion, believes such practice to be otherwise in the Funds’ interests.
The Trust will not execute portfolio transactions through, or buy or sell portfolio securities from or to, the Distributor, the Advisor, the Administrator or their affiliates acting as principal (including repurchase and reverse
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repurchase agreements), except to the extent permitted by applicable law, regulation or order. However, the Advisor is authorized to allocate buy and sell orders for portfolio securities to certain broker/dealers and financial institutions, including, in the case of agency transactions, broker/dealers and financial institutions that are affiliated with Bank of America. To the extent that a Fund executes any securities trades with an affiliate of Bank of America, the Fund does so in conformity with Rule 17e-1 under the 1940 Act and the procedures that the Fund has adopted pursuant to the rule. In this regard, for each transaction, the Board will determine that: (i) the transaction resulted in prices for and execution of securities transactions at least as favorable to the particular Fund as those likely to be derived from a non-affiliated qualified broker/dealer; (ii) the affiliated broker/dealer charged the Fund commission rates consistent with those charged by the affiliated broker/dealer in similar transactions to clients comparable to the Fund and that are not affiliated with the broker/dealer in question; and (iii) the fees, commissions or other remuneration paid by the Fund did not exceed 2% of the sales price of the securities if the sale was effected in connection with a secondary distribution, or 1% of the purchase or sale price of such securities if effected in other than a secondary distribution. In addition, the Columbia Funds are affiliated with BAS, Merrill Lynch and their affiliates (including MLPF&S, Merrill Lynch Government Securities, Inc. and Merrill Lynch Money Markets Inc.) and may, pursuant to conditions prescribed by the SEC and applicable law (i) purchase certain types of securities from such entities in their role as dealers in such securities and (ii) purchase certain eligible municipal securities through group orders when MLPF&S is a member of an underwriting syndicate for such securities.
Certain affiliates of Bank of America, such as its subsidiary banks, may have deposit, loan or commercial banking relationships with the corporate users of facilities financed by industrial development revenue bonds or private activity bonds bought by certain of the Columbia Funds. Bank of America or certain of its affiliates may serve as trustee, custodian, tender agent, guarantor, placement agent, underwriter, or in some other capacity, with respect to certain issues of securities. Under certain circumstances, the Funds may buy securities from a member of an underwriting syndicate in which an affiliate of Bank of America is a member. The Trust has adopted procedures pursuant to Rule 10f-3 under the 1940 Act, and intends to comply with the requirements of Rule 10f-3, in connection with any purchases of municipal securities that may be subject to Rule 10f-3.
Given the breadth of the Advisor’s investment management activities, investment decisions for each Fund are not always made independently from those for other funds, or other investment companies and accounts advised or managed by the Advisor. When a purchase or sale of the same security is made at substantially the same time on behalf of one or more of the Columbia Funds and another investment portfolio, investment company or account, the transaction will be averaged as to price and available investments allocated as to amount in a manner which the Advisor believes to be equitable to each Fund and such other funds, investment portfolio, investment company or account. In some instances, this investment procedure may adversely affect the price paid or received by a Fund or the size of the position obtained or sold by the Fund. To the extent permitted by law, the Advisor may aggregate the securities to be sold or bought for the Funds with those to be sold or bought for other funds, investment portfolios, investment companies, or accounts in executing transactions.
See Investment Advisory and Other Services — Other Roles and Relationships of Bank of America and its Affiliates — Certain Conflicts of Interest for more information about these and other conflicts of interest.
The following table describes the amounts of brokerage commissions paid by the Funds during their three most recently completed fiscal years. In certain instances the Funds may pay brokerage commissions to broker/dealers that are affiliates of Bank of America. As indicated above, all such transactions involving the payment of brokerage commissions to affiliates are done in compliance with Rule 17e-1 under the 1940 Act.
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Aggregate Brokerage Commissions Paid by the Funds
Fund | Fiscal Year Ended December 31, 2009 | Fiscal Year Ended December 31, 2008 | Fiscal Year Ended December 31, 2007 | |||||||||
Asset Allocation Fund VS | $ | 152,148 | $ | 109,917 | $ | 28,001,477 | ||||||
Federal Securities Fund VS | $ | 2,311 | $ | 10,758 | $ | 10,917 | ||||||
International Fund VS | $ | 69,947 | $ | 129,689 | $ | 15,220,222 | ||||||
Large Cap Growth Fund VS | $ | 147,419 | $ | 201,300 | $ | 57,041,084 | ||||||
Large Cap Value Fund VS | $ | 168,480 | $ | 197,887 | $ | 76,792,916 | ||||||
Mid Cap Value Fund VS | $ | 35,640 | $ | 34,689 | $ | 4,401,296 | ||||||
Money Market Fund VS | $ | 0 | $ | 0 | $ | 0 | ||||||
500 Index Fund VS | $ | 1,564 | $ | 2,703 | $ | 2,120 | ||||||
Select Large Cap Growth Fund VS(a) | $ | 2,879 | $ | 0 | N/A | |||||||
Small Cap Value Fund VS | $ | 669,347 | $ | 604,392 | $ | 7,453,121 | ||||||
Small Company Growth Fund VS | $ | 212,376 | $ | 229,842 | $ | 24,487,661 | ||||||
Strategic Income Fund VS | $ | 0 | $ | 40 | $ | 0 | ||||||
Value and Restructuring Fund VS(a) | $ | 2,161 | $ | 4,371 | N/A |
(a) | The Fund commenced operations on September 2, 2008. |
The Funds paid no brokerage commissions to affiliated broker/dealers for the fiscal years ended December 31, 2007, 2008 and 2009.
The Funds or the Advisor, through an agreement or understanding with a broker/dealer, or otherwise through an internal allocation procedure, may direct, subject to applicable legal requirements, the Funds’ brokerage transactions to a broker/dealer because of the research services it provides the Funds or the Advisor.
During the fiscal year ended December 31, 2009, the Funds directed brokerage transactions as follows:
Fund | Transactions | Amount | ||||||
Asset Allocation Fund VS | $ | 139,381,761 | $ | 20,944 | ||||
Federal Securities Fund VS | $ | 0 | $ | 0 | ||||
International Fund VS | $ | 34,838,064 | $ | 10,051 | ||||
Large Cap Growth Fund VS | $ | 154,424,713 | $ | 20,168 | ||||
Large Cap Value Fund VS | $ | 147,816,953 | $ | 18,938 | ||||
Mid Cap Value Fund VS | $ | 23,910,574 | $ | 1,177 | ||||
Money Market Fund VS | $ | 0 | $ | 0 | ||||
500 Index Fund VS | $ | 15,463,843 | $ | 0 | ||||
Select Large Cap Growth Fund VS | $ | 3,535,245 | $ | 129 | ||||
Small Cap Value Fund VS | $ | 348,084,420 | $ | 2,269 | ||||
Small Company Growth Fund VS | $ | 100,146,407 | $ | 7,833 | ||||
Strategic Income Fund VS | $ | 0 | $ | 0 | ||||
Value and Restructuring Fund VS | $ | 1,150,241 | $ | 195 |
Securities of Regular Broker/Dealers
In certain cases, the Funds, as part of their principal investment strategies, or otherwise as a permissible investment, will invest in the common stock or debt obligations of the regular broker/dealers that the Advisor uses to transact brokerage for the Columbia Funds Family.
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As of December 31, 2009, the Funds owned securities of their “regular brokers or dealers” or their parents, as defined in Rule 10b-1 under the 1940 Act, as shown in the table below.
Investments in Securities of Regular Broker/Dealers as of December 31, 2009
Fund | Broker/Dealer | Dollar Amount of Securities Held | ||||
Asset Allocation Fund VS | Morgan Stanley & Co., Inc. JPMorgan Chase & Co. Piper Jaffray Barclays Capital UBS Warburg LLC CS First Boston Corp. BNP Paribas State Street Corp. HSBC Bank USA Deutsche Bank AG Citigroup, Inc. |
| 2,252,046 3,500,155 11,640 223,086 931,936 458,592 239,582 114,510 257,500 159,357 1,347,984 |
| ||
Federal Securities Fund VS | JPMorgan Chase & Co. Morgan Stanley & Co., Inc. Citigroup, Inc. UBS Warburg LLC |
| 515,343 1,703,369 227,993 633,396 |
| ||
International Fund VS | Barclays Capital HSBC Holdings, Plc BNP Paribas |
| 290,827 309,320 301,687 |
| ||
Large Cap Growth Fund VS | Morgan Stanley & Co., Inc. State Street Corp. |
| 622,192 358,770 |
| ||
Large Cap Value Fund VS | JPMorgan Chase & Co. Morgan Stanley & Co., Inc. Citigroup, Inc. |
| 4,850,055 1,524,400 558,115 |
| ||
Mid Cap Value Fund VS | None | None | ||||
Money Market Fund VS | Barclays Capital BNP Paribas UBS Warburg LLC Citigroup, Inc. |
| 5,000,000 6,000,000 5,500,000 999,903 |
| ||
500 Index Fund VS | State Street Corp. Morgan Stanley & Co., Inc. JPMorgan Chase & Co. Citigroup, Inc. |
| 51,943 96,407 393,907 154,915 |
| ||
Select Large Cap Growth Fund VS | None | None | ||||
Small Cap Value Fund VS | None | None | ||||
Small Company Growth Fund VS | None | None | ||||
Strategic Income Fund VS | Deutsche Bank AG Barclays Capital JPMorgan Chase & Co. Citigroup, Inc. |
| 127,486 38,895 110,255 1,140,437 |
| ||
Value and Restructuring Fund VS | JPMorgan Chase & Co. Morgan Stanley & Co., Inc. |
| 71,047 64,676 |
|
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Additional Financial Intermediary Payments
Financial intermediaries may receive different commissions, sales charge reallowances and other payments with respect to sales of different classes of shares of the Funds. For purposes of this section the term “financial intermediary” includes any broker/dealer, bank, bank trust department, registered investment advisor, financial planner, retirement plan or other third party administrator and any other institution having a selling, services or any similar agreement with the Distributor and other Bank of America affiliates.
The Distributor and other Bank of America affiliates may pay compensation to selected financial intermediaries, including other Bank of America affiliates, under the categories described below. These categories are not mutually exclusive, and a single financial intermediary may receive payments under all categories. These payments may create an incentive for a financial intermediary or its representatives to recommend or offer shares of a Fund to its customers. The amount of payments made to financial intermediaries may vary. In determining the amount of payments to be made, the Distributor and other Bank of America affiliates may consider a number of factors, including, without limitation, asset mix and length or relationship with the financial intermediary, the size of the customer/shareholder base of the financial intermediary, the manner in which customers of the financial intermediary make investments in the Funds, the nature and scope of marketing support or services provided by the financial intermediary (as described more fully below) and the costs incurred by the financial intermediary in connection with maintaining the infrastructure necessary or desirable to support investments in the Funds.
These additional payments by the Distributor and other Bank of America affiliates are made pursuant to agreements between the Distributor and other Bank of America affiliates and financial intermediaries, and do not change the price paid by investors for the purchase of a share, the amount a Fund will receive as proceeds from such sales or the distribution fees and expenses paid by the Fund as shown under the heading Fees and Expenses of the Fund in the Fund’s prospectuses.
Marketing Support Payments
The Distributor and the Advisor may make payments, from their own resources, to certain financial intermediaries, including other Bank of America affiliates, for marketing support services relating to the Columbia Funds, including, but not limited to, business planning assistance, educating financial intermediary personnel about the Funds and shareholder financial planning needs, placement on the financial intermediary’s preferred or recommended fund list or otherwise identifying the Funds as being part of a complex to be accorded a higher degree of marketing support than complexes not making such payments, access to sales meetings, sales representatives and management representatives of the financial intermediary, client servicing and systems infrastructure support. These payments are generally based upon one or more of the following factors: average net assets of the Columbia Funds distributed by the Distributor attributable to that financial intermediary, gross sales of the Columbia Funds distributed by the Distributor attributable to that financial intermediary, reimbursement of ticket charges (fees that a financial intermediary firm charges its representatives for effecting transactions in fund shares) or a negotiated lump sum payment.
While the financial arrangements vary for each financial intermediary, the marketing support payments to each financial intermediary generally are expected to be between 0.15% and 0.50% on an annual basis for payments based on average net assets of the Funds attributable to the financial intermediary. The Distributor and the Advisor may make payments in materially larger amounts or on a basis materially different from those described above when dealing with other affiliates of Bank of America. Such increased payments to the other Bank of America affiliate may enable the other Bank of America affiliate to offset credits that it may provide to its customers in order to avoid having such customers pay fees to multiple Bank of America entities in connection with the customer’s investment in a Columbia Fund.
As of the date of this SAI, the Distributor and/or other Bank of America affiliates had agreed to make marketing support payments to the financial intermediaries or their affiliates shown below.
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Recipients of Marketing Support Payments from the Distributor and/or other Bank of America affiliates
• American One United Life Insurance Company
• Ameriprise Financial Services, Inc.
• Farm Bureau Life Insurance Company
• Genworth Financial, Inc.
• ING Insurance Company of America
• Kemper Investors Life Insurance Company
• Merrill Lynch Life Insurance Company
• ML Life Insurance Company of New York
• Monumental Life Insurance Company | • PHL Variable Insurance Company
• RiverSource Life Insurance Company
• RiverSource Life Insurance Company of New York
• Security Benefit Life Insurance Company
• Sun Life Assurance Company of Canada
• Transamerica Financial Life Insurance Company |
The Distributor and/or the Advisor may enter into similar agreements with other financial intermediaries from time to time. Therefore, the preceding list is subject to change at any time without notice.
Other Payments
From time to time, the Distributor, from its own resources, may provide additional compensation to certain financial intermediaries that sell or arrange for the sale of shares of the Funds to the extent not prohibited by laws or the rules of any self-regulatory agency, such as the Financial Industry Regulatory Authority (FINRA). Such compensation provided by the Distributor may include financial assistance to financial intermediaries that enable the Distributor to participate in and/or present at financial intermediary-sponsored conferences or seminars, sales or training programs for invited registered representatives and other financial intermediary employees, financial intermediary entertainment and other financial intermediary-sponsored events, and travel expenses, including lodging incurred by registered representatives and other employees in connection with prospecting, retention and due diligence trips. The Distributor makes payments for entertainment events it deems appropriate, subject to the Distributor’s internal guidelines and applicable law. These payments may vary depending upon the nature of the event.
Your financial intermediary may charge you fees or commissions in addition to those disclosed in this SAI. You should consult with your financial intermediary and review carefully any disclosure your financial intermediary provides regarding its services and compensation. Depending on the financial arrangement in place at any particular time, a financial intermediary and its financial consultants may have a financial incentive for recommending a particular fund or a particular share class over other funds or share classes. See Investment Advisory and Other Services — Other Roles and Relationships of Bank of America and its Affiliates — Certain Conflicts of Interest for more information.
Information About the Standard & Poor’s 500 Composite
The 500 Index Fund VS is not sponsored, endorsed, sold or promoted by S&P. S&P makes no representation or warranty, express or implied, to the owners of the 500 Index Fund VS or any member of the public regarding the advisability of investing in securities generally or in the 500 Index Fund VS particularly or the ability of the S&P 500® Index to track general stock market performance. S&P’s only relationship to the Licensee is the licensing of certain trademarks and trade names of S&P and of the S&P 500® Index which is determined, composed and calculated by S&P without regard to the Licensee or the 500 Index Fund VS. S&P has no obligation to take the needs of the Licensee or the owners of the 500 Index Fund VS into consideration in determining, composing or calculating the S&P 500® Index. S&P is not responsible for and has not participated in
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the determination of the prices and amount of the 500 Index Fund VS or the timing of the issuance or sale of the 500 Index Fund VS or in the determination or calculation of the equation by which the 500 Index Fund VS is to be converted into cash. S&P has no obligation or liability in connection with the administration, marketing or trading of the 500 Index Fund VS.
Stock Price Index
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500® INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE, OWNERS OF THE 500 INDEX FUND, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500® INDEX OR ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500® INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
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CAPITAL STOCK AND OTHER SECURITIES
Description of the Trust’s Shares
The Funds offer shares in the classes shown in the table below. Subject to certain limited exceptions discussed in each Fund’s prospectuses, a Fund may no longer be accepting new investments from current shareholders or prospective investors. The Funds, however, may at any time and without notice, offer any of these classes to the general public for investment.
The Declaration of Trust permits the Trust to issue an unlimited number of full and fractional shares of beneficial interest of each Fund, without par value, and to divide or combine the shares of any series into a greater or lesser number of shares of that Fund without thereby changing the proportionate beneficial interests in that Fund and to divide such shares into classes. Each share of a class of a Fund represents an equal proportional interest in that Fund with each other share in the same class and is entitled to such distributions out of the income earned on the assets belonging to that Fund as are declared in the discretion of the Board. However, different share classes of a Fund pay different distribution amounts because each share class has different expenses. Each time a distribution is made, the net asset value per share of the share class is reduced by the amount of the distribution.
Share Classes Offered by the Funds
Fund | Class A Shares | Class B Shares | ||
Asset Allocation Fund VS | ü | ü | ||
Federal Securities Fund VS | ü | ü | ||
International Fund VS | ü | ü | ||
Large Cap Growth Fund VS | ü | ü | ||
Large Cap Value Fund VS | ü | ü | ||
Mid Cap Value Fund VS | ü | ü | ||
Money Market Fund VS | ü | |||
500 Index Fund VS | ü | ü | ||
Select Large Cap Growth Fund VS | ü | ü | ||
Small Cap Value Fund VS | ü | ü | ||
Small Company Growth Fund VS | ü | ü | ||
Strategic Income Fund VS | ü | ü | ||
Value and Restructuring Fund VS | ü | ü |
Restrictions on Holding or Disposing of Shares
There are no restrictions on the right of shareholders to retain or dispose of the Funds’ shares, other than the possible future termination of the Funds. The Funds may be terminated by reorganization into another mutual fund or by liquidation and distribution of their assets. Unless terminated by reorganization or liquidation, the Fund will continue indefinitely.
Liability
Under Massachusetts law, shareholders could, under certain circumstances, be held personally liable for the obligations of the Trust. However, the Trust’s Declaration of Trust disclaims any shareholder liability for acts or obligations of the Funds and the Trust and requires that notice of such disclaimer be given in each agreement, obligation, or instrument entered into or executed by a Fund or the Trustees. The Declaration of Trust provides for indemnification out of Fund property for all loss and expense of any shareholder held personally liable for the
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obligations of a Fund. Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances (which are considered remote) in which a Fund would be unable to meet its obligations and the disclaimer was inoperative.
The risk of a Fund incurring financial loss on account of another series of the Trust also is believed to be remote, because it would be limited to circumstances in which the disclaimer was inoperative and the other series of the Trust was unable to meet its obligations.
Dividend Rights
The shareholders of a Fund are entitled to receive any dividends or other distributions declared for the Fund. No shares have priority or preference over any other shares of a Fund with respect to distributions. Distributions will be made from the assets of a Fund, and will be paid pro rata to all shareholders of the Fund (or class) according to the number of shares of the Fund (or class) held by shareholders on the record date. The amount of income dividends per share may vary between separate share classes of a Fund based upon differences in the way that expenses are allocated between share classes pursuant to a multiple class plan.
Voting Rights and Shareholder Meetings
The Trust is not required to hold annual shareholder meetings, but special meetings may be called for certain purposes. The Trust voluntarily has undertaken to hold a shareholder meeting at which the Board would be elected at least every five years beginning in 2005. Each whole share (or fractional share) outstanding on the record date established in accordance with the Trust’s By-Laws shall be entitled to a number of votes on any matter on which it is entitled to vote equal to the net asset value of the share (or fractional share) in U.S. dollars determined at the close of business on the record date (for example, a share having a net asset value of $10.50 would be entitled to 10.5 votes).
Shareholders have the power to vote only as expressly granted under the 1940 Act or under Massachusetts business trust law. Shareholders have no independent right to vote on any matter, including the creation, operation, dissolution or termination of the Trust. Shareholders have the right to vote on other matters only as the Board authorizes. Currently, the 1940 Act requires that shareholders have the right to vote, under certain circumstances, to: (i) elect Trustees; (ii) approve investment advisory agreements and principal underwriting agreements; (iii) approve a change in subclassification of a Fund; (iv) approve any change in fundamental investment policies; (v) approve a distribution plan under Rule 12b-1 under the 1940 Act; and (vi) to terminate the employment of the independent accountant.
The Trustees may fill any vacancies on the Board except that the Trustees may not fill a vacancy if, immediately after filling such vacancy, less than two-thirds of the Trustees then in office would have been elected to such office by the shareholders. In addition, at such times as less than a majority of the Trustees then in office have been elected to such office by the shareholders, the Trustees must call a meeting of shareholders. Trustees may be removed from office by a vote of two-thirds of the outstanding shares at a meeting called at the request of shareholders whose interests represent 10% or more of the outstanding shares. Except as otherwise disclosed in a Fund’s prospectuses and this SAI, the Trustees shall continue to hold office and may appoint their successors.
At any shareholders’ meetings that may be held, shareholders of all series would vote together, irrespective of series, on the election of Trustees, but each series would vote separately from the others on other matters, such as changes in the investment policies of that series or the approval of the management agreement for that series. Shares of the Funds and any other series of the Trust that may be in existence from time to time generally vote together except when required by law to vote separately by fund or by class.
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Certain Participating Insurance Companies have voting rights with respect to all Fund shares held in the separate accounts where the Participating Insurance Companies set aside and invest the assets of certain of their annuity contracts and life insurance policies. To the extent a matter is to be voted upon by Fund shareholders and to the extent required by federal securities laws or regulations, it is expected that the Participating Insurance Companies will: (i) notify each annuity contract owner and life insurance policy holder (each an “Owner” and collectively, the “Owners”) of the shareholder meeting if shares held for that Owner’s contract or policy may be voted; (ii) send proxy materials and a form of instructions that each Owner can use to tell its Participating Insurance Company how to vote the Fund shares held for such contract or policy; (iii) arrange for the handling and tallying of proxies received from the Owners; (iv) vote all Fund shares attributable to each Owner’s contract or policy according to instructions received from such Owner; and (v) vote all Fund shares for which no voting instructions are received in the same proportion as shares for which instructions have been received.
Liquidation Rights
In the event of the liquidation or dissolution of the Trust or a Fund, shareholders of a Fund are entitled to a proportionate share of the assets of the Fund that are available for distribution and to a distribution of any general assets not attributable to a particular Fund, in the event of a liquidation or dissolution of the Trust, that are available for distribution in such manner and on such basis as the Board may determine.
Preemptive Rights
There are no preemptive rights associated with Fund shares.
Conversion Rights
Shareholders have the right, which is subject to change by the Board, to convert or “exchange” shares of one class for another. Such right is outlined and subject to certain conditions set forth in each Fund’s prospectuses.
Redemptions
Each Fund’s dividend, distribution and redemption policies can be found in its prospectuses under the headings Buying, Selling and Exchanging Shares and Distributions and Taxes. However, the Board may suspend the right of shareholders to sell shares when permitted or required to do so by law or compel sales of shares in certain cases.
Sinking Fund Provisions
The Trust has no sinking fund provisions.
Calls or Assessment
All Fund shares are issued in uncertificated form only and when issued will be fully paid and non-assessable by the Trust.
Other Securities
The Funds do not offer securities other than capital stock.
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PURCHASE, REDEMPTION AND PRICING OF SHARES
An investor may purchase, redeem and exchange shares in the Funds utilizing the methods, and subject to the restrictions, described in the Funds’ prospectuses. The following information supplements information in the Funds’ prospectuses.
Fund shares are made available to serve as the underlying investment vehicles for variable annuity and variable life insurance separate accounts issued by Participating Insurance Companies. Shares of the Funds are sold at net asset value without the imposition of a sales charge. The separate accounts of the Participating Insurance Companies place orders to purchase and redeem shares of the Funds based on, among other things, the amount of premium payments to be invested and the amount of surrender and transfer requests to be effected on that day pursuant to the contracts.
In addition, in no instance will the Funds be made available to life insurance separate accounts without the Trust having received any necessary SEC consents or approvals. It is conceivable that in the future it may be disadvantageous for variable annuity separate accounts and variable life insurance separate accounts to invest in the Funds simultaneously. Although the Trust and the Funds do not currently foresee any such disadvantages either to variable annuity contract owners or variable life insurance policy owners, the Trust’s Board intends to monitor events in order to identify any material conflicts between such contract owners and policy owners and to determine what action, if any, should be taken in response thereto. If the Board were to conclude that separate funds should be established for variable life and variable annuity separate accounts, the variable life and variable annuity contract holders would not bear any expenses attendant to the establishment of such separate funds.
Purchases of shares of the Funds may be effected on days on which the NYSE is open for business (a “Business Day”). The Trust and the Distributor reserve the right to reject any purchase order. The issuance of Shares is recorded on the books of the Trust, and share certificates are not issued.
Effective Time of Purchases
Purchase orders for shares in the Funds that are received by the Distributor or by the Transfer Agent before the close of regular trading hours on the Exchange (currently 4:00 p.m., Eastern time) on any Business Day are priced according to the net asset value determined on that day but are not executed until 4:00 p.m., Eastern time, on the Business Day on which immediately available funds in payment of the purchase price are received by the Fund’s Custodian.
Redemption proceeds are normally remitted in Federal funds wired to the redeeming Participating Insurance Company within three Business Days following receipt of the order. It is the responsibility of the Distributor to transmit orders it receives to the Trust. No charge for wiring redemption payments is imposed by the Trust. Redemption orders are effected at the net asset value per share next determined after acceptance of the order by the Transfer Agent.
The Trust may redeem shares involuntarily or make payment for redemption in readily marketable securities or other property under certain circumstances in accordance with the 1940 Act.
The Trust has elected to be governed by Rule 18f-1 under the 1940 Act, as a result of which a Fund is obligated to redeem shares, with respect to any one shareholder during any 90-day period, solely in cash up to the lesser of $250,000 or 1% of the net asset value of the Fund at the beginning of the period.
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Anti-Money Laundering Compliance
The Funds are required to comply with various anti-money laundering laws and regulations. Consequently, the Funds may request additional required information from you to verify your identity. Your application will be rejected if it does not contain your name, social security number, date of birth and permanent street address. If at any time the Funds believe a shareholder may be involved in suspicious activity or if certain account information matches information on government lists of suspicious persons, the Funds may choose not to establish a new account or may be required to “freeze” a shareholder’s account. The Funds also may be required to provide a governmental agency with information about transactions that have occurred in a shareholder’s account or to transfer monies received to establish a new account, transfer an existing account or transfer the proceeds of an existing account to a governmental agency. In some circumstances, the law may not permit the Funds to inform the shareholder that it has taken the actions described above.
Offering Price — All Funds Except Money Market Fund VS
The share price of each Fund is based on each Fund’s net asset value per share, which is calculated separately for each class of shares as of the close of regular trading on the NYSE (which is usually 4:00 p.m. Eastern time unless the NYSE closes earlier) on each day the Funds are open for business, unless the Board determines otherwise.
The value of each Fund’s portfolio securities for which a market quotation is available is determined in accordance with the Trust’s valuation procedures. In general terms, the valuation procedures provide that domestic exchange traded securities (other than NASDAQ listed equity securities) generally will be valued at their last traded sale prices as reported on the principal exchange where those securities are traded. If no sales of those securities are reported on a particular day on the principal exchange, the securities generally will be valued at the mean between the latest bid and asked prices as reported on the principal exchange where those securities are traded. Securities traded on a foreign securities exchange will generally be valued at their last sale prices on the exchange where the securities are primarily traded, or in the absence of a reported sale on a particular day, at their bid prices (in the case of securities held long) or ask prices (in the case of securities held short) as reported by that exchange. Securities traded primarily on NASDAQ will generally be valued at the NASDAQ Official Closing Price (NOCP) (which is the last trade price at or before 4:00:02 p.m. (Eastern Time) adjusted up to NASDAQ’s best bid price if the last trade price is below such bid price or adjusted down to NASDAQ’s best ask price if the last trade price is above such ask price). If no NOCP is available, the security will generally be valued at the last sale price shown on NASDAQ prior to the calculation of the NAV of the Fund. If no sale price is shown on NASDAQ, the latest bid price will be used. If no sale price is shown and no latest bid price is available, the price will be deemed “stale” and the value will be determined in accordance with the Funds’ fair valuation procedures.
Securities not traded upon any exchange will generally be valued at the mean between the latest bid and asked prices based upon quotes furnished by the appropriate market makers. If quoted prices are unavailable or are believed to be inaccurate, market values will generally be determined based on quotes obtained from one or more broker(s) or dealer(s) or based on a price obtained from a reputable independent pricing service.
Financial futures will generally be valued at the latest reported sales price. Forward foreign currency contracts will generally be valued using market quotations from a widely used quotation system that reflects the current cost of covering or off-setting the contract. Exchange traded options will generally be valued at the latest reported sales price on their exchange. If there is no reported sale on the valuation date, the options will generally be valued at the mean between the latest bid and asked prices.
Over-the-counter derivatives will generally be valued at fair value in accordance with the Funds’ fair valuation procedures.
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Repurchase agreements will generally be valued at a price equal to the amount of the cash invested in the repurchase agreement at the time of valuation. The market value of the securities underlying a repurchase agreement will be determined in accordance with the procedures above, as appropriate, for the purpose of determining the adequacy of collateral.
Shares of open-end investment companies held in a Fund’s portfolio will generally be valued at the latest net asset value reported by the investment company.
Debt securities will generally be valued by a pricing service which may employ a matrix or other indications of value, including but not limited to broker quotes, to determine valuations for normal institutional size trading units. The matrix can take into account various factors including, without limitation, bids, yield spreads, and/or other market data and specific security characteristics (e.g., credit quality, maturity and coupon rate). Debt securities for which a pricing service does not furnish valuations and for which market quotations are readily available will generally be valued based on the mean of the latest bid prices obtained from one or more dealers. Debt securities with remaining maturities of 60 days or less will, absent unusual circumstances, be valued at amortized cost.
Securities for which market quotations are not readily available for any reason, including that the latest quotation is deemed unreliable or unreasonable, securities and other assets and liabilities are valued at “fair value” as determined in good faith by the Advisor’s valuation committee. In general, any one or more of the following factors may be taken into account in determining fair value: the fundamental analytical data relating to the security; the value of other financial instruments, including derivative securities, traded on other markets or among dealers; trading volumes on markets, exchanges, or among dealers; values of baskets of securities traded on other markets; changes in interest rates; observations from financial institutions; government (domestic or foreign) actions or pronouncements; other news events; information as to any transactions or offers with respect to the security; price and extent of public trading in similar securities of the issuer or comparable companies; nature and expected duration of the event, if any, giving rise to the valuation issue; pricing history of the security; the relative size of the position in the portfolio; and other relevant information.
With respect to securities traded on foreign markets, the following factors also may be relevant: the value of foreign securities traded on other foreign markets; ADR trading; closed-end fund trading; foreign currency exchange activity; and the trading of financial products that are tied to baskets of foreign securities, such as World Equity Benchmark Shares™.
The Board has determined, and the valuation procedures provide, that in certain circumstances it may be necessary to use an alternative valuation method, such as in-kind redemptions with affiliated benefit plans where the Department of Labor requires that valuation to be done in accordance with Rule 17a-7 of the 1940 Act.
Offering Price — Money Market Fund VS
Money Market Fund VS uses the amortized cost method to determine the value of its portfolio securities pursuant to Rule 2a-7 under the 1940 Act. The amortized cost method involves valuing a security at its cost initially and thereafter a constant amortization to maturity of any discount or premium is assumed, regardless of the impact of fluctuating interest rates on the market value of the security. The net asset value per share of the Fund will be determined (unless the Fund closes earlier) as of the times outlined in its prospectus.
Money Market Fund VS invests only in high-quality instruments and maintains a dollar-weighted average portfolio maturity of 90 days or less. The Fund generally may only invest in securities with a remaining maturity of 397 days or less, or that have maturities longer than 397 days but have demand, interest rate reset features or guarantees that are 397 days or less. The Board has established procedures reasonably designed, taking into account current market conditions and the Fund’s investment objective, to stabilize the net asset value per share of the Fund for purposes of sales and redemptions at $1.00. These procedures include review by the Board at
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such intervals as it deems appropriate to determine the extent, if any, to which the net asset value per share of the Fund calculated by using available market quotations deviates from $1.00 per share. In the event such deviation exceeds one-half of one percent, the Board will promptly consider what action, if any, should be initiated. If the Board believes that the extent of any deviation from the Fund’s $1.00 amortized cost price per share may result in material dilution or other unfair results to new or existing investors, it has agreed to take such steps as it considers appropriate to eliminate or reduce, to the extent reasonably practicable, any such dilution or unfair results. These steps may include selling portfolio instruments prior to maturity; shortening the average portfolio maturity; withholding or reducing dividends; redeeming shares in kind; reducing the number of the Fund’s outstanding shares without monetary consideration; or utilizing a net asset value per share determined by using available market quotations.
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The following information supplements and should be read in conjunction with the section in the Funds’ prospectuses entitled Distributions and Taxes. The prospectuses generally describe the U.S. federal income tax treatment of the Funds and their shareholders. This section of the SAI provides additional information concerning U.S. federal income taxes. It is based on the Code, applicable Treasury Regulations, judicial authority, and administrative rulings and practice, all as in effect as of the date of this SAI and all of which are subject to change, including changes with retroactive effect. The following discussion does not address any state, local or foreign tax matters.
The following discussion is generally based on the assumption that the shares of each Fund will be respected as owned by participating insurance companies through their separate accounts. If this is not the case, the person(s) determined to own the Fund shares will not be eligible for tax deferral and, instead, will be taxed currently on Fund distributions and on the proceeds of any sale, exchange or redemption of Fund shares under applicable U.S. federal income tax rules that may not be discussed herein.
Because insurance company separate accounts (and potentially certain other permitted investors) will be the only shareholders of a Fund, only certain tax aspects of an investment in a Fund are described herein. The tax treatment of holders of variable annuity contracts and variable life insurance policies and insurance companies may vary depending on their particular situation.
The Trust has not requested and will not request an advance ruling from the IRS as to the U.S. federal income tax matters described below. The IRS could adopt positions contrary to those discussed below and such positions could be sustained. In addition, the following discussion and the discussions in the Funds’ prospectuses address only some of the U.S. federal income tax considerations generally affecting investments in the Funds.
Prospective holders of variable annuity contracts and variable life insurance policies are urged to review the prospectuses and other information provided by their participating insurance companies and consult their own tax advisors and financial planners regarding the U.S. federal tax consequences of an investment in a Fund, the application of state, local, or foreign laws, and the effect of any possible changes in applicable tax laws on an investment in the Funds.
Qualification as a Regulated Investment Company
It is intended that each Fund qualify as a “regulated investment company” under Subchapter M of Subtitle A, Chapter 1 of the Code. Each Fund will be treated as a separate entity for U.S. federal income tax purposes. Thus, the provisions of the Code applicable to regulated investment companies generally will apply separately to each Fund, even though each Fund is a series of the Trust. Furthermore, each Fund will separately determine its income, gains, losses, and expenses for U.S. federal income tax purposes.
In order to qualify for the special tax treatment accorded regulated investment companies and their shareholders, each Fund must, among other things, derive at least 90% of its gross income each taxable year generally from (i) dividends, interest, certain payments with respect to securities loans, gains from the sale or other disposition of stock, securities or foreign currencies, and other income attributable to its business of investing in such stock, securities or foreign currencies (including, but not limited to, gains from options, futures or forward contracts) and (ii) net income derived from an interest in a qualified publicly traded partnership, as defined below. In general, for purposes of this 90% gross income requirement, 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 directly by the regulated investment company. However, 100% of the net income derived from an interest in a qualified publicly traded partnership (very generally, defined as a partnership (x) the interests in which are traded on an established securities market or readily tradable on a secondary market or the substantial equivalent thereof, (y) that derives at least 90% of its
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income from the passive income sources defined in Code Section 7704(d), and (z) that derives less than 90% of its income from the qualifying income described in clause (i) above) will be treated as qualifying income. Certain of a Fund’s investments in master limited partnerships (MLPs) may qualify as interests in qualified publicly traded partnerships. In addition, although in general the passive loss rules do not apply to a regulated investment company, such rules do apply to a regulated investment company with respect to items attributable to an interest in a qualified publicly traded partnership.
Each Fund must also diversify its holdings so that, at the end of each quarter of the Fund’s taxable year: (i) at least 50% of the fair market value of its total assets consists of (A) cash and cash items (including receivables), U.S. Government securities and securities of other regulated investment companies, and (B) securities of any one issuer (other than those described in clause (A)) to the extent such securities do not exceed 5% of the value of the Fund’s total assets and are 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 consists of the securities of any one issuer (other than those described in clause (i)(A)), the securities of two or more issuers the Fund controls and which are engaged in the same, similar, or related trades or businesses, or the securities of one or more qualified publicly traded partnerships. In addition, for purposes of meeting this diversification requirement, the term “outstanding voting securities of such issuer” includes the equity securities of a qualified publicly traded partnership and in the case of a Fund’s investments in loan participations, the Fund shall treat both the financial intermediary and the issuer of the underlying loan as an issuer. The qualifying income and diversification requirements described above may limit the extent to which a Fund can engage in certain derivative transactions, including, but not limited to, options, futures contracts, forward contracts and swap agreements, as well as the extent to which it can invest in MLPs.
In addition, each Fund generally must distribute to its shareholders at least 90% of its investment company taxable income for the taxable year, which generally includes its ordinary income and the excess of any net short-term capital gain over net long-term capital loss, and at least 90% of its net tax-exempt interest income (if any) for the taxable year.
If a Fund qualifies as a regulated investment company that is accorded special tax treatment, it generally will not be subject to U.S. federal income tax on any of the investment company taxable income and net capital gain (i.e., the excess of net long-term capital gain over net short-term capital loss) it distributes to its shareholders. Each Fund generally intends to distribute at least annually substantially all of its investment company taxable income (computed without regard to the dividends-paid deduction) and substantially all of its net capital gain. However, no assurance can be given that a Fund will not be subject to U.S. federal income taxation. Any investment company taxable income or net capital gain retained by the Fund will be subject to tax at regular corporate rates.
In determining its net capital gain, a regulated investment company generally must treat any net capital loss or any net long-term capital loss incurred after October 31 of a given year as if it had been incurred in the succeeding year. Treasury Regulations permit a regulated investment company, in determining its taxable income, to elect to treat all or part of any net capital loss, any net long-term capital loss or any foreign currency loss incurred after October 31 as if it had been incurred in the succeeding year.
In order to comply with the distribution requirements described above applicable to regulated investment companies, a Fund generally must make the distributions in the same taxable year that it realizes the income and gain, although in certain circumstances, a Fund may make the distributions in the following taxable year in respect of income and gains from the prior taxable year. If a Fund declares a distribution to shareholders of record in October, November or December of one calendar year and pays the distribution by January 31 of the following calendar year the Fund and its shareholders will be treated as if the Fund paid the distribution by December 31 of the earlier year.
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If, for any taxable year, a Fund fails to qualify as a regulated investment company accorded special tax treatment under the Code, (i) it will be taxed in the same manner as an ordinary corporation without any deduction for its distributions to shareholders, and (ii) each insurance company separate account invested in the Fund would fail to satisfy the diversification requirements described below (under Taxation of a Separate Account of a Participating Insurance Company), with the result that the variable annuity contracts and variable life insurance policies supported by that account would no longer be eligible for tax deferral. In addition, the Fund could be required to recognize unrealized gains, pay substantial taxes and interest and make substantial distributions before requalifying as a regulated investment company.
Excise Tax
Amounts not distributed on a timely basis by regulated investment companies in accordance with a calendar year distribution requirement are subject to a nondeductible 4% excise tax at the Fund level. This excise tax, however, is inapplicable to any regulated investment company whose sole shareholders are either tax-exempt pension trusts or separate accounts of insurance companies funding variable contracts. If a Fund is subject to the excise tax requirements and the Fund fails to distribute by December 31 of each calendar year at least the sum of 98% of its ordinary income for that year (excluding capital gains and losses) and 98% of its capital gain net income (adjusted for net ordinary losses) for the 1-year period ending on October 31 of that year (or November 30 or December 31 of that year if the Fund is permitted to and so elects), and any of its ordinary income and capital gain net income from previous years that were not distributed during such years, the Fund will be subject to the excise tax. For these purposes, a Fund will be treated as having distributed any amount on which it has been subject to corporate income tax in the taxable year ending within the calendar year. Each Fund generally intends, if it is subject to the excise tax, to actually distribute or be deemed to have distributed substantially all of its ordinary income and capital gain net income, if any, by the end of each calendar year in order to avoid having any liability for payment of excise tax. However, no assurance can be given that a Fund will not have any excise tax liability.
Capital Loss Carryforwards
Subject to certain limitations, a Fund is permitted to carry forward a net capital loss from any year to offset its capital gains, if any, realized during the eight years following the year of the loss. A Fund’s capital loss carryforward is treated as a short-term capital loss in the year to which it is carried. If future capital gains are offset by carried forward capital losses, such future capital gains are not subject to fund-level U.S. federal income taxation, regardless of whether they are distributed to shareholders. Accordingly, the Funds do not expect to distribute any such offsetting capital gains. The Funds cannot carry back or carry forward any net operating losses.
Equalization Accounting
Each Fund may use the so-called “equalization method” of accounting to allocate a portion of its “accumulated earnings and profits,” which generally equals a Fund’s undistributed net investment income and realized capital gains, with certain adjustments, to redemption proceeds. This method permits a Fund to achieve more balanced distributions for both continuing and redeeming shareholders. Although using this method generally will not affect a Fund’s total returns, it may reduce the amount of income and gains that the Fund would otherwise distribute to continuing shareholders by reducing the effect of redemptions of Fund shares on Fund distributions to shareholders. The IRS has not sanctioned the particular equalization method used by the Funds, and thus a Fund’s use of this method may be subject to IRS scrutiny.
Taxation of Fund Investments
In general, realized gains or losses on the sale of securities held by a Fund will be treated as capital gains or losses, and long-term capital gains or losses if the Fund has held or is deemed to have held the securities for more than one year at the time of disposition.
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If a Fund purchases a debt obligation with original issue discount (OID) (generally a debt obligation with an issue price less than its stated principal amount, such as a zero-coupon bond), the Fund may be required to annually include in its income a portion of the OID as ordinary income, even though the Fund will not receive cash payments for such discount until maturity or disposition of the obligation. Inflation-protected bonds generally can be expected to produce OID income as their principal amounts are adjusted upward for inflation. A Fund generally will be required to make distributions to shareholders representing the OID or market discount (if an election is made by the Fund to accrue market discount over the holding period of the applicable debt obligation) on debt securities that is currently includible in income, even though the cash representing such income may not have been received by the Fund. Cash to pay such distributions may be obtained from borrowing or from sales proceeds of securities held by a Fund which the Fund otherwise might have continued to hold; obtaining such cash might be disadvantageous for the Fund.
In addition, payment-in-kind securities similarly will give rise to income which is required to be distributed and is taxable even though a Fund receives no cash interest payment on the security during the year. A portion of the interest paid or accrued on certain high-yield discount obligations (such as high-yield corporate debt securities) may not (and interest paid on debt obligations owned by a Fund that are considered for tax purposes to be payable in the equity of the issuer or a related party will not) be deductible to the issuer, possibly affecting the cash flow of the issuer.
If a Fund invests in debt obligations that are in the lowest rating categories or are unrated, including debt obligations of issuers not currently paying interest or who are in default, special tax issues may exist for the Fund. Tax rules are not entirely clear about issues such as whether a Fund should recognize market discount on a debt obligation and, if so, the amount of market discount the Fund should recognize, when a Fund may cease to accrue interest, OID 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 a 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.
If an option granted by a Fund is sold, lapses or is otherwise terminated through a closing transaction, such as a repurchase by the Fund of the option from its holder, the Fund generally will realize a short-term capital gain or loss, depending on whether the premium income is greater or less than the amount paid by the Fund in the closing transaction. Some capital losses realized by a Fund in the sale, exchange, exercise or other disposition of an option may be deferred if they result from a position that is part of a “straddle,” discussed below. If securities are sold by a Fund pursuant to the exercise of a covered call option granted by it, the Fund generally will add the premium received to the sale price of the securities delivered in determining the amount of gain or loss on the sale. If securities are purchased by a Fund pursuant to the exercise of a put option written by it, the Fund generally will subtract the premium received from its cost basis in the securities purchased.
Some regulated futures contracts, foreign currency contracts, and non-equity, listed options that may be used by a Fund will be deemed “Section 1256 contracts.” A Fund will be required to “mark to market” any such contracts held at the end of the taxable year by treating them as if they had been sold on the last day of that year at market value. Sixty percent of any net gain or loss realized on all dispositions of Section 1256 contracts, including deemed dispositions under the “mark-to-market” rule, generally will be treated as long-term capital gain or loss, and the remaining 40% will be treated as short-term capital gain or loss, although certain foreign currency gains and losses from such contracts may be treated as ordinary income or loss as described below. These provisions may require a Fund to recognize income or gains without a concurrent receipt of cash. Transactions that qualify as designated hedges are exempt from the mark-to-market rule and the “60%/40%” rule and may require the Fund to defer the recognition of losses on certain futures contracts, foreign currency contracts, and non-equity options.
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Foreign exchange gains and losses realized by a Fund in connection with certain transactions involving foreign currency-denominated debt securities, certain options, futures contracts, forward contracts and similar instruments relating to foreign currency, foreign currencies, or payables or receivables denominated in a foreign currency are subject to Section 988 of the Code, which generally causes such gains and losses to be treated as ordinary income or loss and may affect the amount and timing of recognition of the Fund’s income. Under future U.S. Treasury Regulations, any such transactions that are not directly related to a Fund’s investments in stock or securities (or its options contracts or futures contracts with respect to stock or securities) may have to be limited in order to enable the Fund to satisfy the 90% qualifying income test described above. If the net foreign exchange loss exceeds a Fund’s net investment company taxable income (computed without regard to such loss) for a taxable year, the resulting ordinary loss for such year will not be available as a carryforward and thus cannot be deducted by the Fund or its shareholders in future years.
Offsetting positions held by a Fund involving certain derivative instruments, such as forward, futures and options contracts, may be considered, for U.S. federal income tax purposes, to constitute “straddles.” “Straddles” are defined to include “offsetting positions” in actively traded personal property. The tax treatment of “straddles” is governed by Section 1092 of the Code which, in certain circumstances, overrides or modifies the provisions of Section 1256. If a Fund is treated as entering into a “straddle” and at least one (but not all) of the Fund’s positions in derivative contracts comprising a part of such straddle is governed by Section 1256 of the Code, described above, then such straddle could be characterized as a “mixed straddle.” A Fund may make one or more elections with respect to “mixed straddles.” Depending upon which election is made, if any, the results with respect to a Fund may differ. Generally, to the extent the straddle rules apply to positions established by a Fund, losses realized by the Fund may be deferred to the extent of unrealized gain in any offsetting positions. Furthermore, the Fund may be required to capitalize, rather than deduct currently, any interest expense and carrying charges applicable to a position that is part of a straddle, including any interest on indebtedness incurred or continued to purchase or carry any positions that are part of a straddle. The application of the straddle rules to certain offsetting Fund positions can therefore affect the amount, timing, and character of distributions to shareholders, and may result in significant differences from the amount, timing and character of distributions that would have been made by the Fund if it had not entered into offsetting positions in respect of certain of its portfolio securities.
If a Fund enters into a “constructive sale” of any appreciated financial position in stock, a partnership interest, or certain debt instruments, the Fund will be treated as if it had sold and immediately repurchased the property and must recognize gain (but not loss) with respect to that position. A constructive sale of an appreciated financial position occurs when a Fund enters into certain offsetting transactions with respect to the same or substantially identical property, including, but not limited to: (i) a short sale; (ii) an offsetting notional principal contract; (iii) a futures or forward contract; or (iv) other transactions identified in future Treasury Regulations. The character of the gain from constructive sales will depend upon a Fund’s holding period in the appreciated financial position. Losses realized from a sale of a position that was previously the subject of a constructive sale will be recognized when the position is subsequently disposed of. The character of such losses will depend upon a Fund’s holding period in the position beginning with the date the constructive sale was deemed to have occurred and the application of various loss deferral provisions in the Code. Constructive sale treatment does not apply to certain closed transactions, including if such a transaction is closed on or before the 30th day after the close of the Fund’s taxable year and the Fund holds the appreciated financial position unhedged throughout the 60-day period beginning with the day such transaction was closed.
The amount of long-term capital gain a Fund may recognize from certain derivative transactions with respect to interests in certain pass-through entities is limited under the Code’s constructive ownership rules. The amount of long-term capital gain is limited to the amount of such gain the Fund would have had if the Fund directly invested in the pass-through entity during the term of the derivative contract. Any gain in excess of this amount is treated as ordinary income. An interest charge is imposed on the amount of gain that is treated as ordinary income.
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In addition, a Fund’s transactions in securities and certain types of derivatives (e.g., options, futures contracts, forward contracts and swap agreements) may be subject to other special tax rules, such as the wash-sale rules or the short-sale rules, the effect of which may be to accelerate income to the Fund or defer losses to the Fund. These rules could therefore affect the amount, timing and character of distributions to shareholders.
Certain of a Fund’s investments in derivative instruments and foreign currency-denominated instruments, as well as any of its foreign currency transactions and hedging activities, are likely to produce a difference between its book income and its taxable income. If a Fund’s book income is less than the sum of its taxable income and net tax-exempt income (if any), the Fund could be required to make distributions exceeding book income to qualify as a regulated investment company that is accorded special tax treatment.
Rules governing the U.S. federal income tax aspects of derivatives, including swap agreements, are in a developing stage and are not entirely clear in certain respects. Accordingly, while each Fund intends to account for such transactions in a manner it deems to be appropriate, an adverse determination or future guidance by the IRS with respect to these rules (which determination or guidance could be retroactive) may affect whether a Fund has made sufficient distributions, and otherwise satisfied the relevant requirements to maintain its qualification as a regulated investment company and avoid fund-level tax. Certain requirements that must be met under the Code in order for a Fund to qualify as a regulated investment company may limit the extent to which a Fund will be able to engage in certain derivatives transactions.
Any investment by a Fund in REIT equity securities may result in the Fund’s receipt of cash in excess of the REIT’s earnings. Investments in REIT equity securities also may require a Fund to accrue and distribute income not yet received. 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 may invest directly or indirectly in residual interests in REMICs or equity interests in taxable mortgage pools (TMPs). Under an IRS notice, and Treasury Regulations that have yet to be issued but may apply retroactively, a portion of a Fund’s income (including income allocated to the Fund from a 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 U.S. federal income tax in all events. This notice also provides, and the regulations are expected to provide, that excess inclusion income of a regulated investment company, such as a Fund, 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. As a result, a participating insurance company separate account supporting a variable contract may be taxed currently to the extent of its share of the Fund’s excess inclusion income.
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), (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 certain other tax-exempt entities) 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, (iii) in the case of a foreign shareholder, will not qualify for any reduction in U.S. federal withholding tax, and (iv) in the case of a participating insurance company separate account supporting a variable contract, cannot be offset by an adjustment to the reserves and thus is currently taxed notwithstanding the more general tax deferral available to insurance company separate accounts funding variable contracts.
Some amounts received by a Fund from its investments in MLPs will likely be treated as returns of capital because of accelerated deductions available with respect to the activities of MLPs. On the disposition of an investment in such an MLP, the Fund will likely realize taxable income in excess of economic gain from that asset (or if a Fund does not dispose of the MLP, the Fund will likely realize taxable income in excess of cash flow received by the Fund from the MLP in a later period), and the Fund must take such income into account in
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determining whether the Fund has satisfied its regulated investment company distribution requirements. The Fund may have to borrow or liquidate securities to satisfy its distribution requirements and meet its redemption requests, even though investment considerations might otherwise make it undesirable for the Fund to borrow money or sell securities at the time. In addition, distributions attributable to gain from the sale of MLPs could be characterized as ordinary income under the Code’s recapture provisions.
“Passive foreign investment companies” (PFICs) are generally defined as foreign corporations where at least 75% of their gross income for their taxable year is income from passive sources (such as interest, dividends, certain rents and royalties, or capital gains) or at least 50% of their assets on average produce such passive income. If a Fund acquires any equity interest in a PFIC, the Fund could be subject to U.S. federal income tax and interest charges on “excess distributions” received from the PFIC or on gain from the sale of such equity interest in the PFIC, even if all income or gain actually received by the Fund is timely distributed to its shareholders. Excess distributions and gain from the sale of interests in PFICs may be characterized as ordinary income even though, absent the application of PFIC rules, these amounts may otherwise have been classified as capital gain.
A Fund will not be permitted to pass through to its shareholders any credit or deduction for these special taxes and interest charges incurred with respect to a PFIC. Elections may be available that would ameliorate these adverse tax consequences, but such elections would require a Fund to include its share of the PFIC’s income and net capital gains annually, regardless of whether it receives any distribution from the PFIC (in the case of a “QEF election”), or to mark the gains (and to a limited extent losses) in its interests in the PFIC “to the market” as though the Fund had sold and repurchased such interests on the last day of the Fund’s taxable year, treating such gains and losses as ordinary income and loss (in the case of a “mark-to-market election”). The QEF and mark-to-market elections may require a Fund to recognize taxable income or gain without the concurrent receipt of cash and increase the amount required to be distributed by the Fund to avoid taxation. Making either of these elections therefore may require a Fund to liquidate other investments prematurely to meet the minimum distribution requirements described above, which also may accelerate the recognition of gain and adversely affect the Fund’s total return. Each Fund may attempt to limit and/or manage its holdings in PFICs to minimize tax liability and/or maximize returns from these investments but there can be no assurance that it will be able to do so. Moreover, because it is not always possible to identify a foreign corporation as a PFIC in advance of acquiring shares in the corporation, a Fund may incur the tax and interest charges described above in some instances.
In addition to the investments described above, prospective shareholders should be aware that other investments made by a Fund may involve complex tax rules that may result in income or gain recognition by the Fund without corresponding current cash receipts. Although each Fund seeks to avoid significant noncash income, such noncash income could be recognized by a Fund, in which case the Fund may distribute cash derived from other sources in order to meet the minimum distribution requirements described above. In this regard, a Fund could be required at times to liquidate investments prematurely in order to satisfy its minimum distribution requirements, which may accelerate the recognition of gain and adversely affect the Fund’s total return. Furthermore, amounts realized by a Fund from sources within foreign countries may be subject to withholding and other taxes imposed by such countries, thereby reducing the amount available for distribution to shareholders.
Taxation of a Separate Account of a Participating Insurance Company
Under the Code, if the investments of a segregated asset account, such as the separate accounts of participating insurance companies, are “adequately diversified,” and certain other requirements are met, a holder of a variable annuity contract or variable life insurance policy supported by the account will receive favorable tax treatment in the form of deferral of tax until a distribution is made under the contract or policy.
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In general, the investments of a segregated asset account are considered to be “adequately diversified” only if: (i) no more than 55% of the value of the total assets of the account is represented by any one investment; (ii) no more than 70% of the value of the total assets of the account is represented by any two investments; (iii) no more than 80% of the value of the total assets of the account is represented by any three investments; and (iv) no more than 90% of the value of the total assets of the account is represented by any four investments. Section 817(h) provides as a safe harbor that a segregated asset account is also considered to be “adequately diversified” if it meets the regulated investment company diversification tests described earlier and no more than 55% of the value of the total assets of the account is attributable to cash, cash items (including receivables), U.S. Government securities, and securities of other regulated investment companies.
In general, all securities of the same issuer are treated as a single investment for such purposes, and each U.S. Government agency and instrumentality is considered a separate issuer. However, U.S. Treasury Regulations provide a “look-through rule” with respect to a segregated asset account’s investments in a regulated investment company for purposes of the applicable diversification requirements, provided certain conditions are satisfied by the regulated investment company. In particular, (i) if the beneficial interests in the regulated investment company are held by one or more segregated asset accounts of one or more insurance companies, and (ii) if public access to such regulated investment company is available exclusively through the purchase of a variable annuity contract or variable life insurance policy or through certain retirement plans, then a segregated asset account’s beneficial interest in the regulated investment company is not treated as a single investment. Instead, a pro rata portion of each asset of the regulated investment company is treated as an asset of the segregated asset account. Look-through treatment is also available if the two requirements above are met and notwithstanding the fact that beneficial interests in the regulated investment company are also held by certain other permitted investors, including certain pension or retirement plans, certain qualified tuition programs, or certain Puerto Rican segregated asset accounts.
As indicated above, the Trust intends that each Fund will continue to qualify as a regulated investment company under the Code. The Trust also intends to cause each Fund to continue to satisfy the separate diversification requirements imposed by Section 817(h) of the Code and the regulations thereunder at all times to enable the corresponding separate accounts to be “adequately diversified.” In addition, the Trust intends that each Fund will qualify for the “look-through rule” described above by limiting the investment in each Fund’s shares to insurance company separate accounts and other permitted investors. Accordingly, the Trust intends that each participating insurance company, through its separate accounts, will be able to treat its interests in a Fund as ownership of a pro rata portion of each asset of the Fund, so that individual holders of the variable annuity contracts or variable life insurance policies underlying the separate account will qualify for favorable U.S. federal income tax treatment under the Code. However, no assurance can be made in that regard.
Failure by a Fund to satisfy the Section 817(h) requirements by failing to comply with the “55%-70%-80%-90%” diversification test or the safe harbor described above, or by failing to comply with the “look-through rule”, could cause the variable contracts to lose their favorable tax status and require a contract holder to include currently in ordinary income any income accrued under the contracts for the current and all prior taxable years. Under certain circumstances described in the applicable U.S. Treasury Regulations, inadvertent failure to satisfy the Section 817(h) diversification requirements may be corrected; such a correction would require a payment to the IRS. Any such failure could also result in adverse tax consequences for the insurance company issuing the contracts.
The IRS has indicated that a degree of investor control over the investment options underlying a variable annuity or life insurance contract may interfere with the tax-deferred treatment of such contracts. The Treasury Department has issued rulings addressing the circumstances in which a variable contract holder’s control of the investments of the separate account may cause the holder, rather than the insurance company, to be treated as the owner of the assets held by the separate account, and is likely to issue additional rulings in the future. If the holder is considered the owner of the securities underlying the separate account, income and gains produced by those securities would be included currently in the holder’s gross income.
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In determining whether an impermissible level of investor control is present, one factor the IRS considers is whether a Fund’s investment strategies are sufficiently broad to prevent a contract holder from being deemed to be making particular investment decisions through its investment in the separate account. For this purpose, current IRS guidance indicates that typical fund investment strategies, even those with a specific sector or geographical focus, are generally considered sufficiently broad. Most, although not necessarily all, of the Funds have objectives and strategies that are not materially narrower than the investment strategies held not to constitute an impermissible level of investor control in recent IRS rulings (such as large company stocks, international stocks, small company stocks, mortgage-backed securities, money market securities, telecommunications stocks and financial services stocks).
The above discussion addresses only one of several factors that the IRS considers in determining whether a contract holder has an impermissible level of investor control over a separate account. Contract holders should consult with their insurance companies, their tax advisers, as well as the prospectus relating to their particular contract for more information concerning this investor control issue.
In the event that additional rules, regulations or other guidance is issued by the IRS or the Treasury Department concerning this issue, such guidance could affect the treatment of a Fund as described above, including retroactively. In addition, there can be no assurance that a Fund will be able to continue to operate as currently described, or that the Fund will not have to change its investment objective or investment policies in order to prevent, on a prospective basis, any such rules and regulations from causing variable contract owners to be considered the owners of the shares of the Fund.
Tax Shelter Reporting Regulations
Under Treasury Regulations, if a shareholder recognizes a loss of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder, such as an insurance company holding the separate accounts to which reference is made in this SAI, 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, such as participating insurance companies that own shares in a Fund through their separate accounts, 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 advisors to determine the applicability of these regulations in light of their individual circumstances.
For information concerning the U.S. federal income tax consequences to the holders of variable annuity contracts or variable life insurance policies, such holders should consult the prospectuses and other materials used in connection with the issuance of their particular contracts or policies and should consult their own tax advisers and financial planners.
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CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS
All the shares of the Funds are held of record by sub-accounts of separate accounts of Participating Insurance Companies on behalf of the owners of VLI policies and VA contracts, by the Advisor or by the general account of SunLife Insurance Company (SunLife). At all meetings of shareholders of the Funds each Participating Insurance Company will vote the shares held of record by sub-accounts of its separate accounts only in accordance with the instructions received from the VLI policy and VA contract owners on behalf of whom such shares are held. All such shares as to which no instructions are received (as well as, in the case of SunLife, all shares held by its general account) will be voted in the same proportion as shares as to which instructions are received (with SunLife’s general account shares being voted in the proportions determined by instructing owners of SunLife VLI policies and VA contracts). Accordingly, each Participating Insurance Company disclaims beneficial ownership of the shares of the Funds held of record by the sub-accounts of its separate accounts (or, in the case of SunLife, its general account).
As of March 31, 2010, the name, address and percentage of ownership of each person who may be deemed to be a “principal holder “(i.e., owns of record or is known by the Trust to own beneficially 5% or more of any class of a Fund’s outstanding shares) is listed below.
Principal Holder Ownership of the Funds
Fund/Share Class | Shareholder Account Registration | Class Balance | Percentage of Class | |||||||
Columbia Asset Allocation Fund, Variable Series-Class A | SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) C/O SUN LIFE FINANCIAL P.O. BOX 9133 WELLESLEY HILLS, MA 02481-9133 | 3,210,853.9930 | 37.73 | % | ||||||
Columbia Asset Allocation Fund, Variable Series-Class A | SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) C/O SUN LIFE FINANCIAL P.O. BOX 9133 WELLESLEY HILLS, MA 02481-9133 | 1,725,809.7060 | 20.28 | % | ||||||
Columbia Asset Allocation Fund, Variable Series-Class A | INDEPENDENCE LIFE AND ANNUITY CO C/O SUN LIFE FINANCIAL P.O. BOX 9133 WELLESLEY HILLS, MA 02481-9133 | 1,189,201.8010 | 13.97 | % | ||||||
Columbia Asset Allocation Fund, Variable Series-Class A | HARTFORD LIFE INSURANCE COMPANY SEPARATE ACCOUNT TWO ATTN DAVID BROECK P.O. BOX 2999 HARTFORD, CT 06104-2999 | 719,532.5050 | 8.45 | % | ||||||
Columbia Asset Allocation Fund, Variable Series-Class A | AMERICAN SKANDIA LIFE ASSURANCE CO. ATTN: ALISON MITNICK 1 CORPORATE DRIVE, 9TH FL SHELTON, CT 06484-6208 | 582,721.0100 | 6.86 | % |
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Fund/Share Class | Shareholder Account Registration | Class Balance | Percentage of Class | |||||||
Columbia Asset Allocation Fund, Variable Series-Class B | SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) C/O SUN LIFE FINANCIAL P.O. BOX 9133 WELLESLEY HILLS, MA 02481-9133 | 1,805,637.0060 | 73.61 | % | ||||||
Columbia Asset Allocation Fund, Variable Series-Class B | SUN LIFE INSURANCE AND ANNUITY CO OF NEW YORK C/O SUN LIFE FINANCIAL P.O. BOX 9133 WELLESLEY HILLS, MA 02481-9133 | 340,013.8460 | 13.86 | % | ||||||
Columbia Asset Allocation Fund, Variable Series-Class B | SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) P.O. BOX 9133 WELLESLEY HILLS, MA 02481-9133 | 239,425.3800 | 9.76 | % | ||||||
Columbia Federal Securities Fund, Variable Series-Class A | SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) C/O SUN LIFE FINANCIAL P.O. BOX 9133 WELLESLEY HILLS, MA 02481-9133 | 1,173,404.3680 | 37.04 | % | ||||||
Columbia Federal Securities Fund, Variable Series-Class A | SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) C/O SUN LIFE FINANCIAL P.O. BOX 9133 WELLESLEY HILLS, MA 02481-9133 | 751,702.5210 | 23.73 | % | ||||||
Columbia Federal Securities Fund, Variable Series-Class A | INDEPENDENCE LIFE AND ANNUITY COMPANY C/O SUN LIFE FINANCIAL P.O. BOX 9133 WELLESLEY HILLS, MA 02481-9133 | 523,578.8070 | 16.53 | % | ||||||
Columbia Federal Securities Fund, Variable Series-Class A | AMERICAN SKANDIA LIFE ASSURANCE CO ATTN: ALISON MITNICK 1 CORPORATE DRIVE 9TH FL SHELTON, CT 06484-6208 | 179,440.1510 | 5.66 | % | ||||||
Columbia Federal Securities Fund, Variable Series-Class B | SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) C/O SUN LIFE FINANCIAL P.O. BOX 9133 WELLESLEY HILLS, MA 02481-9133 | 3,520,816.9770 | 77.17 | % | ||||||
Columbia Federal Securities Fund, Variable Series-Class B | SUN LIFE INSURANCE AND ANNUITY CO OF NEW YORK C/O SUN LIFE FINANCIAL P.O. BOX 9133 WELLESLEY HILLS, MA 02481-9133 | 778,123.0310 | 17.05 | % |
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Fund/Share Class | Shareholder Account Registration | Class Balance | Percentage of Class | |||||||
Columbia International Fund, Variable Series-Class A | SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) C/O SUN LIFE FINANCIAL P.O. BOX 9133 WELLESLEY HILLS, MA 02481-9133 | 9,739,200.6980 | 53.18 | % | ||||||
Columbia International Fund, Variable Series-Class A | SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) C/O SUN LIFE FINANCIAL P.O. BOX 9133 WELLESLEY HILLS, MA 02481-9133 | 5,493,659.3550 | 30.00 | % | ||||||
Columbia International Fund, Variable Series-Class A | INDEPENDENCE LIFE AND ANNUITY CO C/O SUN LIFE FINANCIAL P.O. BOX 9133 WELLESLEY HILLS, MA 02481-9133 | 1,244,738.7020 | 6.80 | % | ||||||
Columbia International Fund, Variable Series-Class B | SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) C/O SUN LIFE FINANCIAL P.O. BOX 9133 WELLESLEY HILLS, MA 02481-9133 | 1,544,715.2290 | 92.20 | % | ||||||
Columbia International Fund, Variable Series-Class B | SUN LIFE INSURANCE AND ANNUITY CO C/O SUN LIFE FINANCIAL P.O. BOX 9133 WELLESLEY HILLS, MA 02481-9133 | 130,648.8560 | 7.80 | % | ||||||
Columbia Large Cap Growth Fund, Variable Series-Class A | SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) C/O SUN LIFE FINANCIAL P.O. BOX 9133 WELLESLEY HILLS, MA 02481-9133 | 592,564.9590 | 29.22 | % | ||||||
Columbia Large Cap Growth Fund, Variable Series-Class A | INDEPENDENCE LIFE AND ANNUITY CO C/O SUN LIFE FINANCIAL P.O. BOX 9133 WELLESLEY HILLS, MA 02481-9133 | 511,788.9470 | 25.24 | % | ||||||
Columbia Large Cap Growth Fund, Variable Series-Class A | SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) C/O SUN LIFE FINANCIAL P.O. BOX 9133 WELLESLEY HILLS, MA 02481-9133 | 343,212.8810 | 16.92 | % | ||||||
Columbia Large Cap Growth Fund, Variable Series-Class A | AMERICAN SKANDIA LIFE ASSURANCE CO. ATTN: ALISON MITNICK 1 CORPORATE DRIVE, 9TH FL SHELTON, CT 06484-6208 | 235,296.8630 | 11.60 | % |
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Fund/Share Class | Shareholder Account Registration | Class Balance | Percentage of Class | |||||||
Columbia Large Cap Growth Fund, Variable Series-Class A | AMERICAN SKANDIA LIFE ASSURANCE CO. ATTN ALISON MITNICK 1 CORPORATE DRIVE, 9TH FL SHELTON, CT 06484-6208 | 194,645.1780 | 9.60 | % | ||||||
Columbia Large Cap Growth Fund, Variable Series-Class B | SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) C/O SUN LIFE FINANCIAL P.O. BOX 9133 WELLESLEY HILLS, MA 02481-9133 | 255,642.6190 | 83.09 | % | ||||||
Columbia Large Cap Growth Fund, Variable Series-Class B | SUN LIFE INSURANCE AND ANNUITY CO OF NEW YORK C/O SUN LIFE FINANCIAL P.O. BOX 9133 WELLESLEY HILLS, MA 02481-9133 | 41,804.3530 | 13.59 | % | ||||||
Columbia Large Cap Value Fund, Variable Series-Class A | HARTFORD LIFE INSURANCE COMPANY SEPARATE ACCOUNT TWO ATTN: DAVID TEN BROECK P.O. BOX 2999 HARTFORD, CT 06104-2999 | 2,406,696.1590 | 31.62 | % | ||||||
Columbia Large Cap Value Fund, Variable Series-Class A | SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) C/O SUN LIFE FINANCIAL P.O. BOX 9133 WELLESLEY HILLS, MA 02481-9133 | 2,384,657.4310 | 31.33 | % | ||||||
Columbia Large Cap Value Fund, Variable Series-Class A | SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) C/O SUN LIFE FINANCIAL P.O. BOX 9133 WELLESLEY HILLS, MA 02481-9133 | 1,337,486.2080 | 17.57 | % | ||||||
Columbia Large Cap Value Fund, Variable Series-Class B | SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) C/O SUN LIFE FINANCIAL P.O. BOX 9133 WELLESLEY HILLS, MA 02481-9133 | 1,127,321.5440 | 83.51 | % | ||||||
Columbia Large Cap Value Fund, Variable Series-Class B | SUN LIFE INSURANCE AND ANNUITY CO OF NEW YORK C/O SUN LIFE FINANCIAL P.O. BOX 9133 WELLESLEY HILLS, MA 02481-9133 | 169,791.9840 | 12.58 | % | ||||||
Columbia Mid Cap Value Fund, Variable Series-Class A | TRANSAMERICA LIFE INSURANCE CO. ATTN: FMG ACCOUNTING 4333 EDGEWOOD ROAD NE CEDAR RAPIDS, IA 52499-0001 | 26,767.6930 | 39.15 | % |
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Fund/Share Class | Shareholder Account Registration | Class Balance | Percentage of Class | |||||||
Columbia Mid Cap Value Fund, Variable Series-Class A | TRANSAMERICA LIFE INSURANCE CO. ATTN: FMG ACCOUNTING 4333 EDGEWOOD ROAD NE CEDAR RAPIDS, IA 52499-0001 | 20,712.1300 | 30.30 | % | ||||||
Columbia Mid Cap Value Fund Variable Series-Class A | TRANSAMERICA LIFE INSURANCE CO. ATTN: FMG ACCOUNTING 4333 EDGEWOOD ROAD NE CEDAR RAPIDS, IA 52499-0001 | 19,728.6290 | 28.86 | % | ||||||
Columbia Mid Cap Value Fund, Variable Series-Class B | SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) C/O SUN LIFE FINANCIAL P.O. BOX 9133 WELLESLEY HILLS, MA 02481-9133 | 1,252,035.0900 | 80.21 | % | ||||||
Columbia Mid Cap Value Fund, Variable Series-Class B | SUN LIFE INSURANCE AND ANNUITY CO C/O SUN LIFE FINANCIAL P.O. BOX 9133 WELLESLEY HILLS, MA 02481-9133 | 189,793.0050 | 12.16 | % | ||||||
Columbia Money Market Fund, Variable Series-Class A | SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) C/O SUN LIFE FINANCIAL P.O. BOX 9133 WELLESLEY HILLS, MA 02481-9133 | 64,499,422.9310 | 51.91 | % | ||||||
Columbia Money Market Fund, Variable Series-Class A | SUN LIFE INSURANCE AND ANNUITY CO OF NEW YORK C/O SUN LIFE FINANCIAL P.O. BOX 9133 WELLESLEY HILLS, MA 02481-9133 | 19,127,753.2680 | 15.39 | % | ||||||
Columbia Money Market Fund, Variable Series-Class A | SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) C/O SUN LIFE FINANCIAL P.O. BOX 9133 WELLESLEY HILLS, MA 02481-9133 | 15,615,935.2670 | 12.57 | % | ||||||
Columbia Money Market Fund, Variable Series-Class A | SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) C/O SUN LIFE FINANCIAL P.O. BOX 9133 WELLESLEY HILLS, MA 02481-9133 | 7,061,135.3700 | 5.68 | % | ||||||
Columbia S&P 500 Index Fund, Variable Series-Class A | FIM FUNDING INC 100 FEDERAL ST BOSTON, MA 02110-1802 | 1,014.1990 | 100.00 | % |
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Fund/Share Class | Shareholder Account Registration | Class Balance | Percentage of Class | |||||||
Columbia S&P 500 Index Fund, Variable Series-Class B | SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) C/O SUN LIFE FINANCIAL P.O. BOX 9133 WELLESLEY HILLS, MA 02481-9133 | 1,809,241.5130 | 79.47 | % | ||||||
Columbia S&P 500 Index Fund, Variable Series-Class B | SUN LIFE INSURANCE AND ANNUITY CO OF NEW YORK C/O SUN LIFE FINANCIAL P.O. BOX 9133 WELLESLEY HILLS, MA 02481-9133 | 379,211.7970 | 16.66 | % | ||||||
Columbia Select Large Cap Growth Fund, Variable Series-Class A | FIM FUNDING INC 100 FEDERAL ST BOSTON MA 02110-1802 | 250,080.8630 | 100.00 | % | ||||||
Columbia Select Large Cap Growth Fund, Variable Series-Class B | FIM FUNDING INC 100 FEDERAL ST BOSTON MA 02110-1802 | 250,040.4860 | 100.00 | % | ||||||
Columbia Small Cap Value Fund, Variable Series-Class A | AUL AMERICAN INDIVIDUAL VARIABLE UNIT TRUST 1 ONE AMERICA SQ P.O. BOX 368 INDIANAPOLIS, IN 46206-0368 | 1,117,373.4440 | 67.35 | % | ||||||
Columbia Small Cap Value Fund, Variable Series-Class A | SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) C/O SUN LIFE FINANCIAL P.O. BOX 9133 WELLESLEY HILLS, MA 02481-9133 | 159,746.6680 | 9.63 | % | ||||||
Columbia Small Cap Value Fund, Variable Series-Class A | LIBERTY LIFE ASSURANCE CO OF BOSTON POLICY HOLDER SVCS ATTN: S LABELLA 100 LIBERTY WAY DOVER, NH 03820-4597 | 107,191.8270 | 6.46 | % | ||||||
Columbia Small Cap Value Fund, Variable Series-Class A | AUL AMERICAN INDIVIDUAL VARIABLE UNIT TRUST ONE AMERICA SQ P.O. BOX 368 INDIANAPOLIS, IN 46206-0368 | 104,677.4740 | 6.31 | % | ||||||
Columbia Small Cap Value Fund, Variable Series-Class B | AMERICAN EXPRESS AMERICAN ENTERPRISE LIFE INS. 1497 AXP FINANCIAL CENTER MINNEAPOLIS, MN 55474-0014 | 14,461,630.2590 | 46.25 | % | ||||||
Columbia Small Cap Value Fund, Variable Series-Class B | ING USA ANNUITY AND LIFE INSURANCE COMPANY ATTN: JOHN STANZIANI 1475 DUNWOODY DRIVE WESTCHESTER, PA 19380-1478 | 10,393,032.2780 | 33.24 | % |
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Fund/Share Class | Shareholder Account Registration | Class Balance | Percentage of Class | |||||||
Columbia Small Cap Value Fund, Variable Series-Class B | NEW YORK LIFE INSURANCE & ANNUITY CORP ATTN: CHRISTINE DEMPSEY 169 LACKAWANNA AVENUE PARSIPPANY, NJ 07054-1007 | 4,504,846.1460 | 14.41 | % | ||||||
Columbia Small Company Growth Fund, Variable Series-Class A | HARTFORD LIFE INSURANCE COMPANY SEPARATE ACCOUNT TWO ATTN: DAVID TEN BROECK P.O. BOX 2999 HARTFORD, CT 06104-2999 | 1,671,372.3900 | 36.44 | % | ||||||
Columbia Small Company Growth Fund, Variable Series-Class A | SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) C/O SUN LIFE FINANCIAL P.O. BOX 9133 WELLESLEY HILLS, MA 02481-9133 | 1,668,981.2810 | 36.39 | % | ||||||
Columbia Small Company Growth Fund, Variable Series-Class A | MONUMENTAL LIFE INSURANCE ATTN: FMG ACCOUNTING 4333 EDGEWOOD ROAD NE CEDAR RAPIDS, IA 52499-0001 | 355,210.4050 | 7.74 | % | ||||||
Columbia Small Company Growth Fund, Variable Series-Class B | FARM BUREAU LIFE INSURANCE COMPANY 5400 UNIVERSITY AVE WEST DES MOINES, IA 50266-5950 | 148,512.0720 | 84.45 | % | ||||||
Columbia Small Company Growth Fund, Variable Series-Class B | GUARDIAN INSURANCE & ANNUITY CO, INC S/ A R L SHARE ATTN: PAUL IANNELLI MAIL STATION 3-S 3900 BURGESS PLACE BETHLEHEM, PA 18017-9097 | 16,786.6740 | 9.55 | % | ||||||
Columbia Strategic Income Fund, Variable Series-Class A | SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) C/O SUN LIFE FINANCIAL P.O. BOX 9133 WELLESLEY HILLS, MA 02481-9133 | 2,109,945.9170 | 47.43 | % | ||||||
Columbia Strategic Income Fund, Variable Series-Class A | SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) C/O SUN LIFE FINANCIAL P.O. BOX 9133 WELLESLEY HILLS, MA 02481-9133 | 1,161,678.6490 | 26.11 | % | ||||||
Columbia Strategic Income Fund, Variable Series-Class A | TRANSAMERICA LIFE INSURANCE CO. ATTN: FMG ACCOUNTING 4333 EDGEWOOD ROAD NE CEDAR RAPIDS, IA 52499-0001 | 342,011.0110 | 7.69 | % |
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Fund/Share Class | Shareholder Account Registration | Class Balance | Percentage of Class | |||||||
Columbia Strategic Income Fund, Variable Series-Class A | SUN LIFE INSURANCE AND ANNUITY CO OF NEW YORK C/O SUN LIFE FINANCIAL P.O. BOX 9133 WELLESLEY HILLS, MA 02481-9133 | 238,711.6540 | 5.37 | % | ||||||
Columbia Strategic Income Fund, Variable Series-Class B | SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) C/O SUN LIFE FINANCIAL P.O. BOX 9133 WELLESLEY HILLS, MA 02481-9133 | 2,493,113.7890 | 72.65 | % | ||||||
Columbia Strategic Income Fund, Variable Series-Class B | SUN LIFE INSURANCE AND ANNUITY CO OF NEW YORK C/O SUN LIFE FINANCIAL P.O. BOX 9133 WELLESLEY HILLS, MA 02481-9133 | 674,545.1450 | 19.66 | % | ||||||
Columbia Strategic Income Fund, Variable Series-Class B | SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) P.O. BOX 9133 WELLESLEY HILLS, MA 02481-9133 | 261,863.1410 | 7.63 | % | ||||||
Columbia Value and Restructuring Fund, Variable Series-Class A | FIM FUNDING INC 100 FEDERAL ST BOSTON, MA 02110-1802 | 255,619.4080 | 100.00 | % | ||||||
Columbia Value and Restructuring Fund, Variable Series-Class B | FIM FUNDING INC 100 FEDERAL ST BOSTON, MA 02110-1802 | 254,851.9370 | 100.00 | % |
As of March 31, 2010, the name, address and percentage of ownership of each person who may be deemed to be a “control person” (as that term is defined in the 1940 Act) of a Fund because it owns greater than 25% of the outstanding shares, either beneficially or by virtue of its fiduciary or trust roles or otherwise, is shown below. A controlling person’s vote could have a more significant effect on matters presented to shareholders for approval than the vote of other Fund shareholders.
Control Person Ownership of the Funds
Fund | Shareholder Account Registration | Fund Balance | Percentage of Fund | |||||||
Columbia Asset Allocation Fund, Variable Series- | SUN LIFE ASSURANCE COMPANY OF CANADA (U.S) C/O SUN LIFE FINANCIAL PO BOX 9133 WELLESLEY HILLS, MA 02481-9133 | 6,742,300.7050 | 61.49 | % | ||||||
Columbia Federal Securities Fund, Variable Series- | SUN LIFE ASSURANCE COMPANY OF CANADA (U.S) C/O SUN LIFE FINANCIAL PO BOX 9133 WELLESLEY HILLS, MA 02481-9133 | 5,445,923.8660 | 70.45 | % |
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Fund | Shareholder Account Registration | Fund Balance | Percentage of Fund | |||||||
Columbia International Fund, Variable Series- | SUN LIFE ASSURANCE COMPANY OF CANADA (U.S) C/O SUN LIFE FINANCIAL PO BOX 9133 WELLESLEY HILLS, MA 02481-9133 | 16,777,575.2820 | 83.94 | % | ||||||
Columbia Large Cap Growth Fund, Variable Series- | SUN LIFE ASSURANCE COMPANY OF CANADA (U.S) C/O SUN LIFE FINANCIAL PO BOX 9133 WELLESLEY HILLS, MA 02481-9133 | 1,191,420.4590 | 51.01 | % | ||||||
Columbia Large Cap Value Fund, Variable Series- | SUN LIFE ASSURANCE COMPANY OF CANADA (U.S) C/O SUN LIFE FINANCIAL PO BOX 9133 WELLESLEY HILLS, MA 02481-9133 | 4,849,465.1830 | 54.11 | % | ||||||
Columbia Large Cap Value Fund, Variable Series- | HARTFORD LIFE INSURANCE COMPANY SEPARATE ACCOUNT TWO ATTN DAVID BROECK PO BOX 2999 HARTFORD, CT 06104-2999 | 2,593,156.8190 | 27.05 | % | ||||||
Columbia Mid Cap Value Fund, Variable Series- | SUN LIFE ASSURANCE COMPANY OF CANADA (U.S) C/O SUN LIFE FINANCIAL PO BOX 9133 WELLESLEY HILLS, MA 02481-9133 | 1,252,035.0900 | 76.84 | % | ||||||
Columbia Money Market Fund, Variable Series- | SUN LIFE ASSURANCE COMPANY OF CANADA (U.S) C/O SUN LIFE FINANCIAL PO BOX 9133 WELLESLEY HILLS, MA 02481-9133 | 87,176,493.5680 | 70.16 | % | ||||||
Columbia S&P 500 Index Fund, Variable Series- | SUN LIFE ASSURANCE COMPANY OF CANADA (U.S) C/O SUN LIFE FINANCIAL PO BOX 9133 WELLESLEY HILLS, MA 02481-9133 | 1,809,241.5130 | 79.43 | % | ||||||
Columbia Small Cap Value Fund, Variable Series- | AMERICAN EXPRESS- MANAGED ASSETS TRUST: AMERICAN ENTERPRISE LIFE INS 1497 AXP FINANCIAL CENTER MINNEAPOLIS, MN 55474-0014 | 14,461,630.2590 | 43.92 | % | ||||||
Columbia Small Cap Value Fund, Variable Series- | ING USA ANNUITY AND LIFE INSURANCE COMPANY 1475 DUNWOODY DRIVE ATTN JOHN STANZIANI WESTCHESTER, PA 19380-1478 | 10,393,032.2780 | 31.56 | % |
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Fund | Shareholder Account Registration | Fund Balance | Percentage of Fund | |||||||
Columbia Small Company Growth Fund, Variable Series- | HARTFORD LIFE INSURANCE COMPANY SEPARATE ACCOUNT TWO ATTN DAVID BROECK PO BOX 2999 HARTFORD, CT 06104-2999 | 1,671,372.3900 | 35.10 | % | ||||||
Columbia Small Company Growth Fund, Variable Series- | SUN LIFE ASSURANCE COMPANY OF CANADA (U.S) C/O SUN LIFE FINANCIAL PO BOX 9133 WELLESLEY HILLS, MA 02481-9133 | 1,668,981.2810 | 35.05 | % | ||||||
Columbia Strategic Income Fund, Variable Series- | SUN LIFE ASSURANCE COMPANY OF CANADA (U.S) C/O SUN LIFE FINANCIAL PO BOX 9133 WELLESLEY HILLS, MA 02481-9133 | 5,764,738.3550 | 73.16 | % | ||||||
Columbia Select Large Cap Growth Fund, Variable Series- | FIM FUNDING INC 100 FEDERAL ST BOSTON, MA 02110-1802 | 500,121.3490 | 100.00 | % | ||||||
Columbia Value and Restructuring Fund, Variable Series- | FIM FUNDING INC 100 FEDERAL ST BOSTON, MA 02110-1802 | 510,471.3450 | 100.00 | % |
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APPENDIX A — DESCRIPTIONS OF SECURITIES RATINGS
This Appendix summarizes the various descriptions of securities ratings applicable to securities purchased by the Columbia Funds Family. Please refer to a Fund’s prospectus and statement of additional information to determine whether that Fund may invest in securities that have ratings described in this Appendix.
STANDARD & POOR’S (S&P)
Bonds
The following summarizes the ratings used by S&P for bonds. The ratings AAA, AA, A and BBB denote investment grade securities.
AAA bonds have the highest rating assigned by S&P and are considered to have an extremely strong capacity to pay interest and repay principal.
AA bonds are considered to have a very strong capacity to pay interest and repay principal, and they differ from AAA only in small degree.
A bonds are considered to have a strong capacity to pay interest and repay principal, although they are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories.
BBB bonds are considered to have an adequate capacity to pay interest and repay principal. Whereas they normally exhibit adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal than for bonds in the A category.
BB, B, CCC, CC and C bonds are considered to have predominantly speculative characteristics with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation. BB indicates the lowest degree of speculation and C the highest degree. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or large exposures to adverse conditions.
BB bonds are considered to have less near-term vulnerability to default than other speculative issues. However, they face 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 bonds are considered to have a greater vulnerability to default but currently have 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 bonds are considered to have a currently identifiable vulnerability to default, and are 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, the bonds are 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 rating typically is applied to debt subordinated to senior debt that is assigned an actual or implied CCC rating.
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C rating typically is 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, for example, where a bankruptcy petition has been filed, but debt service payments are continued.
CI rating is reserved for income bonds on which no interest is being paid.
D bonds are 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 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 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.
Municipal Notes
SP-1. Notes rated SP-1 are considered to have very strong or strong capacity to pay principal and interest. Those issues determined to possess overwhelming safety characteristics are designated as SP-1+.
SP-2. Notes rated SP-2 are considered to have satisfactory capacity to pay principal and interest.
Notes due in three years or less normally receive a note rating. Notes maturing beyond three years normally receive a bond rating, although the following criteria are used in making that assessment:
Amortization schedule (the larger the final maturity relative to other maturities, the more likely the issue will be rated as a note).
Source of payment (the more dependent the issue is on the market for its refinancing, the more likely it will be rated as a note).
Commercial Paper
A. Issues assigned this highest rating are regarded as having the greatest capacity for timely payment. Issues in this category are further refined with the designations 1, 2, and 3 to indicate the relative degree of safety.
A-1. Issues assigned to this rating are considered to have overwhelming or very strong capacity for timely payment. Those issues determined to possess overwhelming safety characteristics are designed A-1+.
MOODY’S INVESTORS SERVICE, INC. (MOODY’S)
Municipal Bonds
Aaa bonds are considered to be of the best quality. They are considered to have the smallest degree of investment risk and are generally referred to as “gilt edge”. Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While various protective elements are likely to change, such changes as can be visualized are most unlikely to impair a fundamentally strong position of such issues.
Aa bonds are considered to be of high quality by all standards. Together with Aaa bonds 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 in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in Aaa securities. Those bonds in the Aa through B groups that Moody’s believes possess the strongest investment attributes are designated by the symbols Aa1, A1 or Baa1.
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A bonds are considered to possess many favorable investment attributes and are to be considered to be 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 at some time in the future.
Baa bonds are considered to be medium grade obligations: 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 period of time. Such bonds lack outstanding investment characteristics and, in fact, have speculative characteristics as well.
Ba bonds are considered to have speculative elements: their future cannot be considered as well secured. Often, the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times in the future. Uncertainty of position characterizes bonds in this grade.
B bonds are considered generally to 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 are considered to be 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 are considered to represent obligations that are speculative in a high degree. Such issues are often in default or have other marked shortcomings.
C bonds are the lowest rated class of bonds and issues so rated are considered to have extremely poor prospects of ever attaining any real investment standing.
Conditional Ratings. Bonds for which the security depends upon the completion of some act or the fulfillment of some condition are rated conditionally. These are bonds secured by (a) earnings of projects under construction, (b) earnings of projects unseasoned in operating experience, (c) rentals which begin when facilities are completed, or (d) payments to which some other limiting conditions attach. Parenthetical rating denotes probable credit stature upon completion of construction or elimination of basis of condition.
Corporate Bonds
The description of the applicable rating symbols (Aaa, Aa, A, Baa, etc.) and their meanings is identical to that of the Municipal Bond ratings as set forth above, except for the numerical modifiers. Moody’s applies numerical modifiers 1, 2, and 3 in the Aa and A classifications of 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 midrange ranking; and the modifier 3 indicates that the issuer ranks in the lower end of its generic rating category.
Municipal Notes
MIG 1. This designation denotes best quality. There is present strong protection by established cash flows, superior liquidity support or demonstrated broad-based access to the market for refinancing.
MIG 2. This designation denotes high quality. Margins of protection are ample although not so large as in the preceding group.
MIG 3. This designation denotes favorable quality. All security elements are accounted for, but there is lacking the undeniable strength of the preceding grades. Liquidity and cash flow protection may be narrow and market access for refinancing is likely to be less well established.
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Commercial Paper
Moody’s employs the following three designations, all judged to be investment grade, to indicate the relative repayment capacity of rated issuers:
Prime-1 Highest Quality
Prime-2 Higher Quality
Prime-3 High Quality
If an issuer represents to Moody’s that its commercial paper obligations are supported by the credit of another entity or entities, Moody’s, in assigning ratings to such issuers, evaluates the financial strength of the indicated affiliated corporations, commercial banks, insurance companies, foreign governments, or other entities, but only as one factor in the total rating assessment.
FITCH, INC. (FITCH)
Long-Term Debt
Investment Grade Bond Ratings
AAA bonds are considered to be investment grade and of the highest credit quality. The obligor has an exceptionally strong ability to pay interest and/or dividends and repay principal, which is unlikely to be affected by reasonably foreseeable events.
AA bonds are considered to be investment grade and of very high credit quality. The obligor’s ability to pay interest and repay principal is very strong, although not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA categories are not significantly vulnerable to foreseeable future developments, short-term debt of these issuers is generally rated F-1+.
A bonds are considered to be investment grade and of high credit quality. The obligor’s ability to pay interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than debt securities with higher ratings.
BBB bonds are considered to be investment grade and of satisfactory credit quality. The obligor’s ability to pay interest or dividends and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have adverse impact on these securities and, therefore, impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for securities with higher ratings.
Speculative Grade Bond Ratings
BB bonds are considered speculative. The obligor’s ability to pay interest and repay principal may be affected over time by adverse economic changes. However, business and financial alternatives can be identified, which could assist the obligor in satisfying its debt service requirements.
B bonds are considered highly speculative. While securities in this class are currently meeting debt service requirements, the probability of continued timely payment of principal and interest reflects the obligor’s limited margin of safety and the need for reasonable business and economic activity throughout the life of the issue.
CCC bonds are considered to have certain identifiable characteristics that, if not remedied, may lead to default. The ability to meet obligations requires an advantageous business and economic environment.
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CC bonds are considered to be minimally protected. Default in payment of interest and/or principal seems probable over time.
C bonds are in imminent default in payment of interest or principal.
DDD, DD, and D bonds are in default on interest and/or principal payments. Such securities are extremely speculative and should be valued on the basis of their ultimate recovery value in liquidation or reorganization of the obligor. DDD represents the highest potential for recovery on these securities and D represents the lowest potential for recovery.
Plus (+) or minus (-): Plus or minus signs are used to show relative standing within the major rating categories. Plus and minus signs, however, are not used in the DDD, DD, or D categories.
Short-Term Debt
Fitch’s short-term ratings apply to debt obligations that are payable on demand or have original maturities of up to three years, including commercial paper, certificates of deposit, medium-term notes, and investment notes.
F-1+ obligations have exceptionally strong credit quality and are considered to have the strongest degree of assurance for timely payment.
F-1 obligations are considered to reflect an assurance of timely payment only slightly less in degree than issues rated F-1+.
F-2 obligations are considered to have good credit quality. Securities in this class have a satisfactory degree of assurance for timely payment, but the margin of safety is not as great as for issues assigned F-1+ and F-1 ratings.
F-3 obligations are considered to have characteristics suggesting that the degree of assurance for timely payment is adequate; however, near-term adverse changes could cause these securities to be rated below investment grade.
F-S rating is assigned to obligations that are considered to have a minimal degree of assurance for timely payment and to be vulnerable to near-term adverse changes in financial and economic conditions.
B obligations are considered to have a minimal capacity for timely payment of financial commitments and a susceptibility to the adverse effects of changes in circumstances and economic conditions.
C rating is assigned to obligations that are considered to have a high default risk and whose capacity for meeting financial commitments is solely reliant upon a sustained, favorable business and economic environment.
D obligations are in actual or imminent payment default.
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Last Review Date: | April 2010 | |
Applicable Regulatory Authority: | Rule 206(4)-6 under the Investment Advisers Act of 1940
Form N-PX
ERISA Department of Labor Bulletin 08-2
Institutional Shareholder Services, Inc. (SEC No Action Letter dated September 15, 2004) |
Explanation/Summary of Regulatory Requirements
An investment adviser that exercises voting authority over clients’ proxies must adopt written policies and procedures that are reasonably designed to ensure that those proxies are voted in the best economic interests of clients. An adviser’s policies and procedures must address how the adviser resolves material conflicts of interest between its interests and those of its clients. An investment adviser must comply with certain record keeping and disclosure requirements with respect to its proxy voting responsibilities. In addition, an investment adviser to Employee Retirement Income Security Act (“ERISA”) accounts has an affirmative obligation to vote proxies for an ERISA account, unless the client expressly retains proxy voting authority.
Policy Summary
Columbia Management Advisors, LLC (“CMA”) has adopted and implemented the following policy, which it believes is reasonably designed to: (1) ensure that proxies are voted in the best economic interest of clients; and (2) address material conflicts of interest that may arise. This policy applies primarily to the Global Wealth and Investment Management (“GWIM”) Investment Operations Group, the Investment groups (particularly, Equity and Chief Investment Officer’s Office), as well as to Compliance Risk Management (“CRM”) and Legal. CRM and Business groups to which this policy directly applies must adopt written procedures to implement this Policy.
Policy
All proxies regarding client securities for which CMA has authority to vote will, unless CMA determines in accordance with policies stated below to refrain from voting, be voted in a manner considered by CMA to be in the best interest of CMA’s clients without regard to any resulting benefit or detriment to CMA, its associates, or its affiliates. The best interest of clients is defined for this purpose as the interest of enhancing or protecting the economic value of client accounts, considered as a group rather than individually, as CMA determines in its sole and absolute discretion. In the event a client believes that its other interests require a different vote, CMA will vote as the client clearly instructs, provided CMA receives such instructions in time to act accordingly. Information regarding CMA’s proxy voting decisions is confidential. Therefore, the information may be shared on a need to know basis only, including within CMA and with CMA affiliates. Advisory clients, including mutual funds’ and other funds’ boards, may obtain information on how their proxies were voted by CMA. However, CMA will not selectively disclose its investment company clients’ proxy voting records to third parties. Rather, the investment company clients’ proxy records will be disclosed to shareholders by publicly-available annual filings for 12-month periods ending each year on June 30th on Form N-PX.
CMA endeavors to vote, in accordance with this Policy, all proxies of which it becomes aware prior to the vote deadline date, subject to certain general exceptions described below.
CMA seeks to avoid the occurrence of actual or apparent material conflicts of interest in the proxy voting process by voting in accordance with predetermined voting guidelines and observing other procedures that are
This document is current as of the last Review date but subject to change thereafter. Please consult the online version to verify that this policy has not been updated or otherwise changed.
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intended to prevent where practicable and manage conflicts of interest (refer to Conflicts of Interest section below). CMA’s proxy voting policy and practices are summarized in its Form ADV. Additionally, CMA will provide clients with a copy of its policies, as they may be updated from time to time, upon request.
Means of Achieving Compliance
The Proxy Group within GWIM Investment Operations is primarily responsible for overseeing the day-to-day operations of the proxy voting process. The Proxy Group’s monitoring will take into account the following elements: (1) periodic review of the proxy vendor’s votes to ensure that the proxy vendor is accurately voting consistent with CMA’s Voting Guidelines; and (2) review of the Columbia Funds’ fund website to ensure that annual proxy voting reports are posted in a timely and accurate manner. CMA has established a Proxy Committee which is responsible for overseeing the proxy voting process.
The specific responsibilities of the Proxy Committee and scope of its oversight are described in the Proxy Committee’s charter.
CMA’S INVESTMENT ASSOCIATES’ RESPONSIBILITIES
Under CMA’s Voting Guidelines, certain matters must be determined on a case-by-case basis. In general, the Proxy Group within GWIM Investment Operations will refer these matters first to the relevant CMA research analyst after first confirming that the proxy matter does not present a potential conflict to CMA. If there is not a research analyst assigned to the particular security, the matter will be referred to the appropriate portfolio manager.
In considering a particular proxy matter, the research analyst or portfolio manager must vote in the clients’ best interest as defined above. Information regarding CMA’s proxy voting decisions is confidential information. Therefore, research analysts and portfolio managers generally must not discuss proxy votes with any person outside of CMA and within CMA except on a need to know basis only.
Research analysts and portfolio managers must discharge their responsibilities consistent with the obligations set forth below (refer to Management of Conflicts of Interest — Additional Procedures). A research analyst or portfolio manager must disclose in writing any inappropriate attempt to influence their recommendation or any other personal interest that they have with the issuer (see Appendix B — Conflicts of Interest Disclosure and Certification Form). For each Proxy Referral (defined below), the research analyst or portfolio manager is responsible for memorializing their recommendation on the Proxy Voting Recommendation Form (see Appendix C) and communicating their recommendation to the Proxy Group.
Research analysts and portfolio managers should seek advice from CRM or Legal with respect to any questions that they have regarding personal conflicts of interests, communications regarding proxies, or other related matters.
CONFLICTS OF INTEREST
For purposes of this policy, a material conflict of interest is a relationship or activity engaged in by CMA, a CMA affiliate1, or a CMA associate that creates an incentive (or appearance thereof) to favor the interests of CMA, the affiliate, or associate, rather than the clients’ interests. However, a material conflict of interest is not
1 | Bank of America Corporation (“BAC”), the ultimate corporate parent of CMA, Bank of America, N.A. and all of their numerous affiliates owns, operates and has interests in many lines of business that may create or give rise to the appearance of a conflict of interest between BAC or its affiliates and those of CMA-advised clients. For example, the commercial and investment banking business lines may have interests with respect to issuers of voting securities that could appear to or even actually conflict with CMA’s duty, in the proxy voting process, to act in the best economic interest of its clients. |
This document is current as of the last Review date but subject to change thereafter. Please consult the online version to verify that this policy has not been updated or otherwise changed.
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automatically created when there is a relationship or activity engaged in by a CMA affiliate, but there is a possibility that a CMA affiliate could cause a conflict. CMA may have a conflict of interest if either CMA has a significant business relationship with a company that is soliciting a proxy, or if a CMA associate involved in the proxy voting decision-making process has a significant personal or family relationship with the particular company. A conflict of interest is considered to be “material” to the extent that a reasonable person could expect the conflict to influence CMA’s decision on the particular vote at issue. In all cases where there is deemed to be a material conflict of interest, CMA will seek to resolve said conflict in the clients’ best interests.
For those proxy proposals that: (1) are not addressed by CMA’s proxy voting guidelines; (2) the guidelines specify the issue must be evaluated and determined on a case-by-case basis; or (3) a CMA investment associate believes that an exception to the guidelines may be in the best economic interest of CMA’s clients (collectively, “Proxy Referrals”), CMA may vote the proxy, subject to the conflicts of interest procedures set forth below.
In the case of Proxy Referrals, CRM identifies companies with which CMA has a significant business relationships and Proxy Referrals of such companies will be voted consistent with CMA’s conflicts management procedures described below. For Proxy Referrals that do not involve companies with which CMA has a significant business relationship the relevant CMA investment personnel (i.e. research analyst, portfolio manager, members of Proxy Committee) involved in the particular Proxy Referral must report any personal conflict of interest circumstances (e.g., relationships with nominees for directorship, members of an issuer’s or dissident’s management or otherwise, unusual communications with parties outside the investment organization concerning a proxy matter) to Columbia Management’s Conflicts of Interest Officer in writing (see Appendix B). In the event any member of the Proxy Committee has a conflict of interest regarding a given matter, he or she will similarly disclose the circumstance and abstain from participating in the Committee’s determination of whether and/or how to vote in the matter.
If the Proxy Committee, the Chairperson of the Proxy Committee, or the Conflicts Officer determines that a proxy matter presents a material conflict of interest, or a material conflict of interest is otherwise determined to exist through the application of this Policy, CMA will invoke one or more of the following conflict management procedures:
• | Causing the proxies to be voted in accordance with the recommendations of an independent third party (which generally will be CMA’s proxy voting agent); |
• | Causing the proxies to be delegated to a qualified, independent third party, which may include CMA’s proxy voting agent; or |
• | In unusual cases, with the Client’s consent and upon ample notice, forwarding the proxies to CMA’s clients so that they may vote the proxies directly. |
Affiliate Investment Companies and Public Companies
CMA considers (1) proxies solicited by open-end and closed-end investment companies for which CMA or an affiliate serves as an investment adviser or principal underwriter; and (2) proxies solicited by Bank of America Corporation (“BAC”) or other public companies within the BAC organization to present a material conflict of interest for CMA. Consequently, the proxies of such affiliates will be voted following one of the conflict management practices discussed above.
Management of Conflicts of Interest — Additional Procedures
In certain circumstances, CMA follows the proxy guidelines and uses other research services provided by the proxy vendor or another independent third party. CMA reviews its proxy vendor’s conflicts of interest procedures as part of its oversight of the proxy vendor’s services.
This document is current as of the last Review date but subject to change thereafter. Please consult the online version to verify that this policy has not been updated or otherwise changed.
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CMA and other BAC affiliates have adopted various other policies and procedures that help reinforce this Policy. Please see any associated documents.
Ownership Limits — Delegation of Proxy Voting to an Independent Third Party
From time to time, CMA may face regulatory or compliance limits on the types or amounts of voting securities that it may purchase or hold for client accounts. Among other limits, federal, state, foreign regulatory restrictions, or company-specific ownership limits may restrict the total percentage of an issuer’s voting securities that CMA can hold for clients (collectively, “Ownership Limits”).
The regulations or company-specific documents governing a number of these Ownership Limits often focus upon holdings in voting securities. As a result, in limited circumstances in order to comply with such Ownership Limits and/or internal policies designed to comply with such limits, CMA may delegate proxy voting in certain issuers to a qualified, independent third party, who may be CMA’s proxy voting agent.
PROXY VOTING GUIDELINES
A. CMA’s Proxy Voting Guidelines — General Practices.
The Proxy Committee has adopted the guidelines for voting proxies specified in Appendix A of this policy. CMA uses an independent, third-party proxy vendor to implement its proxy voting process as CMA’s proxy voting agent. In general, whenever a vote is solicited, the proxy vendor will execute the vote according to CMA’s Voting Guidelines.
B. Ability to Vote Proxies Other than as Provided by Voting Guidelines.
A Portfolio Manager or other party involved with a client’s account may conclude that the best interest of the firm’s client, as defined above, requires that a proxy be voted in a manner that differs from the predetermined proxy Voting Guidelines. In this situation, he or she will request in writing that the Proxy Committee consider voting the proxy other than according to such Guidelines and provide information as the Proxy Committee may request. The Proxy Committee may consider the matter, subject to the conflicts of interest procedures discussed above.
C. Other Proxy Matters
For the following categories, proxies will be voted as stated below:
1. New Proposals. For certain new proposals that are expected to be proposed to shareholders of multiple companies, the Proxy Committee may develop a Voting Guideline which will be incorporated into this Policy.
2. Accounts Adhering to Taft Hartley Principles. All proposals for accounts adhering to Taft Hartley principles will be voted according to the Taft Hartley Guidelines developed by the proxy vendor.
3. Accounts Adhering to Socially Responsible Principles. All proposals for accounts adhering to socially responsible principles will be voted according to the Socially Responsible Guidelines developed by the proxy vendor or as specified by the client.
4. Proxies of International Issuers. In general, CMA will refrain from voting securities in cases where international issuers impose share blocking restrictions. However, in the exceptional circumstances that CMA determines that it would be appropriate to vote such securities, all proposals for these securities will be voted only on the specific instruction of the Proxy Committee and to the extent practicable in accordance
This document is current as of the last Review date but subject to change thereafter. Please consult the online version to verify that this policy has not been updated or otherwise changed.
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with the Voting Guidelines set forth in this Policy. Additionally, proxies will typically not be voted in markets where powers of attorney are required to be executed in order to vote shares.
5. Proxy Referrals for Passive Index Accounts. Proxy Referrals for a security that is held only within a passive index account managed by CMA’s Quantitative Strategies Group and not in any other account within CMA, shall be voted according to the guidelines developed by the proxy vendor or as specified by the client. However, if a security is held within a passive index account managed by CMA’s Quantitative Strategies Group and within another CMA-managed account (including without limitation an account actively managed by CMA’s Quantitative Strategies Group), all proposals, including Proxy Referrals, will be voted in accordance with the Voting Guidelines, subject to the other provisions of this Policy.
6. Proxy Voting for Securities on Loan. CMA generally votes in cases where shares have been loaned from actively managed Columbia Funds as long as the shares have been recalled in a timely manner. However, CMA generally does not vote shares that have been loaned from passively managed Columbia Index Funds. Other CMA clients may have their own stock loan programs and may or may not recall their shares for proxy voting.
Supervision
Managers and supervisory personnel are responsible for ensuring that their associates understand and follow this policy and any applicable procedures adopted by the business group to implement the policy. The Proxy Committee has ultimate responsibility for the implementation of this Policy.
Escalation
With the exception of conflicts of interest-related matters, issues arising under this policy should be escalated to the Proxy Committee. Issues involving potential or actual conflicts of interest should be promptly communicated to the Columbia Management Conflicts Officer.
Monitoring/Oversight
CRM and/or Corporate Internal Audit Group perform periodic reviews and assessments of various lines of businesses, including a review of Columbia Management’s compliance with the Proxy Voting Policy.
Recordkeeping
CMA will create and maintain records of each investment company’s proxy record for 12-month periods ended June 30th. CMA will compile the following information for each matter relating to a portfolio security considered at any shareholder meeting during the period covered by the annual report and for which CMA was entitled to vote:
• | The name of the issuer of the security; |
• | The exchange ticker symbol of the portfolio security (if symbol is available through reasonably practicable means); |
• | The Council on Uniform Securities Identification Procedures number for the portfolio security (if number is available through reasonably practicable means); |
• | The shareholder meeting date; |
• | A brief identification of the matter voted on; |
• | Whether the matter was proposed by the issuer or by a security holder; |
This document is current as of the last Review date but subject to change thereafter. Please consult the online version to verify that this policy has not been updated or otherwise changed.
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• | Whether the company cast its vote on the matter; |
• | How the company cast its vote (e.g., for or against proposal, or abstain; for or withhold regarding the election of directors); and |
• | Whether the company cast its vote for or against management. |
Business groups and support partners are responsible for maintaining all records necessary to evidence compliance with this policy. The records must be properly maintained and readily accessible in order to evidence compliance with this policy.
These records include:
Document | Responsible Party | |
Proxy Committee Meeting Minutes and Related Materials | Proxy Group in GWIM Investment Operations | |
Proxy Vote Recommendation Form and Supporting Materials of Investment Management Personnel Concerning Proxy Decisions and Recommendations (or any other document created by CMA that was material to making a voting decision or that memorializes the basis for the voting decision) | Proxy Group in GWIM Investment Operations | |
Conflicts of Interest Review Documentation, including Conflicts of Interest Forms | Compliance Risk Management | |
Client Communications Regarding Proxy Matters | Client Service Group | |
Copy of Each Applicable Proxy Statement Unless it has been Filed with the SEC and may be Obtained from the SEC’s EDGAR System | Proxy Group in GWIM Investment Operations |
Records should be retained for a period of not less than six years plus the current year. Records must be retained in an appropriate office of CM for the first three years.
This document is current as of the last Review date but subject to change thereafter. Please consult the online version to verify that this policy has not been updated or otherwise changed.
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APPENDIX A — CMA’s Proxy Voting Policy
CMA’S VOTING GUIDELINES
A. The Proxy Committee has adopted the following guidelines for voting proxies:
1. Matters Relating to the Board of Directors/Corporate Governance
CMA generally will vote FOR:
• | Proposals for the election of directors or for an increase or decrease in the number of directors, provided that no more than one-third of the Board of Directors would, presently or at any time during the previous three-year period, be from management. |
However, CMA generally will WITHHOLD votes from pertinent director nominees if:
(i) | the board as proposed to be constituted would have more than one-third of its members from management; |
(ii) | the board does not have audit, nominating, and compensation committees composed solely of directors who qualify as being regarded as “independent,” i.e. having no material relationship, directly or indirectly, with the Company, as CMA’s proxy voting agent may determine (subject to the Proxy Committee’s contrary determination of independence or non-independence); |
(iii) | the nominee, as a member of the audit committee, permitted the company to incur excessive non-audit fees (as defined below regarding other business matters — ratification of the appointment of auditors); |
(iv) | a director serves on more than six public company boards; |
(v) | the CEO serves on more than two public company boards other than the company’s board; or |
(vi) | CMA generally will vote AGAINST Director nominee of a company who is chief executive officer of another company on whose board the company’s chief executive officer sits (i.e. interlocking executives). |
One a CASE-BY-CASE basis, CMA may WITHHOLD votes for a director nominee who has failed to observe good corporate governance practices or, through specific corporate action or inaction (e.g. failing to implement policies for which a majority of shareholders has previously cast votes in favor; served voted for the adoption of a poison pill without approval of shareholders), has demonstrated a disregard for the interests of shareholders.
• | Proposals requesting that the board audit, compensation and/or nominating committee be composed solely of independent directors. The Audit Committee must satisfy the independence and experience requirements established by the Securities and Exchange Commission (“SEC”) and the New York Stock Exchange, or appropriate local requirements for foreign securities. At least one member of the Audit Committee must qualify as a “financial expert” in accordance with SEC rules. |
• | Proposals to declassify a board, absent special circumstances that would indicate that shareholder interests are better served by a classified board structure. |
CMA generally will vote FOR:
• | Proposals to separate the role of Chairman of the Board and CEO. |
• | Proposals that grant or restore shareholder ability to remove directors with or without cause. |
This document is current as of the last Review date but subject to change thereafter. Please consult the online version to verify that this policy has not been updated or otherwise changed.
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• | Proposals to permit shareholders to elect directors to fill board vacancies. |
• | Proposals that encourage directors to own a minimum amount of company stock. |
• | Proposals to provide or to restore shareholder appraisal rights. |
• | Proposals for the company to adopt confidential voting. |
CMA will generally vote FOR shareholder proposals calling for majority voting thresholds for director elections unless the company has adopted formal corporate governance principles that present a meaningful alternative to the majority voting standard and/or provides an adequate response to both new nominees as well as incumbent nominees who fail to receive a majority of votes cast.
CMA will generally vote FOR 162(m) bonus plans unless the Proxy Administrator recommends voting against a specific plan, in which case CMA will vote on a CASE- BY- CASE basis.
CMA generally will vote AGAINST:
• | Proposals to classify boards, absent special circumstances indicating that shareholder interests would be better served by a classified board structure. |
• | Proposals that give management the ability to alter the size of the board without shareholder approval. |
• | Proposals that provide directors may be removed only by supermajority vote. |
• | Proposals which allow more than one vote per share in the election of directors. |
• | Proposals that provide that only continuing directors may elect replacements to fill board vacancies. |
• | Proposals that mandate a minimum amount of company stock that directors must own. |
• | Proposals to limit the tenure of non-management directors. |
CMA will vote on a CASE-BY-CASE basis:
• | In contested elections of directors. Proposals to adopt or eliminate cumulative voting. |
• | CMA generally will vote on a CASE-BY-CASE basis on board approved proposals relating to corporate governance. Such proposals include, but are not limited to: |
• | Reimbursement of proxy solicitation expenses taking into consideration whether or not CMA was in favor of the dissidents. |
• | Proxy contest advance notice. CMA generally will vote FOR proposals that allow shareholders to submit proposals as close to the meeting date as possible while allowing for sufficient time for Company response, SEC review, and analysis by other shareholders. |
• | CMA will vote on a CASE-BY-CASE basis to indemnify directors and officers, and AGAINST proposals to indemnify external auditors. |
• | CMA will vote FOR the indemnification of internal auditors, unless the costs associated with the approval are not disclosed. |
2. Compensation
CMA generally will vote FOR:
• | CMA generally will vote FOR management sponsored compensation plans (such as bonus plans, incentive plans, stock option plans, pension and retirement benefits, stock purchase plans or thrift plans) if they are consistent with industry and country standards. |
This document is current as of the last Review date but subject to change thereafter. Please consult the online version to verify that this policy has not been updated or otherwise changed.
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• | Proposals requiring that executive severance arrangements be submitted for shareholder ratification. |
• | Proposals asking a company to expense stock options. |
• | Proposals to put option repricings to a shareholder vote. |
• | Employee stock purchase plans that have the following features: (i) the shares purchased under the plan are acquired for no less than 85% of their market value, (ii) the offering period under the plan is 27 months or less, and (iii) dilution is 10% or less. |
• | Shareholder proposals to adopt a non-binding advisory vote on Executive Compensation (“Say on Pay”). |
• | CMA recognizes that individual compensation committees are in the best position to determine the optimal design of share based plans. However, CMA generally prefers a greater use of restricted stock in place of stock options due to the greater uncertainty involved with the valuation of stock options at the time of issue. |
CMA generally will vote AGAINST:
• | Stock option plans that permit issuance of options with an exercise price below the stock’s current market price, or that permit replacing or repricing of out-of-the money options. |
• | Proposals to authorize the replacement or repricing of out-of-the money options. |
• | Proposals requesting that plan administrators have advance authority to amend the terms of a plan without detailed disclosure of the specific amendments. When sufficient details are provided on the amendments permitted by the advance authority, CMA will recommend on such proposals on a CASE-BY-CASE basis. |
• | CMA generally is opposed to compensation plans that substantially dilute ownership interest in a company, provide participants with excessive awards, or have objectionable structural features. Specifically, for equity-based plans, if the proposed number of shares authorized for option programs (excluding authorized shares for expired options) exceeds 5% of the average number of shares outstanding for the last 3 years, or exceeds 1% of the average number of shares outstanding for the last 3 years (for directors only), CMA will vote on such proposals on a CASE-BY-CASE basis. CMA requires that management provide substantial justification for the repricing of options. |
CMA will vote on a CASE-BY-CASE basis:
• | Proposals regarding approval of specific executive severance arrangements. |
• | Management proposals regarding “Say on Pay” (i.e. non-binding advisory vote on pay). |
• | Proposals that involve awarding 50% or more of the equity shares of an equity-based compensation plan to the top five or fewer executives. |
3. Capitalization
CMA generally will vote FOR:
• | Proposals to increase the authorized shares for stock dividends, stock splits (and reverse stock splits) or general issuance, unless proposed as an anti-takeover measure or a general issuance proposal increases the authorization by more than 30% without a clear need presented by the company. Proposals for reverse stock splits should include an overall reduction in authorization. |
This document is current as of the last Review date but subject to change thereafter. Please consult the online version to verify that this policy has not been updated or otherwise changed.
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For companies recognizing preemptive rights for existing shareholders, CMA generally will vote FOR general issuance proposals that increase the authorized shares by more than 30%. CMA will vote on a CASE-BY-CASE basis all such proposals by companies that do not recognize preemptive rights for existing shareholders.
• | Proposals for the elimination of authorized but unissued shares or retirement of those shares purchased for sinking fund or treasury stock. |
• | Proposals to institute/renew open market share repurchase plans in which all shareholders may participate on equal terms. |
• | Proposals to reduce or change the par value of common stock, provided the number of shares is also changed in order to keep the capital unchanged. |
CMA will evaluate on a CASE-BY-CASE basis proposals regarding:
• | Management proposals that allow listed companies to de-list and terminate the registration of their common stock. CMA will determine whether the transaction enhances shareholder value by giving consideration to: |
• | Whether the company has attained benefits from being publicly traded. |
• | Cash-out value |
• | Balanced interests of continuing vs. cashed-out shareholders |
• | Market reaction to public announcement of transaction |
4. Mergers, Restructurings and Other Transactions
CMA will review, on a CASE-BY-CASE basis, business transactions such as mergers, acquisitions, reorganizations, liquidations, spinoffs, buyouts and sale of all or substantially all of a company’s assets.
5. Anti-Takeover Measures
CMA generally will vote AGAINST proposals intended largely to avoid acquisition prior to the occurrence of an actual event or to discourage acquisition by creating a cost constraint. With respect to the following measures, CMA generally will vote as follows:
Poison Pills
• | CMA votes FOR shareholder proposals that ask a company to submit its poison pill for shareholder ratification. |
• | CMA generally votes FOR shareholder proposals to eliminate a poison pill. |
• | CMA generally votes AGAINST management proposals to ratify a poison pill. |
Greenmail
• | CMA will vote FOR proposals to adopt anti-greenmail charter or bylaw amendments or to otherwise restrict a company’s ability to make greenmail payments. |
Supermajority vote
• | CMA will vote AGAINST board-approved proposals to adopt anti-takeover measures such as supermajority voting provisions, issuance of blank check preferred stock, the creation of a separate class of stock with disparate voting rights and charter amendments adopting control share acquisition provisions. |
This document is current as of the last Review date but subject to change thereafter. Please consult the online version to verify that this policy has not been updated or otherwise changed.
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Control Share Acquisition Provisions
• | CMA will vote FOR proposals to opt out of control share acquisition statutes. |
6. Other Business Matters
CMA generally will vote FOR:
• | Bylaw amendments giving holders of at least 25% of outstanding common stock the ability to call a special meeting of stockholders. |
• | Board governance document amendments or other proposals which give the lead independent director the authority to call special meetings of the independent directors at any time. |
CMA generally will vote FOR:
• | Proposals to approve routine business matters such as changing the company’s name and procedural matters relating to the shareholder meeting such as approving the minutes of a prior meeting. |
• | Proposals to ratify the appointment of auditors, unless any of the following apply in which case CMA will generally vote AGAINST the proposal: |
• | Credible reason exists to question: |
• | The auditor’s independence, as determined by applicable regulatory requirements. |
• | The accuracy or reliability of the auditor’s opinion as to the company’s financial position. |
• | Fees paid to the auditor or its affiliates for “non-audit” services exceeds 25% of the total fees paid for “audit,” “audit-related” and “tax compliance” and/or “tax return preparation” services, as disclosed in the company’s proxy materials. |
• | Bylaw or charter changes that are of a housekeeping nature (e.g., updates or corrections). |
• | Proposals to approve the annual reports and accounts provided the certifications required by the Sarbanes Oxley Act of 2002 have been provided. |
CMA generally will vote AGAINST:
• | Proposals to eliminate the right of shareholders to act by written consent or call special meetings. |
• | Proposals providing management with authority to adjourn an annual or special shareholder meeting absent compelling reasons, or to adopt, amend or repeal bylaws without shareholder approval, or to vote unmarked proxies in favor of management. |
• | Shareholder proposals to change the date, time or location of the company’s annual meeting of shareholders. |
CMA will vote AGAINST:
• | Authorization to transact other unidentified substantive (as opposed to procedural) business at a meeting. |
CMA will vote on a CASE-BY-CASE basis:
• | Proposals to change the location of the company’s state of incorporation. CMA considers whether financial benefits (e.g., reduced fees or taxes) likely to accrue to the company as a result of a reincorporation or other change of domicile outweigh any accompanying material diminution of shareholder rights. |
This document is current as of the last Review date but subject to change thereafter. Please consult the online version to verify that this policy has not been updated or otherwise changed.
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• | Proposals on whether and how to vote on “bundled” or otherwise conditioned proposals, depending on the overall economic effects upon shareholders. |
CMA generally will ABSTAIN from voting on shareholder proposals predominantly involving social, socio-economic, environmental, political or other similar matters on the basis that their impact on share value can rarely be anticipated with any high degree of confidence. CMA may, on a CASE-BY-CASE basis, vote:
• | FOR proposals seeking inquiry and reporting with respect to, rather than cessation or affirmative implementation of, specific policies where the pertinent issue warrants separate communication to shareholders; and |
• | FOR or AGAINST the latter sort of proposal in light of the relative benefits and detriments (e.g. distraction, costs, other burdens) to share value which may be expected to flow from passage of the proposal. |
7. Other Matters Relating to Foreign Issues
CMA generally will vote FOR:
• | Most stock (scrip) dividend proposals. CMA votes AGAINST proposals that do not allow for a cash option unless management demonstrates that the cash option is harmful to shareholder value. |
• | Proposals to capitalize the company’s reserves for bonus issues of shares or to increase the par value of shares. |
• | Proposals to approve control and profit transfer agreements between a parent and its subsidiaries. |
• | Management proposals seeking the discharge of management and supervisory board members, unless there is concern about the past actions of the company’s auditors/directors and/or legal action is being taken against the board by other shareholders. |
• | Management proposals concerning allocation of income and the distribution of dividends, unless the proxy vendor would vote against such proposal in accordance with its guidelines, in which case CMA will evaluate the proposal on a CASE-BY-CASE basis. |
• | Proposals for the adoption of financing plans if they are in the best economic interests of shareholders. |
CMA will generally vote FOR proposals to approve Directors’ Fees, unless the proxy vendor would vote against such proposal in accordance with its guidelines, in which case CMA will evaluate the proposal on a CASE-BY-CASE basis.
CMA will evaluate management proposals to approve protective preference shares for Netherlands located company-friendly foundations proposals on a CASE-BY-CASE basis and will only support resolutions if:
• | The supervisory board needs to approve an issuance of shares while the supervisory board is independent within the meaning of CMA’ categorization rules and the Dutch Corporate Governance Code. |
• | No call/put option agreement exists between the company and the foundation. |
• | There is a qualifying offer clause or there are annual management and supervisory board elections. |
• | The issuance authority is for a maximum of 18 months. |
• | The board of the company-friendly foundation is independent. |
• | The company has disclosed under what circumstances it expects to make use of the possibility to issue preference shares. |
This document is current as of the last Review date but subject to change thereafter. Please consult the online version to verify that this policy has not been updated or otherwise changed.
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• | There are no priority shares or other egregious protective or entrenchment tools. |
• | The company releases its proxy circular, with details of the poison pill proposal, at least three weeks prior to the meeting. |
• | Art 2:359c Civil Code of the legislative proposal has been implemented. |
8. Investment Company Matters
Election of Directors:
CMA will vote on a CASE-BY-CASE basis proposals for the election of directors, considering the following factors:
• | Board structure |
• | Attendance at board and committee meetings. |
CMA will WITHHOLD votes from directors who:
• | Attend less than 75 percent of the board and committee meetings without a valid excuse for the absences. Valid reasons include illness or absence due to company business. Participation via telephone is acceptable. In addition, if the director missed only one meeting or one day’s meetings, votes should not be withheld even if such absence dropped the director’s attendance below 75 percent. |
• | Ignore a shareholder proposal that is approved by a majority of shares outstanding; |
• | Ignore a shareholder proposal this is approved by a majority of the votes cast for two consecutive years; |
• | Are interested directors and sit on the audit or nominating committee; or |
• | Are interested directors and the full board serves as the audit or nominating committee or the company does not have one of these committees. |
Proxy Contests:
CMA will vote on a CASE-BY-CASE basis proposals for proxy contests, considering the following factors:
• | Past performance relative to its peers |
• | Market in which fund invests |
• | Measures taken by the board to address the pertinent issues (e.g., closed-end fund share market value discount to NAV) |
• | Past shareholder activism, board activity and votes on related proposals |
• | Strategy of the incumbents versus the dissidents |
• | Independence of incumbent directors; director nominees |
• | Experience and skills of director nominees |
• | Governance profile of the company |
• | Evidence of management entrenchment |
Converting Closed-end Fund to Open-end Fund:
CMA will vote conversion proposals on a CASE-BY-CASE basis, considering the following factors:
• | Past performance as a closed-end fund |
This document is current as of the last Review date but subject to change thereafter. Please consult the online version to verify that this policy has not been updated or otherwise changed.
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• | Market in which the fund invests |
• | Measures taken by the board to address the discount |
• | Past shareholder activism, board activity, and votes on related proposals. |
Investment Advisory Agreements:
CMA will vote investment advisory agreements on a CASE-BY-CASE basis, considering the following factors:
• | Proposed and current fee schedules |
• | Fund category/investment objective |
• | Performance benchmarks |
• | Share price performance as compared with peers |
• | Resulting fees relative to peers |
• | Assignments (where the adviser undergoes a change of control) |
Approving New Classes or Series of Shares:
CMA will vote FOR the establishment of new classes or series of shares.
Preferred Stock Proposals:
CMA will vote on a CASE-BY-CASE basis proposals for the authorization for or increase in the preferred shares, considering the following factors:
• | Stated specific financing purpose |
• | Possible dilution for common shares |
• | Whether the shares can be used for anti-takeover purposes |
Policies Addressed by the Investment Company Act of 1940 (“1940 Act”):
CMA will vote proposals regarding adoption or changes of policies addressed by the 1940 Act on a CASE-BY-CASE basis, considering the following factors:
• | Potential competitiveness |
• | Regulatory developments |
• | Current and potential returns |
• | Current and potential risk |
CMA generally will vote FOR these amendments as long as the proposed changes do not fundamentally alter the investment focus of the fund and do comply with current SEC interpretations.
Changing a Fundamental Restriction to a Non-fundamental Restriction:
CMA will vote on a CASE-BY-CASE basis proposals to change a fundamental restriction to a non-fundamental restriction, considering the following factors:
• | Fund’s target investments |
This document is current as of the last Review date but subject to change thereafter. Please consult the online version to verify that this policy has not been updated or otherwise changed.
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• | Reasons given by the fund for the change |
• | Projected impact of the change on the portfolio |
Change Fundamental Investment Objective to Non-fundamental:
CMA will vote AGAINST proposals to change a fund’s investment objective from fundamental to non-fundamental unless management acknowledges meaningful limitations upon its future requested ability to change the objective
Name Change Proposals:
CMA will vote on a CASE-BY-CASE basis proposals to change a fund’s name, considering the following factors:
• | Political/economic changes in the target market |
• | Consolidation in the target market |
• | Current asset composition |
Change in Fund’s Subclassification:
CMA will vote on a CASE-BY-CASE basis proposals to change a fund’s subclassification, considering the following factors:
• | Potential competitiveness |
• | Current and potential returns |
• | Risk of concentration |
• | Consolidation in target industry |
Disposition of Assets/Termination/Liquidation:
CMA will vote on a CASE-BY-CASE basis these proposals, considering the following factors:
• | Strategies employed to salvage the company |
• | Past performance of the fund |
• | Terms of the liquidation |
Changes to the Charter Document:
CMA will vote on a CASE-BY-CASE basis proposals to change the charter document, considering the following factors:
• | The degree of change implied by the proposal |
• | The efficiencies that could result |
• | The state of incorporation; net effect on shareholder rights |
• | Regulatory standards and implications |
This document is current as of the last Review date but subject to change thereafter. Please consult the online version to verify that this policy has not been updated or otherwise changed.
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CMA will vote FOR:
• | Proposals allowing the Board to impose, without shareholder approval, fees payable upon redemption of fund shares, provided imposition of such fees is likely to benefit long-term fund investors (e.g., by deterring market timing activity by other fund investors) |
• | Proposals enabling the Board to amend, without shareholder approval, the fund’s management agreement(s) with its investment adviser(s) or sub-advisers, provided the amendment is not required by applicable law (including the Investment Company Act of 1940) or interpretations thereunder to require such approval |
CMA will vote AGAINST:
• | Proposals enabling the Board to: |
• | Change, without shareholder approval the domicile of the fund |
• | Adopt, without shareholder approval, material amendments of the fund’s declaration of trust or other organizational document |
Changing the Domicile of a Fund:
CMA will vote on a CASE-BY-CASE basis proposals to reincorporate, considering the following factors:
• | Regulations of both states |
• | Required fundamental policies of both states |
• | The increased flexibility available |
Authorizing the Board to Hire and Terminate Subadvisors Without Shareholder Approval:
CMA will vote FOR proposals to enable the Board or Investment Adviser to hire and terminate sub-advisers, without shareholder approval, in accordance with applicable rules or exemptive orders under the Investment Company Act of 1940
Distribution Agreements:
CMA will vote these proposals on a CASE-BY-CASE basis, considering the following factors:
• | Fees charged to comparably sized funds with similar objectives |
• | The proposed distributor’s reputation and past performance |
• | The competitiveness of the fund in the industry |
• | Terms of the agreement |
Master-Feeder Structure:
CMA will vote FOR the establishment of a master-feeder structure.
Mergers:
CMA will vote merger proposals on a CASE-BY-CASE basis, considering the following factors:
• | Resulting fee structure |
This document is current as of the last Review date but subject to change thereafter. Please consult the online version to verify that this policy has not been updated or otherwise changed.
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• | Performance of both funds |
• | Continuity of management personnel |
• | Changes in corporate governance and their impact on shareholder rights |
Shareholder Proposals to Establish Director Ownership Requirement:
CMA will generally vote AGAINST shareholder proposals that mandate a specific minimum amount of stock that directors must own in order to qualify as a director or to remain on the board. While CMA favors stockownership on the part of directors, the company should determine the appropriate ownership requirement.
Shareholder Proposals to Reimburse Shareholder for Expenses Incurred:
CMA will vote on a CASE-BY-CASE basis proposals to reimburse proxy solicitation expenses.
Shareholder Proposals to Terminate the Investment Adviser:
CMA will vote on a CASE-BY-CASE basis proposals to terminate the investment adviser, considering the following factors:
• | Performance of the fund’s NAV |
• | The fund’s history of shareholder relations |
• | The performance of other funds under the adviser’s management |
This document is current as of the last Review date but subject to change thereafter. Please consult the online version to verify that this policy has not been updated or otherwise changed.
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APPENDIX B
Conflicts of Interest Disclosure and Certification Form
Conflict Review Questionnaire for Proxy Voting Working Group Members and Other Individuals Participating in the Proxy Voting Decision-Making Process.
Instructions: Please complete each of the questions. Please provide an explanation for any affirmative responses. Return the completed questionnaire to Columbia Management Conflicts of Interest Officer.
Issuer and Proxy Matter: |
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1. | Do you or any member of your immediate family have an existing (or potential) business, financial, personal or other relationship with any management personnel of the issuer?1 | |
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2. | Do you or any member of your immediate family have an existing (or potential) business, financial, personal or other relationship with any person participating, supporting, opposing or otherwise connected with the particular proxy proposal (e.g., principals of the issuer; director nominees of issuer company; shareholder activists)? | |
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3. | Have you discussed this particular proxy proposal with anyone outside of Columbia Management’s investment group?2 | |
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4. | Are you aware of any other potential personal conflicts of interest not described above? Please detail below. | |
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Name: |
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Signed: |
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Date: |
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1 | Personal investing in the issuer by you or a member of your immediate family does not require an affirmative response to this item. |
2 | Communications with issuer or solicitors in the regular course of business would not have to be disclosed on this form. |
This document is current as of the last Review date but subject to change thereafter. Please consult the online version to verify that this policy has not been updated or otherwise changed.
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APPENDIX C
CMA Proxy Vote Recommendation/Proxy Committee Request Form
Name of Investment Associate: |
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Company Name: |
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Overview of Proxy Vote and Meeting Date: |
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Proxy Agenda Item(s) |
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Description of Item: |
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(The above information will be pre-populated by the Proxy Department.) |
Recommendation (FOR, AGAINST, ABSTAIN) including brief rationale:
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Please attach any supporting information other than analysis or reports provided by the Proxy Department. |
Signed
By signing, I am certifying that I either have no conflicts of interest-related information to report or have sent a completed “Conflicts of Interest Disclosure and Certification Form” to Compliance Risk Management (Conflicts Officer).
Send Completed Forms to:
GWIM Investment Operations — Proxy Department
or
In the case of Proxy Votes to be referred to the Proxy Committee, submit this form and materials to the Chair of the Proxy Committee
This document is current as of the last Review date but subject to change thereafter. Please consult the online version to verify that this policy has not been updated or otherwise changed.
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Appendix B – Statement of Additional Information of Variable Portfolio – Conservative Portfolio; Variable Portfolio – Moderately Conservative Portfolio; Variable Portfolio, Moderate Portfolio; Variable Portfolio – Moderately Aggressive Portfolio and Variable Portfolio – Aggressive Portfolio
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Statement of Additional Information (SAI) Supplement – May 1, 2010*
For the SAI dated April 14, 2010, amended and restated May 1, 2010 (Form # S-6534-20 C)
RiverSource Variable Series Trust
Variable Portfolio — Aggressive Portfolio
Variable Portfolio — Conservative Portfolio
Variable Portfolio — Moderate Portfolio
Variable Portfolio — Moderately Aggressive Portfolio
Variable Portfolio — Moderately Conservative Portfolio
The above-referenced funds are each a “fund” and collectively the “funds.”
On May 1, 2010, Ameriprise Financial, Inc. (“Ameriprise Financial”), the parent company of RiverSource Investments, LLC, the funds’ investment manager, announced the closing of its acquisition of the long-term asset management business of Columbia Management Group, LLC and certain of its affiliated companies from Bank of America (the “Columbia Transaction”).
In connection with the Columbia Transaction, effective May 1, 2010, the funds’ investment manager, principal underwriter and transfer agent will change their names to reflect the new, combined business:
New Company Name | Former Name/Service Provider | Services | ||
Columbia Management Investment Advisers, LLC | RiverSource Investments, LLC | Investment Management Services | ||
Columbia Management Investment Distributors, Inc. | RiverSource Fund Distributors, Inc. | Distribution Services | ||
Columbia Management Investment Services Corp. | RiverSource Service Corporation | Transfer Agent Services |
In connection with the Columbia Transaction, the Columbia-branded funds (which does not include the Columbia money market funds) are part of a family of funds that includes the RiverSource, Seligman and Threadneedle funds (collectively, the “Fund Family”). Currently, the Columbia-branded funds do not share the same policies and procedures as the other funds in the Fund Family and, except as described below, may not be exchanged for shares of RiverSource, Seligman or Threadneedle funds. Effective May 1, 2010, the Columbia-branded funds may be exchanged for RiverSource Cash Management Fund (Class A, B, C and Z shares). Please see the prospectus for RiverSource Cash Management Fund for more information.
* | Valid until next update |
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STATEMENT OF ADDITIONAL INFORMATION
April 14, 2010, amended and restated May 1, 2010
RiverSource Variable Series Trust
Variable Portfolio — Aggressive Portfolio
Variable Portfolio — Conservative Portfolio
Variable Portfolio — Moderate Portfolio
Variable Portfolio — Moderately Aggressive Portfolio
Variable Portfolio — Moderately Conservative Portfolio
Each fund offers Class 2 and Class 4 shares.
This is the Statement of Additional Information (SAI) for each of the funds listed above. This SAI is not a prospectus. It should be read together with the appropriate current fund prospectus dated the same date as this SAI. For a free copy of a fund prospectus, or when available, annual or semiannual report, contact your financial intermediary or write to RiverSource Family of Funds, 734 Ameriprise Financial Center, Minneapolis, MN 55474 or call 1 (800) 221-2450.
Each fund is governed by a Board of Trustees (the “Board”) that meets regularly to review a wide variety of matters affecting the funds. Detailed information about fund governance, the funds’ investment manager, RiverSource Investments, LLC (the “investment manager” or “RiverSource Investments”), a wholly-owned subsidiary of Ameriprise Financial, Inc. (“Ameriprise Financial”), and other aspects of fund management can be found by referencing the Table of Contents or the List of Tables on the following page.
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p. 3 | ||
p. 4 | ||
p. 5 | ||
p. 32 | ||
Brokerage Commissions Paid to Brokers Affiliated with the Investment Manager | p. 34 | |
p. 34 | ||
p. 35 | ||
p. 37 | ||
p. 40 | ||
p. 40 | ||
p. 40 | ||
p. 41 | ||
p. 45 | ||
p. 51 | ||
p. 58 | ||
p. 59 | ||
p. 60 |
List of Tables
1. | Fund Fiscal Year Ends and Investment Categories | p. 3 | ||
2. | Investment Strategies and Types of Investments of the Underlying Funds | p. 4 | ||
3. | Portfolio Managers | p. 42 | ||
4. | Fund History Table for RiverSource Family of Funds | p. 45 | ||
5. | Board Members | p. 51 | ||
6. | Fund Officers | p. 53 | ||
7. | Board Member Holdings — All Funds | p. 57 |
Statement of Additional Information – April 14, 2010, amended and restated May 1, 2010 | Page 2 |
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Throughout this SAI, the funds are referred to as follows:
Variable Portfolio — Aggressive Portfolio (Aggressive Portfolio)
Variable Portfolio — Conservative Portfolio (Conservative Portfolio)
Variable Portfolio — Moderate Portfolio (Moderate Portfolio)
Variable Portfolio — Moderately Aggressive Portfolio (Moderately Aggressive Portfolio)
Variable Portfolio — Moderately Conservative Portfolio (Moderately Conservative Portfolio)
Aggressive Portfolio, Conservative Portfolio, Moderate Portfolio, Moderately Aggressive Portfolio and Moderately Conservative Portfolio are singularly and collectively, where the context requires, referred to as either “the fund,” “each fund” or “the funds.” The funds in which these funds invest are referred to as the “underlying funds” or “acquired funds.”
The table that follows lists each fund’s fiscal year end and investment category.
Table 1. Fund Fiscal Year Ends and Investment Categories
Fund | Fiscal Year End | Fund Investment Category | ||
Aggressive Portfolio | December 31 | Fund-of-funds — equity | ||
Conservative Portfolio | December 31 | Fund-of-funds — fixed income | ||
Moderate Portfolio | December 31 | Fund-of-funds — equity | ||
Moderately Aggressive Portfolio | December 31 | Fund-of-funds — equity | ||
Moderately Conservative Portfolio | December 31 | Fund-of-funds — fixed income |
Fundamental and Nonfundamental Investment Policies
Fundamental investment policies adopted by a fund cannot be changed without the approval of a majority of the outstanding voting securities of the fund as defined in the Investment Company Act of 1940, as amended (the “1940 Act”). Nonfundamental investment policies may be changed by the Board at any time.
Notwithstanding any of a fund’s other investment policies, each fund may invest its assets in open-end management investment companies (i.e. underlying funds) that may have similar investment objectives, policies, and restrictions as the fund. Fund-of-funds, such as the funds, invest in a combination of underlying funds. These underlying funds have adopted their own investment policies that may be more or less restrictive than those of the funds. The policies of the underlying funds may permit a fund to engage in investment strategies indirectly that would otherwise be prohibited under the fund’s investment structure.
FUNDAMENTAL POLICIES
Fundamental policies are policies that can be changed only with shareholder approval.
For each fund:
• | The Fund will not act as an underwriter (sell securities for others). However, under the securities laws, the fund may be deemed to be an underwriter when it purchases securities directly from the issuer and later resells them. |
• | The Fund will not lend securities or participate in an interfund lending program if the total of all such loans would exceed 331/3% of the fund’s total assets except this fundamental investment policy shall not prohibit the fund from purchasing money market securities, loans, loan participation or other debt securities, or from entering into repurchase agreements. |
• | The Fund will not borrow money, except for temporary purposes (not for leveraging or investment) in an amount not exceeding 331/3% of its total assets (including the amount borrowed) less liabilities (other than borrowings) immediately after the borrowings. |
• | The Fund will not buy or sell real estate, unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the fund from investing in securities or other instruments backed by real estate or securities of companies engaged in the real estate business or real estate investment trusts. For purposes of this policy, real estate includes real estate limited partnerships. |
Statement of Additional Information – April 14, 2010, amended and restated May 1, 2010 | Page 3 |
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• | The Fund will not buy or sell physical commodities unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the fund from buying or selling options, futures contracts and foreign currency or from entering into forward currency contracts or from investing in securities or other instruments backed by, or whose value is derived from, physical commodities. |
• | The Fund will not issue senior securities, except as permitted under the 1940 Act, the rules and regulations thereunder and any applicable exemptive relief. |
• | The Fund will not concentrate in any one industry. According to the present interpretation by the Securities and Exchange Commission (SEC), this means that up to 25% of the fund’s total assets, based on current market value at time of purchase, can be invested in any one industry. |
• | The Fund will not purchase securities (except securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities) of any one issuer if, as a result, more than 5% of its total assets will be invested in the securities of such issuer or it would own more than 10% of the voting securities of such issuer, except that: (a) up to 25% of its total assets may be invested without regard to these limitations and (b) a Fund’s assets may be invested in the securities of one or more management investment companies to the extent permitted by the 1940 Act, the rules and regulations thereunder, or any applicable exemptive relief. |
NONFUNDAMENTAL POLICIES
Nonfundamental policies are policies that can be changed by the Board without shareholder approval. The following nonfundamental policies are in addition to those described in the prospectus.
• | No more than 15% of the fund’s net assets will be held in securities and other instruments that are illiquid. |
Investment Strategies and Types of Investments of the Funds
The funds seek their investment objectives by investing in a combination of underlying funds and in derivative instruments. A description of the risks associated with the funds’ investments in the underlying funds and derivatives follows Table 2. This table shows many of the various investment strategies and investments the funds are allowed to engage in and purchase. It is intended to show the breadth of investments that the investment manager or subadviser (individually and collectively, the “investment manager”) may make on behalf of an underlying fund. For a description of principal risks for an individual underlying fund, please see the applicable prospectus for that fund. Notwithstanding a fund’s ability to utilize these strategies and investments, the investment manager is not obligated to use them at any particular time. For example, even though the investment manager is authorized to adopt temporary defensive positions and is authorized to attempt to hedge against certain types of risk, these practices are left to the investment manager’s sole discretion.
Table 2 below describes the various investment strategies and types of investments the underlying funds are allowed to engage in by asset class as described in the fund’s prospectus. A black circle indicates that the investment strategy or type of investment is generally authorized for that asset class. Exceptions are noted in the footnotes to the table.
Table 2. Investment Strategies and Types of Investments of the Underlying Funds
Investment Strategy | Authorized for underlying fund | |||||
Cash | Equity | Fixed Income | ||||
Agency and government securities | • | • | • | |||
Borrowing | • | • | • | |||
Cash/money market instruments | • | • | • | |||
Collateralized bond obligations | — | • | • | |||
Commercial paper | • | • | • | |||
Common stock | — | • | • | |||
Convertible securities | — | • | • | |||
Corporate bonds | A | • | • | |||
Debt obligations | • | • | • | |||
Depositary receipts | — | • | • | |||
Derivative instruments | — | • | • |
Statement of Additional Information – April 14, 2010, amended and restated May 1, 2010 | Page 4 |
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Investment Strategy | Authorized for underlying fund | |||||
Cash | Equity | Fixed Income | ||||
Exchange-traded funds | — | • | • | |||
Floating rate loans | — | — | • | |||
Foreign currency transactions | — | • | • | |||
Foreign securities | • | • | • | |||
Funding agreements | • | • | • | |||
High yield debt securities (junk bonds) | — | • | • | |||
Illiquid and restricted securities | • | • | • | |||
Indexed securities | — | • | • | |||
Inflation protected securities | — | • | • | |||
Initial Public Offerings (IPOs) | • | • | • | |||
Inverse floaters | — | — | • | |||
Investment companies | • | • | • | |||
Lending of portfolio securities | • | • | • | |||
Loan participations | — | • | • | |||
Mortgage- and asset-backed securities | • | • | • | |||
Mortgage dollar rolls | — | • | • | |||
Municipal obligations | — | • | • | |||
Pay-in-kind securities | — | • | • | |||
Preferred stock | — | • | • | |||
Real estate investment trusts | — | • | • | |||
Repurchase agreements | • | • | • | |||
Reverse repurchase agreements | • | • | • | |||
Short sales | — | B | B | |||
Sovereign debt | • | • | • | |||
Structured investments | — | • | • | |||
Swap agreements | — | • | • | |||
Variable- or floating-rate securities | • | • | • | |||
Warrants | — | • | • | |||
When-issued securities and forward commitments | — | • | • | |||
Zero-coupon and step-coupon securities | • | • | • |
A. | While the fund is prohibited from investing in corporate bonds, it may invest in securities classified as corporate bonds if they meet the requirements of Rule 2a-7 of the 1940 Act. |
B. | The funds are not prohibited from engaging in short sales, however, each fund will seek Board approval prior to utilizing short sales as an active part of its investment strategy. |
Information Regarding Risks and Investment Strategies
RISKS
The following is a summary of risk characteristics applicable to the underlying funds and, where noted, applicable to the funds. Because the funds invest in the underlying funds, the funds will be subject to the same risks as the underlying funds in direct proportion to the allocation of the funds’ assets among the underlying funds. Following this summary is a description of certain investments and investment strategies and the risks most commonly associated with them (including certain risks not described below and, in some cases, a more comprehensive discussion of how the risks apply to a particular investment or investment strategy). A mutual fund’s risk profile is largely defined by the fund’s primary portfolio holdings and investment strategies. However, most mutual funds are allowed to use certain other strategies and investments that may have different risk characteristics. Accordingly, one or more of the following types of risk may be associated with a fund at any time (for a description of principal risks and investment strategies for an individual fund, please see that fund’s prospectus):
Active Management Risk. The funds and certain of the underlying funds are actively managed; performance will reflect in part the ability of the portfolio managers to select securities and to make investment decisions that are suited to achieving the fund’s investment objective. Due to its active management, a fund could underperform other mutual funds with similar investment objectives and strategies.
Statement of Additional Information – April 14, 2010, amended and restated May 1, 2010 | Page 5 |
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Affiliated Fund Risk. For fund-of-funds, such as the funds, the risk that the investment manager may have potential conflicts of interest in selecting underlying funds because the fees paid to it by some underlying funds are higher than the fees paid by other underlying funds. However, the investment manager is a fiduciary to the funds and is legally obligated to act in the fund’s best interests when selecting underlying funds.
Allocation Risk. For fund-of-funds, the risk that the investment manager’s evaluations regarding asset classes or underlying fund, and the funds’ allocations thereto, may be incorrect. Because the assets of the fund will be invested in underlying funds, the fund’s investment performance is directly related to the investment performance of the underlying funds in which it invests. The ability of the fund to realize its investment objective(s) will depend, in part, on the extent to which the underlying funds realize their investment objectives. There is no guarantee that the underlying funds will achieve their investment objectives. There is also a risk that the selected underlying funds’ performance may be lower than the performance of the asset class they were selected to represent or may be lower than the performance of alternative underlying funds that could have been selected to represent the asset class. Also, the fund is exposed to the same risks as the underlying funds in direct proportion to the allocation of its assets among the underlying funds.
Borrowing Risk. For the funds and underlying funds, to the extent the fund borrows money for investment purposes, which is commonly referred to as “leveraging,” the fund’s exposure to fluctuations in the prices of its assets will be increased as compared to the fund’s exposure if the fund did not borrow. The fund’s borrowing activities will exaggerate any increase or decrease in the net asset value of the fund. In addition, the interest which the fund pays on borrowed money, together with any additional costs of maintaining a borrowing facility, are additional costs borne by the fund and could reduce or eliminate any net investment profits. Unless profits on assets acquired with borrowed funds exceed the costs of borrowing, the use of borrowing will diminish the investment performance of the fund compared with what it would have been without borrowing. When the fund borrows money it must comply with certain asset coverage requirements, which at times may require the fund to dispose of some of its holdings, even though it may be disadvantageous to do so at the time.
Confidential Information Access Risk. In managing the underlying fund, the investment manager normally will seek to avoid the receipt of material, non-public information (Confidential Information) about the issuers of floating rate loans being considered for acquisition by the fund, or held in the underlying fund. In many instances, issuers of floating rate loans offer to furnish Confidential Information to prospective purchasers or holders of the issuer’s floating rate loans to help potential investors assess the value of the loan. The investment manager’s decision not to receive Confidential Information from these issuers may disadvantage the underlying fund as compared to other floating rate loan investors, and may adversely affect the price the underlying fund pays for the loans it purchases, or the price at which the underlying fund sells the loans. Further, in situations when holders of floating rate loans are asked, for example, to grant consents, waivers or amendments, the investment manager’s ability to assess the desirability of such consents, waivers or amendments may be compromised. For these and other reasons, it is possible that the investment manager’s decision under normal circumstances not to receive Confidential Information could adversely affect the underlying fund’s performance.
Common Stock Risk. An adverse event, such as an unfavorable earnings report, may depress the value of a particular common stock held by the fund. Also, the prices of common stocks are sensitive to general movements in the stock market and a drop in the stock market may depress the price of common stocks to which the fund has exposure. Common stock prices fluctuate for several reasons, including changes to investors’ perceptions of the financial condition of an issuer or the general condition of the relevant stock market, or when political or economic events affecting an issuer occurs. In addition, common stock prices may be particularly sensitive to rising interest rates, as the cost of capital rises and borrowing costs increase.
Counterparty Risk. For the funds and certain of the underlying funds, counterparty risk is the risk that a counterparty to a financial instrument entered into by the fund or held by a special purpose or structured vehicle becomes bankrupt or otherwise fails to perform its obligations due to financial difficulties. The fund may experience significant delays in obtaining any recovery in a bankruptcy or other reorganization proceeding. The fund may obtain only limited recovery or may obtain no recovery in such circumstances. The fund will typically enter into financial instrument transactions with counterparties whose credit rating is investment grade, or, if unrated, determined to be of comparable quality by the investment manager.
Credit Risk. Credit risk is the risk that one or more fixed income securities in the fund’s portfolio will decline in price or fail to pay interest or repay principal when due because the issuer of the security experiences a decline in its financial status and is unable or unwilling to honor its obligations, including the payment of interest or the repayment of principal. Adverse conditions in the credit markets can adversely affect the broader global economy, including the credit quality of issuers of fixed income securities in which the fund may invest. Changes by nationally recognized statistical rating organizations in its rating of securities and in the ability of an issuer to make scheduled payments may also affect the value of the fund’s investments. To the extent the fund invests in below-investment grade securities, it will be exposed to a greater amount of credit risk than a fund which invests solely in investment grade
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securities. The prices of lower grade securities are more sensitive to negative developments, such as a decline in the issuer’s revenues or a general economic downturn, than are the prices of higher grade securities. Fixed income securities of below investment grade quality are predominantly speculative with respect to the issuer’s capacity to pay interest and repay principal when due and therefore involve a greater risk of default. If the fund purchases unrated securities, or if the rating of a security is reduced after purchase, the fund will depend on the investment manager’s analysis of credit risk more heavily than usual.
Derivatives Risk. The funds and certain of the underlying funds may invest in derivatives. Derivatives are financial instruments that have a value which depends upon, or is derived from, the value of something else, such as one or more underlying securities, pools of securities, options, futures, indexes or currencies. Losses involving derivative instruments may be substantial, because a relatively small price movement in the underlying security(ies), instrument, currency or index may result in a substantial loss for the fund. In addition to the potential for increased losses, the use of derivative instruments may lead to increased volatility within a fund. Derivative instruments in which the fund invests will typically increase the fund’s exposure to its principal risks (as described in the fund’s prospectus) to which it is otherwise exposed, and may expose the fund to additional risks, including correlation risk, counterparty credit risk, hedging risk, leverage risk, and liquidity risk.
Correlation risk is related to hedging risk and is the risk that there may be an incomplete correlation between the hedge and the opposite position, which may result in increased or unanticipated losses.
Counterparty credit risk is the risk that a counterparty to the derivative instrument becomes bankrupt or otherwise fails to perform its obligations due to financial difficulties, and the fund may obtain no recovery of its investment or may only obtain a limited recovery, and any recovery may be delayed.
Hedging risk is the risk that derivative instruments used to hedge against an opposite position may offset losses, but they may also offset gains. There is no guarantee that a hedging strategy will eliminate the risk which the hedging strategy is intended to offset, which may led to losses within a fund.
Leverage risk is the risk that losses from the derivative instrument may be greater than the amount invested in the derivative instrument. Certain derivatives have the potential for unlimited losses, regardless of the size of the initial investment.
Liquidity risk is the risk that the derivative instrument may be difficult or impossible to sell or terminate, which may cause the fund to be in a position to do something the investment manager would not otherwise choose, including accepting a lower price for the derivative instrument, selling other investments or foregoing another, more appealing investment opportunity. Derivative instruments, which are not traded on an exchange, including, but not limited to, forward contracts, swaps, and over-the-counter options may have liquidity risk.
Certain derivatives have the potential for unlimited losses regardless of the size of the initial investment.
Exchange-Traded Fund (ETF) Risk. An ETF’s share price may not track its specified market index and may trade below its net asset value. ETFs generally use a “passive” investment strategy and will not attempt to take defensive positions in volatile or declining markets. An active secondary market in an ETF’s shares may not develop or be maintained and may be halted or interrupted due to actions by its listing exchange, unusual market conditions or other reasons. There can be no assurance an ETF’s shares will continue to be listed on an active exchange. In addition, shareholders bear both their proportionate share of the fund’s expenses and similar expenses incurred through ownership of the ETF.
The funds generally expect to purchase shares of ETFs through broker-dealers in transactions on a securities exchange, and in such cases the funds will pay customary brokerage commissions for each purchase and sale. Shares of an ETF may also be acquired by depositing a specified portfolio of the ETF’s underlying securities, as well as a cash payment generally equal to accumulated dividends of the securities (net of expenses) up to the time of deposit, with the ETF’s custodian, in exchange for which the ETF will issue a quantity of new shares sometimes referred to as a “creation unit”. Similarly, shares of an ETF purchased on an exchange may be accumulated until they represent a creation unit, and the creation unit may redeemed in kind for a portfolio of the underlying securities (based on the ETF’s net asset value) together with a cash payment generally equal to accumulated dividends as of the date of redemption. The funds may redeem creation units for the underlying securities (and any applicable cash), and may assemble a portfolio of the underlying securities (and any required cash) to purchase creation units. The funds’ ability to redeem creation units may be limited by the 1940 Act, which provides that ETFs will not be obligated to redeem shares held by the funds in an amount exceeding one percent of their total outstanding securities during any period of less than 30 days.
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There is a risk that ETFs in which a fund invests may terminate due to extraordinary events. For example, any of the service providers to ETFs, such as the trustee or sponsor, may close or otherwise fail to perform their obligations to the ETF, and the ETF may not be able to find a substitute service provider. Also, ETFs may be dependent upon licenses to use the various indices as a basis for determining their compositions and/or otherwise to use certain trade names. If these licenses are terminated, the ETFs may also terminate. In addition, an ETF may terminate if its net assets fall below a certain amount.
Foreign Currency Risk. The fund’s exposure to foreign currencies subjects the fund to constantly changing exchange rates and the risk that those currencies will decline in value relative to the U.S. dollar, or, in the case of short positions, that the U.S. dollar will decline in value relative to the currency being sold forward. Currency rates in foreign countries may fluctuate significantly over short periods of time for a number of reasons, including changes in interest rates and economic or political developments in the U.S. or abroad. As a result, the fund’s exposure to foreign currencies may reduce the returns of the fund. Trading of foreign currencies also includes the risk of clearing and settling trades which, if prices are volatile, may be difficult or impossible.
Risks of Foreign/Emerging Markets Investing. Foreign securities are securities of issuers based outside the United States. An issuer is deemed to be based outside the United States if it is organized under the laws of another country. Foreign securities are primarily denominated in foreign currencies. In addition to the risks normally associated with domestic securities of the same type, foreign securities are subject to the following risks:
Country risk includes the political, economic, and other conditions of the country. These conditions include lack of publicly available information, less government oversight and regulation of business and industry practices of stock exchanges, brokers and listed companies than in the U.S. (including lack of uniform accounting, auditing, and financial reporting standards comparable to those applicable to domestic companies). In addition, with certain foreign countries, there is the possibility of nationalization, expropriation, the imposition of additional withholding or confiscatory taxes, political, social, or economic instability, diplomatic developments that could affect investments in those countries, or other unforeseen actions by regulatory bodies (such as changes to settlement or custody procedures). It may be more difficult for an investor’s agents to keep currently informed about corporate actions such as stock dividends or other matters that may affect the prices of portfolio securities. The liquidity of foreign investments may be more limited than for most U.S. investments, which means that, at times it may be difficult to sell foreign securities at desirable prices. Payment for securities without delivery may be required in certain foreign markets and, when participating in new issues, some foreign countries require payment to be made in advance of issuance (at the time of issuance, the market value of the security may be more or less than the purchase price). Fixed commissions on some foreign stock exchanges are generally higher than negotiated commissions on U.S. exchanges. Further, the fund may encounter difficulties or be unable to pursue legal remedies and obtain judgments in foreign courts. The introduction of a single currency, the euro, on Jan. 1, 1999 for participating European nations in the Economic and Monetary Union (EU) presents unique risks. The most important is the exposure to the economic, political and social development of the member countries in the EU.
Currency risk results from the constantly changing exchange rates between local currency and the U.S. dollar. Whenever the fund holds securities valued in a foreign currency or holds the currency, changes in the exchange rate add to or subtract from the value of the investment.
Custody risk refers to the process of clearing and settling trades. It also covers holding securities with local agents and depositories. Low trading volumes and volatile prices in less developed markets make trades harder to complete and settle. Local agents are held only to the standard of care of the local market. Governments or trade groups may compel local agents to hold securities in designated depositories that are not subject to independent evaluation. The less developed a country’s securities market is, the greater the likelihood of problems occurring.
Emerging markets risk includes the dramatic pace of change (economic, social, and political) in these countries as well as the other considerations listed above. These markets are in early stages of development and are extremely volatile. They can be marked by extreme inflation, devaluation of currencies, dependence on trade partners, and hostile relations with neighboring countries.
Geographic Concentration Risk. The fund may be particularly susceptible to economic, political or regulatory events affecting companies and countries within the specific geographic region in which the fund focuses its investments. Currency devaluations could occur in countries that have not yet experienced currency devaluation to date, or could continue to occur in countries that have already experienced such devaluations. As a result, the fund may be more volatile than a more geographically diversified fund.
Highly Leveraged Transactions Risk. Certain corporate loans and corporate debt securities involve refinancings, recapitalizations, mergers and acquisitions, and other financings for general corporate purposes. These investments also may include senior obligations of a borrower issued in connection with a restructuring pursuant to Chapter 11 of the U.S. Bankruptcy Code (commonly known as “debtor-in-possession” financings), provided that such senior obligations are determined by the fund’s investment manager upon its credit analysis to be a suitable investment by the fund. In such highly leveraged transactions, the borrower assumes large amounts of debt in order to have the financial resources to attempt to achieve its business objectives. Such business objectives may include but are
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not limited to: management’s taking over control of a company (leveraged buy-out); reorganizing the assets and liabilities of a company (leveraged recapitalization); or acquiring another company. Loans or securities that are part of highly leveraged transactions involve a greater risk (including default and bankruptcy) than other investments.
Impairment of Collateral Risk. The value of collateral, if any, securing a floating rate loan can decline, and may be insufficient to meet the borrower’s obligations or difficult to liquidate. In addition, the fund’s access to collateral may be limited by bankruptcy or other insolvency laws. Further, certain floating rate loans may not be fully collateralized and may decline in value.
Inflation-Protected Securities Risk. Inflation-protected debt securities tend to react to change in real interest rates. Real interest rates can be described as nominal interest rates minus the expected impact of inflation. In general, the price of an inflation-protected debt security falls when real interest rates rise, and rises when real interest rates fall. Interest payments on inflation-protected debt securities will vary as the principal and/or interest is adjusted for inflation and may be more volatile than interest paid on ordinary bonds. In periods of deflation, the fund may have no income at all. Income earned by a shareholder depends on the amount of principal invested and that principal cannot seek to grow with inflation unless the investor reinvests the portion of fund distributions that comes from inflation adjustments.
Initial Public Offering (IPO) Risk. IPOs are subject to many of the same risks as investing in companies with smaller market capitalizations. To the extent a fund determines to invest in IPOs it may not be able to invest to the extent desired, because, for example, only a small portion (if any) of the securities being offered in an IPO may be made available. 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. IPOs will frequently be sold within 12 months of purchase. This may result in increased short-term capital gains, which will be taxable to shareholders as ordinary income.
Interest Rate Risk. The securities in the fund’s portfolio are subject to the risk of losses attributable to changes in interest rates. Interest rate risk is generally associated with bond prices: when interest rates rise, bond prices generally fall. In general, the longer the maturity or duration of a bond, the greater its sensitivity to changes in interest rates. Interest rate changes also may increase prepayments of debt obligations, which in turn would increase prepayment risk.
Issuer Risk. An issuer, or the value of its securities, may perform poorly. Poor performance may be caused by poor management decisions, competitive pressures, breakthroughs in technology, reliance on suppliers, labor problems or shortages, corporate restructurings, fraudulent disclosures, or other factors.
Leverage Risk. Leverage occurs when the fund increases its assets available for investment using borrowings, short sales, derivatives, or similar instruments or techniques. Due to the fact that short sales involve borrowing securities and then selling them, the fund’s short sales effectively leverage the fund’s assets. The use of leverage may make any change in the fund’s net asset value (“NAV”) even greater and thus result in increased volatility of returns. The fund’s assets that are used as collateral to secure the short sales may decrease in value while the short positions are outstanding, which may force the fund to use its other assets to increase the collateral. Leverage can also create an interest expense that may lower the fund’s overall returns. Lastly, there is no guarantee that a leveraging strategy will be successful.
Liquidity Risk. The risk associated from a lack of marketability of securities which may make it difficult or impossible to sell at desirable prices in order to minimize loss. The fund may have to lower the selling price, sell other investments, or forego another, more appealing investment opportunity.
Market Risk. The market value of securities may fall or fail to rise. Market risk may affect a single issuer, sector of the economy, industry, or the market as a whole. The market value of securities may fluctuate, sometimes rapidly and unpredictably. This risk is generally greater for small and mid-sized companies, which tend to be more vulnerable to adverse developments. In addition, focus on a particular style, for example, investment in growth or value securities, may cause the fund to underperform other mutual funds if that style falls out of favor with the market.
Mortgage-Related and Other Asset-Backed Securities Risk. Generally, rising interest rates tend to extend the duration of fixed rate mortgage-related securities, making them more sensitive to changes in interest rates. As a result, in a period of rising interest rates, if a fund holds mortgage-related securities, it may exhibit additional volatility. This is known as extension risk. In addition, adjustable and fixed rate mortgage-related securities are subject to prepayment risk. When interest rates decline, borrowers may pay off their mortgages sooner.
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Non-Diversification Risk. The funds are diversified funds. Certain of the underlying funds are non-diversified funds. A non-diversified fund may invest more of its assets in fewer companies than if it were a diversified fund. Because each investment has a greater effect on the fund’s performance, the fund may be more exposed to the risks of loss and volatility than a fund that invests more broadly.
Prepayment and Extension Risk. The risk that a bond or other security might be called, or otherwise converted, prepaid, or redeemed, before maturity. This risk is primarily associated with asset-backed securities, including mortgage backed securities. If a security is converted, prepaid, or redeemed, before maturity, particularly during a time of declining interest rates, the portfolio managers may not be able to reinvest in securities providing as high a level of income, resulting in a reduced yield to the fund. Conversely, as interest rates rise, the likelihood of prepayment decreases. The portfolio managers may be unable to capitalize on securities with higher interest rates because the fund’s investments are locked in at a lower rate for a longer period of time.
Quantitative Model Risk. Securities selected using quantitative methods may perform differently from the market as a whole as a result of the factors used in the quantitative method, the weight placed on each factor, and changes in the factors’ historical trends. The quantitative methodology employed by the investment manager has been extensively tested using historical securities market data, but has only recently begun to be used to manage mutual funds. There can be no assurance that the methodology will enable the fund to achieve its objective.
Real Estate Industry Risk. Certain underlying funds concentrate their investments in securities of companies operating in the real estate industry, making the fund more susceptible to risks associated with the ownership of real estate and with the real estate industry in general. These risks can include fluctuations in the value of the underlying properties, defaults by borrowers or tenants, market saturation, decreases in market rates for rents, and other economic, political, or regulatory occurrences affecting the real estate industry, including REITs.
REITs depend upon specialized management skills, may have limited financial resources, may have less trading volume, and may be subject to more abrupt or erratic price movements than the overall securities markets. REITs are also subject to the risk of failing to qualify for tax-free pass-through of income. Some REITs (especially mortgage REITs) are affected by risks similar to those associated with investments in debt securities including changes in interest rates and the quality of credit extended.
Sector Risk. If an underlying fund emphasizes one or more economic sectors, it may be more susceptible to the financial, market or economic events affecting the particular issuers and industries in which it invests than funds that do not emphasize particular sectors. The more a fund diversifies across sectors, the more it spreads risk and potentially reduces the risks of loss and volatility.
Small and Mid-Sized Company Risk. Investments in small and medium companies often involve greater risks than investments in larger, more established companies because small and medium companies may lack the management experience, financial resources, product diversification, experience, and competitive strengths of larger companies. Additionally, in many instances the securities of small and medium companies are traded only over-the-counter or on regional securities exchanges and the frequency and volume of their trading is substantially less and may be more volatile than is typical of larger companies.
Stripped Securities Risk. Stripped securities are the separate income or principal components of debt securities. These securities are particularly sensitive to changes in interest rates, and therefore subject to greater fluctuations in price than typical interest bearing debt securities. For example, stripped mortgage-backed securities have greater interest rate risk than mortgage-backed securities with like maturities, and stripped treasury securities have greater interest rate risk than traditional government securities with identical credit ratings.
Risks of Underlying Funds Selection. By investing in a combination of underlying funds, the funds have exposure to the risks of many areas of the market. Additionally, because each fund is structured with a different risk/return profile, the risks are typically greater for Moderate Portfolio relative to Conservative Portfolio, and greater still for Aggressive Portfolio relative to both Moderate Portfolio and Conservative Portfolio. A description of the more common principal risks to which the underlying funds (and thus, the funds) are subject to are identified in the funds’ prospectus.
Value Securities Risk. Value securities involve the risk that they may never reach what the investment manager believes is their full market value either because the market fails to recognize the stock’s intrinsic worth or the investment manager misgauged that worth. They also may decline in price, even though in theory they are already undervalued. Because different types of stocks tend to shift in and out of favor depending on market and economic conditions, the fund’s performance may sometimes be lower or higher than that of other types of funds (such as those emphasizing growth stocks).
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Varying Distribution Levels Risk. The amount of the distributions paid by the fund generally depends on the amount of income and/or dividends received by the fund on the securities it holds. The fund may not be able to pay distributions or may have to reduce its distribution level if the income and/or dividends the fund receives from its investments decline.
INVESTMENT STRATEGIES
As described in the funds’ prospectus, the funds seek their investment objectives by investing in a combination of underlying funds and in derivative instruments. The following information supplements the discussion of each underlying fund’s investment objectives and strategies that are described in the funds’ prospectus. The following describes strategies that underlying funds, and where noted the funds, may use and types of securities that they purchase. Please refer to the table titled Investment Strategies and Types of Investments of the Underlying Funds to see which are applicable to various categories of funds.
Agency and Government Securities
The U.S. government, its agencies and instrumentalities, and government sponsored enterprises issue many different types of securities. U.S. Treasury bonds, notes, and bills and securities, including mortgage pass through certificates of the Government National Mortgage Association (GNMA), are guaranteed by the U.S. government.
Other U.S. government securities are issued or guaranteed by federal agencies or instrumentalities or government-sponsored enterprises but are not guaranteed by the U.S. government. This may increase the credit risk associated with these investments. Government-sponsored entities issuing securities include privately owned, publicly chartered entities created to reduce borrowing costs for certain sectors of the economy, such as farmers, homeowners, and students. They include the Federal Farm Credit Bank System, Farm Credit Financial Assistance Corporation, Federal Home Loan Bank, Federal Home Loan Mortgage Corporation* (FHLMC), Federal National Mortgage Association* (FNMA), Student Loan Marketing Association (SLMA), and Resolution Trust Corporation (RTC). Government-sponsored entities may issue discount notes (with maturities ranging from overnight to 360 days) and bonds. Agency and government securities are subject to the same concerns as other debt obligations. (See also Debt Obligations and Mortgage- and Asset-Backed Securities.)
Although one or more of the other risks described in this SAI may apply, the largest risks associated with agency and government securities include: Inflation Risk, Interest Rate Risk, Prepayment and Extension Risk, and Reinvestment Risk.
* | On Sept. 7, 2008, the Federal Housing Finance Agency (FHFA), an agency of the U.S. government, placed the FHLMC and FNMA into conservatorship, a statutory process with the objective of returning the entities to normal business operations. FHFA will act as the conservator to operate the enterprises until they are stabilized. |
Borrowing
For the funds and the underlying funds, if the fund borrows money, its share price may be subject to greater fluctuation until the borrowing is paid off. If the fund makes additional investments while borrowings are outstanding, this may be considered a form of leverage. Under the 1940 Act, the fund is required to maintain continuous asset coverage of 300% with respect to such borrowings and to sell (within three days) sufficient portfolio holdings to restore such coverage if it should decline to less than 300% due to market fluctuations or otherwise, even if such liquidations of the fund’s holdings may be disadvantageous from an investment standpoint. Leveraging by means of borrowing may exaggerate the effect of any increase or decrease in the value of portfolio securities or the fund’s NAV, and money borrowed will be subject to interest and other costs (which may include commitment fees and/or the cost of maintaining minimum average balances) which may or may not exceed the income received from the securities purchased with borrowed funds.
Although one or more of the other risks described in this SAI may apply, the largest risks associated with borrowing include: Borrowing Risk and Inflation Risk.
Cash/Money Market Instruments
Cash-equivalent investments include short-term U.S. and Canadian government securities and negotiable certificates of deposit, non-negotiable fixed-time deposits, bankers’ acceptances, and letters of credit of banks or savings and loan associations having capital, surplus, and undivided profits (as of the date of its most recently published annual financial statements) in excess of $100 million (or the equivalent in the instance of a foreign branch of a U.S. bank) at the date of investment. A fund also may purchase short-term notes and obligations of U.S. and foreign banks and corporations and may use repurchase agreements with broker-dealers registered under the Securities Exchange Act of 1934 and with commercial banks. (See also Commercial Paper, Debt Obligations, Repurchase Agreements, and Variable- or Floating-Rate Securities.) These types of instruments generally offer low rates of return and subject a fund to certain costs and expenses. See Appendix A for a discussion of securities ratings.
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Bankers’ acceptances are marketable short-term credit instruments used to finance the import, export, transfer or storage of goods. They are termed “accepted” when a bank guarantees their payment at maturity.
Bank certificates of deposit are certificates issued against funds deposited in a bank (including eligible foreign branches of U.S. banks), are for a definite period of time, earn a specified rate of return and are normally negotiable.
A fund may invest its daily cash balance in RiverSource Short-Term Cash Fund, a money market fund established for the exclusive use of the RiverSource funds and other institutional clients of RiverSource Investments.
Although one or more of the other risks described in this SAI may apply, the largest risks associated with cash/money market instruments include: Credit Risk and Inflation Risk.
Collateralized Bond Obligations
Collateralized bond obligations (CBOs) are investment grade bonds backed by a pool of bonds, which may include junk bonds. CBOs are similar in concept to collateralized mortgage obligations (CMOs), but differ in that CBOs represent different degrees of credit quality rather than different maturities. (See also Mortgage- and Asset-Backed Securities.) Underwriters of CBOs package a large and diversified pool of high-risk, high-yield junk bonds, which is then separated into “tiers.” Typically, the first tier represents the higher quality collateral and pays the lowest interest rate; the second tier is backed by riskier bonds and pays a higher rate; the third tier represents the lowest credit quality and instead of receiving a fixed interest rate receives the residual interest payments — money that is left over after the higher tiers have been paid. CBOs, like CMOs, are substantially overcollateralized and this, plus the diversification of the pool backing them, may earn certain of the tiers investment-grade bond ratings. Holders of third-tier CBOs stand to earn high yields or less money depending on the rate of defaults in the collateral pool. (See also High-Yield Debt Securities (Junk Bonds).)
Although one or more of the other risks described in this SAI may apply, the largest risks associated with CBOs include: Credit Risk, Interest Rate Risk, and Prepayment and Extension Risk.
Commercial Paper
Commercial paper is a short-term debt obligation with a maturity ranging from 2 to 270 days issued by banks, corporations, and other borrowers. It is sold to investors with temporary idle cash as a way to increase returns on a short-term basis. These instruments are generally unsecured, which increases the credit risk associated with this type of investment. (See also Debt Obligations and Illiquid and Restricted Securities.)
Although one or more of the other risks described in this SAI may apply, the largest risks associated with commercial paper include: Credit Risk and Liquidity Risk.
Common Stock
Common stock represents units of ownership in a corporation. Owners typically are entitled to vote on the selection of directors and other important matters as well as to receive dividends on their holdings. In the event that a corporation is liquidated, the claims of secured and unsecured creditors and owners of bonds and preferred stock take precedence over the claims of those who own common stock.
The price of common stock is generally determined by corporate earnings, type of products or services offered, projected growth rates, experience of management, liquidity, and general market conditions for the markets on which the stock trades.
Although one or more of the other risks described in this SAI may apply, the largest risks associated with common stock include: Issuer Risk, Market Risk, and Small and Mid-Sized Company Risk.
Convertible Securities
Convertible securities are bonds, debentures, notes, preferred stocks, or other securities that may be converted into common, preferred or other securities of the same or a different issuer within a particular period of time at a specified price. Some convertible securities, such as preferred equity-redemption cumulative stock (PERCs), have mandatory conversion features. Others are voluntary. A convertible security entitles the holder to receive interest normally paid or accrued on debt or the dividend paid on preferred stock until the convertible security matures or is redeemed, converted, or exchanged. Convertible securities have unique investment characteristics in that they generally (i) have higher yields than common stocks but lower yields than comparable non-convertible
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securities, (ii) are less subject to fluctuation in value than the underlying stock since they have fixed income characteristics, and (iii) provide the potential for capital appreciation if the market price of the underlying common stock increases.
The value of a convertible security is a function of its “investment value” (determined by its yield in comparison with the yields of other securities of comparable maturity and quality that do not have a conversion privilege) and its “conversion value” (the security’s worth, at market value, if converted into the underlying common stock). The investment value of a convertible security is influenced by changes in interest rates, with investment value declining as interest rates increase and increasing as interest rates decline. The credit standing of the issuer and other factors also may have an effect on the convertible security’s investment value. The conversion value of a convertible security is determined by the market price of the underlying common stock. If the conversion value is low relative to the investment value, the price of the convertible security is governed principally by its investment value. Generally, the conversion value decreases as the convertible security approaches maturity. To the extent the market price of the underlying common stock approaches or exceeds the conversion price, the price of the convertible security will be increasingly influenced by its conversion value. A convertible security generally will sell at a premium over its conversion value by the extent to which investors place value on the right to acquire the underlying common stock while holding a fixed income security.
Although one or more of the other risks described in this SAI may apply, the largest risks associated with convertible securities include: Interest Rate Risk, Issuer Risk, Market Risk, Prepayment and Extension Risk, and Reinvestment Risk.
Corporate Bonds
Corporate bonds are debt obligations issued by private corporations, as distinct from bonds issued by a government or its agencies or a municipality. Corporate bonds typically have four distinguishing features: (1) they are taxable; (2) they have a par value of $1,000; (3) they have a term maturity, which means they come due all at once; and (4) many are traded on major exchanges. Corporate bonds are subject to the same concerns as other debt obligations. (See also Debt Obligations and High-Yield Debt Securities (Junk Bonds).) Corporate bonds may be either secured or unsecured. Unsecured corporate bonds are generally referred to as “debentures.” See Appendix A for a discussion of securities ratings.
Although one or more of the other risks described in this SAI may apply, the largest risks associated with corporate bonds include: Credit Risk, Interest Rate Risk, Issuer Risk, Prepayment and Extension Risk, and Reinvestment Risk.
Debt Obligations
Many different types of debt obligations exist (for example, bills, bonds, or notes). Issuers of debt obligations have a contractual obligation to pay interest at a fixed, variable or floating rate on specified dates and to repay principal on a specified maturity date. Certain debt obligations (usually intermediate- and long-term bonds) have provisions that allow the issuer to redeem or “call” a bond before its maturity. Issuers are most likely to call these securities during periods of falling interest rates. When this happens, an investor may have to replace these securities with lower yielding securities, which could result in a lower return.
The market value of debt obligations is affected primarily by changes in prevailing interest rates and the issuers perceived ability to repay the debt. The market value of a debt obligation generally reacts inversely to interest rate changes. When prevailing interest rates decline, the price usually rises, and when prevailing interest rates rise, the price usually declines.
In general, the longer the maturity of a debt obligation, the higher its yield and the greater the sensitivity to changes in interest rates. Conversely, the shorter the maturity, the lower the yield but the greater the price stability.
As noted, the values of debt obligations also may be affected by changes in the credit rating or financial condition of their issuers. Generally, the lower the quality rating of a security, the higher the degree of risk as to the payment of interest and return of principal. To compensate investors for taking on such increased risk, those issuers deemed to be less creditworthy generally must offer their investors higher interest rates than do issuers with better credit ratings. (See also Agency and Government Securities, Corporate Bonds, and High-Yield Debt Securities (Junk Bonds).)
Generally, debt obligations that are investment grade are those that have been rated in one of the top four credit quality categories by two out of the three independent rating agencies. In the event that a debt obligation has been rated by only two agencies, the most conservative, or lower, rating must be in one of the top four credit quality categories in order for the security to be considered investment grade. If only one agency has rated the debt obligation, that rating must be in one of the top four credit quality categories for the security to be considered investment grade. See Appendix A for a discussion of securities ratings.
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All ratings limitations are applied at the time of purchase. Subsequent to purchase, a debt security may cease to be rated or its rating may be reduced below the minimum required for purchase by a fund. Neither event will require the sale of such a security, but it will be a factor in considering whether to continue to hold the security. To the extent that ratings change as a result of changes in a rating agency or its rating system, a fund will attempt to use comparable ratings as standards for selecting investments.
Although one or more of the other risks described in this SAI may apply, the largest risks associated with debt obligations include: Credit Risk, Interest Rate Risk, Issuer Risk, Prepayment and Extension Risk, and Reinvestment Risk.
Depositary Receipts
Some foreign securities are traded in the form of American Depositary Receipts (ADRs). ADRs are receipts typically issued by a U.S. bank or trust company evidencing ownership of the underlying securities of foreign issuers. European Depositary Receipts (EDRs) and Global Depositary Receipts (GDRs) are receipts typically issued by foreign banks or trust companies, evidencing ownership of underlying securities issued by either a foreign or U.S. issuer. Generally, depositary receipts in registered form are designed for use in the U.S. and depositary receipts in bearer form are designed for use in securities markets outside the U.S. Depositary receipts may not necessarily be denominated in the same currency as the underlying securities into which they may be converted. Depositary receipts involve the risks of other investments in foreign securities. In addition, ADR holders may not have all the legal rights of shareholders and may experience difficulty in receiving shareholder communications. (See also Common Stock and Foreign Securities.)
Although one or more of the other risks described in this SAI may apply, the largest risks associated with depositary receipts include: Foreign/Emerging Markets Risk, Issuer Risk, and Market Risk.
Derivative Instruments
The funds and certain of the underlying funds may invest in derivatives. Derivative instruments are commonly defined to include securities or contracts whose values depend, in whole or in part, on (or “derive” from) the value of one or more other assets, such as securities, currencies, or commodities.
A derivative instrument generally consists of, is based upon, or exhibits characteristics similar to options or forward contracts. Such instruments may be used to maintain cash reserves while remaining fully invested, to offset anticipated declines in values of investments, to facilitate trading, to reduce transaction costs, or to pursue higher investment returns. Derivative instruments are characterized by requiring little or no initial payment. Their value changes daily based on a security, a currency, a group of securities or currencies, or an index. A small change in the value of the underlying security, currency, or index can cause a sizable percentage gain or loss in the price of the derivative instrument.
Options and forward contracts are considered to be the basic “building blocks” of derivatives. For example, forward-based derivatives include forward contracts, swap contracts, and exchange-traded futures. Forward-based derivatives are sometimes referred to generically as “futures contracts.” Option-based derivatives include privately negotiated, over-the-counter (OTC) options (including caps, floors, collars, and options on futures) and exchange-traded options on futures. Diverse types of derivatives may be created by combining options or futures in different ways, and by applying these structures to a wide range of underlying assets.
Options. An option is a contract. A person who buys a call option for a security has the right to buy the security at a set price for the length of the contract. A person who sells a call option is called a writer. The writer of a call option agrees for the length of the contract to sell the security at the set price when the buyer wants to exercise the option, no matter what the market price of the security is at that time. A person who buys a put option has the right to sell a security at a set price for the length of the contract. A person who writes a put option agrees to buy the security at the set price if the purchaser wants to exercise the option during the length of the contract, no matter what the market price of the security is at that time. An option is covered if the writer owns the security (in the case of a call) or sets aside the cash or securities of equivalent value (in the case of a put) that would be required upon exercise.
The price paid by the buyer for an option is called a premium. In addition to the premium, the buyer generally pays a broker a commission. The writer receives a premium, less another commission, at the time the option is written. The premium received by the writer is retained whether or not the option is exercised. A writer of a call option may have to sell the security for a below-market price if the market price rises above the exercise price. A writer of a put option may have to pay an above-market price for the security if its market price decreases below the exercise price.
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When an option is purchased, the buyer pays a premium and a commission. It then pays a second commission on the purchase or sale of the underlying security if the option is exercised. For record keeping and tax purposes, the price obtained on the sale of the underlying security is the combination of the exercise price, the premium, and both commissions.
One of the risks an investor assumes when it buys an option is the loss of the premium. To be beneficial to the investor, the price of the underlying security must change within the time set by the option contract. Furthermore, the change must be sufficient to cover the premium paid, the commissions paid both in the acquisition of the option and in a closing transaction or in the exercise of the option and sale (in the case of a call) or purchase (in the case of a put) of the underlying security. Even then, the price change in the underlying security does not ensure a profit since prices in the option market may not reflect such a change.
Options on many securities are listed on options exchanges. If a fund writes listed options, it will follow the rules of the options exchange. Options are valued at the close of the New York Stock Exchange. An option listed on a national exchange, Chicago Board Options Exchange, or NASDAQ will be valued at the last quoted sales price or, if such a price is not readily available, at the mean of the last bid and ask prices.
Options on certain securities are not actively traded on any exchange, but may be entered into directly with a dealer. These options may be more difficult to close. If an investor is unable to effect a closing purchase transaction, it will not be able to sell the underlying security until the call written by the investor expires or is exercised.
Futures Contracts. A futures contract is a sales contract between a buyer (holding the “long” position) and a seller (holding the “short” position) for an asset with delivery deferred until a future date. The buyer agrees to pay a fixed price at the agreed future date and the seller agrees to deliver the asset. The seller hopes that the market price on the delivery date is less than the agreed upon price, while the buyer hopes for the contrary. Many futures contracts trade in a manner similar to the way a stock trades on a stock exchange and the commodity exchanges.
Generally, a futures contract is terminated by entering into an offsetting transaction. An offsetting transaction is effected by an investor taking an opposite position. At the time a futures contract is made, a good faith deposit called initial margin is set up. Daily thereafter, the futures contract is valued and the payment of variation margin is required so that each day a buyer would pay out cash in an amount equal to any decline in the contract’s value or receive cash equal to any increase. At the time a futures contract is closed out, a nominal commission is paid, which is generally lower than the commission on a comparable transaction in the cash market.
Futures contracts may be based on various securities, securities indexes (such as the S&P 500 Index), foreign currencies and other financial instruments and indexes.
A fund may engage in futures and related options transactions to produce incremental earnings, to hedge existing positions, and to increase flexibility. The fund intends to comply with Rule 4.5 of the Commodity Futures Trading Commission (CFTC), under which a mutual fund is exempt from the definition of a “commodity pool operator.” The fund, therefore, is not subject to registration or regulation as a commodity pool operator, meaning that the fund may invest in futures contracts without registering with the CFTC.
Options on Futures Contracts. Options on futures contracts give the holder a right to buy or sell futures contracts in the future. Unlike a futures contract, which requires the parties to the contract to buy and sell a security on a set date (some futures are settled in cash), an option on a futures contract merely entitles its holder to decide on or before a future date (within nine months of the date of issue) whether to enter into a contract. If the holder decides not to enter into the contract, all that is lost is the amount (premium) paid for the option. Further, because the value of the option is fixed at the point of sale, there are no daily payments of cash to reflect the change in the value of the underlying contract. However, since an option gives the buyer the right to enter into a contract at a set price for a fixed period of time, its value does change daily.
One of the risks in buying an option on a futures contract is the loss of the premium paid for the option. The risk involved in writing options on futures contracts an investor owns, or on securities held in its portfolio, is that there could be an increase in the market value of these contracts or securities. If that occurred, the option would be exercised and the asset sold at a lower price than the cash market price. To some extent, the risk of not realizing a gain could be reduced by entering into a closing transaction. An investor could enter into a closing transaction by purchasing an option with the same terms as the one previously sold. The cost to close the option and terminate the investor’s obligation, however, might still result in a loss. Further, the investor might not be able to close the option because of insufficient activity in the options market. Purchasing options also limits the use of monies that might otherwise be available for long-term investments.
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Options on Indexes. Options on indexes are securities traded on national securities exchanges. An option on an index is similar to an option on a futures contract except all settlements are in cash. A fund exercising a put, for example, would receive the difference between the exercise price and the current index level. Options may also be traded with respect to other types of indexes, such as options on indexes of commodities futures.
Currency Options. Options on currencies are contracts that give the buyer the right, but not the obligation, to buy (call options) or sell (put options) a specified amount of a currency at a predetermined price (strike price) on or before the option matures (expiry date). Conversely, the seller has the obligation to buy or sell a currency option upon exercise of the option by the purchaser. Currency options are traded either on a national securities exchange or over-the-counter.
Tax and Accounting Treatment. As permitted under federal income tax laws and to the extent a fund is allowed to invest in futures contracts, a fund would intend to identify futures contracts as part of a mixed straddle and not mark them to market, that is, not treat them as having been sold at the end of the year at market value. If a fund is using short futures contracts for hedging purposes, the fund may be required to defer recognizing losses incurred on short futures contracts and on underlying securities. Any losses incurred on securities that are part of a straddle may be deferred to the extent there is unrealized appreciation on the offsetting position until the offsetting position is sold. Federal income tax treatment of gains or losses from transactions in options, options on futures contracts and indexes will depend on whether the option is a section 1256 contract. If the option is a non-equity option, a fund would either make a 1256(d) election and treat the option as a mixed straddle or mark to market the option at fiscal year end and treat the gain/loss as 40% short-term and 60% long-term.
The Internal Revenue Service (IRS) has ruled publicly that an exchange-traded call option is a security for purposes of the 50%-of-assets test and that its issuer is the issuer of the underlying security, not the writer of the option, for purposes of the diversification requirements.
Accounting for futures contracts will be according to generally accepted accounting principles. Initial margin deposits will be recognized as assets due from a broker (a fund’s agent in acquiring the futures position). During the period the futures contract is open, changes in value of the contract will be recognized as unrealized gains or losses by marking to market on a daily basis to reflect the market value of the contract at the end of each day’s trading. Variation margin payments will be made or received depending upon whether gains or losses are incurred. All contracts and options will be valued at the last-quoted sales price on their primary exchange.
Other Risks of Derivatives. The primary risk of derivatives is the same as the risk of the underlying asset, namely that the value of the underlying asset may go up or down. Adverse movements in the value of an underlying asset can expose an investor to losses. Derivative instruments may include elements of leverage and, accordingly, the fluctuation of the value of the derivative instrument in relation to the underlying asset may be magnified. The successful use of derivative instruments depends upon a variety of factors, particularly the investment manager’s ability to predict movements of the securities, currencies, and commodity markets, which requires different skills than predicting changes in the prices of individual securities. There can be no assurance that any particular strategy will succeed.
Another risk is the risk that a loss may be sustained as a result of the failure of a counterparty to comply with the terms of a derivative instrument. The counterparty risk for exchange-traded derivative instruments is generally less than for privately-negotiated or OTC derivative instruments, since generally a clearing agency, which is the issuer or counterparty to each exchange-traded instrument, provides a guarantee of performance. For privately-negotiated instruments, there is no similar clearing agency guarantee. In all transactions, an investor will bear the risk that the counterparty will default, and this could result in a loss of the expected benefit of the derivative transaction and possibly other losses.
When a derivative transaction is used to completely hedge another position, changes in the market value of the combined position (the derivative instrument plus the position being hedged) result from an imperfect correlation between the price movements of the two instruments. With a perfect hedge, the value of the combined position remains unchanged for any change in the price of the underlying asset. With an imperfect hedge, the values of the derivative instrument and its hedge are not perfectly correlated. For example, if the value of a derivative instrument used in a short hedge (such as writing a call option, buying a put option, or selling a futures contract) increased by less than the decline in value of the hedged investment, the hedge would not be perfectly correlated. Such a lack of correlation might occur due to factors unrelated to the value of the investments being hedged, such as speculative or other pressures on the markets in which these instruments are traded.
Derivatives also are subject to the risk that they cannot be sold, closed out, or replaced quickly at or very close to their fundamental value. Generally, exchange contracts are very liquid because the exchange clearinghouse is the counterparty of every contract. OTC
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transactions are less liquid than exchange-traded derivatives since they often can only be closed out with the other party to the transaction.
Another risk is caused by the legal unenforcibility of a party’s obligations under the derivative. A counterparty that has lost money in a derivative transaction may try to avoid payment by exploiting various legal uncertainties about certain derivative products.
(See also Foreign Currency Transactions.)
Although one or more of the other risks described in this SAI may apply, the largest risks associated with derivative instruments include: Counter Party Risk, Derivatives Risk and Liquidity Risk.
Exchange-Traded Funds
Exchange-traded funds (ETFs) represent shares of ownership in funds, unit investment trusts or depositary receipts. ETFs hold portfolios of securities that are designed to replicate, as closely as possible before expenses, the price and yield of a specified market index. The performance results of ETFs will not replicate exactly the performance of the pertinent index due to transaction and other expenses, including fees to service providers, borne by ETFs. ETF shares are sold and redeemed at net asset value only in large blocks called creation units and redemption units, respectively. The fund’s ability to redeem redemption units may be limited by the 1940 Act, which provides that ETFs will not be obligated to redeem shares held by the funds in an amount exceeding one percentage of their total outstanding securities during any period of less than 30 days. There is a risk that Underlying ETFs in which a fund invests may terminate due to extraordinary events. ETF shares also may be purchased and sold in secondary market trading on national securities exchanges, which allows investors to purchase and sell ETF shares at their market price throughout the day.
Although one or more of the other risks described in this SAI may apply, investments in ETFs involve the same risks associated with a direct investment in the types of securities included in the indices the ETFs are designed to replicate, including Market Risk. ETFs generally use a “passive” investment strategy and will not attempt to take defensive positions in volatile or declining markets. Shares of an ETF may trade at a market price that is less than their net asset value and an active trading market in such shares may not develop or continue and may be halted or interrupted due to actions by its listing exchange, unusual market conditions or other reasons. For example, any of the service providers to ETFs, such as the trustee or sponsor, may close or otherwise fail to perform their obligations to the ETF, and the ETF may not be able to find a substitute service provider. Also, ETFs may be dependent upon licenses to use the various indices as a basis for determining their compositions and/or otherwise to use certain trade names. If these licenses are terminated, the ETFs may also terminate. In addition, an ETF may terminate if its net assets fall below a certain amount. Although the funds believe that, in the event of the termination of an ETF, they will be able to invest instead in shares of an alternate ETF tracking the same market index or another index covering the same general market, there can be no assurance that shares of an alternate ETF would be available for investment at that time. There can be no assurance an ETF’s shares will continue to be listed on an active exchange. Finally, there can be no assurance that the portfolio of securities purchased by an ETF to replicate a particular index will replicate such index.
ETFs, because they invest in other securities (e.g., common stocks of small-, mid- and large capitalization companies (U.S. and foreign, including, for example, real estate investment trusts and emerging markets securities) and fixed income securities), are subject to the risks of investment associated with these and other types of investments, as described in this SAI.
Floating Rate Loans
Most floating rate loans are acquired directly from the agent bank or from another holder of the loan by assignment. Most such loans are secured, and most impose restrictive covenants which must be met by the borrower. These loans are typically made by a syndicate of banks and institutional investors, represented by an agent bank which has negotiated and structured the loan and which is responsible generally for collecting interest, principal, and other amounts from the borrower on its own behalf and on behalf of the other lending institutions in the syndicate, and for enforcing its and their other rights against the borrower. Each of the lending institutions, including the agent bank, lends to the borrower a portion of the total amount of the loan, and retains the corresponding interest in the loan. Floating rate loans may include delayed draw term loans and prefunded or synthetic letters of credit.
A fund’s ability to receive payments of principal and interest and other amounts in connection with loans held by it will depend primarily on the financial condition of the borrower. The failure by the fund to receive scheduled interest or principal payments on a loan would adversely affect the income of the fund and would likely reduce the value of its assets, which would be reflected in a reduction in the fund’s net asset value. Banks and other lending institutions generally perform a credit analysis of the borrower before originating a loan or purchasing an assignment in a loan. In selecting the loans in which the fund will invest, however, the investment manager will not rely on that credit analysis of the agent bank, but will perform its own investment analysis of the borrowers. The
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investment manager’s analysis may include consideration of the borrower’s financial strength and managerial experience, debt coverage, additional borrowing requirements or debt maturity schedules, changing financial conditions, and responsiveness to changes in business conditions and interest rates. The majority of loans the fund will invest in will be rated by one or more of the nationally recognized rating agencies. Investments in loans may be of any quality, including “distressed” loans, and will be subject to the fund’s credit quality policy.
Loans may be structured in different forms, including assignments and participations. In an assignment, a fund purchases an assignment of a portion of a lender’s interest in a loan. In this case, the fund may be required generally to rely upon the assigning bank to demand payment and enforce its rights against the borrower, but would otherwise be entitled to all of such bank’s rights in the loan.
The borrower of a loan may, either at its own election or pursuant to terms of the loan documentation, prepay amounts of the loan from time to time. There is no assurance that a fund will be able to reinvest the proceeds of any loan prepayment at the same interest rate or on the same terms as those of the original loan.
Corporate loans in which a fund may purchase a loan assignment are made generally to finance internal growth, mergers, acquisitions, recapitalizations, stock repurchases, leveraged buy-outs, dividend payments to sponsors and other corporate activities. The highly leveraged capital structure of certain borrowers may make such loans especially vulnerable to adverse changes in economic or market conditions. The fund may hold investments in loans for a very short period of time when opportunities to resell the investments that the investment manager believes are attractive arise.
Certain of the loans acquired by a fund may involve revolving credit facilities under which a borrower may from time to time borrow and repay amounts up to the maximum amount of the facility. In such cases, the fund would have an obligation to advance its portion of such additional borrowings upon the terms specified in the loan assignment. To the extent that the fund is committed to make additional loans under such an assignment, it will at all times designate cash or securities in an amount sufficient to meet such commitments.
Notwithstanding its intention in certain situations to not receive material, non-public information with respect to its management of investments in floating rate loans, the investment manager may from time to time come into possession of material, non-public information about the issuers of loans that may be held in a fund’s portfolio. Possession of such information may in some instances occur despite the investment manager’s efforts to avoid such possession, but in other instances the investment manager may choose to receive such information (for example, in connection with participation in a creditors’ committee with respect to a financially distressed issuer). As, and to the extent, required by applicable law, the investment manager’s ability to trade in these loans for the account of the fund could potentially be limited by its possession of such information. Such limitations on the investment manager’s ability to trade could have an adverse effect on the fund by, for example, preventing the fund from selling a loan that is experiencing a material decline in value. In some instances, these trading restrictions could continue in effect for a substantial period of time.
In some instances, other accounts managed by the investment manager may hold other securities issued by borrowers whose floating rate loans may be held in a fund’s portfolio. These other securities may include, for example, debt securities that are subordinate to the floating rate loans held in the fund’s portfolio, convertible debt or common or preferred equity securities. In certain circumstances, such as if the credit quality of the issuer deteriorates, the interests of holders of these other securities may conflict with the interests of the holders of the issuer’s floating rate loans. In such cases, the investment manager may owe conflicting fiduciary duties to the fund and other client accounts. The investment manager will endeavor to carry out its obligations to all of its clients to the fullest extent possible, recognizing that in some cases certain clients may achieve a lower economic return, as a result of these conflicting client interests, than if the investment manager’s client accounts collectively held only a single category of the issuer’s securities.
Although one or more of the other risks described in this SAI may apply, the largest risks associated with floating rate loans include: Credit Risk and Prepayment and Extension Risk.
Foreign Currency Transactions
Investments in foreign securities usually involve currencies of foreign countries. In addition, a fund may hold cash and cash equivalent investments in foreign currencies. As a result, the value of a fund’s assets as measured in U.S. dollars may be affected favorably or unfavorably by changes in currency exchange rates and exchange control regulations. Also, a fund may incur costs in connection with conversions between various currencies. Currency exchange rates may fluctuate significantly over short periods of time causing a fund’s NAV to fluctuate. Currency exchange rates are generally determined by the forces of supply and demand in the foreign exchange markets, actual or anticipated changes in interest rates, and other complex factors. Currency exchange rates also can be
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affected by the intervention of U.S. or foreign governments or central banks, or the failure to intervene, or by currency controls or political developments.
Spot Rates and Derivative Instruments. A fund may conduct its foreign currency exchange transactions either at the spot (cash) rate prevailing in the foreign currency exchange market or by entering into forward currency exchange contracts (forward contracts). (See also Derivative Instruments.) These contracts are traded in the interbank market conducted directly between currency traders (usually large commercial banks) and their customers. Because foreign currency transactions occurring in the interbank market might involve substantially larger amounts than those involved in the use of such derivative instruments, a fund could be disadvantaged by having to deal in the odd lot market for the underlying foreign currencies at prices that are less favorable than for round lots.
A fund may enter into forward contracts for a variety of reasons, but primarily it will enter into such contracts for risk management (hedging) or for investment purposes.
A fund may enter into forward contracts to settle a security transaction or handle dividend and interest collection. When a fund enters into a contract for the purchase or sale of a security denominated in a foreign currency or has been notified of a dividend or interest payment, it may desire to lock in the price of the security or the amount of the payment, usually in U.S. dollars, although it could desire to lock in the price of the security in another currency. By entering into a forward contract, a fund would be able to protect itself against a possible loss resulting from an adverse change in the relationship between different currencies from the date the security is purchased or sold to the date on which payment is made or received or when the dividend or interest is actually received.
A fund may enter into forward contracts when management of the fund believes the currency of a particular foreign country may decline in value relative to another currency. When selling currencies forward in this fashion, a fund may seek to hedge the value of foreign securities it holds against an adverse move in exchange rates. The precise matching of forward contract amounts and the value of securities involved generally will not be possible since the future value of securities in foreign currencies more than likely will change between the date the forward contract is entered into and the date it matures. The projection of short-term currency market movements is extremely difficult and successful execution of a short-term hedging strategy is highly uncertain. Unless specifically permitted, a fund would not enter into such forward contracts or maintain a net exposure to such contracts when consummating the contracts would obligate it to deliver an amount of foreign currency in excess of the value of its securities or other assets denominated in that currency.
This method of protecting the value of the fund’s securities against a decline in the value of a currency does not eliminate fluctuations in the underlying prices of the securities. It simply establishes a rate of exchange that can be achieved at some point in time. Although forward contracts tend to minimize the risk of loss due to a decline in value of hedged currency, they tend to limit any potential gain that might result should the value of such currency increase.
A fund may also enter into forward contracts when its management believes the currency of a particular country will increase in value relative to another currency. A fund may buy currencies forward to gain exposure to a currency without incurring the additional costs of purchasing securities denominated in that currency.
The funds may also invest in a combination of forward currency contracts and U.S. dollar-denominated market instruments in an attempt to obtain an investment result that is substantially the same as a direct investment in a foreign currency-denominated instrument. For example, the combination of U.S. dollar-denominated instruments with long forward currency exchange contracts creates a position economically equivalent to a position in the foreign currency, in anticipation of an increase in the value of the foreign currency against the U.S. dollar. Conversely, the combination of U.S. dollar-denominated instruments with short forward currency exchange contracts is economically equivalent to borrowing the foreign currency for delivery at a specified date in the future, in anticipation of a decrease in the value of the foreign currency against the U.S. dollar. Unanticipated changes in the currency exchange results could result in poorer performance for funds that enter into these types of transactions.
A fund may designate cash or securities in an amount equal to the value of the fund’s total assets committed to consummating forward contracts entered into under the circumstance set forth above. If the value of the securities declines, additional cash or securities will be designated on a daily basis so that the value of the cash or securities will equal the amount of the fund’s commitments on such contracts.
At maturity of a forward contract, a fund may either deliver (if a contract to sell) or take delivery of (if a contract to buy) the foreign currency or terminate its contractual obligation by entering into an offsetting contract with the same currency trader, the same maturity date, and covering the same amount of foreign currency.
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If a fund engages in an offsetting transaction, it would incur a gain or loss to the extent there has been movement in forward contract prices. If a fund engages in an offsetting transaction, it may subsequently enter into a new forward contract to buy or sell the foreign currency.
Although a fund values its assets each business day in terms of U.S. dollars, it may not intend to convert its foreign currencies into U.S. dollars on a daily basis. It would do so from time to time, and shareholders should be aware of currency conversion costs. Although foreign exchange dealers do not charge a fee for conversion, they do realize a profit based on the difference (spread) between the prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to a fund at one rate, while offering a lesser rate of exchange should a fund desire to resell that currency to the dealer.
Options on Foreign Currencies. A fund may buy put and call options and write covered call and cash-secured put options on foreign currencies for hedging purposes and to gain exposure to foreign currencies. For example, a decline in the dollar value of a foreign currency in which securities are denominated will reduce the dollar value of such securities, even if their value in the foreign currency remains constant. In order to protect against the diminutions in the value of securities, a fund may buy put options on the foreign currency. If the value of the currency does decline, a fund would have the right to sell the currency for a fixed amount in dollars and would offset, in whole or in part, the adverse effect on its portfolio that otherwise would have resulted. Conversely, where a change in the dollar value of a currency would increase the cost of securities a fund plans to buy, or where a fund would benefit from increased exposure to the currency, a fund may buy call options on the foreign currency. The purchase of the options could offset, at least partially, the changes in exchange rates.
As in the case of other types of options, however, the benefit to a fund derived from purchases of foreign currency options would be reduced by the amount of the premium and related transaction costs. In addition, where currency exchange rates do not move in the direction or to the extent anticipated, a fund could sustain losses on transactions in foreign currency options that would require it to forego a portion or all of the benefits of advantageous changes in rates.
A fund may write options on foreign currencies for the same types of purposes. For example, when a fund anticipates a decline in the dollar value of foreign-denominated securities due to adverse fluctuations in exchange rates it could, instead of purchasing a put option, write a call option on the relevant currency. If the expected decline occurs, the option would most likely not be exercised and the diminution in value of securities would be fully or partially offset by the amount of the premium received.
Similarly, instead of purchasing a call option when a foreign currency is expected to appreciate, a fund could write a put option on the relevant currency. If rates move in the manner projected, the put option would expire unexercised and allow the fund to hedge increased cost up to the amount of the premium.
As in the case of other types of options, however, the writing of a foreign currency option will constitute only a partial hedge up to the amount of the premium, and only if rates move in the expected direction. If this does not occur, the option may be exercised and the fund would be required to buy or sell the underlying currency at a loss that may not be offset by the amount of the premium. Through the writing of options on foreign currencies, the fund also may be required to forego all or a portion of the benefits that might otherwise have been obtained from favorable movements on exchange rates.
All options written on foreign currencies will be covered. An option written on foreign currencies is covered if a fund holds currency sufficient to cover the option or has an absolute and immediate right to acquire that currency without additional cash consideration upon conversion of assets denominated in that currency or exchange of other currency held in its portfolio. An option writer could lose amounts substantially in excess of its initial investments, due to the margin and collateral requirements associated with such positions.
Options on foreign currencies are traded through financial institutions acting as market-makers, although foreign currency options also are traded on certain national securities exchanges, such as the Philadelphia Stock Exchange and the Chicago Board Options Exchange, subject to SEC regulation. In an over-the-counter trading environment, many of the protections afforded to exchange participants will not be available. For example, there are no daily price fluctuation limits, and adverse market movements could therefore continue to an unlimited extent over a period of time. Although the purchaser of an option cannot lose more than the amount of the premium plus related transaction costs, this entire amount could be lost.
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Foreign currency option positions entered into on a national securities exchange are cleared and guaranteed by the Options Clearing Corporation (OCC), thereby reducing the risk of counterparty default. Further, a liquid secondary market in options traded on a national securities exchange may be more readily available than in the over-the-counter market, potentially permitting a fund to liquidate open positions at a profit prior to exercise or expiration, or to limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however, is subject to the risks of availability of a liquid secondary market described above, as well as the risks regarding adverse market movements, margining of options written, the nature of the foreign currency market, possible intervention by governmental authorities and the effects of other political and economic events. In addition, exchange-traded options on foreign currencies involve certain risks not presented by the over-the-counter market. For example, exercise and settlement of such options must be made exclusively through the OCC, which has established banking relationships in certain foreign countries for that purpose. As a result, the OCC may, if it determines that foreign governmental restrictions or taxes would prevent the orderly settlement of foreign currency option exercises, or would result in undue burdens on OCC or its clearing member, impose special procedures on exercise and settlement, such as technical changes in the mechanics of delivery of currency, the fixing of dollar settlement prices or prohibitions on exercise.
Foreign Currency Futures and Related Options. A fund may enter into currency futures contracts to buy or sell currencies. It also may buy put and call options and write covered call and cash-secured put options on currency futures. Currency futures contracts are similar to currency forward contracts, except that they are traded on exchanges (and have margin requirements) and are standardized as to contract size and delivery date. Most currency futures call for payment of delivery in U.S. dollars. A fund may use currency futures for the same purposes as currency forward contracts, subject to CFTC limitations.
Currency futures and options on futures values can be expected to correlate with exchange rates, but will not reflect other factors that may affect the value of the fund’s investments. A currency hedge, for example, should protect a Yen-denominated bond against a decline in the Yen, but will not protect a fund against price decline if the issuer’s creditworthiness deteriorates. Because the value of a fund’s investments denominated in foreign currency will change in response to many factors other than exchange rates, it may not be possible to match the amount of a forward contract to the value of a fund’s investments denominated in that currency over time.
A fund will hold securities or other options or futures positions whose values are expected to offset its obligations.
The fund would not enter into an option or futures position that exposes the fund to an obligation to another party unless it owns either (i) an offsetting position in securities or (ii) cash, receivables and short-term debt securities with a value sufficient to cover its potential obligations. (See also Derivative Instruments and Foreign Securities.)
Although one or more of the other risks described in this SAI may apply, the largest risks associated with foreign currency transactions include: Derivatives Risk, Interest Rate Risk, and Liquidity Risk.
Foreign Securities
Foreign securities, foreign currencies, and securities issued by U.S. entities with substantial foreign operations involve special risks, including those set forth below, which are not typically associated with investing in U.S. securities. Foreign companies are not generally subject to uniform accounting, auditing, and financial reporting standards comparable to those applicable to domestic companies. Additionally, many foreign stock markets, while growing in volume of trading activity, have substantially less volume than the New York Stock Exchange, and securities of some foreign companies are less liquid and more volatile than securities of domestic companies. Similarly, volume and liquidity in most foreign bond markets are less than the volume and liquidity in the U.S. and, at times, volatility of price can be greater than in the U.S. Further, foreign markets have different clearance, settlement, registration, and communication procedures and in certain markets there have been times when settlements have been unable to keep pace with the volume of securities transactions making it difficult to conduct such transactions. Delays in such procedures could result in temporary periods when assets are uninvested and no return is earned on them. The inability of an investor to make intended security purchases due to such problems could cause the investor to miss attractive investment opportunities. Payment for securities without delivery may be required in certain foreign markets and, when participating in new issues, some foreign countries require payment to be made in advance of issuance (at the time of issuance, the market value of the security may be more or less than the purchase price). Some foreign markets also have compulsory depositories (i.e., an investor does not have a choice as to where the securities are held). Fixed commissions on some foreign stock exchanges are generally higher than negotiated commissions on U.S. exchanges. Further, an investor may encounter difficulties or be unable to pursue legal remedies and obtain judgments in foreign courts. There is generally less government supervision and regulation of business and industry practices, stock exchanges, brokers, and listed companies than in the U.S. It may be more difficult for an investor’s agents to keep currently informed about corporate actions such as stock dividends or other matters that may affect the prices of portfolio securities. Communications between the
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U.S. and foreign countries may be less reliable than within the U.S., thus increasing the risk of delays or loss of certificates for portfolio securities. In addition, with respect to certain foreign countries, there is the possibility of nationalization, expropriation, the imposition of additional withholding or confiscatory taxes, political, social, or economic instability, diplomatic developments that could affect investments in those countries, or other unforeseen actions by regulatory bodies (such as changes to settlement or custody procedures).
The risks of foreign investing may be magnified for investments in emerging markets, which may have relatively unstable governments, economies based on only a few industries, and securities markets that trade a small number of securities.
The introduction of a single currency, the euro, on Jan. 1, 1999 for participating European nations in the Economic and Monetary Union (EU) presents unique uncertainties, including the legal treatment of certain outstanding financial contracts after Jan. 1, 1999 that refer to existing currencies rather than the euro; the establishment and maintenance of exchange rates; the fluctuation of the euro relative to non-euro currencies; whether the interest rate, tax or labor regimes of European countries participating in the euro will converge over time; and whether the admission of other countries such as Poland, Latvia, and Lithuania as members of the EU may have an impact on the euro.
Although one or more of the other risks described in this SAI may apply, the largest risks associated with foreign securities include: Foreign/Emerging Markets Risk and Issuer Risk.
Funding Agreements
A fund may invest in funding agreements issued by domestic insurance companies. Funding agreements are short-term, privately placed, debt obligations of insurance companies that offer a fixed- or floating-rate of interest. These investments are not readily marketable and therefore are considered to be illiquid securities. (See also Illiquid and Restricted Securities.)
Although one or more of the other risks described in this SAI may apply, the largest risks associated with funding agreements include: Credit Risk and Liquidity Risk.
High-Yield Debt Securities (Junk Bonds)
High yield (high-risk) debt securities are sometimes referred to as junk bonds. They are non-investment grade (lower quality) securities that have speculative characteristics. Lower quality securities, while generally offering higher yields than investment grade securities with similar maturities, involve greater risks, including the possibility of default or bankruptcy. They are regarded as predominantly speculative with respect to the issuer’s capacity to pay interest and repay principal. The special risk considerations in connection with investments in these securities are discussed below.
See Appendix A for a discussion of securities ratings. (See also Debt Obligations.)
All fixed rate interest-bearing securities typically experience appreciation when interest rates decline and depreciation when interest rates rise. The market values of lower-quality and comparable unrated securities tend to reflect individual corporate developments to a greater extent than do higher rated securities, which react primarily to fluctuations in the general level of interest rates. Lower-quality and comparable unrated securities also tend to be more sensitive to economic conditions than are higher-rated securities. As a result, they generally involve more credit risks than securities in the higher-rated categories. During an economic downturn or a sustained period of rising interest rates, highly leveraged issuers of lower-quality securities may experience financial stress and may not have sufficient revenues to meet their payment obligations. The issuer’s ability to service its debt obligations also may be adversely affected by specific corporate developments, the issuer’s inability to meet specific projected business forecasts, or the unavailability of additional financing. The risk of loss due to default by an issuer of these securities is significantly greater than a default by issuers of higher-rated securities because such securities are generally unsecured and are often subordinated to other creditors. Further, if the issuer of a lower quality security defaulted, an investor might incur additional expenses to seek recovery.
Credit ratings issued by credit rating agencies are designed to evaluate the safety of principal and interest payments of rated securities. They do not, however, evaluate the market value risk of lower-quality securities and, therefore, may not fully reflect the true risks of an investment. In addition, credit rating agencies may or may not make timely changes in a rating to reflect changes in the economy or in the condition of the issuer that affect the market value of the securities. Consequently, credit ratings are used only as a preliminary indicator of investment quality.
An investor may have difficulty disposing of certain lower-quality and comparable unrated securities because there may be a thin trading market for such securities. Because not all dealers maintain markets in all lower quality and comparable unrated securities,
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there is no established retail secondary market for many of these securities. To the extent a secondary trading market does exist, it is generally not as liquid as the secondary market for higher-rated securities. The lack of a liquid secondary market may have an adverse impact on the market price of the security. The lack of a liquid secondary market for certain securities also may make it more difficult for an investor to obtain accurate market quotations. Market quotations are generally available on many lower-quality and comparable unrated issues only from a limited number of dealers and may not necessarily represent firm bids of such dealers or prices for actual sales.
Although one or more of the other risks described in this SAI may apply, the largest risks associated with high-yield debt securities include: Credit Risk, Interest Rate Risk, and Prepayment and Extension Risk.
Illiquid and Restricted Securities
Illiquid securities are securities that are not readily marketable. These securities may include, but are not limited to, certain securities that are subject to legal or contractual restrictions on resale, certain repurchase agreements, and derivative instruments. To the extent a fund invests in illiquid or restricted securities, it may encounter difficulty in determining a market value for the securities. Disposing of illiquid or restricted securities may involve time-consuming negotiations and legal expense, and it may be difficult or impossible for a fund to sell the investment promptly and at an acceptable price.
In determining the liquidity of all securities and derivatives, such as Rule 144A securities, which are unregistered securities offered to qualified institutional buyers, and interest-only and principal-only fixed mortgage-backed securities (IOs and POs) issued by the U.S. government or its agencies and instrumentalities the investment manager, under guidelines established by the Board, will consider any relevant factors including the frequency of trades, the number of dealers willing to purchase or sell the security and the nature of marketplace trades.
Although one or more of the other risks described in this SAI may apply, the largest risks associated with illiquid and restricted securities include: Liquidity Risk.
Indexed Securities
The value of indexed securities is linked to currencies, interest rates, commodities, indexes, or other financial indicators. Most indexed securities are short- to intermediate-term fixed income securities whose values at maturity or interest rates rise or fall according to the change in one or more specified underlying instruments. Indexed securities may be more volatile than the underlying instrument itself and they may be less liquid than the securities represented by the index. (See also Derivative Instruments.)
Although one or more of the other risks described in this SAI may apply, the largest risks associated with indexed securities include: Liquidity Risk and Market Risk.
Inflation Protected Securities
Inflation is a general rise in prices of goods and services. Inflation erodes the purchasing power of an investor’s assets. For example, if an investment provides a total return of 7% in a given year and inflation is 3% during that period, the inflation-adjusted, or real, return is 4%. Inflation-protected securities are debt securities whose principal and/or interest payments are adjusted for inflation, unlike debt securities that make fixed principal and interest payments. One type of inflation-protected debt security is issued by the U.S. Treasury. The principal of these securities is adjusted for inflation as indicated by the Consumer Price Index for Urban Consumers (CPI) and interest is paid on the adjusted amount. The CPI is a measurement of changes in the cost of living, made up of components such as housing, food, transportation and energy.
If the CPI falls, the principal value of inflation-protected securities will be adjusted downward, and consequently the interest payable on these securities (calculated with respect to a smaller principal amount) will be reduced. Conversely, if the CPI rises, the principal value of inflation-protected securities will be adjusted upward, and consequently the interest payable on these securities will be increased. Repayment of the original bond principal upon maturity is guaranteed in the case of U.S. Treasury inflation-protected securities, even during a period of deflation. However, the current market value of the inflation-protected securities is not guaranteed and will fluctuate. Other inflation-indexed securities include inflation-related bonds, which may or may not provide a similar guarantee. If a guarantee of principal is not provided, the adjusted principal value of the bond repaid at maturity may be less than the original principal.
Other issuers of inflation-protected debt securities include other U.S. government agencies or instrumentalities, corporations and foreign governments. There can be no assurance that the CPI or any foreign inflation index will accurately measure the real rate of
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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.
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.
Any increase in principal for an inflation-protected security resulting from inflation adjustments is considered by IRS regulations to be taxable income in the year it occurs. For direct holders of an inflation-protected security, this means that taxes must be paid on principal adjustments even though these amounts are not received until the bond matures. By contrast, a fund holding these securities distributes both interest income and the income attributable to principal adjustments in the form of cash or reinvested shares, which are taxable to shareholders.
Although one or more of the other risks described in this SAI may apply, the largest risks associated with inflation-protected securities include: Interest Rate Risk and Market Risk.
Initial Public Offerings (IPOs)
Companies issuing IPOs generally have limited operating histories, and their prospects for future profitability are uncertain. These companies often are engaged in new and evolving businesses and are particularly vulnerable to competition and to changes in technology, markets and economic conditions. They may be dependent on certain key managers and third parties, need more personnel and other resources to manage growth and require significant additional capital. They may also be dependent on limited product lines and uncertain property rights and need regulatory approvals. The funds that invest in IPOs can be affected by sales of additional shares and by concentration of control in existing management and principal shareholders. Stock prices of IPOs can also be highly unstable, due to the absence of a prior public market, the small number of shares available for trading and limited investor information. Most IPOs involve a high degree of risk not normally associated with offerings of more seasoned companies.
Although one or more risks described in this SAI may apply, the largest risks associated with IPOs include: Small and Mid-Sized Company Risk and Initial Public Offering (IPO) Risk.
Inverse Floaters
Inverse floaters or inverse floating rate securities are a type of derivative long-term fixed income obligation with a floating or variable interest rate that moves in the opposite direction of short-term interest rates. As short-term interest rates go down, the holders of the inverse floaters receive more income and, as short-term interest rates go up, the holders of the inverse floaters receive less income. As with all long-term fixed income securities, the price of the inverse floater moves inversely with long-term interest rates; as long-term interest rates go down, the price of the inverse floater moves up and, when long-term interest rates go up, the price of the inverse floater moves down. While inverse floater securities tend to provide more income than similar term and credit quality fixed-rate bonds, they also exhibit greater volatility in price movement (both up and down).
In the municipal market an inverse floater is typically created when the owner of a municipal fixed rate bond transfers that bond to a trust in exchange for cash and a residual interest in the trust’s assets and cash flows (inverse floater certificates). The trust funds the purchase of the bond by issuing two classes of certificates: short-term floating rate notes (typically sold to third parties) and the inverse floaters (also known as residual certificates). No additional income beyond that provided by the trust’s underlying bond is created; rather, that income is merely divided-up between the two classes of certificates. The holder of the inverse floating rate securities typically has the right to (1) cause the holders of the short-term floating rate notes to tender their notes at par ($100) and (2) to return the inverse floaters and withdraw the underlying bonds, thereby collapsing the trust. (See also Derivative Instruments.)
Although one or more of the other risks described in this SAI may apply, the largest risks associated with transactions in inverse floaters include: Interest Rate Risk, Credit Risk, Liquidity Risk and Market Risk.
Investment Companies
For the funds and the underlying funds, investing in securities issued by registered and unregistered investment companies may involve the duplication of advisory fees and certain other expenses.
Although one or more of the other risks described in this SAI may apply, the largest risks associated with the securities of other investment companies include: Market Risk.
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Lending of Portfolio Securities
For the funds and the underlying funds, to generate additional income, a fund may lend up to one-third of the value of its total assets to broker-dealers, banks or other institutional borrowers of securities. JPMorgan Chase Bank, N.A. serves as lending agent (the Lending Agent) to the funds pursuant to a securities lending agreement (the Securities Lending Agreement) approved by the Board.
Under the Securities Lending Agreement, the Lending Agent loans securities to approved borrowers pursuant to borrower agreements in exchange for collateral equal to at least 100% of the market value of the loaned securities. Collateral may consist of cash, securities issued by the U.S. government or its agencies or instrumentalities (collectively, “U.S. government securities”) or such other collateral as may be approved by the Board. For loans secured by cash, the fund retains the interest earned on cash collateral investments, but is required to pay the borrower a rebate for the use of the cash collateral. For loans secured by U.S. government securities, the borrower pays a borrower fee to the Lending Agent on behalf of the fund. If the market value of the loaned securities goes up, the Lending Agent will request additional collateral from the borrower. If the market value of the loaned securities goes down, the borrower may request that some collateral be returned. During the existence of the loan, the lender will receive from the borrower amounts equivalent to any dividends, interest or other distributions on the loaned securities, as well as interest on such amounts.
Loans are subject to termination by a fund or a borrower at any time. A fund may choose to terminate a loan in order to vote in a proxy solicitation if the fund has knowledge of a material event to be voted on that would affect the fund’s investment in the loaned security.
Securities lending involves counterparty risk, including the risk that a borrower may not provide additional collateral when required or return the loaned securities in a timely manner. Counterparty risk also includes a potential loss of rights in the collateral if the borrower or the Lending Agent defaults or fails financially. This risk is increased if a 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 also bear the risk of loss in connection with investments of cash collateral received from the borrowers. Cash collateral is invested in accordance with investment guidelines contained in the Securities Lending Agreement and approved by the Board. 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, a fund may incur losses that exceed the amount it earned on lending the security. The Lending Agent will indemnify a fund from losses resulting from a borrower’s failure to return a loaned security when due, but such indemnification does not extend to losses associated with declines in the value of cash collateral investments.
Although one or more of the other risks described in this SAI may apply, the largest risks associated with the lending of portfolio securities include: Credit Risk.
Loan Participations
Loans, loan participations, and interests in securitized loan pools are interests in amounts owed by a corporate, governmental, or other borrower to a lender or consortium of lenders (typically banks, insurance companies, investment banks, government agencies, or international agencies). Loans involve a risk of loss in case of default or insolvency of the borrower and may offer less legal protection to an investor in the event of fraud or misrepresentation.
Although one or more of the other risks described in this SAI may apply, the largest risks associated with loan participations include: Credit Risk.
Mortgage- and Asset-Backed Securities
Mortgage-backed securities represent direct or indirect participations in, or are secured by and payable from, mortgage loans secured by real property, and include single- and multi-class pass-through securities and Collateralized Mortgage Obligations (CMOs). These securities may be issued or guaranteed by U.S. government agencies or instrumentalities (see also Agency and Government Securities), or by private issuers, generally originators and investors in mortgage loans, including savings associations, mortgage bankers, commercial banks, investment bankers, and special purpose entities. Mortgage-backed securities issued by private lenders may be supported by pools of mortgage loans or other mortgage-backed securities that are guaranteed, directly or indirectly, by the U.S. government or one of its agencies or instrumentalities, or they may be issued without any governmental guarantee of the underlying mortgage assets but with some form of non-governmental credit enhancement. Commercial mortgage-backed securities (CMBS) are a specific type of mortgage-backed security collateralized by a pool of mortgages on commercial real estate.
Stripped mortgage-backed securities are a type of mortgage-backed security that receive differing proportions of the interest and principal payments from the underlying assets. Generally, there are two classes of stripped mortgage-backed securities: Interest Only (IO) and Principal Only (PO). IOs entitle the holder to receive distributions consisting of all or a portion of the interest on the
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underlying pool of mortgage loans or mortgage-backed securities. POs entitle the holder to receive distributions consisting of all or a portion of the principal of the underlying pool of mortgage loans or mortgage-backed securities. The cash flows and yields on IOs and POs are extremely sensitive to the rate of principal payments (including prepayments) on the underlying mortgage loans or mortgage-backed securities. A rapid rate of principal payments may adversely affect the yield to maturity of IOs. A slow rate of principal payments may adversely affect the yield to maturity of POs. If prepayments of principal are greater than anticipated, an investor in IOs may incur substantial losses. If prepayments of principal are slower than anticipated, the yield on a PO will be affected more severely than would be the case with a traditional mortgage-backed security.
CMOs are hybrid mortgage-related instruments secured by pools of mortgage loans or other mortgage-related securities, such as mortgage pass through securities or stripped mortgage-backed securities. CMOs may be structured into multiple classes, often referred to as “tranches,” with each class bearing a different stated maturity and entitled to a different schedule for payments of principal and interest, including prepayments. Principal prepayments on collateral underlying a CMO may cause it to be retired substantially earlier than its stated maturity.
The yield characteristics of mortgage-backed securities differ from those of other debt securities. Among the differences are that interest and principal payments are made more frequently on mortgage-backed securities, usually monthly, and principal may be repaid at any time. These factors may reduce the expected yield.
Asset-backed securities have structural characteristics similar to mortgage-backed securities. Asset-backed debt obligations represent direct or indirect participation in, or secured by and payable from, assets such as motor vehicle installment sales contracts, other installment loan contracts, home equity loans, leases of various types of property, and receivables from credit card or other revolving credit arrangements. The credit quality of most asset-backed securities depends primarily on the credit quality of the assets underlying such securities, how well the entity issuing the security is insulated from the credit risk of the originator or any other affiliated entities, and the amount and quality of any credit enhancement of the securities. Payments or distributions of principal and interest on asset-backed debt obligations may be supported by non-governmental credit enhancements including letters of credit, reserve funds, overcollateralization, and guarantees by third parties. The market for privately issued asset-backed debt obligations is smaller and less liquid than the market for government sponsored mortgage-backed securities. (See also Derivative Instruments.)
Although one or more of the other risks described in this SAI may apply, the largest risks associated with mortgage- and asset-backed securities include: Credit Risk, Interest Rate Risk, Liquidity Risk, and Prepayment and Extension Risk.
Mortgage Dollar Rolls
Mortgage dollar rolls are investments in which an investor sells mortgage-backed securities for delivery in the current month and simultaneously contracts to purchase substantially similar securities on a specified future date. While an investor foregoes principal and interest paid on the mortgage-backed securities during the roll period, the investor is compensated by the difference between the current sales price and the lower price for the future purchase as well as by any interest earned on the proceeds of the initial sale. The investor also could be compensated through the receipt of fee income equivalent to a lower forward price.
Although one or more of the other risks described in this SAI may apply, the largest risks associated with mortgage dollar rolls include: Credit Risk and Interest Rate Risk.
Municipal Obligations
Municipal obligations include debt obligations issued by or on behalf of states, territories, possessions, or sovereign nations within the territorial boundaries of the United States (including the District of Columbia, Guam and Puerto Rico). The interest on these obligations is generally exempt from federal income tax. Municipal obligations are generally classified as either “general obligations” or “revenue obligations.”
General obligation bonds are secured by the issuer’s pledge of its full faith, credit, and taxing power for the payment of interest and principal. Revenue bonds are payable only from the revenues derived from a project or facility or from the proceeds of a specified revenue source. Industrial development bonds are generally revenue bonds secured by payments from and the credit of private users. Municipal notes are issued to meet the short-term funding requirements of state, regional, and local governments. Municipal notes include tax anticipation notes, bond anticipation notes, revenue anticipation notes, tax and revenue anticipation notes, construction loan notes, short-term discount notes, tax-exempt commercial paper, demand notes, and similar instruments.
Municipal lease obligations may take the form of a lease, an installment purchase, or a conditional sales contract. They are issued by state and local governments and authorities to acquire land, equipment, and facilities. An investor may purchase these obligations
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directly, or it may purchase participation interests in such obligations. Municipal leases may be subject to greater risks than general obligation or revenue bonds. State constitutions and statutes set forth requirements that states or municipalities must meet in order to issue municipal obligations. Municipal leases may contain a covenant by the state or municipality to budget for and make payments due under the obligation. Certain municipal leases may, however, provide that the issuer is not obligated to make payments on the obligation in future years unless funds have been appropriated for this purpose each year.
Yields on municipal bonds and notes depend on a variety of factors, including money market conditions, municipal bond market conditions, the size of a particular offering, the maturity of the obligation, and the rating of the issue. The municipal bond market has a large number of different issuers, many having smaller sized bond issues, and a wide choice of different maturities within each issue. For these reasons, most municipal bonds do not trade on a daily basis and many trade only rarely. Because many of these bonds trade infrequently, the spread between the bid and offer may be wider and the time needed to develop a bid or an offer may be longer than other security markets. See Appendix A for a discussion of securities ratings. (See also Debt Obligations.)
Taxable Municipal Obligations. There is another type of municipal obligation that is subject to federal income tax for a variety of reasons. These municipal obligations do not qualify for the federal income exemption because (a) they did not receive necessary authorization for tax-exempt treatment from state or local government authorities, (b) they exceed certain regulatory limitations on the cost of issuance for tax-exempt financing or (c) they finance public or private activities that do not qualify for the federal income tax exemption. These non-qualifying activities might include, for example, certain types of multi-family housing, certain professional and local sports facilities, refinancing of certain municipal debt, and borrowing to replenish a municipality’s underfunded pension plan.
Although one or more of the other risks described in this SAI may apply, the largest risks associated with municipal obligations include: Credit Risk, Inflation Risk, Interest Rate Risk, and Market Risk.
Preferred Stock
Preferred stock is a type of stock that pays dividends at a specified rate and that has preference over common stock in the payment of dividends and the liquidation of assets. Preferred stock does not ordinarily carry voting rights.
The price of a preferred stock is generally determined by earnings, type of products or services, projected growth rates, experience of management, liquidity, and general market conditions of the markets on which the stock trades.
Although one or more of the other risks described in this SAI may apply, the largest risks associated with preferred stock include: Issuer Risk and Market Risk.
Real Estate Investment Trusts
Real estate investment trusts (REITs) are pooled investment vehicles that manage a portfolio of real estate or real estate related loans to earn profits for their shareholders. 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, such as shopping centers, nursing homes, office buildings, apartment complexes, and hotels, and derive income primarily from the collection of rents. Equity REITs can also realize capital gains by selling properties that have appreciated in value. Mortgage REITs invest the majority of their assets in real estate mortgages and derive income from the collection of interest payments. REITs can be subject to extreme volatility due to fluctuations in the demand for real estate, changes in interest rates, and adverse economic conditions. Similar to investment companies, REITs are not taxed on income distributed to shareholders provided they comply with certain requirements under the tax law. The failure of a REIT to continue to qualify as a REIT for tax purposes can materially affect its value. A fund will indirectly bear its proportionate share of any expenses paid by a REIT in which it invests.
REITs often do not provide complete tax information until after the calendar year-end. Consequently, because of the delay, it may be necessary for a fund investing in REITs to request permission to extend the deadline for issuance of Forms 1099-DIV beyond January 31. In the alternative, amended Forms 1099-DIV may be sent.
Although one or more of the other risks described in this SAI may apply, the largest risks associated with REITs include: Interest Rate Risk, Issuer Risk and Market Risk.
Repurchase Agreements
Repurchase agreements may be entered into with certain banks or non-bank dealers. In a repurchase agreement, the purchaser buys a security at one price, and at the time of sale, the seller agrees to repurchase the obligation at a mutually agreed upon time and price (usually within seven days). The repurchase agreement determines the yield during the purchaser’s holding period, while the seller’s
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obligation to repurchase is secured by the value of the underlying security. Repurchase agreements could involve certain risks in the event of a default or insolvency of the other party to the agreement, including possible delays or restrictions upon the purchaser’s ability to dispose of the underlying securities.
Although one or more of the other risks described in this SAI may apply, the largest risks associated with repurchase agreements include: Credit Risk.
Reverse Repurchase Agreements
In a reverse repurchase agreement, an investor sells a security and enters into an agreement to repurchase the security at a specified future date and price. The investor generally retains the right to interest and principal payments on the security. Since the investor receives cash upon entering into a reverse repurchase agreement, it may be considered a borrowing. (See also Derivative Instruments.)
Although one or more of the other risks described in this SAI may apply, the largest risks associated with reverse repurchase agreements include: Credit Risk and Interest Rate Risk.
Short Sales
In short-selling transactions, a fund sells a security it does not own in anticipation of a decline in the market value of the security. To complete the transaction, a fund must borrow the security to make delivery to the buyer. A fund is obligated to replace the security borrowed by purchasing it at the market price at the time of replacement. The price at such time may be more or less than the price at which the security was sold by a fund, which may result in a loss or gain, respectively. Unlike taking a long position in a security by purchasing the security, where potential losses are limited to the purchase price, short sales have no cap on maximum losses, and gains are limited to the price of the security at the time of the short sale.
Short sales of forward commitments and derivatives do not involve borrowing a security. These types of short sales may include futures, options, contracts for differences, forward contracts on financial instruments and options such as contracts, credit-linked instruments, and swap contracts.
A fund may not always be able to borrow a security it wants to sell short. A fund also may be unable to close out an established short position at an acceptable price and may have to sell long positions at disadvantageous times to cover its short positions. The value of your investment in a fund will fluctuate in response to the movements in the market. Fund performance also will depend on the effectiveness of the investment manager’s research and the management team’s investment decisions.
Short sales also involve other costs. A fund must repay to the lender an amount equal to any dividends or interest that accrues while the loan is outstanding. To borrow the security, a fund may be required to pay a premium. A fund also will incur truncation costs in effecting short sales. The amount of any ultimate gain for a fund resulting from a short sale will be decreased and the amount of any ultimate loss will be increased, by the amount of premiums, interest or expenses a fund may be required to pay in connection with the short sale. Until a fund closes the short position, it will earmark and reserve fund assets, in cash or liquid securities to offset a portion of the leverage risk. Realized gains from short sales are typically treated as short-term gains/losses.
Although one or more of the other risks described in this SAI may apply, the largest risks associated with short sales include: Market Risk and Short Sales Risk.
Sovereign Debt
A sovereign debtor’s willingness or ability to repay principal and pay interest in a timely manner may be affected by a variety of factors, including its cash flow situation, the extent of its reserves, the availability of sufficient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole, the sovereign debtor’s policy toward international lenders, and the political constraints to which a sovereign debtor may be subject. (See also Foreign Securities.)
With respect to sovereign debt of emerging market issuers, investors should be aware that certain emerging market countries are among the largest debtors to commercial banks and foreign governments. At times, certain emerging market countries have declared moratoria on the payment of principal and interest on external debt.
Certain emerging market countries have experienced difficulty in servicing their sovereign debt on a timely basis that led to defaults and the restructuring of certain indebtedness.
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Sovereign debt includes Brady Bonds, which are securities issued under the framework of the Brady Plan, an initiative announced by former U.S. Treasury Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to restructure their outstanding external commercial bank indebtedness.
Although one or more of the other risks described in this SAI may apply, the largest risks associated with sovereign debt include: Credit Risk and Foreign/Emerging Markets Risk.
Structured Investments
A structured investment is a security whose return is tied to an underlying index or to some other security or pool of assets. Structured investments generally are individually negotiated agreements and may be traded over-the-counter. Structured investments are created 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, of specified instruments, such as commercial bank loans, and the issuance by that entity of one or more classes of debt obligations (“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. The extent of the 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. Structured securities are often offered in different classes. As a result a given class of a structured security may be 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 securities are typically sold in private placement transactions, and at any given time there may be no active trading market for a particular structured security.
Although one or more of the other risks described in this SAI may apply, the largest risks associated with structured investments include: Credit Risk and Liquidity Risk.
Swap Agreements
Swap agreements are typically individually negotiated agreements that obligate two parties to exchange payments based on a reference to a specified asset, reference rate or index. Swap agreements will tend to shift a party’s investment exposure from one type of investment to another. A swap agreement can increase or decrease the volatility of a fund’s investments and its net asset value.
Swap agreements are traded in the over-the-counter market and may be considered to be illiquid. Swap agreements entail the risk that a party will default on its payment obligations. A fund will enter into a swap agreement only if the claims-paying ability of the other party or its guarantor is considered to be investment grade by the investment manager. Generally, the unsecured senior debt or the claims-paying ability of the other party or its guarantor must be rated in one of the three highest rating categories of at least one Nationally Recognized Statistical Rating Organization (NRSRO) at the time of entering into the transaction. If there is a default by the other party to such a transaction, a fund will have to rely on its contractual remedies (which may be limited by bankruptcy, insolvency or similar laws) pursuant to the agreements related to the transaction. In certain circumstances, a fund may seek to minimize counterparty risk by requiring the counterparty to post collateral.
Swap agreements are usually entered into without an upfront payment because the value of each party’s position is the same. The market values of the underlying commitments will change over time resulting in one of the commitments being worth more than the other and the net market value creating a risk exposure for one counterparty or the other.
Interest Rate Swaps. Interest rate swap agreements are often used to obtain or preserve a desired return or spread at a lower cost than through a direct investment in an instrument that yields the desired return or spread. They are financial instruments that involve the exchange of one type of interest rate cash flow for another type of interest rate cash flow on specified dates in the future. In a standard interest rate swap transaction, two parties agree to exchange their respective commitments to pay fixed or floating rates on a predetermined specified (notional) amount. The swap agreement notional amount is the predetermined basis for calculating the obligations that the swap counterparties have agreed to exchange. Under most swap agreements, the obligations of the parties are exchanged on a net basis. The two payment streams are netted out, with each party receiving or paying, as the case may be, only the net amount of the two payments. Interest rate swaps can be based on various measures of interest rates, including LIBOR, swap rates, treasury rates and other foreign interest rates.
Cross Currency Swaps. Cross currency swaps are similar to interest rate swaps, except that they involve multiple currencies. A fund may enter into a currency swap when it has exposure to one currency and desires exposure to a different currency. Typically the interest rates that determine the currency swap payments are fixed, although occasionally one or both parties may pay a floating rate of interest. Unlike an interest rate swap, however, the principal amounts are exchanged at the beginning of the contract and returned at
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the end of the contract. In addition to paying and receiving amounts at the beginning and termination of the agreements, both sides will also have to pay in full periodically based upon the currency they have borrowed. Change in foreign exchange rates and changes in interest rates, as described above, may negatively affect currency swaps.
Total Return Swaps. Total return swaps are contracts in which one party agrees to make periodic payments based on the change in market value of the underlying assets, which may include a specified security, basket of securities or security indexes during the specified period, in return for periodic payments based on a fixed or variable interest rate of the total return from other underlying assets. Total return swap agreements may be used to obtain exposure to a security or market without owning or taking physical custody of such security or market. For example, CMBS total return swaps are bilateral financial contracts designed to replicate synthetically the total returns of commercial mortgage-backed securities. In a typical total return equity swap, payments made by the fund or the counterparty are based on the total return of a particular reference asset or assets (such as an equity security, a combination of such securities, or an index). That is, one party agrees to pay another party the return on a stock, basket of stocks, or stock index in return for a specified interest rate. By entering into an equity index swap, for example, the index receiver can gain exposure to stocks making up the index of securities without actually purchasing those stocks. Total return swaps involve not only the risk associated with the investment in the underlying securities, but also the risk of the counterparty not fulfilling its obligations under the agreement.
Swaption Transaction. A swaption is an option on a swap agreement and a contract that gives a counterparty the right (but not the obligation) to enter into a new swap agreement or to shorten, extend, cancel or otherwise modify an existing swap agreement, at some designated future time on specified terms, in return for payment of the purchase price (the “premium”) of the option. The fund may write (sell) and purchase put and call swaptions to the same extent it may make use of standard options on securities or other instruments. The writer of the contract receives the premium and bears the risk of unfavorable changes in the market value on the underlying swap agreement.
Swaptions can be bundled and sold as a package. These are commonly called interest rate caps, floors and collars. In interest rate cap transactions, in return for a premium, one party agrees to make payments to the other to the extent that interest rates exceed a specified rate, or cap. Interest rate floor transactions require one party, in exchange for a premium to agree to make payments to the other to the extent that interest rates fall below a specified level, or floor. In interest rate collar transactions, one party sells a cap and purchases a floor, or vice versa, in an attempt to protect itself against interest rate movements exceeding given minimum or maximum levels or collar amounts.
Credit Default Swaps. Credit default swaps are contracts in which third party credit risk is transferred from one party to another party by one party, the protection buyer, making payments to the other party, the protection seller, in return for the ability of the protection buyer to deliver a reference obligation, or portfolio of reference obligations, to the protection seller upon the occurrence of certain credit events relating to the issuer of the reference obligation and receive the notional amount of the reference obligation from the protection seller. A fund may use credit default swaps for various purposes including to increase or decrease its credit exposure to various issuers. For example, as a seller in a transaction, a fund could use credit default swaps as a way of increasing investment exposure to a particular issuer’s bonds in lieu of purchasing such bonds directly. Similarly, as a buyer in a transaction, a fund may use credit default swaps to hedge its exposure on bonds that it owns or in lieu of selling such bonds. A credit default swap agreement may have as reference obligations one or more securities that are not currently held by the fund. The fund may be either the buyer or seller in the transaction. Credit default swaps may also be structured based on the debt of a basket of issuers, rather than a single issuer, and may be customized with respect to the default event that triggers purchase or other factors. As a seller, the fund generally receives an upfront payment or a fixed rate of income throughout the term of the swap, which typically is between six months and three years, provided that there is no credit event. If a credit event occurs, generally the seller must pay the buyer the full face amount of deliverable obligations of the reference obligations that may have little or no value. If the fund is a buyer and no credit event occurs, the fund recovers nothing if the swap is held through its termination date. However, if a credit event occurs, the buyer may elect to receive the full notional value of the swap in exchange for an equal face amount of deliverable obligations of the reference obligation that may have little or no value.
Credit default swap agreements can involve greater risks than if a fund had invested in the reference obligation directly since, in addition to general market risks, credit default swaps are subject to counterparty credit risk, leverage risk, hedging risk, correlation risk and liquidity risk. A fund will enter into credit default swap agreements only with counterparties that meet certain standards of creditworthiness. A buyer generally also will lose its investment and recover nothing should no credit event occur and the swap is held to its termination date. If a credit event were to occur, the value of any deliverable obligation received by the seller, coupled with the upfront or periodic payments previously received, may be less than the full notional value it pays to the buyer, resulting in a loss of value to the seller. A fund’s obligations under a credit default swap agreement will be accrued daily (offset against any amounts owing to the fund). In connection with credit default swaps in which a fund is the buyer, the fund will segregate or “earmark” cash or other liquid assets, or enter into certain offsetting positions, with a value at least equal to the fund’s exposure (any accrued but unpaid net
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amounts owed by the fund to any counterparty), on a marked-to-market basis. In connection with credit default swaps in which a fund is the seller, the fund will segregate or “earmark” cash or other liquid assets, or enter into offsetting positions, with a value at least equal to the full notional amount of the swap (minus any amounts owed to the fund). Such segregation or “earmarking” will ensure that the fund has assets available to satisfy its obligations with respect to the transaction. Such segregation or “earmarking” will not limit the fund’s exposure to loss.
The use of swap agreements by a fund entails certain risks, which may be different from, or possibly greater than, the risks associated with investing directly in the securities and other investments that are the referenced asset for the swap agreement. Swaps are highly specialized instruments that require investment techniques, risk analyses, and tax planning different from those associated with stocks, bonds, and other traditional investments. The use of a swap requires an understanding not only of the referenced asset, reference rate, or index, but also of the swap itself, without the benefit of observing the performance of the swap under all the possible market conditions. Because some swap agreements have a leverage component, adverse changes in the value or level of the underlying asset, reference rate, or index can result in a loss substantially greater than the amount invested in the swap itself. Certain swaps have the potential for unlimited loss, regardless of the size of the initial investment.
Although one or more of the other risks described in this SAI may apply, the largest risks associated with swaps include: Credit Risk, Liquidity Risk and Market Risk.
Variable- or Floating-Rate Securities
Variable-rate securities provide for automatic establishment of a new interest rate at fixed intervals (daily, monthly, semiannually, etc.). Floating-rate securities generally provide for automatic adjustment of the interest rate whenever some specified interest rate index changes. Variable- or floating-rate securities frequently include a demand feature enabling the holder to sell the securities to the issuer at par. In many cases, the demand feature can be exercised at any time. Some securities that do not have variable or floating interest rates may be accompanied by puts producing similar results and price characteristics. Variable-rate demand notes include master demand notes that are obligations that permit the investor to invest fluctuating amounts, which may change daily without penalty, pursuant to direct arrangements between the investor as lender, and the borrower. The interest rates on these notes fluctuate from time to time. The issuer of such obligations normally has a corresponding right, after a given period, to prepay in its discretion the outstanding principal amount of the obligations plus accrued interest upon a specified number of days’ notice to the holders of such obligations. Because these obligations are direct lending arrangements between the lender and borrower, it is not contemplated that such instruments generally will be traded. There generally is not an established secondary market for these obligations. Accordingly, where these obligations are not secured by letters of credit or other credit support arrangements, the lender’s right to redeem is dependent on the ability of the borrower to pay principal and interest on demand. Such obligations frequently are not rated by credit rating agencies and may involve heightened risk of default by the issuer.
Although one or more of the other risks described in this SAI may apply, the largest risks associated with variable- or floating-rate securities include: Credit Risk.
Warrants
Warrants are securities giving the holder the right, but not the obligation, to buy the stock of an issuer at a given price (generally higher than the value of the stock at the time of issuance) during a specified period or perpetually. Warrants may be acquired separately or in connection with the acquisition of securities. Warrants do not carry with them the right to dividends or voting rights and they do not represent any rights in the assets of the issuer. Warrants may be considered to have more speculative characteristics than certain other types of investments. In addition, the value of a warrant does not necessarily change with the value of the underlying securities, and a warrant ceases to have value if it is not exercised prior to its expiration date.
Although one or more of the other risks described in this SAI may apply, the largest risks associated with warrants include: Market Risk.
When-Issued Securities and Forward Commitments
When-issued securities and forward commitments involve a commitment to purchase or sell specific securities at a predetermined price or yield in which payment and delivery take place after the customary settlement period for that type of security. Normally, the settlement date occurs within 45 days of the purchase although in some cases settlement may take longer. The investor does not pay for the securities or receive dividends or interest on them until the contractual settlement date. Such instruments involve the risk of loss if the value of the security to be purchased declines prior to the settlement date and the risk that the security will not be issued as anticipated. If the security is not issued as anticipated, a fund may lose the opportunity to obtain a price and yield considered to be advantageous.
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Although one or more of the other risks described in this SAI may apply, the largest risks associated with when-issued securities and forward commitments include: Credit Risk.
Zero-Coupon, Step-Coupon, and Pay-in-Kind Securities
These securities are debt obligations that do not make regular cash interest payments (see also Debt Obligations). Zero-coupon and step-coupon securities are sold at a deep discount to their face value because they do not pay interest until maturity. Pay-in-kind securities pay interest through the issuance of additional securities. Because these securities do not pay current cash income, the price of these securities can be extremely volatile when interest rates fluctuate. See Appendix A for a discussion of securities ratings.
Although one or more of the other risks described in this SAI may apply, the largest risks associated with zero-coupon, step-coupon, and pay-in-kind securities include: Credit Risk and Interest Rate Risk.
A fund cannot issue senior securities but this does not prohibit certain investment activities for which assets of the fund are set aside, or margin, collateral or escrow arrangements are established, to cover the related obligations. Examples of those activities include borrowing money, delayed-delivery and when-issued securities transactions, and contracts to buy or sell options, derivatives, and hedging instruments.
The funds will invest in a combination of underlying funds and in derivative instruments. To the extent that the funds invest their assets in underlying funds, the funds will not pay any commissions for purchases and sales. Each fund, however, will bear a portion of the commissions paid by the underlying funds in which it invests in connection with the purchase and sale of portfolio securities.
Except as otherwise noted, the description of policies and procedures in this section also applies to any fund subadviser. Subject to policies set by the Board, as well as the terms of the investment management services agreements, and subadviser agreements, as applicable, the investment manager or subadviser is authorized to determine, consistent with a fund’s investment objective and policies, which securities will be purchased, held, or sold. With respect to the underlying funds, in determining where the buy and sell orders are to be placed, the investment manager has been directed to use its best efforts to obtain the best available price and the most favorable execution except where otherwise authorized by the Board.
Each fund, the investment manager, any subadviser and RiverSource Fund Distributors, Inc. (principal underwriter and distributor of the funds) has a strict Code of Ethics that prohibits affiliated personnel from engaging in personal investment activities that compete with or attempt to take advantage of planned portfolio transactions for the funds.
A fund’s securities may be traded on an agency basis with brokers or dealers or on a principal basis with dealers. In an agency trade, the broker-dealer generally is paid a commission. In a principal trade, the investment manager will trade directly with the issuer or with a dealer who buys or sells for its own account, rather than acting on behalf of another client. The investment manager may pay the dealer a commission or instead, the dealer’s profit, if any, is the difference, or spread, between the dealer’s purchase and sale price for the security.
Broker-Dealer Selection
In selecting broker-dealers to execute transactions for the underlying funds, the investment manager and each subadviser will consider from among such factors as the ability to minimize trading costs, trading expertise, infrastructure, ability to provide information or services, financial condition, confidentiality, competitiveness of commission rates, evaluations of execution quality, promptness of execution, past history, ability to prospect for and find liquidity, difficulty of trade, security’s trading characteristics, size of order, liquidity of market, block trading capabilities, quality of settlement, specialized expertise, overall responsiveness, willingness to commit capital and research services provided.
The Board has adopted a policy prohibiting the investment manager, or any subadviser, from considering sales of shares of the funds and the underlying funds as a factor in the selection of broker-dealers through which to execute securities transactions.
On a periodic basis, the investment manager makes a comprehensive review of the broker-dealers and the overall reasonableness of their commissions, including review by an independent third-party evaluator. The review evaluates execution, operational efficiency, and research services.
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Commission Dollars
As stated above, to the extent that the funds invest their assets in underlying funds, the funds will not pay any commissions for purchases and sales. The following applies to the underlying funds. Broker-dealers typically provide a bundle of services including research and execution of transactions. The research provided can be either proprietary (created and provided by the broker-dealer) or third party (created by a third party but provided by the broker-dealer). Consistent with the interests of the fund, the investment manager and each subadviser may use broker-dealers who provide both types of research products and services in exchange for commissions, known as “soft dollars,” generated by transactions in fund accounts.
The receipt of research and brokerage products and services is used by the investment manager, and by each subadviser, to the extent it engages in such transactions, to supplement its own research and analysis activities, by receiving the views and information of individuals and research staffs of other securities firms, and by gaining access to specialized expertise on individual companies, industries, areas of the economy and market factors. Research and brokerage products and services may include reports on the economy, industries, sectors and individual companies or issuers; statistical information; accounting and tax law interpretations; political analyses; reports on legal developments affecting portfolio securities; information on technical market actions; credit analyses; on-line quotation systems; risk measurement; analyses of corporate responsibility issues; on-line news services; and financial and market database services. Research services may be used by the investment manager in providing advice to multiple RiverSource accounts, including the funds (or by any subadviser to any other client of the subadviser) even though it is not possible to relate the benefits to any particular account or fund.
On occasion, it may be desirable to compensate a broker for research services or for brokerage services by paying a commission that might not otherwise be charged or a commission in excess of the amount another broker might charge. The Board has adopted a policy authorizing the investment manager to do so, to the extent authorized by law, if the investment manager or subadviser determines, in good faith, that such commission is reasonable in relation to the value of the brokerage or research services provided by a broker or dealer, viewed either in the light of that transaction or the investment manager’s or subadviser’s overall responsibilities with respect to a fund and the other funds or accounts for which it acts as investment manager (or by any subadviser to any other client of that subadviser).
As a result of these arrangements, some portfolio transactions may not be effected at the lowest commission, but overall execution may be better. The investment manager and each subadviser have represented that under its procedures the amount of commission paid will be reasonable and competitive in relation to the value of the brokerage services and research products and services provided.
The investment manager or a subadviser may use step-out transactions. A “step-out” is an arrangement in which the investment manager or subadviser executes a trade through one broker-dealer but instructs that broker-dealer to step-out all or a part of the trade to another broker-dealer. The second broker-dealer will clear and settle, and receive commissions for, the stepped-out portion. The investment manager or subadviser may receive research products and services in connection with step-out transactions.
Use of fund commissions may create potential conflicts of interest between the investment manager or subadviser and a fund. However, the investment manager and each subadviser has policies and procedures in place intended to mitigate these conflicts and ensure that the use of fund commissions falls within the “safe harbor” of Section 28(e) of the Securities Exchange Act of 1934. Some products and services may be used for both investment decision-making and non-investment decision-making purposes (“mixed use” items). The investment manager and each subadviser, to the extent it has mixed use items, has procedures in place to assure that fund commissions pay only for the investment decision-making portion of a mixed-use item.
Trade Aggregation and Allocation
When the Funds invest in the underlying funds, they do so at the underlying funds’ NAVs. Generally, orders are processed and executed in the order received. When a fund buys or sells the same security as another portfolio, fund, or account, the investment manager or subadviser carries out the purchase or sale pursuant to policies and procedures designed in such a way believed to be fair to the fund. Purchase and sale orders may be combined or aggregated for more than one account if it is believed it would be consistent with best execution. Aggregation may reduce commission costs or market impact on a per-share and per-dollar basis, although aggregation may have the opposite effect. There may be times when not enough securities are received to fill an aggregated order, including in an initial public offering, involving multiple accounts. In that event, the investment manager and each subadviser has policies and procedures designed in such a way believed to result in a fair allocation among accounts, including the fund.
From time to time, different portfolio managers with the investment manager may make differing investment decisions related to the same security. However, with certain exceptions for funds managed using strictly quantitative methods, a portfolio manager or portfolio management team may not sell a security short if the security is owned in another portfolio managed by that portfolio
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manager or portfolio management team. On occasion, a fund may purchase and sell a security simultaneously in order to profit from short-term price disparities.
The investment manager has portfolio management teams in its Minneapolis, New York and Los Angeles offices that may share research information regarding leveraged loans. The investment manager operates separate and independent trading desks in these locations for the purpose of purchasing and selling leveraged loans. As a result, the investment manager does not aggregate orders in leveraged loans across portfolio management teams. For example, funds and other client accounts being managed by these portfolio management teams may purchase and sell the same leveraged loan in the secondary market on the same day at different times and at different prices. There is also the potential for a particular account or group of accounts, including a fund, to forego an opportunity or to receive a different allocation (either larger or smaller) than might otherwise be obtained if the investment manager were to aggregate trades in leveraged loans across the portfolio management teams. Although the investment manager does not aggregate orders in leveraged loans across its portfolio management teams in Minneapolis, New York and Los Angeles, it operates in this structure subject to its duty to seek best execution.
Brokerage Commissions Paid to Brokers Affiliated with the Investment Manager
Affiliates of the investment manager may engage in brokerage and other securities transactions on behalf of a fund according to procedures adopted by the Board and to the extent consistent with applicable provisions of the federal securities laws. Subject to approval by the Board, the same conditions apply to transactions with broker-dealer affiliates of any subadviser. The investment manager will use an affiliate only if (i) the investment manager determines that the fund will receive prices and executions at least as favorable as those offered by qualified independent brokers performing similar brokerage and other services for the fund and (ii) the affiliate charges the fund commission rates consistent with those the affiliate charges comparable unaffiliated customers in similar transactions and if such use is consistent with terms of the Investment Management Services Agreement.
The assets of funds-of-funds consist primarily of shares of the underlying funds, which are valued at their NAVs. Other securities held by funds-of-funds are valued as described below.
In determining net assets before shareholder transactions, a fund’s securities are valued as follows as of the close of business of the New York Stock Exchange (the “Exchange”):
• | Securities traded on a securities exchange for which a last-quoted sales price is readily available are valued at the last-quoted sales price on the exchange where such security is primarily traded. |
• | Securities traded on a securities exchange for which a last-quoted sales price is not readily available are valued at the mean of the closing bid and asked prices, looking first to the bid and asked prices on the exchange where the security is primarily traded and, if none exist, to the over-the-counter market. |
• | Securities included in the NASDAQ National Market System are valued at the last-quoted sales price in this market. |
• | Securities included in the NASDAQ National Market System for which a last-quoted sales price is not readily available, and other securities traded over-the-counter but not included in the NASDAQ National Market System are valued at the mean of the closing bid and asked prices. |
• | Futures and options traded on major exchanges are valued at the last-quoted sales price on their primary exchange. |
• | Foreign securities traded outside the United States are generally valued as of the time their trading is complete, which is usually different from the close of the Exchange. Foreign securities quoted in foreign currencies are translated into U.S. dollars utilizing spot exchange rates at the close of regular trading on the NYSE. |
• | Occasionally, events affecting the value of securities occur between the time the primary market on which the securities are traded closes and the close of the Exchange. If events materially affect the value of securities, the securities will be valued at their fair value according to procedures decided upon in good faith by the Board. This occurs most commonly with foreign securities, but may occur in other cases. The fair value of a security is likely to be different from the quoted or published price. |
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• | Short-term securities maturing more than 60 days from the valuation date are valued at the readily available market price or approximate market value based on current interest rates. Short-term securities maturing in 60 days or less that originally had maturities of more than 60 days at acquisition date are valued at amortized cost using the market value on the 61st day before maturity. Short-term securities maturing in 60 days or less at acquisition date are valued at amortized cost. Amortized cost is an approximation of market value determined by systematically increasing the carrying value of a security if acquired at a discount, or reducing the carrying value if acquired at a premium, so that the carrying value is equal to maturity value on the maturity date. |
• | Securities without a readily available market price and securities for which the price quotations or valuations received from other sources are deemed unreliable or not reflective of market value are valued at fair value as determined in good faith by the Board. The Board is responsible for selecting methods it believes provide fair value. |
• | When possible, bonds are valued by a pricing service independent from the funds. If a valuation of a bond is not available from a pricing service, the bond will be valued by a dealer knowledgeable about the bond if such a dealer is available. |
Each fund’s Board and the investment manager believe that the investment ideas of the investment manager and any subadviser with respect to portfolio management of a fund should benefit the fund and its shareholders, and do not want to afford speculators an opportunity to profit by anticipating fund trading strategies or by using fund portfolio holdings information for stock picking. However, each fund’s Board also believes that knowledge of the fund’s portfolio holdings can assist shareholders in monitoring their investments, making asset allocation decisions, and evaluating portfolio management techniques.
Each fund’s Board has therefore adopted policies and procedures relating to disclosure of the fund’s portfolio securities. These policies and procedures are intended to protect the confidentiality of fund portfolio holdings information and generally prohibit the release of such information until such information is made public, unless such persons have been authorized to receive such information on a selective basis, as described below. It is the policy of the fund not to provide or permit others to provide portfolio holdings on a selective basis, and the investment manager does not intend to selectively disclose portfolio holdings or expect that such holdings information will be selectively disclosed, except where necessary for the fund’s operation or where there are legitimate business purposes for doing so and, in any case, where conditions are met that are designed to protect the interests of the fund and its shareholders.
Although the investment manager seeks to limit the selective disclosure of portfolio holdings information and such selective disclosure is monitored under the fund’s compliance program for conformity with the policies and procedures, there can be no assurance that these policies will protect the fund from the potential misuse of holdings information by individuals or firms in possession of that information. Under no circumstances may the investment manager, its affiliates or any employee thereof receive any consideration or compensation for disclosing such holdings information.
Public Disclosures
The funds’ portfolio holdings are currently disclosed to the public through filings with the SEC and postings on the funds’ website. The information is available on the funds’ website as described below.
• | For Equity and Balanced funds, a complete list of fund portfolio holdings as of month-end are posted on the website on a monthly basis approximately, but no earlier than, 15 calendar days after each month-end. The four most recent consecutive monthly disclosures remain posted for each fund. Such portfolio holdings information posted on the website includes the name of each portfolio security, number of shares held by the fund, value of the security and the security’s percentage of the market value of the fund’s portfolio as of month-end. |
• | For Fixed Income funds, a complete list of fund portfolio holdings as of calendar quarter-end are posted on the website on a quarterly basis approximately, but no earlier than, 30 calendar days after such quarter-end, and remain posted at least until the date on which the fund files its Form N-CSR or Form N-Q with the SEC for the subsequent fiscal period. Fixed income fund portfolio holdings information posted on the website shall include the name of each portfolio security, maturity/rate, par value and the security’s percentage of the market value of the fund’s portfolio as of calendar quarter-end. |
• | For Money Market funds, a complete list of fund portfolio holdings as of month-end are posted on the website on a monthly basis, approximately five business days after such month-end. Commencing with the month-end holdings as of September 2010 and thereafter, such month-end holdings will be continuously available on the website for at least six months, together with a link to an SEC webpage where a user of the website may obtain access to the fund’s most recent 12 months of publicly available filings on Form N-MFP. Additionally, as of September 2010 and thereafter, Money Market fund portfolio holdings |
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information posted on the website will, at minimum, include with respect to each holding, the name of the issuer, the category of investment (e.g., Treasury debt, government agency debt, asset backed commercial paper, structured investment vehicle note), the CUSIP number (if any), the principal amount, the maturity date (as determined under Rule 2a-7 for purposes of calculating weighted average maturity), the final maturity date (if different from the maturity date previously described), coupon or yield and the amortized cost value. The Money Market funds will also disclose on the website the overall weighted average maturity and weighted average life maturity of a holding and any other information that may be required by the SEC. |
Portfolio holdings of funds owned solely by affiliates of the investment manager may not be disclosed on the website. A complete schedule of each fund’s portfolio holdings is available semi-annually and annually in shareholder reports filed on Form N-CSR and, after the first and third fiscal quarters, in regulatory filings on Form N-Q. These shareholder reports and regulatory filings are filed with the SEC in accordance with federal securities laws and are generally available on the SEC’s website within sixty (60) days of the end of a fund’s fiscal quarter.
In addition, the investment manager makes publicly available information regarding certain fund’s largest five to fifteen holdings, as a percent of the market value of the funds’ portfolios as of a month-end. This holdings information is made publicly available through the websites (riversource.com/funds for RiverSource and Threadneedle funds and seligman.com for Seligman funds), approximately fifteen (15) days following the month-end. The scope of the information that is made available on the funds’ websites pursuant to the funds’ policies may change from time to time without prior notice.
Other Disclosures
The funds’ policies and procedures provide that no disclosures of the funds’ portfolio holdings may be made prior to the portfolio holdings information being made public unless (i) the funds have a legitimate business purpose for making such disclosure, (ii) the funds or their authorized agents authorize such non-public disclosure of information, and (iii) the party receiving the non-public information enters into an appropriate confidentiality agreement or is otherwise subject to a confidentiality obligation.
In determining the existence of a legitimate business purpose for making portfolio disclosures, the following factors, among others, are considered: (i) any prior disclosure must be consistent with the anti-fraud provisions of the federal securities laws and the fiduciary duties of the investment manager; (ii) any conflicts of interest between the interests of fund shareholders, on the one hand, and those of the investment manager, the funds’ distributor or any affiliated person of a fund, the investment manager or distributor on the other; and (iii) any prior disclosure to a third party, although subject to a confidentiality agreement, would not make conduct lawful that is otherwise unlawful.
In addition, the funds periodically disclose their portfolio information on a confidential basis to various service providers that require such information to assist the funds with their day-to-day business affairs. These service providers include each fund’s sub-advisor(s) (if any), affiliates of the investment manager, the funds’ custodian, sub-custodians, the funds’ independent registered public accounting firm, legal counsel, financial printers, proxy solicitor and proxy voting service provider, as well as ratings agencies that maintain ratings on certain funds. These service providers are required to keep such information confidential, and are prohibited from trading based on the information or otherwise using the information except as necessary in providing services to the funds. The funds also may disclose portfolio holdings information to broker/dealers and certain other entities in connection with potential transactions and management of the funds, provided that reasonable precautions, including limitations on the scope of the portfolio holdings information disclosed, are taken to avoid any potential misuse of the disclosed information.
The fund also discloses holdings information as required by federal, state or international securities laws, and may disclose holdings information in response to requests by governmental authorities, or in connection with litigation or potential litigation, a restructuring of a holding, where such disclosure is necessary to participate or explore participation in a restructuring of the holding (e.g., as part of a bondholder group), or to the issuer of a holding, pursuant to a request of the issuer or any other party who is duly authorized by the issuer.
Each fund’s Board has adopted policies to ensure that the fund’s holdings information is only disclosed in accordance with these policies. Before any selective disclosure of holdings information is permitted, the person seeking to disclose such holdings information must submit a written request to the Portfolio Holdings Committee (“PHC”). The PHC is comprised of members from the investment manager’s legal department, Compliance, and the funds’ President. The PHC has been authorized by each fund’s Board to perform an initial review of requests for disclosure of holdings information to evaluate whether there is a legitimate business purpose for selective disclosure, whether selective disclosure is in the best interests of a fund and its shareholders, to consider any potential conflicts of interest between the fund, the investment manager, and its affiliates, and to safeguard against improper use of holdings information. Factors considered in this analysis are whether the recipient has agreed to or has a duty to keep the holdings information confidential and whether risks have been mitigated such that the recipient has agreed or has a duty to use the holdings information only as necessary to effectuate the purpose for which selective disclosure was authorized, including a duty not to trade on such
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information. Before portfolio holdings may be selectively disclosed, requests approved by the PHC must also be authorized by either the fund’s President, Chief Compliance Officer or General Counsel or their respective designees. On at least an annual basis, the PHC reviews the approved recipients of selective disclosure and may require a resubmission of the request, in order to re-authorize certain ongoing arrangements. These procedures are intended to be reasonably designed to protect the confidentiality of fund holdings information and to prohibit their release to individual investors, institutional investors, intermediaries that distribute the fund’s shares, and other parties, until such holdings information is made public or unless such persons have been authorized to receive such holdings information on a selective basis, as set forth above.
Although the investment manager has set up these procedures to monitor and control selective disclosure of holdings information, there can be no assurance that these procedures will protect a fund from the potential misuse of holdings information by individuals or firms in possession of that information.
The funds currently have ongoing arrangements with certain approved recipients with respect to the disclosure of portfolio holdings information prior to such information being made public. Portfolio holdings information disclosed to such recipients is current as of the time of its disclosure, is disclosed to each recipient solely for purposes consistent with the services described below and has been authorized in accordance with the policy. These special arrangements are described in the table below.
Ongoing Portfolio Holdings Disclosure Arrangements:
In addition to the daily information provided to the fund’s custodians, subcustodians, administrator and investment advisers, the following disclosure arrangements are in place:
IDENTITY OF RECIPIENT | CONDITIONS/RESTRICTIONS ON USE OF INFORMATION | FREQUENCY OF DISCLOSURE | ||
Bitlathe | Website support for fund performance disclosure | Monthly | ||
BlackRock, Inc. | For providing trading operations and portfolio management support. | Daily | ||
Bloomberg, L.P. | For independent research of funds. Sent monthly, approximately 30 days after month end. | Monthly | ||
Bowne & Co. | For printing of proxies and annual updates to prospectuses and SAIs. | As needed | ||
Cenveo, Inc. | For printing of prospectuses, supplements, SAIs and shareholder reports. | As needed | ||
Factset Research Systems | For provision of quantitative analytics, charting and fundamental data to the investment manager. | Daily | ||
Investment Technology Group, Inc. (ITG, formerly known as Plexus Group) | For evaluation and assessment of trading activity, execution and practices by the investment manager. | Daily | ||
InvestorTools, Inc. | Provide descriptive data for municipal securities | Daily | ||
Morningstar, Inc. | For independent research and ranking of funds. Sent monthly, approximately 25 days after month end. | Monthly | ||
RiskMetrics Group (formerly Institutional Shareholder Services) | Proxy voting administration and research on proxy matters. | Daily | ||
Thomson Reuters Corp. (Lipper) | Information provided monthly with a 30 day lag to assure accuracy of Lipper Fact Sheets. | Monthly |
GENERAL GUIDELINES, POLICIES AND PROCEDURES
In the event that the funds hold securities other than shares of the underlying funds, proxies for such securities held by the funds will be voted as described below, as will the proxies for securities held by the underlying funds.
The funds uphold a long tradition of supporting sound and principled corporate governance. For over 30 years, the Board, which consists of a majority of independent Board members, has determined policies and voted proxies. The funds’ investment manager,
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RiverSource Investments, and the funds’ administrator, Ameriprise Financial, provide support to the Board in connection with the proxy voting process.
GENERAL GUIDELINES
Corporate Governance Matters — The Board supports proxy proposals that it believes are tied to the interests of shareholders and votes against proxy proposals that appear to entrench management. For example:
• | The Board generally votes in favor of proposals for an independent chairman or, if the chairman is not independent, in favor of a lead independent director. |
• | The Board supports annual election of all directors and proposals to eliminate classes of directors. |
• | In a routine election of directors, the Board will generally vote with management’s recommendations because the Board believes that management and nominating committees of independent directors are in the best position to know what qualifications are required of directors to form an effective board. However, the Board will generally vote against a nominee who has been assigned to the audit, compensation or nominating committee if the nominee is not independent of management based on established criteria. The Board will also withhold support for any director who fails to attend 75% of meetings or has other activities that appear to interfere with his or her ability to commit sufficient attention to the company and, in general, will vote against nominees who are determined to have been involved in options backdating. |
• | The Board generally supports proposals requiring director nominees to receive a majority of affirmative votes cast in order to be elected to the board, and opposes cumulative voting based on the view that each director elected should represent the interests of all shareholders. |
• | Votes in a contested election of directors are evaluated on a case-by-case basis. In general, the Board believes that incumbent management and nominating committees, with access to more and better information, are in the best position to make strategic business decisions. However, the Board will consider an opposing slate if it makes a compelling business case for leading the company in a new direction. |
Shareholder Rights Plans — The Board generally supports shareholder rights plans based on a belief that such plans force uninvited bidders to negotiate with a company’s board. The Board believes these negotiations allow time for the company to maximize value for shareholders by forcing a higher premium from a bidder, attracting a better bid from a competing bidder or allowing the company to pursue its own strategy for enhancing shareholder value. The Board supports proposals to submit shareholder rights plans to shareholders and supports limiting the vote required for approval of such plans to a majority of the votes cast.
Auditors — The Board values the independence of auditors based on established criteria. The Board supports a reasonable review of matters that may raise concerns regarding an auditor’s service that may cause the Board to vote against a management recommendation, including, for example, auditor involvement in significant financial restatements, options backdating, material weaknesses in control, attempts to limit auditor liability or situations where independence has been compromised.
Stock Option Plans and Other Management Compensation Issues — The Board expects company management to give thoughtful consideration to providing competitive long-term employee incentives directly tied to the interest of shareholders. The Board votes against proxy proposals that it believes dilute shareholder value excessively.
The Board believes that equity compensation awards can be a useful tool, when not abused, for retaining employees and giving them incentives to engage in conduct that will improve the performance of the company. In this regard, the Board generally favors minimum holding periods of stock obtained by senior management pursuant to an option plan and will vote against compensation plans for executives that it deems excessive.
Social and Corporate Policy Issues — The Board believes proxy proposals should address the business interests of the corporation. Shareholder proposals sometime seek to have the company disclose or amend certain business practices based purely on social or environmental issues rather than compelling business arguments. In general, the Board recognizes our fund shareholders are likely to have differing views of social and environmental issues and believes that these matters are primarily the responsibility of a company’s management and its board of directors.
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POLICIES AND PROCEDURES
The policy of the Board is to vote all proxies of the companies in which a fund holds investments. Because of the volume and complexity of the proxy voting process, including inherent inefficiencies in the process that are outside the control of the Board or the Proxy Team (as defined below), not all proxies may be voted. The Board has implemented policies and procedures that have been reasonably designed to vote proxies and to ensure that there are no conflicts between interests of a fund’s shareholders and those of the funds’ principal underwriters, RiverSource Investments, or other affiliated persons. In exercising its proxy voting responsibilities, the Board may rely upon the research or recommendations of one or more third party service providers.
The administration of the proxy voting process is handled by the RiverSource Proxy Administration Team (“Proxy Team”). In exercising its responsibilities, the Proxy Team may rely upon one or more third party service providers. The Proxy Team assists the Board in identifying situations where its guidelines do not clearly require a vote in a particular manner and assists in researching matters and making voting recommendations. RiverSource Investments may recommend that a proxy be voted in a manner contrary to the Board’s guidelines. In making recommendations to the Board about voting on a proposal, the investment manager relies on its own investment personnel (or the investment personnel of a fund’s subadviser(s)) and information obtained from an independent research firm. The investment manager makes the recommendation in writing. The process requires that Board members who are independent from the investment manager consider the recommendation and decide how to vote the proxy proposal or establish a protocol for voting the proposal.
On an annual basis, or more frequently as determined necessary, the Board reviews recommendations to revise the existing guidelines or add new guidelines. Recommendations are based on, among other things, industry trends and the frequency that similar proposals appear on company ballots.
The Board considers management’s recommendations as set out in the company’s proxy statement. In each instance in which a fund votes against management’s recommendation (except when withholding votes from a nominated director), the Board sends a letter to senior management of the company explaining the basis for its vote. This permits both the company’s management and the Board to have an opportunity to gain better insight into issues presented by the proxy proposal(s).
Voting in Countries Outside the United States (Non-U.S. Countries) — Voting proxies for companies not domiciled in the United States may involve greater effort and cost due to the variety of regulatory schemes and corporate practices. For example, certain non-U.S. countries require securities to be blocked prior to a vote, which means that the securities to be voted may not be traded within a specified number of days before the shareholder meeting. The Board typically will not vote securities in non-U.S. countries that require securities to be blocked as the need for liquidity of the securities in the funds will typically outweigh the benefit of voting. There may be additional costs associated with voting in non-U.S. countries such that the Board may determine that the cost of voting outweighs the potential benefit.
Securities on Loan — The Board will generally refrain from recalling securities on loan based upon its determination that the costs and lost revenue to the funds, combined with the administrative effects of recalling the securities, generally outweigh the benefit of voting the proxy. While neither the Board nor the funds’ administrator assesses the economic impact and benefits of voting loaned securities on a case-by-case basis, situations may arise where the Board requests that loaned securities be recalled in order to vote a proxy. In this regard, if a proxy relates to matters that may impact the nature of a company, such as a proposed merger or acquisition, and the funds’ ownership position is more significant, the Board has established a guideline to direct the funds’ administrator to use its best efforts to recall such securities based upon its determination that, in these situations, the benefits of voting such proxies generally outweigh the costs or lost revenue to the funds, or any potential adverse administrative effects to the funds, of not recalling such securities.
Investment in Affiliated Funds — Certain RiverSource funds may invest in shares of other RiverSource funds (referred to in this context as “underlying funds”) and may own substantial portions of these underlying funds. The proxy policy of the funds is to ensure that direct public shareholders of underlying funds control the outcome of any shareholder vote. To help manage this potential conflict of interest, recognizing that the direct public shareholders of these underlying funds may represent only a minority interest, the policy of the funds is to vote proxies of the underlying funds in the same proportion as the vote of the direct public shareholders. If there are no direct public shareholders of an underlying fund, the policy is to cast votes in accordance with instructions from the independent members of the Board.
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OBTAIN A PROXY VOTING RECORD
Each year the RiverSource funds file their proxy voting records with the SEC and make them available by August 31 for the 12-month period ending June 30 of that year. The records can be obtained without charge through riversource.com/funds (for RiverSource and Threadneedle funds) or seligman.com (for Seligman funds) or searching the website of the SEC at www.sec.gov.
The funds are offered to separate accounts (Accounts) funding variable annuity contracts and variable life insurance policies (Contracts) issued by affiliated life insurance companies. Accounts may not buy (nor will they own) shares of the fund directly. Accounts invest by buying an annuity contract or life insurance policy and allocating purchase payments to the Account that invests in the fund. Your purchase price will be the next NAV calculated after your request is received in good order by the fund or an authorized insurance company.
There is no sales charge associated with the purchase of fund shares, but there may be charges associated with the surrender or withdrawal of your annuity contract or life insurance policy. Any charges that apply to the Account and your contract are described in your annuity contract or life insurance policy prospectus.
You may transfer all or part of your value in an Account investing in shares of the fund to one or more of the other Accounts investing in shares of other funds with different investment objectives.
You may provide instructions to sell any shares you have allocated to the Accounts. Proceeds will be mailed within seven days after your surrender or withdrawal request is accepted by an authorized agent. The amount you receive may be more or less than the amount you invested. Your sale price will be the next NAV calculated after your request is received in good order by the fund or an authorized insurance company.
Please refer to your annuity contract or life insurance policy prospectus for more information about minimum and maximum payments and submission and acceptance of your application, transfers among Accounts as well as surrenders and withdrawals.
REJECTION OF BUSINESS
Each fund and the distributor reserve the right to reject any business, in its sole discretion.
A fund will sell any shares presented by the shareholders (Accounts of participating insurance companies) for sale. The policies on when or whether to buy or sell shares are described in your annuity or life insurance prospectus.
During an emergency the Board of the funds and the underlying funds can suspend the computation of net asset value, stop accepting payments for purchase of shares, or suspend the duty of a fund to sell shares for more than seven days. Such emergency situations would occur if:
• | The Exchange closes for reasons other than the usual weekend and holiday closings or trading on the Exchange is restricted, or |
• | Disposal of a fund’s securities is not reasonably practicable or it is not reasonably practicable for the fund to determine the fair value of its net assets, or |
• | The SEC, under the provisions of the 1940 Act, declares a period of emergency to exist. |
Should a fund stop selling shares, the Board may make a deduction from the value of the assets held by the fund to cover the cost of future liquidations of the assets so as to distribute these costs fairly among all contract owners.
Each fund will be treated as a partnership for federal income purposes. A partnership is not subject to U.S. federal income tax itself, although it must file a “Partnership Return of Income”. Rather, each partner of a partnership, in computing its federal income tax liability for a taxable year, is required to take into account its allocable share of the fund’s items of income, gain, loss, deduction or credit for the taxable year of the fund ending within or with the taxable year of the partner, regardless of whether such partner has received or will receive corresponding distributions from the fund.
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The funds will not need to make distributions to their shareholders to preserve their tax status.
The funds intend to comply with the requirements of Section 817(h) and the related regulations issued thereunder by the Treasury Department. Under a safe harbor for separate accounts in Section 817(h) of the Code and Section 1.817-5(b)(2) of the Treasury Regulations, (a) at least 50% of the market value of the fund’s total assets must be represented by cash and cash items (including receivables), Government securities, and securities of other regulated investment companies, and other securities limited in respect of any one issuer, to an amount not greater than 5% of the fund’s total assets and 10% of the outstanding voting securities of such issuer, and (b) not more than 25% of the value of its total assets may be invested in the securities of any one issuer (other than U.S. government securities and securities of other regulated investment companies), the securities of two or more issuers which the fund controls and which are engaged in the same, similar or related trades or businesses, or in the securities of one or more publicly traded partnerships. In addition, no more than 55% of the assets of the separate account which owns shares in the fund, including the separate account’s proportionate share of the assets of the fund, can be in cash, cash items (including receivables), government securities and securities of other regulated investment companies.
If the fund does not qualify for the safe harbor test, an alternative diversification test is provided for in Section 1.817-5(b)(1). Under this test, no more than 55% of the value of total assets can be invested in one security, no more than 70% of the value of total assets can be invested in two securities, no more than 80% of the value of total assets can be invested in three securities, no more than 90% of the value of total assets can be invested in four securities. For purposes of the latter diversification requirement, the fund’s beneficial interest in a regulated investment company, a real estate investment trust, a partnership or a grantor trust will not be treated as a single investment of a segregated asset account if the fund meets certain requirements related to its ownership and access. Instead, a pro rata portion of each asset of the investment company, partnership, or trust will be treated as an asset of the segregated asset account. The funds intend to meet such requirements.
The partners or owners of the funds may be subject to U.S. taxes resulting from holdings in a passive foreign investment company (PFIC). To avoid taxation and to the extent possible, a fund may make an election to mark to market its PFIC stock. A foreign corporation is a PFIC when 75% or more of its gross income for the taxable year is passive income or 50% or more of the average value of its assets consists of assets that produce or could produce passive income.
Income earned by a fund may have had foreign taxes imposed and withheld on it in foreign countries. Tax conventions between certain countries and the U.S. may reduce or eliminate such taxes.
This is a brief summary that relates to federal income taxation only. Shareholders should consult their tax advisor as to the application of federal, state, and local income tax laws to fund distributions.
INVESTMENT MANAGEMENT SERVICES
RiverSource Investments is the investment manager for each fund. Under the Investment Management Services Agreement, the investment manager, subject to the policies set by the Board, provides investment management services.
Subject to the Board’s approval, the funds do not pay the investment manager a direct fee for investment management services. Under the agreement, the funds will pay taxes, brokerage commissions (if any) and nonadvisory expenses, which include custodian fees and charges; fidelity bond premiums; registration fees for public sale of securities; certain legal fees; consultants’ fees; compensation or Board members, officers and employees not employed by the investment manager or its affiliates; corporate filing fees; organizational expenses; expenses incurred in connection with lending securities; interest and fee expenses related to a fund’s participation in inverse floater structures; and expense properly payable by a fund, approved by the Board.
Manager of Managers Exemption
The RiverSource Family of Funds has received an order from the Securities and Exchange Commission (SEC) that permits RiverSource Investments, subject to the approval of the Board, to appoint a subadviser or change the terms of a subadvisory agreement for a fund (including any underlying fund) without first obtaining shareholder approval. The order permits the fund (including any underlying fund) to add or change unaffiliated subadvisers or the fees paid to subadvisers from time to time without the expense and delays associated with obtaining shareholder approval of the change. RiverSource Investments and its affiliates may have other relationships, including significant financial relationships, with current or potential subadvisers or their affiliates, which may create a conflict of interest. In making recommendations to the Board to appoint or to change a subadviser, or to change the terms of a
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subadvisory agreement, RiverSource Investments does not consider any other relationship it or its affiliates may have with a subadviser, and RiverSource Investments discloses the nature of any material relationships it has with a subadviser to the Board.
Portfolio Managers. The following provides information about the funds’ portfolio managers as of Dec. 31, 2009.
Portfolio Manager | Other Accounts Managed (excluding the fund) | Ownership of Fund Shares(c) | Potential Conflicts of Interest | Structure of Compensation | ||||||||||
Fund | Number and type of account(a) | Approximate Total Net Assets | Performance Based Accounts(b) | |||||||||||
Aggressive Portfolio | Colin J. Lundgren | 17 RICs 16 other accounts | $1.55 billion $270.34 million | None | (2) | |||||||||
Gene R. Tannuzzo | 1 RIC 2 other accounts | $283.41 million $0.04 million | None | None | (1) | (3) | ||||||||
Kent M. Bergene | 6 RICs 7 other accounts | $3.89 billion $1.36 million | None | (4) | ||||||||||
Conservative Portfolio | Colin J. Lundgren | 17 RICs 16 other accounts | $1.55 billion $270.34 million | None | (2) | |||||||||
Gene R. Tannuzzo | 1 RIC 2 other accounts | $283.41 million $0.04 million | None | None | (1) | (3) | ||||||||
Kent M. Bergene | 6 RICs 7 other accounts | $3.89 billion $1.36 million | None | (4) | ||||||||||
Moderate Portfolio | Colin J. Lundgren | 17 RICs 16 other accounts | $1.55 billion $270.34 million | None | (2) | |||||||||
Gene R. Tannuzzo | 1 RIC 2 other accounts | $283.41 million $0.04 million | None | None | (1) | (3) | ||||||||
Kent M. Bergene | 6 RICs 7 other accounts | $3.89 billion $1.36 million | None | (4) | ||||||||||
Moderately Aggressive Portfolio | Colin J. Lundgren | 17 RICs 16 other accounts | $1.55 billion $270.34 million | None | (2) | |||||||||
Gene R. Tannuzzo | 1 RIC 2 other accounts | $283.41 million $0.04 million | None | None | (1) | (3) | ||||||||
Kent M. Bergene | 6 RICs 7 other accounts | $3.89 billion $1.36 million | None | (4) | ||||||||||
Moderately Conservative Portfolio | Colin J. Lundgren | 17 RICs 16 other accounts | $1.55 billion $270.34 million | None | (2) | |||||||||
Gene R. Tannuzzo | 1 RIC 2 other accounts | $283.41 million $0.04 million | None | None | (1) | (3) | ||||||||
Kent M. Bergene | 6 RICs 7 other accounts | $3.89 billion $1.36 million | None | (4) |
(a) | RIC refers to a Registered Investment Company (each series or portfolio of a RIC is treated as a separate RIC); PIV refers to a Pooled Investment Vehicle. |
(b) | Number of accounts for which the advisory fee paid is based in part or wholly on performance and the aggregate net assets in those accounts. |
(c) | All shares of the Variable Portfolio funds are owned by life insurance companies and are not available for purchase by individuals. Consequently no portfolio manager owns any shares of Variable Portfolio funds. |
Potential Conflicts of Interest:
(1) | Management of the fund-of-funds differs from that of the other RiverSource funds. The portfolio management process is set forth generally below and in more detail in the funds’ prospectus. |
Because of the structure of the fund-of-funds, the potential conflicts of interest for the portfolio managers may be different than the potential conflicts of interest for portfolio managers who manage other funds. These potential conflicts of interest include:
• | In certain cases, the portfolio managers of the underlying funds are the same as the portfolio managers of the fund-of-funds, and could influence the allocation of funds-of-funds assets to or away from the underlying funds that they manage. |
• | RiverSource Investments and its affiliates may receive higher compensation as a result of allocations to underlying funds with higher fees. |
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• | RiverSource Investments monitors the performance of the underlying funds and may, from time to time, recommend to the Board of the funds a change in portfolio management or fund strategy or the closure or merger of an underlying fund. In addition, RiverSource Investments may believe that certain RiverSource funds may benefit from additional assets or could be harmed by redemptions. All of these factors may also influence decisions in connection with the allocation of funds-of-funds assets to or away from certain underlying funds. |
In addition to the accounts above, portfolio managers may manage accounts in a personal capacity that may include holdings that are similar to, or the same as, those of the fund. The investment manager has in place a Code of Ethics that is designed to address conflicts and that, among other things, imposes restrictions on the ability of the portfolio managers and other “investment access persons” to invest in securities that may be recommended or traded in the fund and other client accounts.
Structure of Compensation:
(2) | Portfolio manager compensation is typically comprised of (i) a base salary, (ii) an annual cash bonus, and (iii) an equity incentive award in the form of stock options and/or restricted stock. The annual cash bonus and equity incentive awards are paid from a team bonus pool that is based on the performance of the accounts managed by the portfolio management team, which might include mutual funds, wrap accounts, institutional portfolios and hedge funds. Funding for the bonus pool is determined by a percentage of the aggregate assets under management in the accounts managed by the portfolio managers, including the fund, and by the short term (typically one-year) and long-term (typically three-year, five-year and ten-year) performance of those accounts in relation to the relevant peer group universe. Funding for the bonus pool would also include a percentage of any performance fees earned on long/short mutual funds managed by the Team. With respect to hedge funds and separately managed accounts that follow a hedge fund mandate, funding for the bonus pool is a percentage of performance fees earned on the hedge funds or accounts managed by the portfolio managers. Senior management of RiverSource Investments has the discretion to increase or decrease the size of the part of the bonus pool and to determine the exact amount of each portfolio manager’s bonus paid from this portion of the bonus pool based on his/her performance as an employee. In addition, where portfolio managers invest in a hedge fund managed by the investment manager, they receive a cash reimbursement for the investment management fees charged on their hedge fund investments. RiverSource Investments portfolio managers are provided with a benefits package, including life insurance, health insurance, and participation in a company 401(k) plan, comparable to that received by other RiverSource Investments employees. Certain investment personnel are also eligible to defer a portion of their compensation. An individual making this type of election can allocate the deferral to the returns associated with one or more products they manage or support or to certain other products managed by their investment team. Depending upon their job level, RiverSource Investments portfolio managers may also be eligible for other benefits or perquisites that are available to all RiverSource Investments employees at the same job level. |
(3) | Portfolio manager compensation is typically comprised of (i) a base salary, (ii) an annual cash bonus, a portion of which may be subject to a mandatory deferral program, and may include (iii) an equity incentive award in the form of stock options and/or restricted stock. The annual cash bonus is paid from a team bonus pool that is based on the performance of the accounts managed by the portfolio management team, which might include mutual funds, wrap accounts, institutional portfolios and hedge funds. The bonus pool is determined by the aggregate market competitive bonus targets for the teams of which the portfolio manager is a member and by the short-term (typically one-year) and long-term (typically three-year) performance of those accounts in relation to applicable benchmarks or the relevant peer group universe. Senior management of RiverSource Investments has the discretion to increase or decrease the size of the part of the bonus pool and to determine the exact amount of each portfolio manager’s bonus paid from this portion of the bonus pool based on his/her performance as an employee. RiverSource Investments portfolio managers are provided with a benefits package, including life insurance, health insurance, and participation in a company 401(k) plan, comparable to that received by other RiverSource Investments employees. Certain investment personnel are also eligible to defer a portion of their compensation. An individual making this type of election can allocate the deferral to the returns associated with one or more products they manage or support or to certain other products managed by their investment team. Depending upon their job level, RiverSource Investments portfolio managers may also be eligible for other benefits or perquisites that are available to all RiverSource Investments employees at the same job level. |
(4) | The compensation of RiverSource Investments employees consists of (i) a base salary, (ii) an annual cash bonus, and (iii) equity incentive awards in the form of stock options and/or restricted stock. The annual cash bonus is based on management’s assessment of the employee’s performance relative to individual and business unit goals and objectives. The annual bonus may be based, in part, on developing competitive products, managing existing products, and selecting and monitoring subadvisers for funds. RiverSource Investments’ portfolio managers are provided with a benefits package including life insurance, health insurance and participation in the company’s 401(k) plan comparable to that received by other RiverSource Investments employees. Depending upon their job level, RiverSource Investments’ portfolio managers may also be eligible for other benefits |
Statement of Additional Information – April 14, 2010, amended and restated May 1, 2010 | Page 43 |
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or perquisites that are available to all RiverSource Investments employees at the same job level. |
ADMINISTRATIVE SERVICES
Each fund has an Administrative Services Agreement with Ameriprise Financial. Under this agreement, the fund pays Ameriprise Financial for providing administration and accounting services. Subject to the Board’s approval the fee paid is 0.020% on all asset levels and is calculated for each calendar day on the basis of net assets as of the close of the preceding day.
TRANSFER AGENCY SERVICES
Each fund has a Transfer Agency and Servicing Agreement with RiverSource Service Corporation located at 734 Ameriprise Financial Center, Minneapolis, MN 55474. This agreement governs RiverSource Service Corporation’s responsibility for administering and/or performing transfer agent functions and for acting as service agent in connection with dividend and distribution functions in connection with the sale and redemption of the fund’s shares. The transfer agent may hire third parties to perform services under this agreement. Subject to the Boards approval, under the agreement, the funds do not pay a direct fee for transfer agency services.
DISTRIBUTION SERVICES
RiverSource Fund Distributors, Inc. (the distributor), 50611 Ameriprise Financial Center, Minneapolis, MN 55474, an indirect wholly-owned subsidiary of RiverSource Investments, LLC, is the funds’ principal underwriter. Each fund’s shares are offered on a continuous basis.
PLAN AND AGREEMENT OF DISTRIBUTION
To help defray the cost of distribution and servicing, each fund approved a Plan of Distribution (the “Plan”) and entered into an agreement under the Plan pursuant to Rule 12b-1 under the 1940 Act with the distributor. Subject to the Board’s approval, under the Plan, of the type known as a reimbursement plan, the fund pays a fee applicable to Class 2 and Class 4 shares up to actual expenses incurred at an annual rate of up to 0.25% of the fund’s average daily net assets.
Expenses covered under this Plan include sales commissions; business, employee and financial advisor expenses charged to distribution of shares; and overhead appropriately allocated to the sale of shares. These expenses also include costs of providing personal service to contract owners. A substantial portion of the costs are not specifically identified to any one of the funds. The fee is not allocated to any one service (such as advertising, payments to underwriters, or other uses). However, a significant portion of the fee is generally used for sales and promotional expenses. Payments under the Plan are intended to result in an increase in fund assets and thus potentially result in economies of scale and lower costs for all shareholders over time.
The Plan must be approved annually by the Board, including a majority of the Board members who are not “interested” persons of the funds, as that term is defined in the 1940 Act, if it is to continue for more than a year. At least quarterly, the Board reviews written reports concerning the amounts expended under the Plan and the purposes for which such expenditures were made. The Plan and any agreement related to it may be terminated at any time by vote of a majority of Board members who are not interested persons of the fund and have no direct or indirect financial interest in the operation of the Plan or in any agreement related to the Plan, or by vote of a majority of the outstanding voting securities of the fund or by the distributors. Any agreement related to the Plan will terminate in the event of its assignment, as that term is defined in the 1940 Act. The Plan may not be amended to increase the amount to be spent for distribution without shareholder approval, and all material amendments to the Plan must be approved by a majority of the Board members, including a majority of the Board members who are not interested persons of the fund and who do not have a financial interest in the operation of the Plan or any agreement related to it. The selection and nomination of Board members who are not interested persons of the fund is the responsibility of the other independent Board members. No Board member who is not an interested person has any direct or indirect financial interest in the operation of the Plan or any related agreement.
CUSTODIAN SERVICES
The fund’s securities and cash are held pursuant to a custodian agreement with JPMorgan Chase Bank, N.A. (JPMorgan), 1 Chase Manhattan Plaza, 19th floor, New York, NY 10005. The custodian is permitted to deposit some or all of its securities in central depository systems as allowed by federal law. For its services, the fund pays the custodian a maintenance charge and a charge per transaction in addition to reimbursing the custodian’s out-of-pocket expenses.
BOARD SERVICES CORPORATION
The funds have an agreement with Board Services Corporation (Board Services) located at 901 Marquette Avenue South, Suite 2810, Minneapolis, MN 55402. This agreement sets forth the terms of Board Services’ responsibility to serve as an agent of the funds for
Statement of Additional Information – April 14, 2010, amended and restated May 1, 2010 | Page 44 |
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purposes of administering the payment of compensation to each independent Board member, to provide office space for use by the funds and their boards, and to provide any other services to the boards or the independent members, as may be reasonably requested.
Each fund is an open-end management investment company. The funds’ headquarters are at 901 S. Marquette Ave., Suite 2810, Minneapolis, MN 55402-3268.
SHARES
Each fund is owned by subaccounts, its shareholders. The shares of a fund represent an interest in that fund’s assets only (and profits or losses), and, in the event of liquidation, each share of a fund would have the same rights to dividends and assets as every other share of that fund.
VOTING RIGHTS
For a discussion of the rights of contract owners concerning the voting of shares held by the subaccounts, please see your annuity or life insurance contract prospectus. All shares have voting rights over the fund’s management and fundamental policies. Each share is entitled to vote based on the total dollar interest in the fund. All shares have cumulative voting rights with respect to the election of Board members. This means that shareholders have as many votes as the dollar amount owned, including the fractional amount, multiplied by the number of members to be elected.
SHAREHOLDER LIABILITY
Under Massachusetts law, shareholders of a Massachusetts business trust may, under certain circumstances, be held personally liable as partners for its obligation. However, the Declaration of Trust that establishes a trust, a copy of which, together with all amendments thereto (the “Declaration of Trust”), is on file with the office of the Secretary of the Commonwealth of Massachusetts for each applicable fund, contains an express disclaimer of shareholder liability for acts or obligations of the Trust, or of any fund in the Trust. The Declaration of Trust provides that, if any shareholder (or former shareholder) of a fund in the Trust is charged or held to be personally liable for any obligation or liability of the Trust, or of any fund in the Trust, solely by reason of being or having been a shareholder and not because of such shareholder’s acts or omissions or for some other reason, the Trust (upon request of the shareholder) shall assume the defense against such charge and satisfy any judgment thereon, and the shareholder or former shareholder (or the heirs, executors, administrators or other legal representatives thereof, or in the case of a corporation or other entity, its corporate or other general successor) shall be entitled (but solely out of the assets of the fund of which such shareholder or former shareholder is or was the holder of shares) to be held harmless from and indemnified against all loss and expense arising from such liability.
The Declaration of Trust also provides that the Trust may maintain appropriate insurance (for example, fidelity bond and errors and omissions insurance) for the protection of the Trust, its shareholders, Trustees, officers, employees and agents covering possible tort and other liabilities. Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which both inadequate insurance existed and the Trust itself was unable to meet its obligations.
The Declaration of Trust further provides that obligations of the Trust are not binding upon the Trustees individually, but only upon the assets and property of the Trust, and that the Trustees will not be liable for any action or failure to act, errors of judgment, or mistakes of fact or law, but nothing in the Declaration of Trust or other agreement with a Trustee protects a Trustee against any liability to which he or she would otherwise be subject by reason of his or her willful bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of his or her office. By becoming a shareholder of the fund, each shareholder shall be expressly held to have assented to and agreed to be bound by the provisions of the Declaration of Trust.
Table 4. Fund History Table for RiverSource Family of Funds
Fund* | Date of Organization | Date Began Operations | Form of Organization | State of Organization | Fiscal Year End | Diversified** | ||||||||||||||||
RiverSource Bond Series, Inc.(2) | 4/29/81, 4/8/86(1) | Corporation | NV/MN | 7/31 | ||||||||||||||||||
RiverSource Floating Rate Fund | 2/16/06 | Yes | ||||||||||||||||||||
RiverSource Income Opportunities Fund | 6/19/03 | Yes | ||||||||||||||||||||
RiverSource Inflation Protected Securities Fund | 3/4/04 | No | ||||||||||||||||||||
RiverSource Limited Duration Bond Fund | 6/19/03 | Yes |
RiverSource California Tax-Exempt Trust | 4/7/86 | Business Trust | MA | 8/31(10) | ||||||||||||||||||
RiverSource California Tax-Exempt Fund | 8/18/86 | No |
Statement of Additional Information – April 14, 2010, amended and restated May 1, 2010 | Page 45 |
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Fund* | Date of Organization | Date Began Operations | Form of Organization | State of Organization | Fiscal Year End | Diversified** | ||||||||||||||||||
RiverSource Dimensions Series, Inc. | 2/20/68, 4/8/86(1) | Corporation | NV/MN | 7/31 | ||||||||||||||||||||
RiverSource Disciplined Small and Mid Cap Equity Fund | 5/18/06 | Yes | ||||||||||||||||||||||
RiverSource Disciplined Small Cap Value Fund | 2/16/06 | Yes | ||||||||||||||||||||||
RiverSource Diversified Income Series, Inc.(2) | 6/27/74, 4/8/86(1) | Corporation | NV/MN | 8/31 | ||||||||||||||||||||
RiverSource Diversified Bond Fund(3) | 10/3/74 | Yes | ||||||||||||||||||||||
RiverSource Equity Series, Inc. | 3/18/57, 4/8/86(1) | Corporation | NV/MN | 11/30 | ||||||||||||||||||||
RiverSource Mid Cap Growth Fund(4) | 6/4/57 | Yes | ||||||||||||||||||||||
RiverSource Global Series, Inc. | 10/28/88 | Corporation | MN | 10/31 | ||||||||||||||||||||
RiverSource Absolute Return Currency and Income Fund | 6/15/06 | Yes | ||||||||||||||||||||||
RiverSource Emerging Markets Bond Fund | 2/16/06 | No | ||||||||||||||||||||||
RiverSource Global Bond Fund | 3/20/89 | No | ||||||||||||||||||||||
Threadneedle Emerging Markets Fund(4),(5),(11) | 11/13/96 | Yes | ||||||||||||||||||||||
Threadneedle Global Equity Fund(5),(6),(11) | 5/29/90 | Yes | ||||||||||||||||||||||
Threadneedle Global Equity Income Fund | 8/1/08 | Yes | ||||||||||||||||||||||
Threadneedle Global Extended Alpha Fund | 8/1/08 | Yes | ||||||||||||||||||||||
RiverSource Government Income Series, Inc. | 3/12/85 | Corporation | MN | 5/31 | ||||||||||||||||||||
RiverSource Short Duration U.S. Government | 8/19/85 | Yes | ||||||||||||||||||||||
RiverSource U.S. Government Mortgage Fund | 2/14/02 | Yes | ||||||||||||||||||||||
RiverSource Government Money Market Fund, Inc.(17) | 6/29/76 | 1/31/77 | Corporation | MD | 12/31 | Yes | ||||||||||||||||||
RiverSource High Yield Income Series, Inc. | 8/17/83 | Corporation | MN | 5/31 | ||||||||||||||||||||
RiverSource High Yield Bond Fund(3) | 12/8/83 | Yes | ||||||||||||||||||||||
RiverSource Income Series, Inc. | 2/10/45; 4/8/86(1) | Corporation | NV/MN | 1/31(7) | ||||||||||||||||||||
RiverSource Income Builder Basic Income Fund | 2/16/06 | Yes | ||||||||||||||||||||||
RiverSource Income Builder Enhanced Income Fund | 2/16/06 | Yes | ||||||||||||||||||||||
RiverSource Income Builder Moderate Income Fund | 2/16/06 | Yes | ||||||||||||||||||||||
RiverSource International Managers Series, Inc.(2) | 5/9/01 | Corporation | MN | 10/31 | ||||||||||||||||||||
RiverSource Partners International Select Growth Fund(11) | 9/28/01 | Yes | ||||||||||||||||||||||
RiverSource Partners International Select Value | 9/28/01 | Yes | ||||||||||||||||||||||
RiverSource Partners International Small Cap | 10/3/02 | Yes | ||||||||||||||||||||||
RiverSource International Series, Inc.(2) | 7/18/84 | Corporation | MN | 10/31 | ||||||||||||||||||||
RiverSource Disciplined International Equity Fund | 5/18/06 | Yes | ||||||||||||||||||||||
Threadneedle Asia Pacific Fund | 7/15/09 | Yes | ||||||||||||||||||||||
Threadneedle European Equity Fund(5),(11) | 6/26/00 | Yes | ||||||||||||||||||||||
Threadneedle International Opportunity | 11/15/84 | Yes | ||||||||||||||||||||||
RiverSource Investment Series, Inc. | 1/18/40; 4/8/86(1) | Corporation | NV/MN | 9/30 | ||||||||||||||||||||
RiverSource Balanced Fund(4) | 4/16/40 | Yes | ||||||||||||||||||||||
RiverSource Disciplined Large Cap Growth Fund | 5/17/07 | Yes | ||||||||||||||||||||||
RiverSource Disciplined Large Cap Value Fund | 8/1/08 | Yes | ||||||||||||||||||||||
RiverSource Diversified Equity Income Fund | 10/15/90 | Yes | ||||||||||||||||||||||
RiverSource Mid Cap Value Fund | 2/14/02 | Yes |
Statement of Additional Information – April 14, 2010, amended and restated May 1, 2010 | Page 46 |
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Fund* | Date of Organization | Date Began Operations | Form of Organization | State of Organization | Fiscal Year End | Diversified** | ||||||||||||
RiverSource Large Cap Series, Inc.(2) | 5/21/70, 4/8/86(1) | Corporation | NV/MN | 7/31 | ||||||||||||||
RiverSource Disciplined Equity Fund(4) | 4/24/03 | Yes | ||||||||||||||||
RiverSource Managers Series, Inc.(2) | 3/20/01 | Corporation | MN | 5/31 | ||||||||||||||
RiverSource Partners Fundamental Value | 6/18/01 | Yes | ||||||||||||||||
RiverSource Partners Small Cap Value Fund(11) | 6/18/01 | Yes | ||||||||||||||||
RiverSource Market Advantage Series, Inc. | 8/25/89 | Corporation | MN | 1/31 | ||||||||||||||
RiverSource Portfolio Builder Conservative Fund | 3/4/04 | Yes | ||||||||||||||||
RiverSource Portfolio Builder Moderate Conservative Fund | 3/4/04 | Yes | ||||||||||||||||
RiverSource Portfolio Builder Moderate Fund | 3/4/04 | Yes | ||||||||||||||||
RiverSource Portfolio Builder Moderate Aggressive Fund | 3/4/04 | Yes | ||||||||||||||||
RiverSource Portfolio Builder Aggressive Fund | 3/4/04 | Yes | ||||||||||||||||
RiverSource Portfolio Builder Total Equity Fund | 3/4/04 | Yes | ||||||||||||||||
RiverSource S&P 500 Index Fund | 10/25/99 | Yes | ||||||||||||||||
RiverSource Small Company Index Fund | 8/19/96 | Yes | ||||||||||||||||
RiverSource Money Market Series, Inc. | 8/22/75; 4/8/86(1) | Corporation | NV/MN | 7/31 | ||||||||||||||
RiverSource Cash Management Fund | 10/6/75 | Yes | ||||||||||||||||
RiverSource Sector Series, Inc. | 3/25/88 | Corporation | MN | 6/30 | ||||||||||||||
RiverSource Dividend Opportunity Fund(8) | 8/1/88 | Yes | ||||||||||||||||
RiverSource Real Estate Fund | 3/4/04 | No | ||||||||||||||||
RiverSource Selected Series, Inc. | 10/5/84 | Corporation | MN | 3/31 | ||||||||||||||
RiverSource Precious Metals and Mining Fund(9) | 4/22/85 | No | ||||||||||||||||
RiverSource Series Trust(14) | 1/27/06 | Business Trust | MA | 4/30 | ||||||||||||||
RiverSource 120/20 Contrarian Equity Fund | 10/18/07 | Yes | ||||||||||||||||
RiverSource Recovery and Infrastructure Fund | 2/19/09 | No | ||||||||||||||||
RiverSource Retirement Plus 2010 Fund | 5/18/06 | Yes | ||||||||||||||||
RiverSource Retirement Plus 2015 Fund | 5/18/06 | Yes | ||||||||||||||||
RiverSource Retirement Plus 2020 Fund | 5/18/06 | Yes | ||||||||||||||||
RiverSource Retirement Plus 2025 Fund | 5/18/06 | Yes | ||||||||||||||||
RiverSource Retirement Plus 2030 Fund | 5/18/06 | Yes | ||||||||||||||||
RiverSource Retirement Plus 2035 Fund | 5/18/06 | Yes | ||||||||||||||||
RiverSource Retirement Plus 2040 Fund | 5/18/06 | Yes | ||||||||||||||||
RiverSource Retirement Plus 2045 Fund | 5/18/06 | Yes | ||||||||||||||||
RiverSource Short Term Investments Series, Inc.(15) | 4/23/68, 4/8/86(1) | Corporation | NV/MN | 7/31 | ||||||||||||||
RiverSource Short-Term Cash Fund | 9/26/06 | Yes | ||||||||||||||||
RiverSource Special Tax-Exempt Series Trust | 4/7/86 | Business Trust | MA | 8/31(10) | ||||||||||||||
RiverSource Minnesota Tax-Exempt Fund | 8/18/86 | No | ||||||||||||||||
RiverSource New York Tax-Exempt Fund | 8/18/86 | No | ||||||||||||||||
RiverSource Strategic Allocation Series, Inc.(2) | 10/9/84 | Corporation | MN | 9/30 | ||||||||||||||
RiverSource Strategic Allocation Fund(4) | 1/23/85 | Yes | ||||||||||||||||
RiverSource Strategic Income Allocation Fund | 5/17/07 | Yes | ||||||||||||||||
RiverSource Strategy Series, Inc. | 1/24/84 | Corporation | MN | 3/31 | ||||||||||||||
RiverSource Equity Value Fund | 5/14/84 | Yes | ||||||||||||||||
RiverSource Tax-Exempt Income Series, Inc.(2) | 12/21/78; 4/8/86(1) | Corporation | NV/MN | 11/30 | ||||||||||||||
RiverSource Tax-Exempt High Income Fund(4) | 5/7/79 | Yes |
Statement of Additional Information – April 14, 2010, amended and restated May 1, 2010 | Page 47 |
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Fund* | Date of Organization | Date Began Operations | Form of Organization | State of Organization | Fiscal Year End | Diversified** | ||||||||||||
RiverSource Tax-Exempt Series, Inc. | 9/30/76, 4/8/86(1) | Corporation | NV/MN | 11/30 | ||||||||||||||
RiverSource Intermediate Tax-Exempt Fund | 11/13/96 | Yes | ||||||||||||||||
RiverSource Tax-Exempt Bond Fund | 11/24/76 | Yes | ||||||||||||||||
RiverSource Variable Series Trust(12) | 9/11/07 | Business Trust | MA | 12/31 | ||||||||||||||
Disciplined Asset Allocation Portfolios – Aggressive | 5/1/08 | Yes | ||||||||||||||||
Disciplined Asset Allocation Portfolios – Conservative | 5/1/08 | Yes | ||||||||||||||||
Disciplined Asset Allocation Portfolios – Moderate | 5/1/08 | Yes | ||||||||||||||||
Disciplined Asset Allocation Portfolios – Moderately Aggressive | 5/1/08 | Yes | ||||||||||||||||
Disciplined Asset Allocation Portfolios – Moderately Conservative | 5/1/08 | Yes | ||||||||||||||||
RiverSource Variable Portfolio – Balanced Fund(4) | 4/30/86 | Yes | ||||||||||||||||
RiverSource Variable Portfolio – Cash Management Fund | 10/31/81 | Yes | ||||||||||||||||
RiverSource Variable Portfolio – Core Equity Fund | 9/10/04 | Yes | ||||||||||||||||
RiverSource Variable Portfolio – Diversified Bond Fund(3) | 10/13/81 | Yes | ||||||||||||||||
RiverSource Variable Portfolio – Diversified Equity Income Fund | 9/15/99 | Yes | ||||||||||||||||
RiverSource Variable Portfolio – Dynamic Equity Fund(5),(16) | 10/13/81 | Yes | ||||||||||||||||
RiverSource Variable Portfolio – Global Bond Fund | 5/1/96 | No | ||||||||||||||||
RiverSource Variable Portfolio – Global Inflation Protected Securities Fund(13) | 9/13/04 | No | ||||||||||||||||
RiverSource Variable Portfolio – High Yield Bond Fund(3) | 5/1/96 | Yes | ||||||||||||||||
RiverSource Variable Portfolio – Income Opportunities Fund | 6/1/04 | Yes | ||||||||||||||||
RiverSource Variable Portfolio – Limited Duration Bond Fund | 4/14/10 | Yes | ||||||||||||||||
RiverSource Variable Portfolio – Mid Cap Growth Fund(4) | 5/1/01 | Yes | ||||||||||||||||
RiverSource Variable Portfolio – Mid Cap Value Fund | 5/2/05 | Yes | ||||||||||||||||
RiverSource Variable Portfolio – S&P 500 Index Fund | 5/1/00 | Yes | ||||||||||||||||
RiverSource Variable Portfolio – Short Duration U.S. Government Fund(3) | 9/15/99 | Yes | ||||||||||||||||
RiverSource Variable Portfolio – Strategic Income Fund | 4/14/10 | Yes | ||||||||||||||||
Seligman Variable Portfolio – Growth | 9/15/99 | Yes | ||||||||||||||||
Seligman Variable Portfolio – Larger-Cap Value Fund(16) | 02/4/04 | Yes | ||||||||||||||||
Seligman Variable Portfolio – Smaller-Cap Value Fund(16) | 9/15/99 | Yes | ||||||||||||||||
Threadneedle Variable Portfolio – Emerging Markets Fund(4),(5),(11) | 5/1/00 | Yes | ||||||||||||||||
Threadneedle Variable Portfolio – International Opportunity Fund(4),(5),(11) | 1/13/92 | Yes | ||||||||||||||||
Variable Portfolio – Aggressive Portfolio | 4/14/10 | Yes |
Statement of Additional Information – April 14, 2010, amended and restated May 1, 2010 | Page 48 |
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Fund* | Date of Organization | Date Began Operations | Form of Organization | State of Organization | Fiscal Year End | Diversified** | ||||||||||||
Variable Portfolio – AllianceBernstein International Value Fund | 4/14/10 | Yes | ||||||||||||||||
Variable Portfolio – American Century Diversified Bond Fund | 4/14/10 | Yes | ||||||||||||||||
Variable Portfolio – American Century Growth Fund | 4/14/10 | Yes | ||||||||||||||||
Variable Portfolio – Columbia Wanger International Equities Fund | 4/14/10 | Yes | ||||||||||||||||
Variable Portfolio – Columbia Wanger U.S. Equities Fund | 4/14/10 | Yes | ||||||||||||||||
Variable Portfolio – Conservative Portfolio | 4/14/10 | Yes | ||||||||||||||||
Variable Portfolio – Davis New York Venture | 5/1/06 | Yes | ||||||||||||||||
Variable Portfolio – Eaton Vance Floating-Rate Income Fund | 4/14/10 | Yes | ||||||||||||||||
Variable Portfolio – Goldman Sachs Mid Cap Value | 2/4/04 | Yes | ||||||||||||||||
Variable Portfolio – Invesco International Growth Fund | 4/14/10 | Yes | ||||||||||||||||
Variable Portfolio – J.P. Morgan Core Bond Fund | 4/14/10 | Yes | ||||||||||||||||
Variable Portfolio – Jennison Mid Cap Growth Fund | 4/14/10 | Yes | ||||||||||||||||
Variable Portfolio – Marsico Growth Fund | 4/14/10 | Yes | ||||||||||||||||
Variable Portfolio – MFS Value Fund | 4/14/10 | Yes | ||||||||||||||||
Variable Portfolio – Moderate Portfolio | 4/14/10 | Yes | ||||||||||||||||
Variable Portfolio – Moderately Aggressive Portfolio | 4/14/10 | Yes | ||||||||||||||||
Variable Portfolio – Moderately Conservative Portfolio | 4/14/10 | Yes | ||||||||||||||||
Variable Portfolio – Mondrian International Small Cap Fund | 4/14/10 | Yes | ||||||||||||||||
Variable Portfolio – Morgan Stanley Global Real Estate Fund | 4/14/10 | No | ||||||||||||||||
Variable Portfolio – NFJ Dividend Value Fund | 4/14/10 | Yes | ||||||||||||||||
Variable Portfolio – Partners Small Cap Growth Fund | 4/14/10 | Yes | ||||||||||||||||
Variable Portfolio – Partners Small Cap Value | 8/14/01 | Yes | ||||||||||||||||
Variable Portfolio – PIMCO Mortgage-Backed Securities Fund | 4/14/10 | Yes | ||||||||||||||||
Variable Portfolio – Pyramis International Equity Fund | 4/14/10 | Yes | ||||||||||||||||
Variable Portfolio – UBS Large Cap Growth Fund | 4/14/10 | Yes | ||||||||||||||||
Variable Portfolio – Wells Fargo Short Duration Government Fund | 4/14/10 | Yes | ||||||||||||||||
Seligman Capital Fund, Inc. | 10/21/68 | 10/9/69 | Corporation | MD | 12/31 | Yes | ||||||||||||
Seligman Communications and Information Fund, Inc. | 10/8/82 | 6/23/83 | Corporation | MD | 12/31 | Yes | ||||||||||||
Seligman Frontier Fund, Inc. | 7/9/84 | 12/10/84 | Corporation | MD | 10/31 | Yes | ||||||||||||
Seligman Global Fund Series, Inc. | 11/22/91 | Corporation | MD | 10/31 | ||||||||||||||
Seligman Global Technology Fund | 5/23/94 | Yes | ||||||||||||||||
Seligman Growth Fund, Inc. | 1/26/37 | 4/1/37 | Corporation | MD | 12/31 | Yes |
Statement of Additional Information – April 14, 2010, amended and restated May 1, 2010 | �� | Page 49 |
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Fund* | Date of Organization | Date Began Operations | Form of Organization | State of Organization | Fiscal Year End | Diversified** | ||||||||||||||||
Seligman LaSalle Real Estate Fund Series, Inc. | 5/30/03 | Corporation | MD | 12/31 | ||||||||||||||||||
RiverSource LaSalle Global Real Estate | 12/29/06 | No | ||||||||||||||||||||
RiverSource LaSalle Monthly Dividend Real Estate Fund(17) | 7/16/03 | Yes | ||||||||||||||||||||
Seligman Municipal Fund Series, Inc. | 8/8/83 | Corporation | MD | 9/30 | ||||||||||||||||||
Seligman National Municipal Class | 12/31/83 | Yes | ||||||||||||||||||||
Seligman Minnesota Municipal Class | 12/30/83 | No | ||||||||||||||||||||
Seligman New York Municipal Class | 1/3/84 | No | ||||||||||||||||||||
Seligman Municipal Series Trust | 7/25/84 | Business Trust | MA | 9/30 | ||||||||||||||||||
Seligman California Municipal High-Yield Series | 11/20/84 | No | ||||||||||||||||||||
Seligman California Municipal Quality Series | 11/20/84 | No | ||||||||||||||||||||
Seligman Portfolios, Inc. | 7/1/87 | Corporation | MD | 12/31 | ||||||||||||||||||
Seligman Capital Portfolio | 6/21/88 | Yes | ||||||||||||||||||||
Seligman Common Stock Portfolio | 6/21/88 | Yes | ||||||||||||||||||||
Seligman Communications and Information Portfolio | 10/11/94 | Yes | ||||||||||||||||||||
Seligman Global Technology Portfolio | 5/1/96 | Yes | ||||||||||||||||||||
Seligman International Growth Portfolio | 5/3/93 | Yes | ||||||||||||||||||||
Seligman Investment Grade Fixed Income Portfolio | 6/21/88 | Yes | ||||||||||||||||||||
Seligman Large-Cap Value Portfolio | 5/1/98 | Yes | ||||||||||||||||||||
Seligman Smaller-Cap Value Portfolio | 5/1/98 | Yes | ||||||||||||||||||||
Seligman TargetHorizon ETF Portfolios, Inc. | 7/6/05 | Corporation | MD | 9/30 | ||||||||||||||||||
Seligman TargETFund 2015 | 10/3/05 | Yes | ||||||||||||||||||||
Seligman TargETFund 2025 | 10/3/05 | Yes | ||||||||||||||||||||
Seligman TargETFund 2035 | 10/2/06 | Yes | ||||||||||||||||||||
Seligman TargETFund 2045 | 10/2/06 | Yes | ||||||||||||||||||||
Seligman TargETFund Core | 10/3/05 | Yes | ||||||||||||||||||||
Seligman Value Fund Series, Inc. | 1/27/97 | Corporation | MD | 12/31 | ||||||||||||||||||
Seligman Large-Cap Value Fund | 4/25/97 | Yes | ||||||||||||||||||||
Seligman Smaller-Cap Value Fund | 4/25/97 | Yes |
* | Effective Oct. 1, 2005 American Express Funds changed its name to RiverSource funds and the names Threadneedle and Partners were removed from fund names. |
** | If a Non-diversified fund is managed as if it were a diversified fund for a period of three years, its status under the 1940 Act will convert automatically from Non-diversified to diversified. A diversified fund may convert to Non-diversified status only with shareholder approval. |
(1) | Date merged into a Minnesota corporation incorporated on April 8, 1986. |
(2) | Effective April 21, 2006, AXP Discovery Series, Inc. changed its name to RiverSource Bond Series, Inc.; AXP Fixed Income Series, Inc. changed its name to RiverSource Diversified Income Series, Inc.; AXP Growth Series, Inc. changed its name to RiverSource Large Cap Series, Inc.; AXP High Yield Tax-Exempt Series, Inc. changed its name to RiverSource Tax-Exempt Income Series, Inc.; AXP Managed Series, Inc. changed its name to RiverSource Strategic Allocation Series, Inc.; AXP Partners International Series, Inc. changed its name to RiverSource International Managers Series, Inc.; AXP Partners Series, Inc. changed its name to RiverSource Managers Series, Inc.; and for all other corporations and business trusts, AXP was replaced with RiverSource in the registrant name. |
(3) | Effective June 27, 2003, Bond Fund changed its name to Diversified Bond Fund, Federal Income Fund changed its name to Short Duration U.S. Government Fund and Extra Income Fund changed its name to High Yield Bond Fund, Variable Portfolio — Bond Fund changed its name to Variable Portfolio — Diversified Bond Fund, Variable Portfolio — Extra Income Fund changed its name to Variable Portfolio — High Yield Bond Fund and Variable Portfolio — Federal Income Fund changed its name to Variable Portfolio — Short Duration U.S. Government Fund. |
(4) | Effective Oct. 1, 2005, Equity Select Fund changed its name to Mid Cap Growth Fund, High Yield Tax-Exempt Fund changed its name to Tax-Exempt High Income Fund, Managed Allocation Fund changed its name to Strategic Allocation Fund, Mutual changed its name to Balanced Fund, Quantitative Large Cap Equity Fund changed its name to Disciplined Equity Fund, and Threadneedle International Fund changed its name to International Opportunity Fund. Variable Portfolio — Equity Select Fund changed its name to Variable Portfolio — Mid Cap Growth Fund, Variable Portfolio — Threadneedle Emerging Markets Fund changed its name to Variable Portfolio — Emerging Markets Fund, Variable Portfolio — Threadneedle International Fund changed its name to Variable Portfolio — International Opportunity Fund, and Variable Portfolio — Managed Fund changed its name to Variable Portfolio — Balanced Fund. |
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(5) | Effective July 9, 2004, Emerging Markets Fund changed its name to Threadneedle Emerging Markets Fund, European Equity Fund changed its name to Threadneedle European Equity Fund, Global Equity Fund changed its name to Threadneedle Global Equity Fund, and International Fund changed its name to Threadneedle International Fund, Variable Portfolio – Capital Resource Fund changed its name to Variable Portfolio – Large Cap Equity Fund, Variable Portfolio – Emerging Markets Fund changed its name to Variable Portfolio – Threadneedle Emerging Markets Fund and Variable Portfolio – International Fund changed its name to Variable Portfolio – Threadneedle International Fund. |
(6) | Effective Oct. 20, 2003, Global Growth Fund changed its name to Global Equity Fund. |
(7) | Effective Jan. 31, 2008, the fiscal year end was changed from May 31 to Jan. 31. |
(8) | Effective Feb. 18, 2004, Utilities Fund changed its name to Dividend Opportunity Fund. |
(9) | Effective Nov. 1, 2006, Precious Metals Fund changed its name to Precious Metals and Mining Fund. |
(10) | Effective April 13, 2006, the fiscal year end was changed from June 30 to Aug. 31. |
(11) | Effective March 31, 2008, RiverSource Emerging Markets Fund changed its name to Threadneedle Emerging Markets Fund; RiverSource Global Equity Fund changed its name to Threadneedle Global Equity Fund; RiverSource European Equity Fund changed its name to Threadneedle European Equity Fund; RiverSource International Opportunity Fund changed its name to Threadneedle International Opportunity Fund; RiverSource International Aggressive Growth Fund changed its name to RiverSource Partners International Select Growth Fund; RiverSource International Select Value Fund changed its name to RiverSource Partners International Select Value Fund; RiverSource International Small Cap Fund changed its name to RiverSource Partners International Small Cap Fund; RiverSource Small Cap Value Fund changed its name to RiverSource Partners Small Cap Value Fund; RiverSource Variable Portfolio – Fundamental Value Fund changed its name to RiverSource Partners Variable Portfolio – Fundamental Value Fund; RiverSource Variable Portfolio – Select Value Fund changed its name to RiverSource Partners Variable Portfolio – Select Value Fund; and RiverSource Variable Portfolio – Small Cap Value Fund changed its name to RiverSource Partners Variable Portfolio – Small Cap Value Fund. |
(12) | Prior to January 2008, the assets of the funds in RiverSource Variable Series Trust were held by funds organized under six separate Minnesota Corporations. |
(13) | Effective June 8, 2005, Variable Portfolio – Inflation Protected Securities Fund changed its name to Variable Portfolio – Global Inflation Protected Securities Fund. |
(14) | Prior to September 11, 2007, RiverSource Series Trust was known as RiverSource Retirement Series Trust. |
(15) | Prior to April 21, 2006, RiverSource Short Term Investments Series, Inc. was known as AXP Stock Series, Inc. |
(16) | Effective May 1, 2009, RiverSource Variable Portfolio – Growth Fund changed its name to Seligman Variable Portfolio – Growth Fund, RiverSource Variable Portfolio – Large Cap Equity Fund changed its name to RiverSource Variable Portfolio – Dynamic Equity Fund, RiverSource Variable Portfolio – Large Cap Value Fund changed its name to Seligman Variable Portfolio – Larger-Cap Value Fund, and RiverSource Variable Portfolio – Small Cap Advantage Fund changed its name to Seligman Variable Portfolio – Smaller-Cap Value Fund. |
(17) | Effective Sept. 25, 2009, Seligman Cash Management Fund, Inc. changed its name to RiverSource Government Money Market Fund, Inc.; Seligman LaSalle Global Real Estate Fund changed its name to RiverSource LaSalle Global Real Estate Fund; and Seligman LaSalle Monthly Dividend Real Estate Fund changed its name to RiverSource LaSalle Monthly Dividend Real Estate Fund. |
(18) | Effective May 1, 2010, RiverSource Partners Variable Portfolio – Fundamental Value Fund changed its name to Variable Portfolio – Davis New York Venture Fund; RiverSource Partners Variable Portfolio – Select Value Fund changed its name to Variable Portfolio – Goldman Sachs Mid Cap Value Fund; and RiverSource Partners Variable Portfolio – Small Cap Value Fund changed its name to Variable Portfolio – Partners Small Cap Value Fund. |
Shareholders elect a Board that oversees a fund’s operations. The Board appoints officers who are responsible for day-to-day business decisions based on policies set by the Board. The following is a list of each fund’s Board members. The RiverSource Family of Funds consists of 152 funds. Under current Board policy, members may serve until the next regular shareholders’ meeting, until he or she reaches the mandatory retirement age established by the Board, or the fifteenth anniversary of the first Board meeting they attended as members of the Board.
Independent Board Members
Name, address, age | Position held with funds and length of service | Principal occupation during past five years | Other present or past directorships (within past 5 years) | Committee memberships | ||||
Kathleen Blatz 901 S. Marquette Ave. Minneapolis, MN 55402 Age 55 | Board member since 1/11/06 | Chief Justice, Minnesota Supreme Court, 1998-2006; Attorney | None | Board Governance, Compliance, Investment Review, Audit |
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Name, address, age | Position held with funds and length of service | Principal occupation during past five years | Other present or past directorships (within past 5 years) | Committee memberships | ||||
Arne H. Carlson 901 S. Marquette Ave. Minneapolis, MN 55402 Age 75 | Board member since 1/5/99 | Chair, RiverSource Family of Funds, 1999-2006; former Governor of Minnesota | None | Board Governance, Compliance, Contracts, Executive, Investment Review | ||||
Pamela G. Carlton 901 S. Marquette Ave. Minneapolis, MN 55402 Age 55 | Board member since 11/11/07 | President, Springboard-Partners in Cross Cultural Leadership (consulting company) | None | Distribution, Investment Review, Audit | ||||
Patricia M. Flynn 901 S. Marquette Ave. Minneapolis, MN 55402 Age 59 | Board member since 11/1/04 | Trustee Professor of Economics and Management, Bentley University; former Dean, McCallum Graduate School of Business, Bentley University | None | Board Governance, Contracts, Investment Review | ||||
Anne P. Jones 901 S. Marquette Ave. Minneapolis, MN 55402 Age 75 | Board member since 3/1/85 | Attorney and Consultant | None | Board Governance, Compliance, Executive, Investment Review, Audit | ||||
Jeffrey Laikind, CFA 901 S. Marquette Ave. Minneapolis, MN 55402 Age 74 | Board member since 11/1/05 | Former Managing Director, Shikiar Asset Management | American Progressive Insurance; Hapoalim Securities USA, Inc. | Distribution, Executive, Investment Review, Audit | ||||
Stephen R. Lewis, Jr. 901 S. Marquette Ave. Minneapolis, MN 55402 Age 71 | Chair of the Board since 1/1/07, Board member since 1/1/02 | President Emeritus and Professor of Economics, Carleton College | Valmont Industries, Inc. (manufactures irrigation systems) | Board Governance, Compliance, Contracts, Executive, Investment Review | ||||
John F. Maher 901 S. Marquette Ave. Minneapolis, MN 55402 Age 67 | Board member since 11/7/08 | Retired President and Chief Executive Officer and former Director, Great Western Financial Corporation (financial services), 1986-1997 | None | Distribution, Investment Review, Audit | ||||
Catherine James Paglia 901 S. Marquette Ave. Minneapolis, MN 55402 Age 57 | Board member since 11/1/04 | Director, Enterprise Asset Management, Inc. (private real estate and asset management company) | None | Board Governance, Compliance, Contracts, Executive, Investment Review | ||||
Leroy C. Richie 901 S. Marquette Ave. Minneapolis, MN 55402 Age 68 | Board member since 11/7/08 | Counsel, Lewis & Munday, P.C. since 1987; Vice President and General Counsel, Automotive Legal Affairs, Chrysler Corporation, 1990-1997 | Digital Ally, Inc. (digital imaging); Infinity, Inc. (oil and gas exploration and production); OGE Energy Corp. (energy and energy services) | Contracts, Distribution, Investment Review | ||||
Alison Taunton-Rigby 901 S. Marquette Ave. Minneapolis, MN 55402 Age 66 | Board member since 11/13/02 | Chief Executive Officer and Director, RiboNovix, Inc. since 2003 (biotechnology); former President, Aquila Biopharmaceuticals | Idera Pharmaceuticals, Inc. (biotechnology); Healthways, Inc. (health management programs) | Contracts, Distribution, Executive, Investment Review |
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Board Member Affiliated with the Investment Manager*
Name, address, age | Position held with funds and length of service | Principal occupation during past five years | Other present or past directorships (within past 5 years) | Committee Memberships | ||||
William F. Truscott 53600 Ameriprise Financial Center Minneapolis, MN 55474 Age 49 | Board member since 11/7/01, Vice President since 2002 | Chairman of the Board, Columbia Management Investment Advisers, LLC (formerly RiverSource Investments, LLC) since May 2010 (previously President, Chairman of the Board and Chief Investment Officer, 2001-April 2010); Chief Executive Officer, U.S. Asset Management & President, Annuities, Ameriprise Financial, Inc. since May 2010 (previously President – U.S. Asset Management and Chief Investment Officer, 2005-April 2010 and Senior Vice President – Chief Investment Officer, 2001-2005); Director, President and Chief Executive Officer, Ameriprise Certificate Company since 2006; Director, Columbia Management Investment Distributors, Inc. (formerly RiverSource Fund Distributors, Inc.) since May 2010 (previously Chairman of the Board and Chief Executive Officer, 2008-April 2010; Chairman of the Board and Chief Executive Officer, RiverSource Distributors, Inc. since 2006; former Chief Investment Officer and Managing Director, Zurich Scudder Investments | None | None |
* | Interested person (as defined under the 1940 Act) by reason of being an officer, director, security holder and/or employee of the investment manager or Ameriprise Financial. |
The Board has appointed officers who are responsible for day-to-day business decisions based on policies it has established. The officers serve at the pleasure of the Board. In addition to Mr. Truscott, who is Vice President, the fund’s other officers are:
Name, address, age | Position held with funds and length of service | Principal occupation during past five years | ||
J. Kevin Connaughton One Financial Center Boston, MA 02111 Age 46 | President since 5/1/10 | Senior Vice President and General Manager – Mutual Fund Products, Columbia Management Investment Advisers, LLC since May 2010; Managing Director of Columbia Management Advisors, LLC, December 2004 - April 2010; Senior Vice President and Chief Financial Officer, Columbia Funds, June 2008 - January 2009; Treasurer, Columbia Funds, October 2003 - May 2008; Treasurer, the Liberty Funds, Stein Roe Funds and Liberty All-Star Funds, December 2000 - December 2006; Senior Vice President — Columbia Management Advisors, LLC, April 2003 - December 2004; President, Columbia Funds, Liberty Funds and Stein Roe Funds, February 2004 - October 2004 | ||
Amy K. Johnson 5228 Ameriprise Financial Center Minneapolis, MN 55474 Age 44 | Vice President since 12/5/06 | Senior Vice President and Chief Operating Officer, Columbia Management Investment Advisers, LLC (formerly RiverSource Investments, LLC) since May 2010 (previously Chief Administrative Officer, 2009 – April 2010 and Vice President – Asset Management and Trust Company Services, 2006–2009 and Vice President – Operations and Compliance, 2004-2006); Director of Product Development – Mutual Funds, Ameriprise Financial, Inc., 2001-2004 |
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Name, address, age | Position held with funds and length of service | Principal occupation during past five years | ||
Jeffrey P. Fox 105 Ameriprise Financial Center Minneapolis, MN 55474 Age 54 | Treasurer since 7/10/02 | Vice President, Columbia Management Investment Advisers, LLC (formerly RiverSource Investments, LLC) since May 2010; Chief Financial Officer, Columbia Management Investment Distributors, Inc. (formerly RiverSource Fund Distributors, Inc.) and of Seligman Data Corp. since 2008; Vice President – Investment Accounting, Ameriprise Financial, Inc. since 2002; Chief Financial Officer, RiverSource Distributors, Inc. since 2006 | ||
Scott R. Plummer 5228 Ameriprise Financial Center Minneapolis, MN 55474 Age 50 | Vice President, General Counsel and Secretary since 12/5/06 | Chief Legal Officer and Assistant Secretary, Columbia Management Investment Advisers, LLC (formerly RiverSource Investments, LLC) since June 2005; Vice President and Lead Chief Counsel – Asset Management, Ameriprise Financial, Inc. since May 2010 (previously Vice President and Chief Counsel – Asset Management, 2005-April 2010 and Vice President – Asset Management Compliance, 2004-2005); Vice President, Chief Counsel and Assistant Secretary, Columbia Management Investment Distributors, Inc. (formerly RiverSource Fund Distributors, Inc.) since 2008; Vice President, General Counsel and Secretary, Ameriprise Certificate Company since 2005; Chief Counsel, RiverSource Distributors, Inc. since 2006; Senior Vice President and Chief Compliance Officer, USBancorp Asset Management, 2002-2004 | ||
Mike Jones 100 Federal Street Boston, MN 02110 Age 51 | Vice President since 5/1/10 | Director and President, Columbia Management Investment Advisers, LLC since May 2010; President and Director, Columbia Management Investment Distributors, Inc. since May 2010; Manager, Chairman, Chief Executive Officer and President, Columbia Management Advisors, LLC, 2007 – April 2010; Chief Executive Officer, President and Director, Columbia Management Distributors, Inc., 2006 – April 2010; former Co-President and Senior Managing Director, Robeco Investment Management | ||
Colin Moore One Financial Center Boston, MA 02111 Age 52 | Vice President since 5/1/10 | Director and Chief Investment Officer, Columbia Management Investment Advisers, LLC since May 2010; Manager, Managing Director and Chief Investment Officer, Columbia Management Advisors, LLC, 2007- April 2010; Head of Equities, Columbia Management Advisors, LLC, 2002-Sept. 2007 | ||
Linda Wondrack One Financial Center Boston, MA 02111 Age 46 | Chief Compliance Officer since 5/1/10 | Vice President and Chief Compliance Officer, Columbia Management Investment Advisers, LLC since May 2010; Director (Columbia Management Group, LLC and Investment Product Group Compliance), Bank of America, June 2005 - April 2010; Director of Corporate Compliance and Conflicts Officer, MFS Investment Management (investment management), August 2004 - May 2005 | ||
Neysa M. Alecu 2934 Ameriprise Financial Center Minneapolis, MN 55474 Age 46 | Money Laundering Prevention Officer since 11/9/05 and Identity Theft Prevention Officer since 2008 | Vice President – Compliance, Ameriprise Financial, Inc. since 2008; Anti-Money Laundering Officer and Identity Theft Prevention Officer, Columbia Management Investment Distributors, Inc. (formerly RiverSource Fund Distributors, Inc.) since 2008; Anti-Money Laundering Officer, Ameriprise Financial, Inc. since 2005; Compliance Director, Ameriprise Financial, Inc., 2004-2008 |
Responsibilities of Board with respect to fund management
The Board is chaired by an Independent Director who has significant additional responsibilities compared to the other Board members, including, among other things: setting the agenda for Board meetings, communicating and meeting regularly with Board members between Board and committee meetings on fund-related matters with the funds’ Chief Compliance Officer, counsel to the Independent Directors, and representatives of the funds’ service providers and overseeing Board Services. The Board initially approves an Investment Management Services Agreement and other contracts with the investment manager and its affiliates, and other service providers. Once the contracts are approved, the Board monitors the level and quality of services including commitments of service providers to achieve expected levels of investment performance and shareholder services. In addition, the Board oversees that processes are in place to assure compliance with applicable rules, regulations and investment policies and addresses possible conflicts
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of interest. Annually, the Board evaluates the services received under the contracts by receiving reports covering investment performance, shareholder services, marketing, and the investment manager’s profitability in order to determine whether to continue existing contracts or negotiate new contracts. The Board also oversees fund risks, primarily through the functions (described below) performed by the Investment Review Committee, the Audit Committee and the Compliance Committee.
Committees of the Board
The Board has organized the following standing committees to facilitate its work: Board Governance Committee, Compliance Committee, Contracts Committee, Distribution Committee, Executive Committee, Investment Review Committee and Audit Committee. These Committees are comprised solely of Independent Directors (persons who are not “interested persons” of the fund as that term is defined in the 1940 Act. The table above describing each Director also includes their respective committee memberships. The duties of these committees are described below.
Mr. Lewis, as Chair of the Board, acts as a point of contact between the Independent Directors and the investment manager between Board meetings in respect of general matters.
Board Governance Committee — Recommends to the Board the size, structure and composition of the Board and its committees; the compensation to be paid to members of the Board; and a process for evaluating the Board’s performance. The committee also reviews candidates for Board membership including candidates recommended by shareholders. The committee also makes recommendations to the Board regarding responsibilities and duties of the Board, oversees proxy voting and supports the work of the Board Chair in relation to furthering the interests of the Funds and their shareholders on external matters.
To be considered as a candidate for director, recommendations must include a curriculum vitae and be mailed to the Chair of the Board, RiverSource Family of Funds, 901 Marquette Avenue South, Suite 2810, Minneapolis, MN 55402-3268. To be timely for consideration by the committee, the submission, including all required information, must be submitted in writing not less than 120 days before the date of the proxy statement for the previous year’s annual meeting of shareholders, if such a meeting is held. The committee will consider only one candidate submitted by such a shareholder or group for nomination for election at a meeting of shareholders. The committee will not consider self-nominated candidates or candidates nominated by members of a candidate’s family, including such candidate’s spouse, children, parents, uncles, aunts, grandparents, nieces and nephews.
The committee will consider and evaluate candidates submitted by the nominating shareholder or group on the basis of the same criteria as those used to consider and evaluate candidates submitted from other sources. The committee may take into account a wide variety of factors in considering director candidates, including (but not limited to): (i) the candidate’s knowledge in matters relating to the investment company industry; (ii) any experience possessed by the candidate as a director or senior officer of other public or private companies; (iii) the candidate’s educational background; (iv) the candidate’s reputation for high ethical standards and personal and professional integrity; (v) any specific financial, technical or other expertise possessed by the candidate, and the extent to which such expertise would complement the Board’s existing mix of skills and qualifications; (vi) the candidate’s perceived ability to contribute to the ongoing functions of the Board, including the candidate’s ability and commitment to attend meetings regularly, work collaboratively with other members of the Board and carry out his or her duties in the best interests of the fund; (vii) the candidate’s ability to qualify as an independent director; and (viii) such other criteria as the committee determines to be relevant in light of the existing composition of the Board and any anticipated vacancies or other factors.
Members of the committee (and/or the Board) also meet personally with each nominee to evaluate the candidate’s ability to work effectively with other members of the Board, while also exercising independent judgment. Although the Board does not have a formal diversity policy, the Board endeavors to comprise itself of members with a broad mix of professional and personal backgrounds. Thus, the committee and the Board accorded particular weight to the individual professional background of each Independent Director, as encapsulated in their bios included in Table 5.
The Board believes that the funds are well-served by a Board, the membership of which consists of persons that represent a broad mix of professional and personal backgrounds. In considering nominations, the Committee takes the following matrix into account in assessing how a candidate’s professional background would fit into the mix of experiences represented by the then-current Board.
PROFESSIONAL BACKGROUND | ||||||||||||||||||
Name | Geographic | For Profit; | Non-Profit; Government; CEO | Investment | Legal; Regulatory | Political | Academic | Distribution; Marketing | Audit Committee; Financial Expert | |||||||||
Blatz | MN | X | X | X |
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PROFESSIONAL BACKGROUND | ||||||||||||||||||
Name | Geographic | For Profit; | Non-Profit; Government; CEO | Investment | Legal; Regulatory | Political | Academic | Distribution; Marketing | Audit Committee; Financial Expert | |||||||||
Carlson | MN | X | X | |||||||||||||||
Carlton | NY | X | X | X | ||||||||||||||
Flynn | MA | X | ||||||||||||||||
Jones | MD | X | X | |||||||||||||||
Laikind | NY | X | X | X | X | |||||||||||||
Lewis | MN | X | X | |||||||||||||||
Maher | CT | X | X | X | ||||||||||||||
Paglia | NY | X | X | X | ||||||||||||||
Richie | MI | X | X | |||||||||||||||
Taunton-Rigby | MA | X | X | X |
With respect to the directorship of Mr. Truscott, who is not an Independent Director, the committee and the Board have concluded that having a senior member of the investment manager serve on the Board can facilitate the Independent Directors’ increased access to information regarding the funds’ investment manager, which is the funds’ most significant service provider.
Compliance Committee — Supports the Funds’ maintenance of a strong compliance program by providing a forum for independent Board members to consider compliance matters impacting the Funds or their key service providers; developing and implementing, in coordination with the Funds’ Chief Compliance Officer (CCO), a process for the review and consideration of compliance reports that are provided to the Boards; and providing a designated forum for the Funds’ CCO to meet with independent Board members on a regular basis to discuss compliance matters.
Contracts Committee — Reviews and oversees the contractual relationships with service providers. Receives and analyzes reports covering the level and quality of services provided under contracts with the fund and advises the Board regarding actions taken on these contracts during the annual review process.
Distribution Committee — Reviews and supports product development, marketing, sales activity and practices related to the funds and will report to the Board as appropriate.
Executive Committee — Acts for the Board between meetings of the Board.
Investment Review Committee — Reviews and oversees the management of the Funds’ assets. Considers investment management policies and strategies; investment performance; risk management techniques; and securities trading practices and reports areas of concern to the Board.
Audit Committee — Oversees the accounting and financial reporting processes of the Funds and internal controls over financial reporting. Oversees the quality and integrity of the Funds’ financial statements and independent audits as well as the Funds’ compliance with legal and regulatory requirements relating to the Funds’ accounting and financial reporting, internal controls over financial reporting and independent audits. The committee also makes recommendations regarding the selection of the Funds’ independent auditor and reviews and evaluates the qualifications, independence and performance of the auditor. The committee oversees the funds’ risks by, among other things, meeting with the funds’ internal auditors, establishing procedures for the confidential, anonymous submission by employees of concerns about accounting or audit matters, and overseeing the funds’ Disclosure Controls and Procedures.
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BOARD MEMBER HOLDINGS
The following table shows the dollar range of equity securities beneficially owned on Dec. 31, 2009 of all funds in the RiverSource Family of Funds overseen by the Board members. All shares of the funds are owned by life insurance companies and are not available for purchase by individuals. Consequently no Board member owns any shares of funds.
Table 7. Board Member Holdings — All Funds
Based on net asset values as of Dec. 31, 2009:
Board member | Aggregate dollar range of equity securities of all funds in the RiverSource Family of Funds overseen by Board member | |
Kathleen Blatz | Over $100,000 | |
Arne H. Carlson | Over $100,000 | |
Pamela G. Carlton | Over $100,000* | |
Patricia M. Flynn | $50,001-$100,000* | |
Anne P. Jones | Over $100,000 | |
Jeffrey Laikind | Over $100,000 | |
Stephen R. Lewis, Jr. | Over $100,000* | |
John F. Maher | Over $100,000* | |
Catherine James Paglia | Over $100,000* | |
Leroy C. Richie | Over $100,000 | |
Alison Taunton-Rigby | Over $100,000 | |
William F. Truscott | Over $100,000 |
* | Includes deferred compensation invested in share equivalents. |
COMPENSATION OF BOARD MEMBERS
The independent Board members determine the amount of compensation that they receive, including the amount paid to the Chair of the Board. In determining compensation for the independent Board members, the independent Board members take into account a variety of factors including, among other things, their collective significant work experience (e.g., in business and finance, government or academia). The independent Board members also recognize that these individuals’ advice and counsel are in demand by other organizations, that these individuals may reject other opportunities because the time demands of their duties as independent Board members, and that they undertake significant legal responsibilities. The independent Board members also consider the compensation paid to independent board members of other mutual fund complexes of comparable size. In determining the compensation paid to the Chair, the independent Board members take into account, among other things, the Chair’s significant additional responsibilities (e.g., setting the agenda for Board meetings, communicating or meeting regularly with the Funds’ Chief Compliance Officer, Counsel to the independent Board members, and the Funds’ service providers) which result in a significantly greater time commitment required of the Board Chair. The Chair’s compensation, therefore, has generally been set at a level between 2.5 and 3 times the level of compensation paid to other independent Board members.
Effective Jan. 1, 2010, independent Board members will be paid an annual retainer of $125,000. Committee and subcommittee Chairs will each receive an additional annual retainer of $5,000. In addition, independent Board members will be paid the following fees for attending Board and committee meetings: $5,000 per day of in-person Board meetings and $2,500 per day of in-person committee or sub-committee meetings (if such meetings are not held on the same day as a Board meeting). Independent Board members are not paid for special telephonic meetings. In 2010, the Board’s Chair will receive total annual cash compensation of $435,000.
The independent Board members may elect to defer payment of up to 100% of the compensation they receive in accordance with a Deferred Compensation Plan (the Deferred Plan). Under the Deferred Plan, a Board member may elect to have his or her deferred compensation treated as if they had been invested in shares of one or more RiverSource funds and the amount paid to the Board member under the Deferred Plan will be determined based on the performance of such investments. Distributions may be taken in a lump sum or over a period of years. The Deferred Plan will remain unfunded for federal income tax purposes under the Internal Revenue Code of 1986, as amended. It is anticipated that deferral of Board member compensation in accordance with the Deferred Plan will have, at most, a negligible impact on Fund assets and liabilities.
Compensation from each fund. Funds-of-Funds do not pay additional compensation to the Board members for attending meetings. Compensation is paid directly from the underlying funds in which each Fund-of-Funds invests.
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Information Regarding Pending and Settled Legal Proceedings
In June 2004, an action captioned John E. Gallus et al. v. American Express Financial Corp. and American Express Financial Advisors Inc., was filed in the United States District Court for the District of Arizona. The plaintiffs allege that they are investors in several American Express Company (now known as RiverSource) mutual funds and they purport to bring the action derivatively on behalf of those funds under the 1940 Act. The plaintiffs allege that fees allegedly paid to the defendants by the funds for investment advisory and administrative services are excessive. The plaintiffs seek remedies including restitution and rescission of investment advisory and distribution agreements. The plaintiffs voluntarily agreed to transfer this case to the United States District Court for the District of Minnesota (the “District Court”). In response to defendants’ motion to dismiss the complaint, the District Court dismissed one of plaintiffs’ four claims and granted plaintiffs limited discovery. Defendants moved for summary judgment in April 2007. Summary judgment was granted in the defendants’ favor on July 9, 2007. The plaintiffs filed a notice of appeal with the Eighth Circuit Court of Appeals (the “Eighth Circuit”) on Aug. 8, 2007. On April 8, 2009, the Eighth Circuit reversed summary judgment and remanded to the District Court for further proceedings. On August 6, 2009, defendants filed a writ of certiorari with the U.S. Supreme Court (the “Supreme Court”), asking the Supreme Court to stay the District Court proceedings while the Supreme Court considers and rules in a case captioned Jones v. Harris Associates, which involves issues of law similar to those presented in the Gallus case. On March 30, 2010, the Supreme Court issued its ruling in Jones v. Harris Associates, and on April 5, 2010, the Supreme Court vacated the Eighth Circuit’s decision in the Gallus case and remanded the case to the Eighth Circuit for further consideration in light of the Supreme Court’s decision in Jones v. Harris Associates.
In December 2005, without admitting or denying the allegations, American Express Financial Corporation (AEFC, which is now known as Ameriprise Financial, Inc. (Ameriprise Financial)), entered into settlement agreements with the Securities and Exchange Commission (SEC) and Minnesota Department of Commerce (MDOC) related to market timing activities. As a result, AEFC was censured and ordered to cease and desist from committing or causing any violations of certain provisions of the Investment Advisers Act of 1940, the Investment Company Act of 1940, and various Minnesota laws. AEFC agreed to pay disgorgement of $10 million and civil money penalties of $7 million. AEFC also agreed to retain an independent distribution consultant to assist in developing a plan for distribution of all disgorgement and civil penalties ordered by the SEC in accordance with various undertakings detailed at http://www.sec.gov/litigation/admin/ia-2451.pdf. Ameriprise Financial and its affiliates have cooperated with the SEC and the MDOC in these legal proceedings, and have made regular reports to the RiverSource Family of Funds’ Boards of Directors/Trustees.
On November 7, 2008, RiverSource Investments, LLC, a subsidiary of Ameriprise Financial, Inc., acquired J.&W. Seligman & Co., Inc. (“Seligman”). In late 2003, Seligman conducted an extensive internal review concerning mutual fund trading practices. Seligman’s review, which covered the period 2001-2003, noted one arrangement that permitted frequent trading in certain openend registered investment companies managed by Seligman (the “Seligman Funds”); this arrangement was in the process of being closed down by Seligman before September 2003. Seligman identified three other arrangements that permitted frequent trading, all of which had been terminated by September 2002. In January 2004, Seligman, on a voluntary basis, publicly disclosed these four arrangements to its clients and to shareholders of the Seligman Funds. Seligman also provided information concerning mutual fund trading practices to the SEC and the Office of the Attorney General of the State of New York (“NYAG”).
In September 2006, the NYAG commenced a civil action in New York State Supreme Court against Seligman, Seligman Advisors, Inc. (which is now known as RiverSource Fund Distributors, Inc.), Seligman Data Corp. and Brian T. Zino (collectively, the “Seligman Parties”), alleging, in substance, that the Seligman Parties permitted various persons to engage in frequent trading and, as a result, the prospectus disclosure used by the registered investment companies then managed by Seligman was and had been misleading. The NYAG included other related claims and also claimed that the fees charged by Seligman to the Seligman Funds were excessive. On March 13, 2009, without admitting or denying any violations of law or wrongdoing, the Seligman Parties entered into a stipulation of settlement with the NYAG and settled the claims made by the NYAG. Under the terms of the settlement, Seligman paid $11.3 million to four Seligman Funds. This settlement resolved all outstanding matters between the Seligman Parties and the NYAG. In addition to the foregoing matter, the New York staff of the SEC indicated in September 2005 that it was considering recommending to the Commissioners of the SEC the instituting of a formal action against Seligman and Seligman Advisors, Inc. relating to frequent trading in the Seligman Funds. Seligman responded to the staff in October 2005 that it believed that any action would be both inappropriate and unnecessary, especially in light of the fact that Seligman had previously resolved the underlying issue with the Independent Directors of the Seligman Funds and made recompense to the affected Seligman Funds. There have been no further developments with the SEC on this matter.
Ameriprise Financial and certain of its affiliates have historically been involved in a number of legal, arbitration and regulatory proceedings, including routine litigation, class actions, and governmental actions, concerning matters arising in connection with the conduct of their business activities. Ameriprise Financial believes that the Funds are not currently the subject of, and that neither
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Ameriprise Financial nor any of its affiliates are the subject of, any pending legal, arbitration or regulatory proceedings that are likely to have a material adverse effect on the Funds or the ability of Ameriprise Financial or its affiliates to perform under their contracts with the Funds. Ameriprise Financial is required to make 10-Q, 10-K and, as necessary, 8-K filings with the Securities and Exchange Commission on legal and regulatory matters that relate to Ameriprise Financial and its affiliates. Copies of these filings may be obtained by accessing the SEC website at www.sec.gov.
There can be no assurance that these matters, or the adverse publicity associated with them, will not result in increased fund redemptions, reduced sale of fund shares or other adverse consequences to the Funds. Further, although we believe proceedings are not likely to have a material adverse effect on the Funds or the ability of Ameriprise Financial or its affiliates to perform under their contracts with the Funds, these proceedings are subject to uncertainties and, as such, we are unable to estimate the possible loss or range of loss that may result. An adverse outcome in one or more of these proceedings could result in adverse judgments, settlements, fines, penalties or other relief that could have a material adverse effect on the consolidated financial condition or results of operations of Ameriprise Financial.
Independent Registered Public Accounting Firm
The financial statements, when available, will be audited by the independent registered public accounting firm, Ernst & Young LLP, 220 South 6th Street, Suite 1400, Minneapolis, MN 55402-3900. The independent registered public accounting firm will also provide other accounting and tax-related services as requested by the fund.
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Description of Ratings
Standard & Poor’s Long-Term Debt Ratings
A Standard & Poor’s corporate or municipal debt rating is a current assessment of the creditworthiness of an obligor with respect to a specific obligation. This assessment may take into consideration obligors such as guarantors, insurers, or lessees.
The debt rating is not a recommendation to purchase, sell, or hold a security, inasmuch as it does not comment as to market price or suitability for a particular investor.
The ratings are based on current information furnished by the issuer or obtained by S&P from other sources it considers reliable. S&P does not perform an audit in connection with any rating and may, on occasion, rely on unaudited financial information. The ratings may be changed, suspended, or withdrawn as a result of changes in, or unavailability of such information or based on other circumstances.
The ratings are based, in varying degrees, on the following considerations:
• | Likelihood of default capacity and willingness of the obligor as to the timely payment of interest and repayment of principal in accordance with the terms of the obligation. |
• | Nature of and provisions of the obligation. |
• | Protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors’ rights. |
Investment Grade
Debt rated AAA has the highest rating assigned by Standard & Poor’s. Capacity to pay interest and repay principal is extremely strong.
Debt rated AA has a very strong capacity to pay interest and repay principal and differs from the highest rated issues only in a small degree.
Debt rated A has a strong capacity to pay interest and repay principal, although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher-rated categories.
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 lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher-rated categories.
Speculative Grade
Debt rated BB, B, 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.
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 that could lead to inadequate capacity to meet timely interest and principal payments. The BB rating category also is used for debt subordinated to senior debt that is assigned an actual or implied BBB- rating.
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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 also is used for debt subordinated to senior debt that is assigned an actual or implied BB or BB- rating.
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 also is used for debt subordinated to senior debt that is assigned an actual or implied B or B- rating.
Debt rated CC typically is applied to debt subordinated to senior debt that is assigned an actual or implied CCC rating.
Debt rated C typically is applied to debt subordinated to senior debt that is assigned an actual or implied CCC rating. The C rating may be used to cover a situation where a bankruptcy petition has been filed, but debt service payments are continued.
The rating CI is reserved for income bonds on which no interest is being paid.
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 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 if debt service payments are jeopardized.
Moody’s Long-Term Debt Ratings
Aaa – Bonds that are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk. Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues.
Aa – Bonds that 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 risk appear somewhat larger than in Aaa securities.
A – Bonds that 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 some time in the future.
Baa – Bonds that 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.
Ba – Bonds that are rated Ba are judged to have speculative elements – their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very 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 that are rated B generally lack characteristics of a desirable investment. Assurance of interest and principal payments or maintenance of other terms of the contract over any long period of time may be small.
Caa – Bonds that 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 that are rated Ca represent obligations that are speculative in a high degree. Such issues are often in default or have other marked shortcomings.
C – Bonds that 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 standing.
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Fitch’s Long-Term Debt Ratings
Fitch’s bond ratings provide a guide to investors in determining the credit risk associated with a particular security. The ratings represent Fitch’s assessment of the issuer’s ability to meet the obligations of a specific debt issue in a timely manner.
The rating takes into consideration special features of the issue, its relationship to other obligations of the issuer, the current and prospective financial condition and operating performance of the issuer and any guarantor, as well as the economic and political environment that might affect the issuer’s future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided by insurance policies or financial guaranties unless otherwise indicated.
Fitch ratings are not recommendations to buy, sell or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature of taxability of payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other obligors, underwriters, their experts, and other sources Fitch believes to be reliable. Fitch does not audit or verify the truth or accuracy of such information. Ratings may be changed, suspended, or withdrawn as a result of changes in, or the unavailability of, information or for other reasons.
Investment Grade
AAA: Bonds considered to be investment grade and of the highest credit quality. The obligor has an exceptionally strong ability to pay interest and repay principal, which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality. The obligor’s ability to pay interest and repay principal is very strong, although not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA categories are not significantly vulnerable to foreseeable future developments, short-term debt of these issuers is generally rated F-1+.
A: Bonds considered to be investment grade and of high credit quality. The obligor’s ability to pay interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit quality. The obligor’s ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have adverse impact on these bonds and, therefore, impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings.
Speculative Grade
BB: Bonds are considered speculative. The obligor’s ability to pay interest and repay principal may be affected over time by adverse economic changes. However, business and financial alternatives can be identified, which could assist the obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are currently meeting debt service requirements, the probability of continued timely payment of principal and interest reflects the obligor’s limited margin of safety and the need for reasonable business and economic activity throughout the life of the issue.
CCC: Bonds have certain identifiable characteristics that, if not remedied, may lead to default. The ability to meet obligations requires an advantageous business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
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DDD, DD, and D: Bonds are in default on interest and/or principal payments. Such bonds are extremely speculative and should be valued on the basis of their ultimate recovery value in liquidation or reorganization of the obligor. DDD represents the highest potential for recovery on these bonds, and D represents the lowest potential for recovery.
SHORT-TERM RATINGS
Standard & Poor’s Commercial Paper Ratings
A Standard & Poor’s commercial paper rating is a current assessment of the likelihood of timely payment of debt considered short-term in the relevant market.
Ratings are graded into several categories, ranging from A-1 for the highest quality obligations to D for the lowest. These categories are as follows:
A-1 | This highest category indicates that the degree of safety regarding timely payment is strong. Those issues determined to possess extremely strong safety characteristics are denoted with a plus sign (+) designation. |
A-2 | Capacity for timely payment on issues with this designation is satisfactory. However, the relative degree of safety is not as high as for issues designated A-1. |
A-3 | Issues carrying this designation have adequate capacity for timely payment. They are, however, more vulnerable to the adverse effects of changes in circumstances than obligations carrying the higher designations. |
B | Issues are regarded as having only speculative capacity for timely payment. |
C | This rating is assigned to short-term debt obligations with doubtful capacity for payment. |
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 believes that such payments will be made during such grace period. |
Standard & Poor’s Muni Bond and Note Ratings
An S&P municipal bond or note rating reflects the liquidity factors and market-access risks unique to these instruments. Notes maturing 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.
Note rating symbols and definitions are as follows:
SP-1 | Strong capacity to pay principal and interest. Issues determined to possess very strong characteristics are given a plus (+) designation. |
SP-2 | Satisfactory capacity to pay principal and interest, with some vulnerability to adverse financial and economic changes over the term of the notes. |
SP-3 | Speculative capacity to pay principal and interest. |
Municipal bond rating symbols and definitions are as follows:
Standard & Poor’s rating SP-1 indicates very strong or strong capacity to pay principal and interest. Those issues determined to possess overwhelming safety characteristics will be given a plus (+) designation.
Standard & Poor’s rating SP-2 indicates satisfactory capacity to pay principal and interest.
Standard & Poor’s rating SP-3 indicates speculative capacity to pay principal and interest.
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Moody’s Short-Term 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:
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: (i) leading market positions in well-established industries, (ii) high rates of return on funds employed, (iii) conservative capitalization structure with moderate reliance on debt and ample asset protection, (iv) broad margins in earnings coverage of fixed financial charges and high internal cash generation, and (v) well established access to a range of financial markets and assured sources of alternate liquidity.
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.
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.
Issuers rated Not Prime do not fall within any of the Prime rating categories.
Moody’s Short-Term Muni Bonds and Notes
Short-term municipal bonds and notes are rated by Moody’s. The ratings reflect the liquidity concerns and market access risks unique to notes.
Moody’s MIG 1/VMIG 1 indicates the best quality. There is present strong protection by established cash flows, superior liquidity support or demonstrated broad-based access to the market for refinancing.
Moody’s MIG 2/VMIG 2 indicates high quality. Margins of protection are ample although not so large as in the preceding group.
Moody’s MIG 3/VMIG 3 indicates favorable quality. All security elements are accounted for but there is lacking the undeniable strength of the preceding grades. Liquidity and cash flow protection may be narrow and market access for refinancing is likely to be less well established.
Moody’s MIG 4/VMIG 4 indicates adequate quality. Protection commonly regarded as required of an investment security is present and although not distinctly or predominantly speculative, there is specific risk.
Fitch’s Short-Term Ratings
Fitch’s short-term ratings apply to debt obligations that are payable on demand or have original maturities of generally up to three years, including commercial paper, certificates of deposit, medium-term notes, and municipal and investment notes. The short-term rating places greater emphasis than a long-term rating on the existence of liquidity necessary to meet the issuer’s obligations in a timely manner.
Fitch short-term ratings are as follows:
F-1+: Exceptionally Strong Credit Quality. Issues assigned this rating are regarded as having the strongest degree of assurance for timely payment.
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F-1: Very Strong Credit Quality. Issues assigned this rating reflect an assurance of timely payment only slightly less in degree than issues rated F-1+.
F-2: Good Credit Quality. Issues assigned this rating have a satisfactory degree of assurance for timely payment, but the margin of safety is not as great as for issues assigned F-1+ and F-1 ratings.
F-3: Fair Credit Quality. Issues assigned this rating have characteristics suggesting that the degree of assurance for timely payment is adequate, however, near-term adverse changes could cause these securities to be rated below investment grade.
F-S: Weak Credit Quality. Issues assigned this rating have characteristics suggesting a minimal degree of assurance for timely payment and are vulnerable to near-term adverse changes in financial and economic conditions.
D: Default. Issues assigned this rating are in actual or imminent payment default.
S-6534-20 C (4/10)
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Appendix C – Pro Forma Financial Statements of Columbia Strategic Income Fund, Variable Series, Variable Portfolio – Conservative Portfolio; Variable Portfolio – Moderately Conservative Portfolio; Variable Portfolio, Moderate Portfolio; Variable Portfolio – Moderately Aggressive Portfolio and Variable Portfolio – Aggressive Portfolio
NARRATIVE DESCRIPTION OF THE PRO FORMA EFFECTS OF THE REORGANIZATIONS
The unaudited pro forma information set forth below for the period ended on the date indicated is intended to present supplemental data as if the reorganization of one fund (the “Selling Fund”) into the corresponding fund (the “Buying Fund”), as noted in Table 1 below (the “Reorganization”), had occurred as of May 7, 2010 (the Selling Fund’s commencement of investment operations). Information has not been presented for any Reorganizations involving a Selling Fund the net assets of which were less than 10% of the net assets of the corresponding Buying Fund as of October 6, 2010.
Table 1 – Reorganizations
Selling Fund | Buying Fund | Period Ended | ||
RiverSource Variable Portfolio – Strategic Income Fund | Columbia Strategic Income Fund, Variable Series | June 30, 2010 |
Basis of Combination
In August 2010, the Board of Trustees of the Selling Fund approved an Agreement and Plan of Reorganization (the “Plan of Reorganization”) pursuant to which, subject to shareholder approval, the Selling Fund will transfer all of its assets to the Buying Fund in exchange for shares of the Buying Fund (“Reorganization Shares”) and the Buying Fund will assume all of the liabilities of the Selling Fund. Selling Fund shareholders will receive the class of Reorganization Shares indicated in Table 2 below. The Buying Fund will issue Reorganization Shares with an aggregate net asset value equal to the aggregate value of the assets that it receives from the Selling Fund, less the liabilities it assumes from the Selling Fund. All Reorganization Shares delivered to the Selling Fund will be delivered at net asset value without a sales load, commission or other similar fee being imposed. Immediately following the transfer, the Reorganization Shares received by the Selling Fund attributable to each class thereof will be distributed pro rata, on what is expected to be a tax-free basis for U.S. federal income tax purposes, to the shareholders of such class of the Selling Fund in proportion to their holdings of shares of the Selling Fund.
Table 2 – Reorganization Shares
Selling Fund Share Class | Reorganization Share Class | |||||
Class 1 | g | Class A | ||||
Class 2 | g | Class B |
Under the terms of the Plan of Reorganization, the Reorganization will be accounted for by the method of accounting for tax-free mergers of investment companies. Following the Reorganization, the Buying Fund will be the accounting survivor. In accordance with accounting principles generally accepted in the United States, the historical cost of investment securities will be carried forward to the surviving fund and the results of operations for pre-Reorganization periods will not be restated. The costs of the Reorganization, current estimates of which are set forth in Table 5 below, will be borne by the Selling Fund and the Buying Fund (each a “Fund” and collectively, the “Funds”) up to the amount of the anticipated reduction in expenses borne by that Fund over the first year following the Reorganization. Any Reorganization expenses otherwise allocable to a Fund that are in excess of that limitation will be borne by Columbia Management Investment Advisers, LLC (“Columbia Management”) or its affiliates and not by any other Fund. If the Reorganization is not consummated, Columbia Management or its affiliates will bear the costs associated with the Reorganization. The pro forma information provided herein should be read in conjunction with the audited financial statements of the Funds included in their most recent annual reports and the unaudited financial statements of the Funds included in their most recent semi-annual reports, in each case dated as indicated in Table 3 below.
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Table 3 – Shareholder Report Dates
Fund | Annual Report | Semi-Annual Report | ||||
Columbia Strategic Income Fund, Variable Series (Buying Fund) | 12/31/2009 | 6/30/2010 | ||||
RiverSource Variable Portfolio – Strategic Income Fund (Selling Fund) | N/A | 6/30/2010 |
The semi-annual report for the Selling Fund covers the period from May 7, 2010 (inception) through June 30, 2010.
Table 4 below presents, as of the date indicated, the net assets of each Fund.
Table 4 – Selling Funds and Buying Funds Net Assets
Fund | Net Assets | As-Of Date | ||||
Columbia Strategic Income Fund, Variable Series (Buying Fund) | $ | 65,847,257 | June 30, 2010 | |||
RiverSource Variable Portfolio – Strategic Income Fund (Selling Fund) | $ | 752,264,120 | June 30, 2010 |
Table 5 presents the estimated Reorganization costs (exclusive of any transaction costs associated with any portfolio realignment); the net assets as of the date indicated in Table 4 above of the Buying Fund assuming the Reorganization occurred on that date, after accounting for the estimated Reorganization costs to be borne by the Buying Fund and the Selling Fund; and, on a pro forma basis, the estimated relative increases or decreases in combined operating expenses that would have been incurred during the period from May 7, 2010 (commencement of investment operations of the Selling Fund) through the date indicated in Table 4 above. The pro forma increases and decreases represent the differences between (i) the combined expenses actually charged to the Buying Fund and the Selling Fund during the period and (ii) the expenses that would have been charged to the combined assets of the Buying Fund and Selling Fund if the reorganization and other contractual changes had occurred at the beginning of the period.
The unaudited pro forma information set forth in Table 5 below reflects adjustments made to expenses for differences in contractual rates, duplicate services and other services that would not have occurred if the Reorganization had taken place on May 7, 2010. The pro forma information has been derived from the books and records of the Funds utilized in calculating daily net asset value for the Funds and has been prepared in accordance with accounting principles generally accepted in the United States, which require the use of management estimates. Actual results could differ from those estimates.
Table 5 – Estimated Reorganization Costs, Combined Fund Net Assets and Pro Forma Increases or Decreases in Expenses (1)
RiverSource Variable Portfolio – | ||
Estimated Reorganization Costs | $13,681 | |
Combined Fund Net Assets as of the Date Indicated in Table 4 | $818,097,696 | |
Increase (Decrease) | ||
Management fees (2) | ($1,267) | |
Custodian fees (3) | ($20,732) | |
Pricing and bookkeeping (4) | ($12,972) | |
Professional fees (5) | ($3,073) | |
Reports to shareholders (5) | ($1,910) | |
Transfer agency fees (3) | $5,863 | |
Other (5) | $4,614 | |
(Increase) Decrease | ||
Waiver and/or reimbursement of fund expenses (6) | $20,122 |
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(1) | See “Fees and Expenses” in the Proxy Statement/Prospectus for more information. |
(2) | Management fees are composed of an advisory fee and an administration fee and have been adjusted to reflect the contractual rates charged to the Buying Fund, proposed to be effective in the second quarter of 2011, subject to shareholder approval. |
(3) | Adjustment reflects changes in contractual rates. |
(4) | Adjustment reflects changes in contractual rates. This service will not be separately charged and will be provided as a component of administration services. |
(5) | Adjustment reflects the elimination of duplicate services and adjustments to reflect contractual rates charged to the buying fund. |
(6) | Adjustment reflects the aggregate (increase) decrease in expense reimbursements and/or waivers by Columbia Management and its affiliates. |
Pursuant to an Investment Management Services Agreement with Columbia Management, each Fund pays a monthly management fee to Columbia Management based on the average daily net assets of the Fund, at the annual rates shown in Table 6 below. The Board of Trustees of the Buying Fund has approved a new Investment Management Services Agreement (“New Agreement”) for the Buying Fund, under which management fees would be paid to Columbia Management based on the average daily net assets of the Fund, at the annual rates shown below.
The New Agreement is subject to approval by shareholders of the Buying Fund.
Table 6 – Investment Management Fees
Fund | Assets (billions) | Annual Rate at | Annual Rate at | |||
Columbia Strategic Income Fund, Variable Series (Buying Fund) | First $0.5 | 0.600% | 0.530% | |||
Next $0.5 | 0.550% | 0.525% | ||||
Next $0.5 | 0.520% | 0.515% | ||||
Next $0.5 | 0.490% | 0.515% | ||||
Next $1.0 | 0.490% | 0.495% | ||||
Next $3.0 | 0.490% | 0.480% | ||||
Next $1.5 | 0.490% | 0.455% | ||||
Next $1.5 | 0.490% | 0.440% | ||||
Next $1.0 | 0.490% | 0.431% | ||||
Next $5.0 | 0.490% | 0.419% | ||||
Next $5.0 | 0.490% | 0.409% | ||||
Next $4.0 | 0.490% | 0.393% | ||||
Next $26.0 | 0.490% | 0.374% | ||||
Over $50.0 | 0.490% | 0.353% | ||||
RiverSource Variable Portfolio – Strategic Income Fund (Selling Fund) | First $1.0 | 0.570% | N/A | |||
Next $1.0 | 0.545% | |||||
Next $1.0 | 0.520% | |||||
Next $3.0 | 0.495% | |||||
Next $1.5 | 0.470% | |||||
Next $2.5 | 0.450% | |||||
Next $5.0 | 0.430% | |||||
Next $9.0 | 0.410% | |||||
Over $24.0 | 0.390% |
Pursuant to an Administrative Services Agreement with Columbia Management or Ameriprise Financial, Inc. (“Ameriprise Financial”), as indicated in Table 7 below, each Fund’s administrator (“Administrator”) provides most administrative services to the Fund. For all services provided under the Administrative Services Agreement, each Fund pays its Administrator a monthly administration fee as a percentage of the Fund’s average daily net assets, at the annual rates shown in Table 7 below. The Board of Trustees of the Buying Fund has approved a new Administrative Services Agreement for the Fund under which administration fees would be paid to Columbia Management based on the average daily net assets of the Fund, at the annual rates shown below.
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Table 7 – Administration Fees
Fund | Administrator | Assets (billions) | Annual Rate at | Annual Rate at | ||||
Columbia Strategic Income Fund, Variable Series | Columbia Management | First $0.5 | 0.00% | 0.070% | ||||
(Buying Fund) | Next $0.5 | 0.00% | 0.065% | |||||
Next $2.0 | 0.00% | 0.060% | ||||||
Next $9.0 | 0.00% | 0.050% | ||||||
Over $12.0 | 0.00% | 0.040% | ||||||
RiverSource Variable Portfolio - Strategic Income Fund | Ameriprise Financial | First $0.5 | 0.070% | N/A | ||||
(Selling Fund) | Next $0.5 | 0.065% | ||||||
Next $2.0 | 0.060% | |||||||
Next $9.0 | 0.050% | |||||||
Over $12.0 | 0.040% |
Ameriprise Financial provides accounting services as part of its Administrative Services Agreement. State Street Bank and Trust Company provides accounting services to the Funds administered by Columbia Management.
Columbia Management Investment Services Corp., an affiliate of Columbia Management, is the transfer agent for each Fund. Columbia Management Investment Distributors, Inc., an affiliate of Columbia Management, is the distributor for each Fund.
No significant accounting policies will change as the result of the proposed Reorganization.
The estimated costs of the Reorganization shown in Table 5 above do not reflect any brokerage commissions incurred by a Fund in connection with any portfolio realignment. Columbia Management expects that, subsequent to the Reorganization, there may be some portfolio realignment of the Buying Fund (of securities acquired from the Selling Fund). However, Columbia Management expects that any such portfolio realignment will not result in any significant increase in the Buying Fund’s portfolio turnover rate, relative to its historical portfolio turnover rates. Columbia Management also does not expect any incremental trading costs to be significant.
Federal Income Taxes
Please see “Tax Status of the Reorganization” in the Prospectus/Proxy Statement for a discussion of the tax effects of the Reorganization.
It is each Fund’s policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies, and to distribute all of its investment company taxable income to shareholders. After the Reorganization, the Buying Fund intends to continue to qualify as a regulated investment company.
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COLUMBIA FUNDS VARIABLE INSURANCE TRUST
PART C
OTHER INFORMATION
PART C. OTHER INFORMATION
Item 15. Indemnification
Article Five of the Amended and Restated Bylaws of Registrant (“Article Five”) provides that Registrant shall indemnify each of its trustees and officers (including persons who serve at Registrant’s request as directors, officers or trustees of another organization in which Registrant has any interest as a shareholder, creditor or otherwise) who are not employees or officers of any investment adviser to Registrant or any affiliated person thereof, and its chief compliance officer, regardless of whether such person is an employee or officer of any investment adviser to Registrant or any affiliated person thereof, and may indemnify each of its trustees and officers (including persons who serve at Registrant’s request as directors, officers or trustees of another organization in which Registrant has any interest as a shareholder, creditor or otherwise) who are employees or officers of any investment adviser to Registrant or any affiliated person thereof (“Covered Persons”) under specified circumstances.
Section 17(h) of the Investment Company Act of 1940 (“1940 Act”) provides that neither the Agreement and Declaration of Trust nor the Bylaws of Registrant, nor any other instrument pursuant to which Registrant is organized or administered, shall contain any provision which protects or purports to protect any trustee or officer of Registrant against any liability to Registrant or its shareholders to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of his office. In accordance with Section 17(h) of the 1940 Act, Article Five shall not protect any person against any liability to Registrant or its shareholders to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of his office. To the extent required under the 1940 Act, (i) Article Five does not protect any person against any liability to Registrant or to its shareholders to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of his office; (ii) in the absence of a final decision on the merits by a court or other body before whom a proceeding was brought that a Covered Person was not liable by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of his office, no indemnification is permitted under Article Five unless a determination that such person was not so liable is made on behalf of Registrant by (a) the vote of a majority of the trustees who are neither “interested persons” of Registrant, as defined in Section 2(a)(19) of the 1940 Act, nor parties to the proceeding (“disinterested, non-party trustees”), or (b) an independent legal counsel as expressed in a written opinion; and (iii) Registrant will not advance attorneys’ fees or other expenses incurred by a Covered Person in connection with a civil or criminal action, suit or proceeding unless Registrant receives an undertaking by or on behalf of the Covered Person to repay the advance (unless it is ultimately determined that he is entitled to indemnification) and (a) the Covered Person provides security for his undertaking, or (b) Registrant is insured against losses arising by reason of any lawful advances, or (c) a majority of the disinterested, non-party trustees of Registrant or an independent legal counsel as expressed in a written opinion, determine, based on a review of readily-available facts (as opposed to a full trial-type inquiry), that there is reason to believe that the Covered Person ultimately will be found entitled to indemnification.
Any approval of indemnification pursuant to Article Five does not prevent the recovery from any Covered Person of any amount paid to such Covered Person in accordance with Article Five as indemnification if such Covered Person is subsequently adjudicated by a court of competent jurisdiction not to have acted in good faith in the reasonable belief that such Covered Person’s action was in, or not opposed to, the best interests of Registrant or to have been liable to Registrant or its shareholders by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of such Covered Person’s office.
Article Five also provides that its indemnification provisions are not exclusive. Registrant has also entered into Indemnification Agreements with each of its trustees and its chief compliance officer, a copy of which has been filed as an exhibit to this registration statement, establishing certain procedures with respect to the indemnification described above.
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Registrant’s investment adviser, Columbia Management Advisors, LLC, maintains investment advisory professional liability insurance to insure it, for the benefit of Registrant and its non-interested trustees, against loss arising out of any effort, omission, or breach of any duty owed to Registrant or any series of Registrant by Columbia Management Advisors, LLC.
Item 16. Exhibits
Columbia Asset Allocation Fund, Variable Series (CAAF)
Columbia Federal Securities Fund, Variable Series (CFSF)
Columbia International Fund, Variable Series (CIF)
Columbia Large Cap Growth Fund, Variable Series (CLCGF)
Columbia Large Cap Value Fund, Variable Series (CLCVF)
Columbia Mid Cap Value Fund, Variable Series (CMCVF)
Columbia Money Market Fund, Variable Series (CMMF)
Columbia S&P 500 Index Fund, Variable Series (CSP500F)
Columbia Select Large Cap Growth Fund, Variable Series (CSLCGF)
Columbia Small Cap Value Fund, Variable Series (CSCVF)
Columbia Small Company Growth Fund, Variable Series (CSCGF)
Columbia Strategic Income Fund, Variable Series (CSIF)
Columbia Value and Restructuring Fund, Variable Series (CVRF)
(1) | (a) Second Amended and Restated Agreement and Declaration of Trust dated April 12, 2006. (10) |
(1) | (b) Amendment No. 1 to Second Amended and Restated Agreement and Declaration of Trust dated June 14, 2006. (10) |
(2) | Amended and Restated By-Laws. (8) |
(3) | Not applicable. |
(4) | Form of Agreement and Plan of Reorganization is filed electronically herewith. |
(5) | Not applicable. |
(6) | (a) Investment Advisory Agreement, dated as of November 1, 2003, between the Registrant on behalf of CSCGF, CLCGF, CAAF, CFSF and CMMF and Columbia Management Advisors, LLC (Columbia Management) (5). |
(6) | (b) Amendment to Investment Management Agreement dated October 12, 2004, with respect to CSCGF, CLCGF, CAAF, CFSF and CMMF (6) |
(6) | (c) Management Agreement dated as of May 1, 2006 between the Registrant and Columbia Management, with respect to CSCVF, CSIF, CIF, CLCVF and CMCVF. (9) |
(6) | (d) Management Agreement dated as of May 1, 2006 between the Registrant and Columbia Management, with respect to CSP500F. (9) |
(6) | (e) Investment Advisory Agreement dated as of September 1, 2008 between the Registrant and Columbia Management with respect to CSLCGF and CVRF. (12) |
(7) | Distribution Agreement between the Registrant, the other Massachusetts business trusts party thereto and Columbia Management Distributors, Inc., dated as of May 1, 2006 with Schedule I dated November 23, 2009. (22) |
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(8) | Not Applicable. |
(9) | (a) Amended and Restated Master Custodian Agreement between the Registrant and State Street Bank and Trust Company (“State Street”) dated September 19, 2005 (7). |
(9) | (b) Appendix A to Amended and Restated Master Custodian Agreement between the Registrant and State Street Bank and Trust Company dated September 19, 2005 (7). |
(10) | (a) Rule 12b-1 Inter-Distributor Agreement dated June 1, 2000. (3) |
(10) | (b) Distribution Plan as revised on October 29, 2008. (13) |
(11) | Opinion and consent of counsel as to the legality of the securities being registered is filed electronically herewith. |
(12) | Opinion of Counsel – to be filed by amendment. |
(13) | (a) Amended and Restated Administrative Agreement dated as of September 1, 2008 between the Registrant on behalf of the Funds and Columbia Management Advisors, LLC with Schedule A and Schedule C each dated November 23, 2009. (22) |
(13) | (b)(i) Transfer, Dividend Disbursing and Shareholders’ Servicing Agent Agreement, dated as of May 1, 2006 with Schedule A dated November 23, 2009, by and between the Registrant, the other Massachusetts business trusts party thereto, Columbia Management Services, Inc. and Columbia Management Advisors, LLC. (22) |
(13) | (b)(ii) Amendment No. 1 dated October 1, 2006 to the Transfer, Dividend Disbursing and Shareholders’ Servicing Agent Agreement dated May 1, 2006 by and among the Registrant, the other Massachusetts business trusts party thereto, Columbia Management Services, Inc. and Columbia Management Advisors, LLC. (12) |
(13) | (b)(iii) Amendment dated August 26, 2008 to the Transfer, Dividend Disbursing and Shareholders’ Servicing Agent Agreement dated May 1, 2006 by and among the Registrant, the other Massachusetts business trusts party thereto, Columbia Management Services, Inc. and Columbia Management Advisors, LLC. (12) |
(13) | (b)(iv) Amended and Restated Pricing and Bookkeeping Oversight and Services Agreement between Registrant, the other parties listed on Schedule A and Columbia Management Advisors, LLC dated January 1, 2008 with Schedule A dated November 23, 2009. (22) |
(13) | (c)(i) Amended and Restated Participation Agreement dated April 3, 1998 among the Registrant, Keyport Life Insurance Company and Keyport Financial Services Corp. (1) |
(13) | (c)(ii) Participation Agreement dated as of October 1, 1993 among the Registrant, Keyport Financial Services Corp. and Independence Life Annuity Company. (2) |
(13) | (c)(iii) Participation Agreement dated as of April 15, 1994 among the Registrant, Transamerica Occidental Life Insurance Company, Stein Roe and Charles Schwab & Co., Inc. (2) |
(13) | (c)(iv) Participation Agreement dated as of December 1, 1994 among the Registrant, First Transamerica Life Insurance Company, Stein Roe and Charles Schwab & Co., Inc. (2) |
(13) | (c)(v) Participation Agreement dated May 8, 1998 among the Registrant, Keyport Benefit Life Insurance Company, and Keyport Financial Services Corp. (2) |
(13) | (d) Fee Waiver/Expense Reimbursement Agreement dated November 19, 2008 between the Registrant and Columbia Management. (13) |
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(13) | (e)(i) Amended and Restated Credit Agreement dated as of October 19, 2006 by and among Registrant and certain other trusts party thereto, on behalf of certain of their series listed on Schedule A thereto, Columbia Funds Series Trust, Columbia Funds Master Investment Trust, Columbia Funds Variable Insurance Trust I and Banc of America Funds Trust, on behalf of certain of their series listed on Schedule B thereto, Lloyds TSB Bank plc, Société Générale, New York Branch, Banco Bilbao Vizcaya Argentaria S.A., State Street Bank and Trust Company, individually, State Street Bank and Trust Company, as administrative agent for each of the banks party thereto, and State Street Bank and Trust Company, as operations agent for each of the banks party thereto. (11) |
(13) | (e)(ii) Amendment Agreement No. 1 and Instrument of Adherence dated as of October 18, 2007 by and among Columbia Funds Series Trust, Columbia Funds Master Investment Trust, LLC, Columbia Funds Variable Insurance Trust I, Banc of America Funds Trust, Excelsior Funds, Inc., Excelsior Funds Trust and Excelsior Tax-Exempt Funds, Inc., Registrant, Columbia Funds Institutional Trust and Columbia Funds Series Trust I, the banks party thereto, State Street Bank and Trust Company, as operations agent for itself and the banks party thereto, and State Street Bank and Trust Company, as administrative agent for itself and the banks party thereto. (11) |
(13) | (e)(iii) Amendment Agreement No. 2 dated as of February 28, 2008 by and among Columbia Funds Series Trust, Columbia Funds Master Investment Trust, LLC, Columbia Funds Variable Insurance Trust I, Banc of America Funds Trust, Excelsior Funds, Inc., Excelsior Funds Trust, Excelsior Tax-Exempt Funds, Inc., Registrant, Columbia Funds Institutional Trust and Columbia Funds Series Trust I, the banks party thereto, State Street Bank and Trust Company, as operations agent for itself and the banks party thereto, and State Street Bank and Trust Company, as administrative agent for itself and the banks party thereto. (11) |
(13) | (e)(iv) Amendment Agreement No. 3 dated as of March 31, 2008 by and among Columbia Funds Series Trust, Columbia Funds Master Investment Trust, LLC, Columbia Funds Variable Insurance Trust I, Banc of America Funds Trust, Excelsior Funds, Inc., Excelsior Funds Trust, Excelsior Tax-Exempt Funds, Inc., Registrant, Columbia Funds Institutional Trust and Columbia Funds Series Trust I, the banks party thereto, State Street Bank and Trust Company, as operations agent for itself and the banks party thereto, and State Street Bank and Trust Company, as administrative agent for itself and the banks party thereto. (11) |
(13) | (f)(i) Letter agreement dated as of September 19, 2005, by and among Nations Funds Trust, Nations Master Investment Trust and Nations Separate Account Trust, each on behalf of certain of its series, and State Street Bank and Trust Company, individually, as acknowledged by State Street Bank and Trust Company, as custodian. (11) |
(13) | (f)(ii) Letter agreement dated as of February 15, 2006, by and among Columbia Funds Series Trust, Columbia Funds Master Investment Trust and Nations Separate Account Trust, each on behalf of certain of its series, and State Street Bank and Trust Company. (11) |
(13) | (f)(iii) Letter agreement dated as of June 7, 2006, by and among Columbia Funds Series Trust, Columbia Funds Master Investment Trust, Columbia Funds Variable Insurance Trust I and Banc of America Funds Trust, each on behalf of certain of its series, and State Street Bank and Trust Company. (11) |
(13) | (f)(iv) Letter agreement dated as of September 15, 2006, by and among Columbia Funds Series Trust, Columbia Funds Master Investment Trust, Columbia Funds Variable Insurance Trust I and Banc of America Funds Trust, each on behalf of certain of its series, and State Street Bank and Trust Company. (11) |
(13) | (f)(v) Letter agreement dated as of October 19, 2006, by and among the Registrant, Columbia Funds Series Trust, Columbia Funds Master Investment Trust, Columbia Funds Variable Insurance Trust I, Banc of America Funds Trust, Columbia Funds Series Trust I, and Columbia Funds Institutional Trust, each on behalf of certain of its series, and State Street Bank and Trust Company, individually, as acknowledged by State Street Bank and Trust Company, as custodian. (11) |
(13) | (f)(vi) Letter agreement dated as of September 17, 2007, by and among Registrant, Columbia Funds Institutional Trust, Columbia Funds Series Trust I, Columbia Funds Series Trust, Columbia Funds Master Investment Trust, LLC, Columbia Funds Variable Insurance Trust I, Banc of America Funds Trust, Excelsior Funds, Inc., Excelsior Funds Trust and Excelsior Tax-Exempt Funds, Inc., each on behalf of certain of its series, and State Street Bank and Trust Company, individually, as acknowledged by State Street Bank and Trust Company, as custodian. (11) |
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(13) | (f)(vii) Letter agreement dated as of October 18, 2007, by and among Registrant, Columbia Funds Institutional Trust and Columbia Funds Variable Insurance Trust, each on behalf of certain of its series, as set forth on Appendix I to the Sixth Amendment Agreement, Columbia Fund Series Trust, Columbia Funds Master Investment Trust, LLC, Columbia Funds Variable Insurance Trust I, Banc of America Funds Trust, Excelsior Funds, Inc., Excelsior Funds Trust and Excelsior Tax-Exempt Funds, Inc., each on behalf of certain of its series, as set forth on Appendix I thereto, and State Street Bank and Trust Company, individually, as acknowledged by State Street Bank and Trust Company, as custodian. (11) |
(13) | (f)(viii) Letter agreement dated as of February 28, 2008, by and among the Registrant, Columbia Funds Series Trust, Columbia Funds Master Investment Trust, LLC, Columbia Funds Variable Insurance Trust I, Columbia Funds Series Trust I, Columbia Funds Institutional Trust, Banc of America Funds Trust, Excelsior Funds, Inc., Excelsior Funds Trust and Excelsior Tax-Exempt Funds, Inc., each on behalf of certain of its series, and State Street Bank and Trust Company, individually, as acknowledged by State Street Bank and Trust Company, as custodian. (11) |
(13) | (f)(ix) Letter agreement dated as of March 31, 2008, by and among the Registrant, Columbia Funds Series Trust, Columbia Funds Master Investment Trust, LLC, Columbia Funds Variable Insurance Trust I, Columbia Funds Series Trust I, Columbia Funds Institutional Trust, Banc of America Funds Trust, Excelsior Funds, Inc., Excelsior Funds Trust and Excelsior Tax-Exempt Funds, Inc., each on behalf of certain of its series, and State Street Bank and Trust Company, individually, as acknowledged by State Street Bank and Trust Company, as custodian. (11) |
(13) | (g)(i) Financial Reporting Services Agreement dated December 15, 2006 between Registrant, Columbia Management Advisors, LLC and State Street Bank and Trust Company with Schedule A dated May 5, 2008. (12) |
(13) | (g)(ii) Amendment to Financial Reporting Services Agreement between Registrant, the other parties listed on Schedule A, Columbia Management Advisors, LLC and State Street Bank and Trust Company dated as of June 29, 2007 with Schedule A dated as of June 29, 2007. (22) |
(13) | (h)(i) Accounting Services Agreement between Registrant, Columbia Management Advisors, LLC and State Street Bank and Trust Company dated as of December 15, 2006 with Schedule A dated May 5, 2008. (12) |
(13) | (h)(ii) Amendment to Accounting Services Agreement between Registrant, the other parties listed on Schedule A, Columbia Management Advisors, LLC and State Street Bank and Trust Company dated as of June 29, 2007 with Schedule A dated as of June 29, 2007. (22) |
(13) | (i) Amendment Agreement No. 4, dated October 16, 2008, to the Limited Waiver and Limited Consent, by and among the Registrant, Columbia Variable Insurance Trust, Columbia Funds Institutional Trust, Columbia Funds Series Trust, Columbia Funds Master Investment Trust, LCC, Columbia Funds Variable Insurance Trust I and Banc of America Funds Trust, on behalf of each of their respective series listed on Schedule 2 and State Street Bank and Trust Company, individually, as operations agent and as administrative agent. (13) |
(13) | (j) Amendment Agreement No. 5 and Limited Consent, dated as of June 1, 2009, by and among the Registrant, Columbia Funds Series Trust I, Columbia Funds Institutional Trust, Columbia Funds Series Trust, Columbia Funds Master Investment Trust, LLC, Columbia Funds Variable Insurance Trust I, Banc of America Funds Trust, each on behalf of each of its respective series listed on Schedule 2 thereto and State Street Bank and Trust Company, individually, as operations agent and as administrative agent. (22) |
(13) | (k) Amendment Agreement No. 6, dated as of October 15, 2009, by and among the Registrant, Columbia Funds Series Trust I, Columbia Funds Institutional Trust, Columbia Funds Series Trust, Columbia Funds Master Investment Trust, LLC, Columbia Funds Variable Insurance Trust I, Columbia Funds Series Trust II, each on behalf of each of its respective series listed on Schedule 2 thereto and State Street Bank and Trust Company, individually, as operations agent and as administrative agent. (22) |
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(13) | (l)(i) Code of Ethics, of Columbia Management Advisors, LLC and Columbia Management Distributors, Inc. dated September 15, 2009, effective January 1, 2009. (22) |
(13) | (l)(ii) Columbia Funds Family Code of Ethics, as revised September, 2009. (22) |
(14) | (a) Consent of Independent Registered Public Accounting Firm (Ernst & Young LLP) is filed electronically herewith. |
(14) | (b) Consent of Independent Registered Public Accounting Firm (PricewaterhouseCoopers LLP) is filed electronically herewith. |
(15) | Not applicable. |
(16) | Trustees Power of Attorney to sign Amendments to this Registration Statement is filed electronically herewith. |
(17) | Not applicable. |
1. Incorporated by Reference to Post-Effective Amendment No. 13 to the Registration Statement of the Registrant on Form N-1A, filed April 1998.
2. Incorporated by Reference to Post-Effective Amendment No. 14 to the Registration Statement of the Registrant on Form N-1A, filed May 1998.
3. Incorporated by Reference to Post-Effective Amendment No. 19 to the Registration Statement of the Registrant on Form N-1A, filed on or about June 1, 2000.
4. Incorporated by Reference to Post-Effective Amendment No. 22 to the Registration Statement of the Registrant on Form N-1A, filed April 2002.
5. Incorporated by Reference to Post-Effective Amendment No. 24 to the Registration Statement of the Registrant on Form N-1A, filed April 23, 2004.
6. Incorporated by Reference to Post-Effective Amendment No. 26 to the Registration Statement of the Registrant on Form N-1A, filed on or about May 1, 2005.
7. Incorporated by Reference to Post-Effective Amendment No. 27 to the Registration Statement of the Registrant on Form N-1A, filed on or about January 25, 2006.
8. Incorporated by Reference to Post-Effective Amendment No. 29 to the Registration Statement of the Registrant on Form N-1A, filed on or about April 10, 2006.
9. Incorporated by Reference to Post-Effective Amendment No. 30 to the Registration Statement of the Registrant on Form N-1A, filed on or about April 27, 2007.
10. Incorporated by Reference to Post-Effective Amendment No. 31 to the Registration Statement of the Registrant on Form N-1A, filed on February 29, 2008.
11. Incorporated by Reference to the Post-Effective Amendment No. 32 to the Registration Statement of the Registrant on
Form N-1A, filed on April 29, 2008.
12. Incorporated by Reference to the Post-Effective Amendment No. 34 to the Registration Statement of the Registrant on
Form N-1A, filed on August 29, 2008.
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13. Incorporated by Reference to the Post-Effective Amendment No. 35 to the Registration Statement of the Registrant on Form N-1A, filed on April 30, 2009.
14. Incorporated by Reference to the Post-Effective Amendment No. 37 to the Registration Statement of the Registrant on Form N-1A, filed on April 29, 2010.
15. Incorporated by reference to Post-Effective Amendment No. 88 to the Registration Statement of Columbia Funds Series Trust I on Form N-1A (File Nos. 2-99356 and 811-04367), filed with the Commission on or about July 29, 2009.
16. Incorporated by reference to Post-Effective Amendment No. 90 to the Registration Statement of Columbia Funds Series Trust I on Form N-1A (File Nos. 2-99356 and 811-04367), filed with the Commission on or about July 31, 2009.
17. Incorporated by reference to Post-Effective Amendment No. 91 to the Registration Statement of Columbia Funds Series Trust I on Form N-1A (File Nos. 2-99356 and 811-04367), filed with the Commission on or about August 28, 2009.
18. Incorporated by reference to Post-Effective Amendment No. 93 to the Registration Statement of Columbia Funds Series Trust I on Form N-1A (File Nos. 2-99356 and 811-04367), filed with the Commission on or about October 9, 2009.
19. Incorporated by reference to Post-Effective Amendment No. 94 to the Registration Statement of Columbia Funds Series Trust I on Form N-1A (File Nos. 2-99356 and 811-04367), filed with the Commission on or about October 28, 2009.
20. Incorporated by reference to Post-Effective Amendment No. 95 to the Registration Statement of Columbia Funds Series Trust I on Form N-1A (File Nos. 2-99356 and 811-04367), filed with the Commission on or about November 20, 2009.
21. Incorporated by reference to Post-Effective Amendment No. 97 to the Registration Statement of Columbia Funds Series Trust I on Form N-1A (File Nos. 2-99356 and 811-04367), filed with the Commission on or about December 2, 2009.
22. Incorporated by reference to Post-Effective Amendment No. 98 to the Registration Statement of Columbia Funds Series Trust I on Form N-1A (File Nos. 2-99356 and 811-04367), filed with the Commission on or about December 29, 2009.
Item 17. Undertakings
(1) | The undersigned registrant agrees that prior to any public reoffering of the securities registered through the use of a prospectus which is a part of this registration statement by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c) of the Securities Act, the reoffering prospectus will contain the information called for by the applicable registration form for reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form. |
(2) | The undersigned registrant agrees that every prospectus that is filed under paragraph (1) above will be filed as a part of an amendment to the registration statement and will not be used until the amendment is effective, and that, in determining any liability under the 1933 Act, each post-effective amendment shall be deemed to be a new registration statement for the securities offered therein, and the offering of the securities at that time shall be deemed to be the initial bona fide offering of them. |
(3) | The Registrant undertakes to file the opinion of counsel supporting the tax consequences of the proposed reorganization required by Item 16(12) through an amendment to this Registration Statement no later than a reasonable time after the closing of the transaction. |
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SIGNATURES
As required by the Securities Act of 1933, this Registration Statement has been signed on behalf of the Registrant by the undersigned, duly authorized, in the City of Minneapolis, and The State of Minnesota on the 5th day of November, 2010.
COLUMBIA FUNDS VARIABLE INSURANCE TRUST | ||
By: | /s/ J. Kevin Connaughton | |
Name: Title: | J. Kevin Connaughton President |
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated:
SIGNATURES | TITLE | DATE | ||
/S/ J. KEVIN CONNAUGHTON J. Kevin Connaughton | President (Principal Executive Officer) | November 5, 2010 | ||
/S/ MICHAEL G. CLARKE Michael G. Clarke | Chief Financial Officer (Principal Financial Officer) | November 5, 2010 | ||
/S/ JOSEPH F. DIMARIA Joseph F. DiMaria | Chief Accounting Officer (Principal Accounting Officer) | November 5, 2010 | ||
/S/ JOHN D. COLLINS* John D. Collins | Trustee | November 5, 2010 | ||
/S/ RODMAN L. DRAKE* Rodman L. Drake | Trustee | November 5, 2010 | ||
/S/ DOUGLAS A. HACKER* Douglas A. Hacker | Trustee | November 5, 2010 | ||
/S/ JANET LANGFORD KELLY* Janet Langford Kelly | Trustee | November 5, 2010 | ||
/S/ WILLIAM E. MAYER* William E. Mayer | Trustee | November 5, 2010 | ||
/S/ CHARLES R. NELSON* Charles R. Nelson | Trustee | November 5, 2010 | ||
/S/ JOHN J. NEUHAUSER* John J. Neuhauser | Trustee | November 5, 2010 |
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/S/ JONATHAN PIEL* Jonathan Piel | Trustee | November 5, 2010 | ||
/S/ PATRICK J. SIMPSON* Patrick J. Simpson | Trustee | November 5, 2010 | ||
/S/ ANNE-LEE VERVILLE* Anne-Lee Verville | Trustee | November 5, 2010 | ||
/S/ MICHAEL A. JONES* Michael A. Jones | Trustee | November 5, 2010 |
*By: | /S/ RYAN C. LARRENAGA | |
Ryan C. Larrenaga** Attorney-in-Fact November 5, 2010 |
** Executed by Ryan C. Larrenaga on behalf of each of the Trustees pursuant to a Power of Attorney filed herewith.
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Exhibit Index
Exhibit No. | Description | |
(4) | Form of Agreement and Plan of Reorganization | |
(11) | Opinion and consent of counsel as to the legality of the securities being registered | |
(14)(a) | Consent of Independent Registered Public Accounting Firm (Ernst & Young LLP) | |
(14)(b) | Consent of Independent Registered Public Accounting Firm (PricewaterhouseCoopers LLP) | |
(16) | Trustees Power of Attorney to sign Amendments to this Registration Statement |