UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14C INFORMATION
INFORMATION STATEMENT PURSUANT TO SECTION 14 (c) OF THE SECURITIES
EXCHANGE ACT OF 1934
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THE MAINSTAY FUNDS
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THE MAINSTAY FUNDS
51 MADISON AVENUE
NEW YORK, NEW YORK 10010
October 22, 2008
Dear Shareholders of the MainStay Tax Free Bond Fund (the "Fund"):
Effective September 29, 2008, the Board of Trustees of The MainStay Funds
(the "Trust") approved Standish Mellon Asset Management Company LLC ("Standish")
to replace MacKay Shields LLC as the subadvisor to the Fund.
New York Life Investment Management LLC ("NYLIM") will remain the Fund's
investment manager and will oversee Standish. Under the supervision of NYLIM,
Standish will be responsible for the portfolio management of the Fund, including
making the specific decisions about buying, selling and holding securities.
This package contains more information about Standish and the Fund. Please
review this information and call us toll-free at 800-MAINSTAY (624-6782) if you
have any questions. Clients of investment advisers may also contact their
investment adviser with any questions. We are not asking you for a proxy and you
are requested not to send us a proxy.
Thank you for your continued investment in the Fund.
Sincerely,
(-s- Stephen P. Fisher)
Stephen P. Fisher
President
The MainStay Funds
IMPORTANT INFORMATION
FOR THE SHAREHOLDERS
OF THE
MAINSTAY TAX FREE BOND FUND
This document is an Information Statement and is being furnished to
shareholders of the MainStay Tax Free Bond Fund (the "Fund"), a series of The
MainStay Funds (the "Trust"), under the terms of an exemptive order (the
"Order") issued by the Securities and Exchange Commission. New York Life
Investment Management LLC ("NYLIM") serves as the investment manager for the
Fund.
The Order permits NYLIM, on behalf of a Fund and subject to the approval of
the Board of Trustees (the "Board"), to hire or terminate unaffiliated
subadvisors and to modify any existing or future subadvisory agreement with
unaffiliated subadvisors without shareholder approval. This authority is subject
to certain conditions. Under the Order, if the Fund retains a new unaffiliated
subadvisor, the Fund must provide shareholders with certain information about
the new subadvisor and the subadvisory agreement within 90 days of the hiring of
the new subadvisor.
The Board reviews all advisory and subadvisory agreements annually.
This Information Statement is being mailed on or about October 22, 2008 to
the shareholders of the Fund of record as of September 22, 2008 (the "Record
Date"). Although the Fund will bear the expenses incurred in connection with
preparing this Information Statement, NYLIM indirectly will bear these expenses
through a management fee waiver or expense reimbursement under the terms of the
Fund's contractual expense limitation arrangements. However, NYLIM may be able
to recoup the amount of any such fee waiver or expense reimbursement from the
Fund under the Fund's contractual expense limitation arrangements.
As of the Record Date, the number of Fund shares issued and outstanding
were as follows: Investor Class: 2,648,803; Class A: 16,330,706; Class B:
2,877,648; and Class C: 906,248. Information on shareholders who owned
beneficially more than 5% of each class of shares of the Fund as of the Record
Date is set forth in Appendix A. To the knowledge of NYLIM, the executive
officers and Trustees of the Trust as a group owned less than 1% of the
outstanding shares of the Fund as of the Record Date.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
APPOINTMENT OF STANDISH MELLON ASSET
MANAGEMENT COMPANY LLC
AS SUBADVISOR TO THE FUND
On September 25, 2008, the Board approved NYLIM's recommendation to replace
MacKay Shields LLC ("MacKay Shields") with Standish Mellon Asset Management
Company LLC ("Standish") as the Fund's Subadvisor, effective September 29, 2008.
As the municipal bond markets have become more specialized, NYLIM concluded
that it had become more difficult for MacKay Shields to effectively manage the
Fund. Based on ongoing discussions with the Board, NYLIM also acknowledged that
the investment performance of the Fund has not met the Board's expectations in
recent years, as evidenced in part by the Fund's historical investment
performance relative to its peers and benchmark (the Lehman Brothers Municipal
Bond Index). NYLIM's recommendation to engage Standish as the Fund's new
subadvisor was based primarily on Standish's ability to provide enhanced
services to the Fund with the goal of improving the Fund's long-term investment
performance. NYLIM believes that Standish's historical commitment to the
municipal securities asset class and strong in-house credit research capability
will enhance the Fund's ability to monitor a broad range of potential municipal
bond investments and the credit quality of bond insurers, which is particularly
important in the current municipal bond market. NYLIM also noted the
comparatively strong investment performance of similar portfolios managed by
Standish as compared to the relative investment performance of the Fund over
various time periods. In recommending Board approval of Standish to serve as the
Fund's subadvisor, NYLIM believed that the Fund's shareholders would benefit
from Standish's expertise, research capabilities and potential for stronger
relative investment performance.
Prior to recommending that Standish replace MacKay Shields as the Fund's
Subadvisor, NYLIM undertook a multistep analysis of potential new subadvisors
for the Fund. This analysis included a quantitative examination of investment
performance track records and consistency of investment performance, risk
controls and tracking error relative to relevant benchmark indices. Leading
subadvisor candidates were then reviewed based on several qualitative factors,
including strength and experience of portfolio management teams, scale of
research capabilities, and quality of investment and operational risk controls.
Following this analysis and subsequent in-person due diligence meetings, NYLIM
determined to recommend that the Board approve Standish to serve as the Fund's
new subadvisor.
In connection with its consideration of NYLIM's recommendation, the members
of the Board, including members of its Contracts Committee and Investment
Committee, undertook a review of Standish's
2
qualifications to serve as the Fund's subadvisor. On behalf of the Board,
certain members of the Board's Contracts and Investment Committees conducted an
in-person meeting with Standish representatives at Standish's headquarters in
Boston, Massachusetts. The Contracts Committee considered factors relevant to
the proposed new subadvisory relationship at a special meeting held on August
19, 2008, and the Contracts and Investment Committees both reviewed various
matters relating to the proposed new subadvisory relationship at their regular
meetings on September 24, 2008. Following these meetings, the Contracts
Committee and Investment Committee of the Board each recommended Board approval
of the new subadvisory agreement with Standish.
In reaching its decision to approve the subadvisory agreement, the Board
considered information furnished to the Board from NYLIM and Standish. The Board
also requested and received responses from Standish to a comprehensive list of
questions encompassing a variety of topics prepared on behalf of the Board by
independent legal counsel to the Board.
In determining to approve the new subadvisory agreement, the members of the
Board reviewed and evaluated all of this information and factors they believed
to be relevant and appropriate in light of legal advice furnished to them by
independent legal counsel and through the exercise of their own business
judgment. The broad factors considered by the Board are discussed in greater
detail below, and included, among other things: (i) the nature, extent, and
quality of the services to be provided to the Fund by Standish; (ii) the
investment performance of the Fund and the historical investment performance of
similar portfolios managed by Standish; (iii) the costs of the services to be
provided by Standish from its relationship with the Fund; (iv) the extent to
which economies of scale may be realized as the Fund grows, and the extent to
which economies of scale may benefit Fund investors; and (v) the reasonableness
of the Fund's management and subadvisory fee levels and overall total ordinary
operating expenses.
While the members of the Board may have weighed certain factors
differently, the Board's decision to approve the subadvisory agreement was based
on a comprehensive consideration of all the information provided to the Board in
connection with its review of Standish. The Board also considered that
shareholders of the Fund approved the ability of NYLIM to act as a "manager of
managers," which allows the Board to engage certain new subadvisors for the Fund
without the approval of Fund shareholders. A more detailed discussion of the
factors that figured prominently in the Board's decision to approve the new
subadvisory agreement is provided below.
3
NATURE, EXTENT AND QUALITY OF SERVICES TO BE PROVIDED BY STANDISH
In considering the approval of the agreement, the Board examined the
nature, extent and quality of the services that Standish proposed to provide to
the Fund. The Board evaluated Standish's experience in serving as manager of
other similar portfolios. In this regard, the Board took note of the experience
of the Fund's portfolio managers, the number of accounts managed by the
portfolio managers and Standish's method for compensating portfolio managers.
The Board also considered the experience of senior personnel at Standish, as
well as Standish's reputation and financial condition. The Board also observed
that Standish has a long history of managing assets across all sectors of the
municipal bond market and yield curve. The Board noted that Standish manages
approximately $200 billion in total assets under management as of June 30, 2008
comprised entirely of fixed income investments. Based on these considerations,
the Board concluded, within the context of its overall determinations regarding
the subadvisory agreement, that the Fund is likely to benefit from the nature,
extent and quality of these services as a result of Standish's experience,
personnel, operations and resources.
INVESTMENT PERFORMANCE
In evaluating investment performance, the Board considered the Fund's
historical investment performance results in light of the Fund's investment
objective, strategies and risks, as disclosed in the Fund's prospectus. The
Board also considered information provided by NYLIM showing the investment
performance of the Fund as compared to similar mutual funds managed by other
investment advisers. The Board compared the Fund's historical investment
performance to the investment performance of similar portfolios managed by
Standish, as well as the strength of Standish's resources (including research
capabilities) that may result in stronger long-term investment performance for
the Fund over time. Based on these considerations, the Board concluded, within
the context of its overall determinations regarding the subadvisory agreement,
that the selection of Standish as subadvisor to the Fund is likely to benefit
the Fund's long-term investment performance.
COSTS OF THE SERVICES PROVIDED BY STANDISH
The Board considered the estimated costs of the services to be provided by
Standish under the subadvisory agreement. In evaluating these estimated costs,
the Board considered, among other things, Standish's investments in personnel,
systems, equipment and other resources necessary to manage the Fund. The Board
acknowledged that Standish must be in a position to pay and retain experienced
professional personnel to provide services to the Fund, and that Standish's
ability to maintain a strong financial position is important in order for
Standish to provide high-quality ongoing services to the Fund and its
shareholders. The Board
4
did not consider estimated profitability information from Standish's
relationship with the Fund, since Standish had not commenced its service as the
Fund's subadvisor at the time the Board considered its approval of the
subadvisory agreement. The Board will request information concerning the
profitability of the Fund to Standish the next time that the Board considers the
approval of the subadvisory agreement. The Board did consider, however,
representations from NYLIM and Standish that the fees to be paid to Standish
under the subadvisory agreement are the product of arm's length negotiations
between NYLIM and Standish.
The Board also considered certain fall-out benefits that may be realized by
Standish due to its relationship with the Fund. The Board requested and received
information from Standish and NYLIM concerning other business relationships
between Standish and its affiliates, on the one hand, and NYLIM and its
affiliates, on the other. The Board requested and received assurances that these
other business relationships did not impact NYLIM's recommendation for Standish
to serve as the Fund's subadvisor, and that neither NYLIM nor its affiliates is
expected to benefit in its other business relationships due to Standish's
engagement as the Fund's subadvisor.
After evaluating the information presented to the Board, the Board
concluded, within the context of its overall determinations regarding the
subadvisory agreement, that any profits realized by Standish due to its
relationship with the Fund will be the result of arm's length negotiations
between NYLIM and Standish, and are based on subadvisory fees paid to Standish
by NYLIM, not the Fund.
EXTENT TO WHICH ECONOMIES OF SCALE MAY BE REALIZED AS THE FUND GROWS
The Board also considered whether the Fund's expense structure permitted
economies of scale to be shared with Fund investors. The Board considered the
extent to which the Fund benefits from economies of scale through expense
waivers and reimbursements. The Board also observed that NYLIM historically has
subsidized the Fund's overall expenses through the operation of contractual
expense limitations that may be lifted only with prior approval of the Board.
Based on this information, the Board concluded, within the context of its
overall determinations regarding the subadvisory agreement, that the Fund's
expense structure appropriately reflects economies of scale for the benefit of
Fund investors. The Board noted, however, that it would continue to evaluate the
reasonableness of the Fund's expense structure as the Fund continues to grow
over time.
5
MANAGEMENT AND SUBADVISORY FEES AND TOTAL ORDINARY OPERATING EXPENSES
The Board evaluated the reasonableness of the fees to be paid under the
existing management and new subadvisory agreement, and the Fund's total ordinary
operating expenses. The Board considered that the fees to be paid to Standish
under the subadvisory agreement are paid by NYLIM, not the Fund, and will result
in no increase in the Fund's expenses. While acknowledging that NYLIM will
retain a greater portion of its management fee under the new subadvisory
agreement with Standish as compared to the old subadvisory agreement with MacKay
Shields, the Board considered that MacKay Shields is an affiliate of NYLIM, and
that the net fees retained by NYLIM and its affiliates under the new subadvisory
agreement with Standish therefore would be lower than the net fees retained by
NYLIM and its affiliates under the old subadvisory agreement with MacKay
Shields. The Board considered information provided by Standish concerning the
fees it charges to other investment advisory clients, including institutional
separate accounts and other funds with similar investment objectives as the
Fund.
In assessing the reasonableness of the Fund's management and subadvisory
fees and total ordinary operating expenses, the Board took note of fee and
expense arrangements that had been negotiated by the Board with NYLIM in recent
years and observed that NYLIM has subsidized the total ordinary operating
expenses of Fund share classes through the imposition of expense limitation
arrangements that may be modified only with the prior approval of the Board.
Based on these considerations, the Board concluded that the Fund's
management and subadvisory fees and total ordinary operating expenses were
within a range that is competitive and, within the context of the Board's
overall conclusions regarding the subadvisory agreement, supports the conclusion
that these fees to be paid under the subadvisory agreement are reasonable.
CONCLUSION
On the basis of the information provided to it and its evaluation thereof,
the Board, which consisted entirely of Independent Trustees, unanimously
approved the new subadvisory agreement with Standish.
STANDISH MELLON ASSET MANAGEMENT COMPANY LLC
Standish is a limited liability company located at BNY Mellon Center, 201
Washington Street, Boston, Massachusetts 02108. As of June 30, 2008, Standish
managed approximately $200 billion in assets. Standish is a wholly-owned
subsidiary of The Bank of New York Mellon Corporation, which is a publicly owned
and traded company. The Bank of New York
6
Mellon Corporation is a global financial services company operating in 37
countries and serving more than 100 markets.
No officers or Trustees of the Trust are officers, employees, directors,
general partners or shareholders of Standish. In addition, since November 1,
2007, the beginning of the Trust's last fiscal year, no Trustee of the Trust has
had, directly or indirectly, a material interest in any material transaction or
material proposed transaction to which Standish, any of its parents or
subsidiaries or any subsidiaries of a parent of any such entities was or is to
be a party.
The names and principal occupations of the principal executive officers of
Standish, all located at BNY Mellon Center, 201 Washington Street, Boston,
Massachusetts 02108 are listed below:
<Table>
<Caption>
NAME PRINCIPAL OCCUPATION/TITLE
- ---- --------------------------
Mitchell Harris Chief Executive Officer
Desmond Mac Intyre President
Edward Ladd Chairman
</Table>
Day-to-day management of the Fund is the responsibility of the following
co-portfolio managers:
Christine Todd, CFA Ms. Todd became a manager of the Tax Free Bond
Fund in September 2008. At Standish, Ms. Todd is Managing Director, Tax
Exempt Fixed Income and Insurance Strategies. She manages tax-sensitive
fixed income portfolios for mutual funds, larger institutional, insurance,
asbestos trust and high net worth clients. She joined Standish in 1995 from
Gannett, Welsh & Kotler, where she was vice president responsible for
municipal bond research and trading. Ms. Todd has an M.B.A. from Boston
University and a B.A. from Georgetown University. Ms. Todd is a Trustee for
the Dedham Institution for Savings and a member of its Investment
Committee. She is a member of the Boston Security Analysts Society and the
National Federation of Municipal Analysts.
Michael Faloon, CFA, FRM Mr. Faloon became a manager of the Tax Free
Bond Fund in September 2008. At Standish, Mr. Faloon is the Quantitative
Analyst and Portfolio Manager for Tax Sensitive Strategies, responsible for
quantitative research and assessing relative value of option imbedded
securities. He also performs scenario analysis and evaluates index
composition versus portfolio positioning. He joined Standish in 1999 from
Fidelity Investments. Mr. Faloon is certified by the Global Association of
Risk Professionals. Mr. Faloon has an M.S.F. from Northeastern University
and a B.S. from the University of Maine.
7
Standish acts as adviser/subadvisor with respect to the following funds
that each have a similar investment objective as the Fund.
<Table>
<Caption>
EFFECTIVE
FUND NAME ASSETS AS OF 6/30/08 SUBADVISORY FEE
- --------- -------------------- ---------------
UBS PACE Municipal Fixed
Income.................. $341,234,997 0.15%
Standish Mellon
Intermediate Tax
Exempt.................. $152,731,584 0.40%
SEI Intermediate-Term
Municipal Fund.......... $659,752,851 0.12%
SEI Massachusetts
Municipal Bond Fund..... $148,487,096 0.12%
SEI New York Municipal
Bond Fund............... $ 45,577,225 0.12%
SEI Pennsylvania Municipal
Bond Fund............... $104,097,483 0.12%
Russell Tax Exempt Bond
Fund*................... $204,954,134 0.18%
</Table>
- --------
* The fund is sub-advised with a 50/50 split between Standish and Delaware
Management Company.
INVESTMENT OBJECTIVES AND PRINCIPAL INVESTMENT STRATEGY OF THE FUND
The Fund's investment objective is to provide a high level of current
income free from regular federal income tax, consistent with the preservation of
capital. The Fund normally invests in U.S. tax-exempt securities of any maturity
that are at the time of purchase, rated in one of the top four categories (or
short-term tax exempt securities rated in one of the top three categories) by
Moody's Investors Service Inc. or Standard & Poor's. Not more than 20% of the
Fund's net assets may be invested in unrated tax-exempt securities that are
deemed by the Fund's subadvisor to be of comparable quality.
The Fund normally invests at least 80% of its net assets in "municipal
bonds" issued by, or on behalf of, the
- states;
- District of Columbia;
- territories, commonwealths and possession of the United States and their
political subdivisions; and
- agencies, authorities and instrumentalities of these entities.
8
The two main types of municipal bonds are general obligation and revenue
bonds. Issuers of general obligation bonds include states, counties, cities,
towns and regional districts. Payments of principal and interest are secured by
the issuer's pledge of its full faith, credit and taxing powers. Revenue bonds
are issued to finance capital projects. They are repaid from revenues raised by
the project that the bonds finance. Many bonds also provide additional security.
The Fund may not invest more than 20% of its net assets in tax-exempt
securities subject to the federal alternative minimum tax for individual
shareholders.
PRINCIPAL RISKS
The values of debt securities fluctuate depending upon various factors,
including:
- interest rates,
- issuer creditworthiness,
- market conditions, and
- maturities.
Consistent with its principal investment strategies, the Fund's investments
include derivatives, such as call and put options, futures contracts on debt
securities or securities indices and options on futures contracts. The Fund may
use derivatives to try to enhance returns or reduce the risk of loss of (hedge)
certain of its holdings. Regardless of the purpose, the Fund may lose money
using derivatives. The use of derivatives may increase the volatility of the
Fund's net asset value and may involve a small investment of cash relative to
the magnitude of risk assumed.
Industrial development, pollution control, and revenue bonds are generally
not secured by the taxing power of the municipality but are secured by revenues
paid by the industrial user. This means that if the industrial user cannot repay
principal and/or interest on the bonds, the Fund may lose money.
TERMS OF THE AGREEMENT
The Agreement will continue in force until September 29, 2010, unless
sooner terminated as provided in the Agreement. Thereafter, the Agreement will
continue in force from year to year so long as it is specifically approved at
least annually in the manner required by the Investment Company Act of 1940
("1940 Act").
The Agreement will automatically terminate in the event of its assignment
(as defined in the 1940 Act) or upon the termination of the Fund's management
agreement with NYLIM and may be terminated by
9
NYLIM or Standish at any time without payment of any penalty on sixty days'
prior written notice to the other party. The Agreement may also be terminated at
any time without payment of any penalty by action of the Board or by a vote of a
majority of the outstanding voting securities of the Fund (as defined by the
1940 Act) on sixty days' prior written notice to Standish.
MANAGEMENT AND SUBADVISORY FEES
The management fee for the Fund is an annual percentage of the Fund's
average daily net assets. Effective August 1, 2008, NYLIM has contractually
agreed to waive a portion of its management fee to 0.45% on assets of up to $500
million, 0.425% on assets from $500 million to $1 billion and 0.40% on assets in
excess of $1 billion. Without this waiver, the actual management fee would be
0.60% on assets up to $500 million, 0.575% on assets from $500 million to $1
billion and 0.55% on assets in excess of $1 billion. This waiver may be
discontinued at any time without notice.
Under the Agreement, NYLIM pays Standish a subadvisory fee, computed daily
and payable monthly, at an annual rate of 0.25% on assets up to $50 million and
0.15% on assets in excess of $50 million. As discussed above, the annual
subadvisory fees paid to Standish under the Agreement are lower than those paid
to MacKay Shields.
For the fiscal year ended October 31, 2007, the aggregate subadvisory fees
paid by NYLIM to MacKay Shields for services rendered to the Fund were $523,358.
No fees were paid to Standish during the Fund's last fiscal year.
If Standish had served as subadvisor during the fiscal year ended October
31, 2007, the aggregate subadvisory fees that would have been paid under the
terms of the Agreement would have been $413,022.
All fees due to Standish under the Agreement are paid by NYLIM and are not
additional expenses to the Fund.
THERE WILL BE NO INCREASE IN ADVISORY FEES PAID BY THE FUND TO NYLIM IN
CONNECTION WITH THE REPLACEMENT OF MACKAY SHIELDS BY STANDISH AS THE SUBADVISOR
TO THE FUND.
10
GENERAL INFORMATION
More information about the Fund, including the Statement of Additional
Information and the Annual/Semiannual Reports, is available, without charge,
upon request. To obtain information, call toll-free 800-MAINSTAY (624-6782),
visit our website at mainstayinvestments.com, or write to NYLIFE Distributors
LLC, Attn: MainStay Marketing Department, 169 Lackawanna Avenue, Parsippany, New
Jersey 07054.
The principal executive offices of NYLIM and the Fund are located at 51
Madison Avenue, New York, New York 10010.
NYLIM Service Company LLC, 169 Lackawanna Avenue, Parsippany, New Jersey
07054, acts as the Fund's transfer agent and dividend disbursing agent. The
Fund's distributor is NYLIFE Distributors LLC, 169 Lackawanna Avenue,
Parsippany, New Jersey 07054. The Fund's custodian is State Street Bank & Trust
Company, One Lincoln Street, Boston, Massachusetts 02111-2900.
11
APPENDIX A
SHAREHOLDERS OWNING MORE THAN 5%
OF MAINSTAY TAX FREE BOND FUND AS OF SEPTEMBER 22, 2008
<Table>
<Caption>
NAME AND ADDRESS OF BENEFICIAL
OWNER CLASS PERCENTAGE NUMBER OF SHARES
- ------------------------------ ----- ---------- ----------------
NFS LLC FEBO.................... C 5.56% 50,407.1100
David G. Newsom
33 Winston Road
Holliston, MA 01746-1454
Citigroup Global Markets Inc.... C 5.68% 51,492.2990
Attn: Peter Booth 7(th) Floor
333 West 34(th) Street
New York, NY 10001-2402
Merrill Lynch Pierce Fenner & C 25.22% 228,553.5580
Smith Inc.....................
For the Sole Benefit of its
Customers
Attn: Fund Administration
97T98
4800 Deer Lake Drive East
3(rd) Floor
Jacksonville, FL 32246-6484
</Table>
12