The Securities and
Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this
Prospectus. Any representation to the contrary is a
criminal offense.
Contents
Fund Summary
Investment Objectives
1
Fees and Expenses
1
Portfolio Turnover
2
Principal Investment Strategies
2
Principal Risks
2
Past Performance
3
Investment Adviser
4
Purchase and Sale of Fund Shares
4
Tax Information
4
Payments to Broker-Dealers and Other Financial Intermediaries.
4
Fund Details
Additional Information about the Fund’s Investment
Objectives, Strategies and Risks
5
Portfolio Holdings
10
Fund Management
10
Shareholder
Information
Pricing Fund Shares
11
How to Buy Shares
12
How to Exchange Shares
13
How to Sell Shares
15
Distributions
18
Frequent Purchases and Redemptions of Fund Shares
19
Tax Consequences
20
Share Class Arrangements
21
Additional Information
29
Financial Highlights
30
Morgan Stanley Funds
Inside Back Cover
This Prospectus contains important information about the
Fund. Please read it carefully and keep it for future reference.
The
table below describes the fees and expenses that you may pay if
you buy and hold shares of the Fund. You may qualify for sales
charge discounts if you and your family invest, or agree to
invest in the future, at least $25,000 in the Morgan Stanley
Funds. More information about these and other discounts is
available from your financial adviser and in the “Share
Class Arrangements” section on page 21 of this
Prospectus and in the “Purchase, Redemption and
Pricing of Shares” section on page 50 of the
Fund’s Statement of Additional Information
(“SAI”).
Shareholder Fees
(fees
paid directly from your investment)
Class A
Class B
Class C
Class I
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price)
5.25%1
None
None
None
Maximum deferred sales charge (load) (as a percentage based on
the lesser of the offering price or net asset value at
redemption)
None2
5.00%3
1.00%3
None
Annual
Fund Operating Expenses
(expenses
that you pay each year as a percentage of the value of your
investment)
Class A
Class B
Class C
Class I
Advisory fee
%
%
%
%
Distribution and service (12b-1) fees
%
%
%
None
Other expenses
%
%
%
%
Total annual Fund operating expenses
%
%
%
%
Example
The example below is intended to help you compare the cost of
investing in the Fund with the cost of investing in other mutual
funds.
The example assumes that you invest $10,000 in the Fund, your
investment has a 5% return each year, and the Fund’s
operating expenses remain the same (except for ten-year amounts
for Class B shares which reflect the conversion to
Class A shares eight years after the end of the calendar
month in which shares were purchased). Although your actual
costs may be higher or lower, the tables below show your costs
at the end of each period based on these assumptions, depending
upon whether or not you sell your shares at the end of each
period.
If You SOLD Your
Shares:
1 Year
3 Years
5 Years
10 Years
Class A
$
$
$
$
Class B
$
$
$
$
*
Class C
$
$
$
$
Class I
$
$
$
$
morganstanley.com/im ï 1
If You HELD Your
Shares:
1 Year
3 Years
5 Years
10 Years
Class A
$
$
$
$
Class B
$
$
$
$
*
Class C
$
$
$
$
Class I
$
$
$
$
*
Does
not reflect conversion to Class A shares eight years after
the end of the calendar month in which shares were purchased.
The conversion feature is currently suspended because the total
annual operating expense ratio of Class B is currently
lower than that of Class A. See “Conversion
Feature” for Class B shares in “Share
Class Arrangements” for more information.
(1)
Reduced
for purchases of $25,000 and over.
(2)
Investments
that are not subject to any sales charges at the time of
purchase are subject to a contingent deferred sales charge
(“CDSC”) of 1.00% that will be imposed if you sell
your shares within 18 months after purchase, except for
certain specific circumstances.
(3)
The
Class B CDSC is scaled down to 1.00% during the sixth year,
reaching zero thereafter and the Class C CDSC is only
applicable if you sell your shares within one year after
purchase. See “Share Class Arrangements” for a
complete discussion of the CDSC.
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 and may result in higher taxes when Fund shares are held
in a taxable account. These costs, which are not reflected in
Total annual Fund operating Expenses or in the Example, affect
the Fund’s performance. During the most recent fiscal year,
the Fund’s portfolio turnover rate was
[ ]% of the average value of its
portfolio.
Principal
Investment Strategies
The
Fund will normally invest at least 80% of its assets in common
stocks of companies which pay dividends and have the potential
for increasing dividends. The Fund’s “Investment
Adviser,” Morgan Stanley Investment Advisors Inc.,
initially employs a quantitative screening process in an attempt
to identify a number of common stocks which are undervalued and
pay dividends. The Investment Adviser also considers other
factors, such as a company’s return on invested capital and
levels of free cash flow. The Investment Adviser then applies
qualitative analysis to determine which stocks it believes have
attractive future growth prospects and the potential to increase
dividends and, finally, to determine whether any of the stocks
should be added to or sold from the Fund’s portfolio. The
Fund may also use derivative instruments as discussed below.
These derivative instruments will be counted toward the 80%
policy discussed above to the extent they have economic
characteristics similar to the securities included within that
policy.
The Fund’s stock investments may include foreign securities
held directly or in the form of depositary receipts that are
listed in the United States on a national securities exchange.
The Fund may also invest in convertible securities.
The Fund may, but it is not required to, use derivative
instruments for a variety of purposes, including hedging, risk
management, portfolio management or to earn income. The
Fund’s use of derivatives may involve the purchase and sale
of derivative instruments such as options, futures and swaps and
other related instruments and techniques.
Principal
Risks
There
is no assurance that the Fund will achieve its investment
objective and you can lose money investing in this Fund. The
principal risks of investing in the Fund include:
•
Common Stock and Other Equity Securities. In
general, stock values fluctuate, and sometimes widely fluctuate,
in response to activities specific to the company as well as
general market, economic and political conditions. Investments
in convertible securities subject the Fund to the risks
associated with both fixed-income securities, including credit
risk and interest rate risk, and common stocks.
•
Foreign Securities. Investments in foreign markets
entail special risks such as currency, political, economic and
market risks. There also may be greater market volatility, less
reliable financial information, higher transaction and custody
costs, decreased market liquidity and less government and
exchange regulation associated with investments in foreign
markets.
•
Derivatives. A derivative instrument often has risks
similar to its underlying instrument and may have additional
risks, including imperfect correlation between the value of the
derivative and the underlying instrument, risks of default by
the other party to certain transactions, magnification of
2
losses incurred due to changes in the market value of the
securities, instruments, indices or interest rates to which they
relate, and risks that the transactions may not be liquid.
Certain derivative transactions may give rise to a form of
leverage. Leverage magnifies the potential for gain and the risk
of loss.
Shares of the Fund are not bank deposits and are not guaranteed
or insured by the FDIC or any other government agency.
The
bar chart and table below provide some indication of the risks
of investing in the Fund by showing changes in the Fund’s
Class B shares’ performance from year to year and by
showing how the Fund’s average annual returns for the 1, 5
and ten year periods compare with those of broad measures of
market performance, as well as an index that represents a group
of similar mutual funds, over time. The performance of the other
Classes will differ because the Classes have different ongoing
fees. The performance information in the bar chart does not
reflect the deduction of sales charges; if these amounts were
reflected, returns would be less than shown. The Fund’s
returns include the maximum applicable sales charge for each
Class and assume you sold your shares at the end of each period
(unless otherwise noted). The Fund’s past performance
(before and after taxes) does not indicate how the Fund will
perform in the future. Updated performance information is
available online at www.morganstanley.com/im or by calling
toll-free (800) 869-NEWS.
Annual Total
Returns — Calendar Years
The year-to-date
total return as of March 31, 2010 was
[ ]%.
S&P
500®
Index (reflects no deduction for fees, expenses or
taxes)2
%
%
%
Lipper Large-Cap Core Funds Index (reflects no deduction for
taxes)3
%
%
%
*
Does
not reflect conversion to Class A shares eight years after
the end of the calendar month in which shares were purchased.
The conversion feature is currently suspended because the total
annual operating expense ratio of Class B is currently
lower than that of Class A. See “Conversion
Feature” for Class B shares in “Shares
Class Arrangements” for more information.
(1)
These
returns do not reflect any tax consequences from a sale of your
shares at the end of each period, but they do reflect any
applicable sales charges on such a sale.
(2)
The
Standard & Poor’s
500®
Index (S&P
500®
Index) measures the performance of the large cap segment of the
U.S. equities market, covering approximately 75% of the
U.S. equities market. The Index includes 500 leading
companies in leading industries of the U.S. economy. It is not
possible to invest directly in an index.
(3)
The
Lipper Large-Cap Core Funds Index is an equally weighted
performance index of the largest qualifying funds (based on net
assets) in the Lipper Large-Cap Core Funds classification. There
are currently 30 funds represented in this Index.
The after-tax returns shown in the table above are calculated
using the historical highest individual federal marginal income
tax rates during the period shown and do not reflect the impact
of state and local taxes. After-tax returns for the Fund’s
other Classes will vary from the Class B shares’
returns. Actual after-tax returns depend on an investor’s
tax situation and may differ from those shown, and after-tax
returns are not relevant to investors who hold their Fund shares
through tax-deferred arrangements, such as 401(k) plans or
individual retirement accounts. After-tax returns may be higher
than before-tax returns due to foreign tax credits
and/or an
assumed benefit from capital losses that would have been
morganstanley.com/im ï 3
realized had Fund shares been sold at the end of the relevant
periods, as applicable.
Investment
Adviser
Investment
Adviser. Morgan Stanley Investment Advisors Inc.
Portfolio
Managers. The Fund
is managed by members of the U.S. Active Equity team.
Information about the members jointly and primarily responsible
for the
day-to-day
management of the Fund’s portfolio is shown below:
Title with
Date Began
Name
Investment
Adviser
Managing
Fund
Gregory R. Lai
Managing Director
May 2008
Steven W. Pelensky
Managing Director
May 2008
Michael A. Petrino
Executive Director
May 2008
Jordan Floriani
Vice President
May 2008
Purchase
and Sale of Fund Shares
Minimum
Investment Amounts
Minimum
Investment
Investment Options
Initial
Additional
Regular Account
$1,000
$100
Individual Retirement Account
$1,000
$100
Coverdell Education Savings Account
$500
$100
EasyInvest®
(Automatically from your checking or savings account or Money
Market Fund)
$100
*
$100
*
*
Provided
your schedule of investments totals $1,000 in
12 months
You may not be subject to the minimum investment requirements
under certain circumstances. For more information, please refer
to the “How to Buy Shares — Minimum Investment
Amounts” section beginning on page 13 of this
Prospectus.
You can purchase or sell Fund shares by contacting your Morgan
Stanley Smith Barney Financial Advisor or other authorized
financial representative. You can also sell Fund shares at any
time by telephonic request to the Fund or by enrolling in a
systematic withdrawal plan. In addition, you can purchase
additional Fund shares or sell Fund shares by written request to
the Fund.
Your shares will be sold at the next price calculated after we
receive your order to redeem. If you redeem Class A,
Class B or Class C shares, your net sale proceeds are
reduced by the amount of any applicable CDSC.
To contact a Morgan Stanley Smith Barney Financial Advisor, call
toll-free 1-866-MORGAN8 for the telephone number of the Morgan
Stanley Smith Barney office nearest you or access our office
locator at www.morganstanley.com. To sell shares by telephone,
call (800) 869-NEWS. To purchase additional Fund shares or
sell Fund shares by mail, contact the Fund’s transfer
agent, Morgan Stanley Trust (the “Transfer Agent”) at:
Morgan Stanley Trust, P.O. Box 219885, Kansas City, MO
64121-9885
(for purchases) or Morgan Stanley Trust,
P.O. Box 219886, Kansas City, MO
64121-9886
(for sales). For more information, please refer to the “How
to Buy Shares” and “How to Sell Shares” sections,
beginning on page 12 and page 15, respectively, of
this Prospectus.
Tax
Information
The
Fund intends to make distributions that may be taxed as ordinary
income or capital gains, unless you are investing through a
tax-deferred arrangement, such as a 401(k) plan or an individual
retirement account.
Payments
to Broker-Dealers and Other Financial Intermediaries
If
you purchase the Fund through a broker-dealer or other financial
intermediary (such as a bank), the Investment Adviser
and/or the
Fund’s distributor may pay the intermediary for the sale of
Fund shares and related services. These payments, which may be
significant in amount, may create a conflict of interest by
influencing the broker-dealer or other intermediary and your
salesperson to recommend the Fund over another investment. Ask
your salesperson or visit your financial intermediary’s web
site for more information.
4
Fund Details
Additional
Information about the Fund’s Investment Objectives,
Strategies and Risks
Investment
Objectives
Morgan
Stanley Dividend Growth Securities Inc. seeks to provide
reasonable current income and long-term growth of income and
capital.
Investment
objectives having the goal of selecting securities with the
potential to rise in price and pay out income.
The
Fund will normally invest at least 80% of its assets in common
stocks of companies which pay dividends and have the potential
for increasing dividends. The Investment Adviser initially
employs a quantitative screening process in an attempt to
identify a number of common stocks which are undervalued and pay
dividends. The Investment Adviser also considers other factors,
such as a company’s return on invested capital and levels
of free cash flow. The Investment Adviser then applies
qualitative analysis to determine which stocks it believes have
attractive future growth prospects and the potential to increase
dividends and, finally, to determine whether any of the stocks
should be added to or sold from the Fund’s portfolio. The
Fund may also use derivative instruments as discussed below.
These derivative instruments will be counted toward the 80%
policy discussed above to the extent they have economic
characteristics similar to the securities included within that
policy.
The Fund’s stock investments may include foreign securities
held directly or in the form of depositary receipts that are
listed in the United States on a national securities exchange.
The Fund may also invest in convertible securities.
Up to 20% of the Fund’s assets may be invested in
fixed-income securities. In addition, the Fund may invest in
real estate investment trusts (commonly known as
“REITs”).
Common stock is a share ownership or equity interest in a
corporation. It may or may not pay dividends, as some companies
reinvest all of their profits back into their businesses, while
others pay out some of their profits to shareholders as
dividends. A depositary receipt is generally issued by a bank or
financial institution and represents an ownership interest in
the common stock or other equity securities of a foreign
company. A convertible security is a bond, debenture, note,
preferred stock, right, warrant or other security that may be
converted into or exchanged for a prescribed amount of common
stock or other security of the same or a different issuer or into
5
cash within a particular period of time at a specified price or
formula. A convertible security generally entitles the holder to
receive interest paid or accrued on debt securities or the
dividend paid on preferred stock until the convertible security
matures or is redeemed, converted or exchanged.
The Fund may, but it is not required to, use derivative
instruments for a variety of purposes, including hedging, risk
management, portfolio management or to earn income. Derivatives
are financial instruments whose value is based on the value of
another underlying asset, interest rate, index or financial
instrument. The Fund’s use of derivatives may involve the
purchase and sale of derivative instruments such as options,
futures, swaps and other related instruments and techniques.
In pursuing the Fund’s investment objectives, the
Investment Adviser has considerable leeway in deciding which
investments it buys, holds or sells on a day-to-day basis and
which trading strategies it uses. For example, the Investment
Adviser in its discretion may determine to use some permitted
trading strategies while not using others.
This
section provides additional information relating to the
Fund’s investment strategies.
Fixed-Income
Securities. The Fund may invest up to 20%
of its assets in U.S. government securities, investment
grade corporate debt securities
and/or money
market securities. The Fund’s fixed-income investments may
include zero coupon securities, which are purchased at a
discount and generally accrue interest, but make no payments
until maturity.
REITs. REITs
pool investors’ funds for investments primarily in real
estate properties or real estate-related loans. They may also
include, among other businesses, real estate developers, brokers
and operating companies whose products and services are
significantly related to the real estate industry such as
building suppliers and mortgage lenders.
Defensive
Investing. The Fund may take temporary
“defensive” positions in attempting to respond to
adverse market conditions. The Fund may invest any amount of its
assets in cash or money market instruments in a defensive
posture that may be inconsistent with the Fund’s principal
investment strategies when the Investment Adviser believes it is
advisable to do so.
Although taking a defensive posture is designed to protect the
Fund from an anticipated market downturn, it could have the
effect of reducing the benefit from any upswing in the market.
When the Fund takes a defensive position, it may not achieve its
investment objectives.
* *
*
The percentage limitations relating to the composition of the
Fund’s portfolio apply at the time the Fund acquires an
investment. Subsequent percentage changes that result from
market fluctuations generally will not require the Fund to sell
any portfolio security. However, the Fund may be required to
sell its illiquid securities holdings, or reduce its borrowings,
if any, in response to fluctuations in the value of such
holdings. The Fund may change its principal investment
strategies without shareholder approval; however, you would be
notified of any changes.
There
is no assurance that the Fund will achieve its investment
objectives. The Fund’s share price and return will
fluctuate with changes in the market value of the Fund’s
portfolio securities. When you sell Fund shares, they may be
worth less than what you paid for them and, accordingly, you can
lose money investing in this Fund.
Common Stock and
Other Equity Securities. A principal risk
of investing in the Fund is associated with its common stock
investments. In general, stock values fluctuate in response to
activities specific to the company as well as general market,
economic and political conditions. Stock prices can fluctuate
widely in response to these factors.
Investments in convertible securities subject the Fund to the
risks associated with both fixed-income securities, including
credit risk and interest rate risk, and common stocks. To the
extent that a convertible security’s investment value is
greater than its conversion value, its price will be likely to
increase when interest rates fall and decrease when interest
rates rise. If the conversion value exceeds the investment
value, the price of the convertible security will tend to
fluctuate directly with the price of the underlying equity
security.
Foreign
Securities. The Fund’s investments in
foreign securities involve risks that are in addition to the
risks associated with domestic securities. One additional risk
is currency risk. While the price of Fund shares is quoted in
U.S. dollars, the Fund may convert U.S. dollars to a
foreign market’s local currency to purchase a security in
that market. If the value of that local currency falls relative
to the U.S. dollar, the U.S. dollar value of the
foreign security will decrease. This is true even if the foreign
security’s local price remains unchanged.
Foreign securities also have risks related to economic and
political developments abroad, including expropriations,
confiscatory taxation, exchange control regulation, limitations
on the use or transfer of Fund assets and any effects of foreign
social, economic or political instability. Foreign companies, in
general, are not subject to the regulatory requirements of
U.S. companies and, as such, there may be less publicly
available information about these companies. Moreover, foreign
accounting, auditing and financial reporting standards generally
are different from those applicable to U.S. companies.
Finally, in the event of a default of any foreign debt
obligations, it may be more difficult for the Fund to obtain or
enforce a judgment against the issuers of the securities.
Securities of foreign issuers may be less liquid than comparable
securities of U.S. issuers and, as such, their price
changes may be more volatile. Furthermore, foreign exchanges and
broker-dealers are generally subject to less government and
exchange scrutiny and regulation than their
U.S. counterparts. In addition, differences in clearance
and settlement procedures in foreign markets may cause delays in
settlement of the Fund’s trades effected in those markets
and could result in losses to the Fund due to subsequent
declines in the value of the securities subject to the trades.
Depositary receipts involve many of the same risks associated
with direct investment in foreign securities. In addition, the
underlying issuers of certain depositary receipts, particularly
unsponsored or unregistered depositary receipts, are under no
obligation to distribute shareholder communications to the
holders of such receipts, or to pass through to them any voting
rights with respect to the deposited securities.
Derivatives. A
derivative instrument often has risks similar to its underlying
instrument and may have additional risks, including imperfect
correlation between the value of the derivative and the
underlying instrument, risks of
7
default by the other party to certain transactions,
magnification of losses incurred due to changes in the market
value of the securities, instruments, indices or interest rates
to which they relate, and risks that the transactions may not be
liquid. The use of derivatives involves risks that are different
from, and possibly greater than, the risks associated with other
portfolio investments. Derivatives may involve the use of highly
specialized instruments that require investment techniques and
risk analyses different from those associated with other
portfolio investments.
Certain derivative transactions may give rise to a form of
leverage. Leverage magnifies the potential for gain and the risk
of loss. Leverage associated with derivative transactions may
cause the Fund to liquidate portfolio positions when it may not
be advantageous to do so to satisfy its obligations or to meet
earmarking or segregation requirements, pursuant to applicable
Securities and Exchange Commission (“SEC”) rules and
regulations, or may cause the Fund to be more volatile than if
the Fund had not been leveraged. Although the Investment Adviser
seeks to use derivatives to further the Fund’s investment
objectives, there is no assurance that the use of derivatives
will achieve this result.
The derivative instruments and techniques that the Fund may
principally use include:
Futures. A
futures contract is a standardized agreement between two parties
to buy or sell a specific quantity of an underlying instrument
at a specific price at a specific future time. The value of a
futures contract tends to increase and decrease in tandem with
the value of the underlying instrument. Futures contracts are
bilateral agreements, with both the purchaser and the seller
equally obligated to complete the transaction. Depending on the
terms of the particular contract, futures contracts are settled
through either physical delivery of the underlying instrument on
the settlement date or by payment of a cash settlement amount on
the settlement date. A decision as to whether, when and how to
use futures involves the exercise of skill and judgment and even
a well conceived futures transaction may be unsuccessful because
of market behavior or unexpected events. In addition to the
derivatives risks discussed above, the prices of futures can be
highly volatile, using futures can lower total return, and the
potential loss from futures can exceed the Fund’s initial
investment in such contracts.
Options. If
the Fund buys an option, it buys a legal contract giving it the
right to buy or sell a specific amount of the underlying
instrument or futures contract on the underlying instrument at
an agreed upon price typically in exchange for a premium paid by
the Fund. If the Fund sells an option, it sells to another
person the right to buy from or sell to the Fund a specific
amount of the underlying instrument or futures contract on the
underlying instrument at an agreed upon price typically in
exchange for a premium received by the Fund. A decision as to
whether, when and how to use options involves the exercise of
skill and judgment and even a well conceived option transaction
may be unsuccessful because of market behavior or unexpected
events. The prices of options can be highly volatile and the use
of options can lower total returns.
Swaps. A
swap contract is an agreement between two parties pursuant to
which the parties exchange payments at specified dates on the
basis of a specified notional amount, with the payments
calculated by reference to specified securities, indexes,
reference rates, currencies or other instruments. Most swap
agreements provide that when the period payment dates for both
parties are the same, the payments are made on a net basis
(i.e., the two payment streams are netted out, with only the net
amount paid by one party to the other). The Fund’s
obligations or rights under a swap contract entered into on a
net basis will generally be equal only to the net amount to be
paid or received under the agreement, based on the relative
values of the positions held by each counterparty. Swap
8
agreements are not entered into or traded on exchanges and there
is no central clearing or guaranty function for swaps.
Therefore, swaps are subject to credit risk or the risk of
default or non-performance by the counterparty. Swaps could
result in losses if interest rates or foreign currency exchange
rates or credit quality changes are not correctly anticipated by
the Fund or if the reference index, security or investments do
not perform as expected.
Other
Risks. The performance of the Fund also
will depend on whether or not the Investment Adviser is
successful in applying the Fund’s investment strategies.
The Fund is also subject to other risks from its permissible
investments, including the risks associated with its investments
in fixed-income securities and REITs. For more information about
these risks, see the “Additional Risk Information”
section.
This
section provides additional information relating to the risks of
investing in the Fund.
Fixed-Income
Securities. All fixed-income securities
are subject to two types of risk: credit risk and interest rate
risk. Credit risk refers to the possibility that the issuer of a
security will be unable to make interest payments
and/or repay
the principal on its debt. Interest rate risk refers to
fluctuations in the value of a fixed-income security resulting
from changes in the general level of interest rates. When the
general level of interest rates goes up, the prices of most
fixed-income securities go down. When the general level of
interest rates goes down, the prices of most fixed-income
securities go up. (Zero coupon securities are typically subject
to greater price fluctuations than comparable securities that
pay interest.) While the credit risk for U.S. government
securities in which the Fund may invest is minimal, the
Fund’s investment grade corporate debt holdings may have
speculative characteristics.
REITs. REITs
generally derive their income from rents on the underlying
properties or interest on the underlying loans, and their value
is impacted by changes in the value of the underlying property
or changes in interest rates affecting the underlying loans
owned by the REITs. REITs are more susceptible to risks
associated with the ownership of real estate and the real estate
industry in general. These risks can include fluctuations in the
value of underlying properties; defaults by borrowers or
tenants; market saturation; changes in general and local
economic conditions; decreases in market rates for rents;
increases in competition, property taxes, capital expenditures
or operating expenses; and other economic, political or
regulatory occurrences affecting the real estate industry. In
addition, REITs depend upon specialized management skills, may
not be diversified (which may increase the volatility of a
REIT’s value), may have less trading volume and may be
subject to more abrupt or erratic price movements than the
overall securities market. Furthermore, investments in REITs may
involve duplication of management fees and certain other
expenses, as the Fund indirectly bears its proportionate share
of any expenses paid by REITs in which it invests.
U.S. REITs are not taxed on income distributed to
shareholders provided they comply with several requirements of
the Internal Revenue Code of 1986, as amended (the
“Code”). U.S. REITs are subject to the risk of
failing to qualify for tax-free pass-through of income under the
Code.
The Investment
Adviser, together with its affiliated asset management
companies, had approximately $395 billion in assets under
management or supervision as of March 31, 2010.
The
Fund has retained the Investment Adviser — Morgan
Stanley Investment Advisors Inc. — to provide
investment advisory services. The Investment Adviser is a
wholly-owned subsidiary of Morgan Stanley, a preeminent global
financial services firm engaged in securities trading and
brokerage activities, as well as providing investment banking,
research and analysis, financing and financial advisory
services. The Investment Adviser’s address is
522 Fifth Avenue, New York, New York10036.
The Fund is managed by members of the U.S. Active Equity
team. The team consists of portfolio managers and analysts.
Current members of the team jointly and primarily responsible
for the day-to-day management of the Fund’s portfolio are
Gregory R. Lai, Steven W. Pelensky, Michael A. Petrino and
Jordan Floriani.
Mr. Lai has been associated with the Investment Adviser in
an investment management capacity since May 2007. Prior to May
2007, Mr. Lai was a Senior Portfolio Manager at Affinity
Investment Advisors. Mr. Pelensky has been associated with
the Investment Adviser in an investment management capacity
since May 2007. Prior to May 2007, Mr. Pelensky was a
Senior Portfolio Manager at Alliance Bernstein. Mr. Petrino
has been associated with the Investment Adviser in an investment
management capacity since May 2007. Prior to May 2007,
Mr. Petrino was a Portfolio Manager at Affinity Investment
Advisors. Ms. Floriani has been associated with the
Investment Adviser in an investment management capacity since
May 2007. Prior to May 2007, Ms. Floriani was a Portfolio
Manager at Affinity Investment Advisors.
Mr. Lai is the lead portfolio manager of the Fund. All team
members are responsible for the day-to-day management of the
Fund and Mr. Lai is responsible for the execution of the
overall strategy of the Fund.
The Fund’s SAI provides additional information about
the portfolio managers’ compensation structure, other
accounts managed by the portfolio managers and the portfolio
managers’ ownership of securities in the Fund.
The composition of the team may change from time to time.
The Fund pays the Investment Adviser a monthly advisory fee as
full compensation for the services and facilities furnished to
the Fund, and for Fund expenses assumed by the Investment
Adviser. The fee is based on the Fund’s average daily net
assets. For the fiscal year ended February 28, 2010, the
Fund accrued total compensation to the Investment Adviser
amounting to [ ]% of the
Fund’s average daily net assets.
A discussion regarding the Board of Directors’ approval of
the investment advisory agreement is available in the
Fund’s semiannual report to shareholders for the period
ended August 31, 2009.
The
price of Fund shares (excluding sales charges), called “net
asset value,” is based on the value of the Fund’s
portfolio securities. While the assets of each Class are
invested in a single portfolio of securities, the net asset
value of each Class will differ because the Classes have
different ongoing distribution fees.
The net asset value per share of the Fund is determined once
daily at 4:00 p.m. Eastern time on each day that the
New York Stock Exchange (“NYSE”) is open (or, on
days when the NYSE closes prior to 4:00 p.m., at such
earlier time). Shares will not be priced on days that the NYSE
is closed.
The value of the Fund’s portfolio securities is based on
the securities’ market price when available. When a market
price is not readily available, including circumstances under
which the Investment Adviser determines that a security’s
market price is not accurate, a portfolio security is valued at
its fair value, as determined under procedures established by
the Fund’s Board of Directors.
In addition, with respect to securities that primarily are
listed on foreign exchanges, when an event occurs after the
close of such exchanges that is likely to have changed the value
of the securities (for example, a percentage change in value of
one or more U.S. securities indices in excess of specified
thresholds), such securities will be valued at their fair value,
as determined under procedures established by the Fund’s
Board of Directors. Securities also may be fair valued in the
event of a significant development affecting a country or region
or an issuer-specific development which is likely to have
changed the value of the security.
In these cases, the Fund’s net asset value will reflect
certain portfolio securities’ fair value rather than their
market price. Fair value pricing involves subjective judgment
and it is possible that the fair value determined for a security
is materially different than the value that could be realized
upon the sale of that security. With respect to securities that
are primarily listed on foreign exchanges, the value of the
Fund’s portfolio securities may change on days when you
will not be able to purchase or sell your shares.
To the extent the Fund invests in open-end management companies
that are registered under the Investment Company Act of 1940, as
amended (“Investment Company Act”), the Fund’s
net asset value is calculated based upon the net asset value of
such funds. The prospectuses for such funds explain the
circumstances under which they will use fair value pricing and
its effects.
An exception to the Fund’s general policy of using market
prices concerns its short-term debt portfolio securities. Debt
securities with remaining maturities of 60 days or less at
the time of purchase are valued at amortized cost. However, if
the cost does not reflect the securities’ market value,
these securities will be valued at their fair value.
If you are new to
the Morgan Stanley Funds and would like to contact a Morgan
Stanley Smith Barney Financial Advisor, call toll-free
1-866-MORGAN8
for the telephone number of the Morgan Stanley Smith Barney
office nearest you. You may also access our office locator on
our Internet site at:
www.morganstanley.com/im
You
may open a new account to buy Fund shares or buy additional Fund
shares for an existing account by contacting your Morgan Stanley
Smith Barney Financial Advisor or other authorized financial
representative. Your Financial Advisor will assist you,
step-by-step,
with the procedures to invest in the Fund. The Transfer Agent,
in its sole discretion, may allow you to purchase shares
directly by calling and requesting an application.
To help the government fight the funding of terrorism and money
laundering activities, federal law requires all financial
institutions to obtain, verify and record information that
identifies each person who opens an account. What this means to
you: when you open an account, we will ask your name, address,
date of birth and other information that will allow us to
identify you. If we are unable to verify your identity, we
reserve the right to restrict additional transactions
and/or
liquidate your account at the next calculated net asset value
after your account is closed (less any applicable sales/account
charges
and/or tax
penalties) or take any other action required by law. In
accordance with federal law requirements, the Fund has
implemented an anti-money laundering compliance program, which
includes the designation of an anti-money laundering compliance
officer.
Because every investor has different immediate financial needs
and long-term investment goals, the Fund offers investors four
Classes of shares: Classes A, B, C and I. Class I
shares are only offered to a limited group of investors. Each
Class of shares offers a distinct structure of sales charges,
distribution and service fees, and other features that are
designed to address a variety of needs. Your Morgan Stanley
Smith Barney Financial Advisor or other authorized financial
representative can help you decide which Class may be most
appropriate for you. When purchasing Fund shares, you must
specify which Class of shares you wish to purchase.
When you buy Fund shares, the shares are purchased at the next
share price calculated (plus any applicable front-end sales
charge for Class A shares) after we receive your purchase
order. Your payment is due on the third business day after you
place your purchase order. We reserve the right to reject any
order for the purchase of Fund shares for any reason.
Order Processing
Fees. Your financial intermediary may
charge processing or other fees in connection with the purchase
or sale of the Fund’s shares. For example, client accounts
held through the Morgan Stanley channel of Morgan Stanley Smith
Barney are charged an order processing fee of $5.25 (except in
certain circumstances, including, but not limited to, activity
in fee-based accounts, exchanges, dividend reinvestments and
systematic investment and withdrawal plans) when a client buys
or redeems shares of the Fund. Please consult your financial
representative for more information regarding any such fees.
12
Minimum
Investment Amounts
EasyInvest®
A purchase plan
that allows you to transfer money automatically from your
checking or savings account or from a Money Market Fund on a
semi-monthly, monthly or quarterly basis. Contact your Morgan
Stanley Smith Barney Financial Advisor for further information
about this service.
Minimum Investment
Investment Options
Initial
Additional
Regular Account
$1,000
$100
Individual Retirement Account
$1,000
$100
Coverdell Education Savings Account
$500
$100
EasyInvest® (Automatically from your checking or savings account or
Money Market Fund)
$100
*
$100
*
*
Provided your schedule of
investments totals $1,000 in 12 months.
There is no minimum investment amount if you purchase Fund
shares through: (1) the Investment Adviser’s mutual
fund asset allocation program; (2) a program, approved by
the Fund’s distributor, in which you pay an asset-based fee
for advisory, administrative
and/or
brokerage services; (3) the following programs approved by
the Fund’s distributor: (i) qualified state tuition
plans described in Section 529 of the Code or
(ii) certain other investment programs that do not charge
an asset-based fee; (4) employer-sponsored employee benefit
plan accounts; (5) certain deferred compensation programs
established by the Investment Adviser or its affiliates for
their employees or the Fund’s Directors; or (6) the
reinvestment of dividends in additional Fund shares.
Investment
Options for Certain Institutional and Other
Investors/Class I Shares. To be
eligible to purchase Class I shares, you must qualify under
one of the investor categories specified in the “Share
Class Arrangements” section of this Prospectus.
Subsequent
Investments Sent Directly to the Fund. In
addition to buying additional Fund shares for an existing
account by contacting your Morgan Stanley Smith Barney Financial
Advisor, you may send a check directly to the Fund. To buy
additional shares in this manner:
n
Write a “letter of instruction” to the Fund specifying
the name(s) on the account, the account number, the social
security or tax identification number, the Class of shares you
wish to purchase and the investment amount (which would include
any applicable front-end sales charge). The letter must be
signed by the account owner(s).
n
Make out a check for the total amount payable to: Morgan Stanley
Dividend Growth Securities Inc.
n
Mail the letter and check to Morgan Stanley Trust at
P.O. Box 219885, Kansas City,
MO 64121-9885.
Permissible
Fund Exchanges. You may exchange
shares of any Class of the Fund for the same Class of any other
continuously offered Multi-Class Fund, or for shares of a
Money Market Fund or the Limited Duration U.S. Government
Trust, without the imposition of an exchange fee. In addition,
Class Q shares of Morgan Stanley Global Infrastructure Fund
may be exchanged for Class A shares of the Fund without
payment of sales
13
charges (including contingent deferred sales charges
(“CDSCs”)) or the imposition of an exchange fee.
Front-end sales charges are not imposed on exchanges of
Class A shares. See the inside back cover of this
Prospectus for each Morgan Stanley Fund’s designation
as a Multi-Class Fund or Money Market Fund. If a Morgan
Stanley Fund is not listed, consult the inside back cover of
that fund’s current prospectus for its designation.
The current prospectus for each Morgan Stanley Fund describes
its investment objective(s), policies and investment minimums,
and should be read before investment. Since exchanges are
available only into continuously offered Morgan Stanley Funds,
exchanges are not available into Morgan Stanley Funds or classes
of Morgan Stanley Funds that are not currently being offered for
purchase.
Exchange
Procedures. You can process an exchange by
contacting your Morgan Stanley Smith Barney Financial Advisor or
other authorized financial representative. You may also write
the Transfer Agent or call toll-free (800) 869-NEWS, our
automated telephone system (which is generally accessible
24 hours a day, seven days a week), to place an exchange
order. You automatically have the telephone exchange privilege
unless you indicate otherwise by checking the applicable box on
the new account application form. If you hold share
certificates, no exchanges may be processed until we have
received all applicable share certificates.
Exchange requests received on a business day prior to the time
shares of the funds involved in the request are priced will be
processed on the date of receipt. “Processing” a
request means that shares of the fund which you are exchanging
will be redeemed at the net asset value per share next
determined on the date of receipt. Shares of the fund that you
are purchasing will also normally be purchased at the net asset
value per share, plus any applicable sales charge, next
determined on the date of receipt. Exchange requests received on
a business day after the time that shares of the funds involved
in the request are priced will be processed on the next business
day in the manner described herein.
The Fund may terminate or revise the exchange privilege upon
required notice or in certain cases without notice. See
“Limitations on Exchanges.” The check writing
privilege is not available for Money Market Fund shares you
acquire in an exchange.
Telephone
Exchanges. Morgan Stanley and its
subsidiaries, including the Transfer Agent, and the Fund employ
procedures considered by them to be reasonable to confirm that
instructions communicated by telephone are genuine. Such
procedures may include requiring certain personal identification
information prior to acting upon telephone instructions,
tape-recording telephone communications and providing written
confirmation of instructions communicated by telephone. If
reasonable procedures are employed, none of Morgan Stanley, the
Transfer Agent or the Fund will be liable for following
telephone instructions which it reasonably believes to be
genuine. Telephone exchanges may not be available if you cannot
reach the Transfer Agent by telephone, whether because all
telephone lines are busy or for any other reason; in such case,
a shareholder would have to use the Fund’s other exchange
procedures described in this section.
Telephone instructions will be accepted if received by the
Transfer Agent between 9:00 a.m. and
4:00 p.m. Eastern time on any day the NYSE is open for
business. During periods of drastic economic or market changes,
it is possible that the telephone exchange procedures may be
difficult to implement, although this has not been the case with
the Fund in the past.
14
Margin
Accounts. If you have pledged your Fund
shares in a margin account, contact your Morgan Stanley Smith
Barney Financial Advisor or other authorized financial
representative regarding restrictions on the exchange of such
shares.
Tax
Considerations of Exchanges. If you
exchange shares of the Fund for shares of another Morgan Stanley
Fund, there are important tax considerations. For tax purposes,
the exchange out of the Fund is considered a sale of Fund shares
and the exchange into the other fund is considered a purchase.
As a result, you may realize a capital gain or loss.
You should review the “Tax Consequences” section and
consult your own tax professional about the tax consequences of
an exchange.
Limitations on
Exchanges. Certain patterns of past
exchanges
and/or
purchase or sale transactions involving the Fund or other Morgan
Stanley Funds may result in the Fund rejecting, limiting or
prohibiting, at its sole discretion, and without prior notice,
additional purchases
and/or
exchanges and may result in a shareholder’s account being
closed. Determinations in this regard may be made based on the
frequency or dollar amount of the previous exchanges or purchase
or sale transactions. The Fund reserves the right to reject an
exchange request for any reason.
CDSC Calculations
on Exchanges. See the “Share
Class Arrangements” section of this Prospectus
for a discussion of how applicable CDSCs are calculated for
shares of one Morgan Stanley Fund that are exchanged for shares
of another.
For further information regarding exchange privileges, you
should contact your Morgan Stanley Smith Barney Financial
Advisor or call toll-free (800) 869-NEWS.
You
can sell some or all of your Fund shares at any time. If you
sell Class A, Class B or Class C shares, your net
sale proceeds are reduced by the amount of any applicable CDSC.
Your shares will be sold at the next price calculated after we
receive your order to sell as described below.
Options
Procedures
Contact Your Financial Advisor
To sell your shares, simply call your Morgan Stanley Smith
Barney Financial Advisor or other authorized financial
representative. Payment will be sent to the address to which the
account is registered or deposited in your brokerage account.
By Telephone
You can also sell your shares by telephone and have the proceeds
sent to the address of record or your bank account on record.
You automatically have the telephone redemption privilege unless
you indicate otherwise by checking the applicable box on the new
application form.
Before processing a telephone redemption, keep the following
information in mind:
n You
can establish this option at the time you open the account by
completing the Morgan Stanley Funds New Account Application or
subsequently by calling toll-free
(800) 869-NEWS.
n Call
toll-free (800) 869-NEWS to process a telephone redemption using
our automated telephone system which is generally accessible
24 hours a day, seven days a week.
15
Options
Procedures
By Telephone (continued)
n Your request must be received prior to market close, generally 4:00 p.m. Eastern time.
n If your account has multiple owners, the Transfer Agent may rely on the instructions of any one owner.
n Proceeds
must be made payable to the name(s) and address in which the
account is registered.
n You
may redeem amounts of $50,000 or less daily if the proceeds are
to be paid by check or by Automated Clearing House.
n This
privilege is not available if the address on your account has
changed within 15 calendar days prior to your telephone
redemption request.
n Telephone
redemption is available for most accounts other than accounts
with shares represented by certificates.
If you request to sell shares that were recently purchased by
check, the proceeds of that sale may not be sent to you until it
has been verified that the check has cleared, which may take up
to 15 calendar days from the date of purchase.
Morgan Stanley and its subsidiaries, including the Transfer
Agent, employ procedures considered by them to be reasonable to
confirm that instructions communicated by telephone are genuine.
Such procedures may include requiring certain personal
identification information prior to acting upon telephone
instructions, tape-recording telephone communications and
providing written confirmation of instructions communicated by
telephone. If reasonable procedures are employed, neither Morgan
Stanley nor the Transfer Agent will be liable for following
telephone instructions which it reasonably believes to be
genuine. Telephone redemptions may not be available if a
shareholder cannot reach the Transfer Agent by telephone,
whether because all telephone lines are busy or for any other
reason; in such case, a shareholder would have to use the
Fund’s other redemption procedures described in this
section.
By Letter
You can also sell your shares by writing a “letter of
instruction” that includes:
n your
account number;
n the
name of the Fund;
n the
dollar amount or the number of shares you wish to sell;
n the
Class of shares you wish to sell; and
n the
signature of each owner as it appears on the account.
If you are requesting payment to anyone other than the
registered owner(s) or that payment be sent to any address other
than the address of the registered owner(s) or pre-designated
bank account, you will need a signature guarantee. You can
obtain a signature guarantee from an eligible guarantor
acceptable to the Transfer Agent. (You should contact the
Transfer Agent toll-free at (800) 869-NEWS for a determination
as to whether a particular institution is an eligible
guarantor.) A notary public cannot provide a signature
guarantee. Additional documentation may be required for shares
held by a corporation, partnership, trustee or executor.
16
Options
Procedures
By Letter (continued)
Mail the letter to Morgan Stanley Trust at
P.O. Box 219886, Kansas City, MO64121-9886. If you
hold share certificates, you must return the certificates, along
with the letter and any required additional documentation.
A check will be mailed to the name(s) and address in which the
account is registered, or otherwise according to your
instructions.
Systematic Withdrawal Plan
If your investment in all of the Morgan Stanley Funds has a
total market value of at least $10,000, you may elect to
withdraw amounts of $25 or more, or in any whole percentage of a
fund’s balance (provided the amount is at least $25), on a
monthly, quarterly, semi-annual or annual basis, from any fund
with a balance of at least $1,000. Each time you add a fund to
the plan, you must meet the plan requirements.
Amounts withdrawn are subject to any applicable CDSC. A CDSC may
be waived under certain circumstances. See the Class B waiver
categories listed in the “Share Class Arrangements”
section of this Prospectus.
To sign up for the systematic withdrawal plan, contact your
Morgan Stanley Smith Barney Financial Advisor or call toll-free
(800) 869-NEWS. You may terminate or suspend your plan at any
time. Please remember that withdrawals from the plan are sales
of shares, not Fund “distributions,” and ultimately
may exhaust your account balance. The Fund may terminate or
revise the plan at any time.
Payment for Sold
Shares. After we receive your complete
instructions to sell as described above, a check will be mailed
to you within seven days, although we will attempt to make
payment within one business day. Payment may also be sent to
your brokerage account.
Payment may be postponed or the right to sell your shares
suspended under unusual circumstances. If you request to sell
shares that were recently purchased by check, the proceeds of
that sale may not be sent to you until it has been verified that
the check has cleared, which may take up to 15 calendar days
from the date of purchase.
Payments-in-Kind. If
we determine that it is in the best interest of the Fund not to
pay redemption proceeds in cash, we may pay you partly or
entirely by distributing to you securities held by the Fund.
Such in-kind securities may be illiquid and difficult or
impossible for a shareholder to sell at a time and at a price
that a shareholder would like. Redemptions paid in such
securities generally will give rise to income, gain or loss for
income tax purposes in the same manner as redemptions paid in
cash. In addition, you may incur brokerage costs and a further
gain or loss for income tax purposes when you ultimately sell
the securities.
Order Processing
Fees. Your financial intermediary may
charge processing or other fees in connection with the purchase
or sale of the Fund’s shares. For example, client accounts
held through the Morgan Stanley channel of Morgan Stanley Smith
Barney are charged an order processing fee of $5.25 (except in
certain circumstances, including, but not limited to, activity
in fee-based accounts, exchanges, dividend reinvestments and
systematic investment and withdrawal plans) when a client buys
or redeems shares of the Fund. Please consult your financial
representative for more information regarding any such fees.
17
Tax
Considerations. Normally, your sale of
Fund shares is subject to federal and state income tax. You
should review the “Tax Consequences” section of this
Prospectus and consult your own tax professional about
the tax consequences of a sale.
Reinstatement
Privilege. If you sell Fund shares and
have not previously exercised the reinstatement privilege, you
may, within 35 days after the date of sale, invest any
portion of the proceeds in the same Class of Fund shares at
their net asset value and receive a pro rata credit for any CDSC
paid in connection with the sale.
Involuntary
Sales. The Fund reserves the right, on
60 days’ notice, to sell the shares of any shareholder
(other than shares held in an individual retirement account
(“IRA”) or 403(b) Custodial Account) whose shares, due
to sales by the shareholder, have a value below $100, or in the
case of an account opened through
EasyInvest®,
if after 12 months the shareholder has invested less than
$1,000 in the account.
However, before the Fund sells your shares in this manner, we
will notify you and allow you 60 days to make an additional
investment in an amount that will increase the value of your
account to at least the required amount before the sale is
processed. No CDSC will be imposed on any involuntary sale.
Margin
Accounts. If you have pledged your Fund
shares in a margin account, contact your Morgan Stanley Smith
Barney Financial Advisor or other authorized financial
representative regarding restrictions on the sale of such shares.
You may select to
have your Fund distributions automatically invested in other
Classes of Fund shares or Classes of another Morgan Stanley Fund
that you own. Contact your Morgan Stanley Smith Barney Financial
Advisor for further information about this service.
The
Fund passes substantially all of its earnings from income and
capital gains along to its investors as
“distributions.” The Fund earns income from stocks and
interest from fixed-income investments. These amounts are passed
along to Fund shareholders as “income dividend
distributions.” The Fund realizes capital gains whenever it
sells securities for a higher price than it paid for them. These
amounts may be passed along as “capital gain
distributions.”
The Fund declares income dividends separately for each Class.
Distributions paid on Class A and Class I shares
usually will be higher than for Class B and Class C
shares because distribution fees that Class B and
Class C shares pay are higher. Normally, income dividends
are distributed to shareholders quarterly. Capital gains, if
any, are usually distributed in June and December. The Fund,
however, may retain and reinvest any long-term capital gains.
The Fund may at times make payments from sources other than
income or capital gains that represent a return of a portion of
your investment. These payments would not be taxable to you as a
shareholder, but would have the effect of reducing your basis in
the Fund.
Distributions are reinvested automatically in additional shares
of the same Class and automatically credited to your account,
unless you request in writing that all distributions be paid in
cash. If you elect the cash option, the Fund will mail a check
to you no later than seven business days
18
after the distribution is declared. However, if you purchase
Fund shares through a Morgan Stanley Smith Barney Financial
Advisor or other authorized financial representative within
three business days prior to the record date for the
distribution, the distribution will automatically be paid to you
in cash, even if you did not request to receive all
distributions in cash. No interest will accrue on uncashed
checks. If you wish to change how your distributions are paid,
your request should be received by the Transfer Agent at least
five business days prior to the record date of the distributions.
Frequent
purchases and redemptions of Fund shares by Fund shareholders
are referred to as “market-timing” or “short-term
trading” and may present risks for other shareholders of
the Fund, which may include, among other things, dilution in the
value of Fund shares held by long-term shareholders,
interference with the efficient management of the Fund’s
portfolio, increased brokerage and administrative costs,
incurring unwanted taxable gains and forcing the Fund to hold
excess levels of cash.
In addition, the Fund is subject to the risk that market-timers
and/or
short-term traders may take advantage of time zone differences
between the foreign markets on which the Fund’s portfolio
securities trade and the time as of which the Fund’s net
asset value is calculated (“time-zone arbitrage”). For
example, a market-timer may purchase shares of the Fund based on
events occurring after foreign market closing prices are
established, but before the Fund’s net asset value
calculation, that are likely to result in higher prices in
foreign markets the following day. The market-timer would redeem
the Fund’s shares the next day when the Fund’s share
price would reflect the increased prices in foreign markets, for
a quick profit at the expense of long-term Fund shareholders.
Investments in other types of securities also may be susceptible
to short-term trading strategies. These investments include
securities that are, among other things, thinly traded, traded
infrequently or relatively illiquid, which have the risk that
the current market price for the securities may not accurately
reflect current market values. A shareholder may seek to engage
in short-term trading to take advantage of these pricing
differences (referred to as “price arbitrage”).
Investments in certain fixed-income securities may be adversely
affected by price arbitrage trading strategies.
The Fund’s policies with respect to valuing portfolio
securities are described in “Shareholder
Information — Pricing Fund Shares.”
The Fund discourages and does not accommodate frequent purchases
and redemptions of Fund shares by Fund shareholders and the
Fund’s Board of Directors has adopted policies and
procedures with respect to such frequent purchases and
redemptions. The Fund’s policies with respect to purchases,
redemptions and exchanges of Fund shares are described in the
“How to Buy Shares,”“How to Exchange
Shares” and “How to Sell Shares” sections of this
Prospectus. Except as described in each of these
sections, and with respect to trades that occur through omnibus
accounts at intermediaries, as described below, the Fund’s
policies regarding frequent trading of Fund shares are applied
uniformly to all shareholders. With respect to trades that occur
through omnibus accounts at intermediaries, such as investment
managers, broker-dealers, transfer agents and third party
administrators, the Fund (i) has requested assurance that
such intermediaries currently selling Fund shares have in place
internal policies and procedures reasonably designed to address
market-timing concerns and has instructed such intermediaries to
notify the Fund immediately if they are unable to comply with
such policies and procedures and (ii) requires all
19
prospective intermediaries to agree to cooperate in enforcing
the Fund’s policies with respect to frequent purchases,
redemptions and exchanges of Fund shares.
Omnibus accounts generally do not identify customers’
trading activity to the Fund on an individual ongoing basis.
Therefore, with respect to trades that occur through omnibus
accounts at financial intermediaries, to some extent, the Fund
relies on the financial intermediary to monitor frequent
short-term trading within the Fund by the financial
intermediary’s customers. However, the Fund or the
distributor has entered into agreements with financial
intermediaries whereby intermediaries are required to provide
certain customer identification and transaction information upon
the Fund’s request. The Fund may use this information to
help identify and prevent market-timing activity in the Fund.
There can be no assurance that the Fund will be able to identify
or prevent all market-timing activities.
As
with any investment, you should consider how your Fund
investment will be taxed. The tax information in this
Prospectus is provided as general information. You should
consult your own tax professional about the tax consequences of
an investment in the Fund.
Unless your investment in the Fund is through a tax-deferred
retirement account, such as a 401(k) plan or IRA, you need to be
aware of the possible tax consequences when:
n
The Fund makes distributions; and
n
You sell Fund shares, including an exchange to another Morgan
Stanley Fund.
Taxes on
Distributions. Your distributions are
normally subject to federal and state income tax when they are
paid, whether you take them in cash or reinvest them in Fund
shares. A distribution also may be subject to local income tax.
Any income dividend distributions and any short-term capital
gain distributions are taxable to you as ordinary income. Any
long-term capital gain distributions are taxable as long-term
capital gains, no matter how long you have owned shares in the
Fund. Under current law, a portion of the income dividends you
receive may be taxed at the same rate as long-term capital
gains. However, even if income received in the form of income
dividends is taxed at the same rates as long-term capital gains,
such income will not be considered long-term capital gains for
other federal income tax purposes. For example, you generally
will not be permitted to offset income dividends with capital
losses. Short-term capital gain distributions will continue to
be taxed at ordinary income rates.
If more than 50% of the Fund’s assets are invested in
foreign securities at the end of any fiscal year, the Fund may
elect to permit shareholders to take a credit or reduction on
their federal income tax return for foreign taxes paid by the
Fund.
You will be sent a statement (IRS
Form 1099-DIV)
by February of each year showing the taxable distributions paid
to you in the previous year. The statement provides information
on your dividends and capital gains for tax purposes.
Taxes on
Sales. Your sale of Fund shares normally
is subject to federal and state income tax and may result in a
taxable gain or loss to you. A sale also may be subject to local
income tax. Your exchange of Fund shares for shares of another
Morgan Stanley Fund is treated for tax purposes like a sale of
your original shares and a purchase of your
20
new shares. Thus, the exchange may, like a sale, result in a
taxable gain or loss to you and will give you a new tax basis
for your new shares.
When you open your Fund account, you should provide your social
security or tax identification number on your investment
application. By providing this information, you will avoid being
subject to federal backup withholding tax on taxable
distributions and redemption proceeds (as of the date of this
Prospectus this rate is 28%). Any withheld amount would
be sent to the IRS as an advance payment of your taxes due on
your income.
The
Fund offers several Classes of shares having different
distribution arrangements designed to provide you with different
purchase options according to your investment needs. Your Morgan
Stanley Smith Barney Financial Advisor or other authorized
financial representative can help you decide which Class may be
appropriate for you.
The general public is offered three Classes: Class A
shares, Class B shares and Class C shares, which
differ principally in terms of sales charges and ongoing
expenses. A fourth Class, Class I shares, is offered only
to a limited category of investors. Shares that you acquire
through reinvested distributions will not be subject to any
front-end sales charge or CDSC.
Sales personnel may receive different compensation for selling
each Class of shares. The sales charges applicable to each Class
provide for the distribution financing of shares of that Class.
The chart below compares the sales charge and annual
12b-1 fee
applicable to each Class:
Class
Sales Charge
Maximum Annual 12b-1
Fee
A
Maximum 5.25% initial sales charge reduced for purchases of
$25,000 or more; shares purchased without an initial sales
charge are generally subject to a 1.00% CDSC if sold during the
first 18 months
0.25
%
B
Maximum 5.00% CDSC during the first year decreasing to 0% after
six years
1.00
%
C
1.00% CDSC during the first year
1.00
%
I
None
None
While Class B and Class C shares do not have any
front-end sales charges, their higher ongoing annual expenses
(due to higher
12b-1 fees)
mean that over time you could end up paying more for these
shares than if you were to pay front-end sales charges for
Class A shares.
Certain shareholders may be eligible for reduced sales charges
(i.e., breakpoint discounts), CDSC waivers and eligibility
minimums. Please see the information for each Class set forth
below for specific eligibility requirements. You must notify
your Morgan Stanley Smith Barney Financial Advisor or other
authorized financial representative (or the Transfer Agent if
you purchase shares directly through the Fund) at the time a
purchase order (or in the case of Class B or Class C
shares, a redemption order) is placed, that the purchase (or
redemption) qualifies for a reduced sales charge (i.e.,
breakpoint discount), CDSC waiver or eligibility minimum.
Similar notification must be made in writing when an order is
placed by mail. The reduced sales charge, CDSC waiver or
eligibility minimum will not be granted if:
(i) notification is not furnished at the time of order; or
(ii) a review of the records of Morgan Stanley Smith
Barney, Morgan Stanley & Co. Incorporated
(“Morgan Stanley & Co.”) or other authorized
dealer of Fund shares, or the Transfer Agent does not confirm
your represented holdings.
21
In order to obtain a reduced sales charge (i.e., breakpoint
discount) or to meet an eligibility minimum, it may be necessary
at the time of purchase for you to inform your Morgan Stanley
Smith Barney Financial Advisor or other authorized financial
representative (or the Transfer Agent if you purchase shares
directly through the Fund) of the existence of other accounts in
which there are holdings eligible to be aggregated to meet the
sales load breakpoints or eligibility minimums. In order to
verify your eligibility, you may be required to provide account
statements
and/or
confirmations regarding shares of the Fund or other Morgan
Stanley Funds held in all related accounts described below at
Morgan Stanley Smith Barney, Morgan Stanley & Co. or by
other authorized dealers, as well as shares held by related
parties, such as members of the same family or household, in
order to determine whether you have met a sales load breakpoint
or eligibility minimum. The Fund makes available, in a clear and
prominent format, free of charge, on its web site,
www.morganstanley.com/im, information regarding applicable sales
loads, reduced sales charges (i.e., breakpoint discounts), sales
load waivers and eligibility minimums. The web site includes
hyperlinks that facilitate access to the information.
CLASS A
SHARES Class A shares
are sold at net asset value plus an initial sales charge of up
to 5.25% of the public offering price. The initial sales charge
is reduced for purchases of $25,000 or more according to the
schedule below. Investments of $1 million or more are not
subject to an initial sales charge, but are generally subject to
a CDSC of 1.00% on sales made within 18 months after the
last day of the month of purchase. The CDSC will be assessed in
the same manner and with the same CDSC waivers as with
Class B shares. In addition, the CDSC on Class A
shares will be waived in connection with sales of Class A
shares for which no commission or transaction fee was paid by
the distributor to authorized dealers at the time of purchase of
such shares. Class A shares are also subject to a
distribution and shareholder services
(12b-1) fee
of up to 0.25% of the average daily net assets of the Class. The
maximum annual
12b-1 fee
payable by Class A shares is lower than the maximum annual
12b-1 fee
payable by Class B or Class C shares.
22
The offering price of Class A shares includes a sales
charge (expressed as a percentage of the public offering price)
on a single transaction as shown in the following table:
Front-End
Sales Charge or FSC
An initial sales
charge you pay when purchasing Class A shares that is based
on a percentage of the offering price. The percentage declines
based upon the dollar value of Class A shares you purchase.
We offer three ways to reduce your Class A sales
charges — the Combined Purchase Privilege, Right of
Accumulation and Letter of Intent.
Front-End Sales Charge
Amount of Single Transaction
Percentage of
Public Offering Price
Approximate Percentage
of Net Amount Invested
Less than $25,000
5.25%
5.54%
$25,000 but less than $50,000
4.75%
4.99%
$50,000 but less than $100,000
4.00%
4.17%
$100,000 but less than $250,000
3.00%
3.09%
$250,000 but less than $500,000
2.50%
2.56%
$500,000 but less than $1 million
2.00%
2.04%
$1 million and over
0.00%
0.00%
You may benefit from a reduced sales charge schedule (i.e.,
breakpoint discount) for purchases of Class A shares of the
Fund, by combining, in a single transaction, your purchase with
purchases of Class A shares of the Fund by the following
related accounts:
n
A single account (including an individual, trust or fiduciary
account).
n
A family member account (limited to spouse, and children under
the age of 21).
n
Pension, profit sharing or other employee benefit plans of
companies and their affiliates.
n
Employer sponsored and individual retirement accounts (including
IRAs, Keogh, 401(k), 403(b), 408(k) and 457(b) plans).
n
Tax-exempt organizations.
n
Groups organized for a purpose other than to buy mutual fund
shares.
Combined Purchase
Privilege. You will have the benefit of
reduced sales charges by combining purchases of Class A
shares of the Fund for any related account in a single
transaction with purchases of any class of shares of other
Morgan Stanley Multi-Class Funds for the related account or
any other related account. For the purpose of this combined
purchase privilege, a “related account” is:
n
A single account (including an individual account, a joint
account and a trust account established solely for the benefit
of the individual).
n
A family member account (limited to spouse, and children under
the age of 21, but including trust accounts established solely
for the benefit of a spouse, or children under the age of 21).
n
An IRA and single participant retirement account (such as a
Keogh).
n
An UGMA/UTMA account.
23
Right of
Accumulation. You may benefit from a
reduced sales charge if the cumulative net asset value of
Class A shares of the Fund purchased in a single
transaction, together with the net asset value of all classes of
shares of Morgan Stanley Multi-Class Funds (including
shares of Morgan Stanley Non-Multi-Class Funds which
resulted from an exchange from Morgan Stanley
Multi-Class Funds) held in related accounts, amounts to
$25,000 or more. For the purposes of the right of accumulation
privilege, a related account is any one of the accounts listed
under “Combined Purchase Privilege” above.
Notification. You
must notify your Morgan Stanley Smith Barney Financial Advisor
or other authorized financial representative (or Morgan Stanley
Trust if you purchase shares directly through the Fund) at the
time a purchase order is placed, that the purchase qualifies for
a reduced sales charge under any of the privileges discussed
above. Similar notification must be made in writing when an
order is placed by mail. The reduced sales charge will not be
granted if: (i) notification is not furnished at the time
of the order; or (ii) a review of the records of Morgan
Stanley Smith Barney, Morgan Stanley & Co. or other
authorized dealer of Fund shares or the Transfer Agent does not
confirm your represented holdings.
In order to obtain a reduced sales charge under any of the
privileges discussed above, it may be necessary at the time of
purchase for you to inform your Morgan Stanley Smith Barney
Financial Advisor or other authorized financial representative
(or the Transfer Agent if you purchase shares directly through
the Fund) of the existence of the other accounts in which there
are holdings eligible to be aggregated to meet the sales load
breakpoint
and/or right
of accumulation threshold. In order to verify your eligibility,
you may be required to provide account statements
and/or
confirmations regarding shares of the Fund or other Morgan
Stanley Funds held in all related accounts described above at
Morgan Stanley Smith Barney, Morgan Stanley & Co. or by
other authorized dealers, as well as shares held by related
parties, such as members of the same family or household, in
order to determine whether you have met the sales load
breakpoint
and/or right
of accumulation threshold. The Fund makes available, in a clear
and prominent format, free of charge, on its web site,
www.morganstanley.com, information regarding applicable sales
loads and reduced sales charges (i.e., breakpoint discounts).
The web site includes hyperlinks that facilitate access to the
information.
Letter of
Intent. The above schedule of reduced
sales charges for larger purchases also will be available to you
if you enter into a written “Letter of Intent.” A
Letter of Intent provides for the purchase of Class A
shares of the Fund or other Multi-Class Funds within a
13-month
period. The initial purchase under a Letter of Intent must be at
least 5% of the stated investment goal. The Letter of Intent
does not preclude the Fund (or any other Multi-Class Fund)
from discontinuing sales of its shares. To determine the
applicable sales charge reduction, you may also include:
(1) the cost of shares of other Morgan Stanley Funds which
were previously purchased at a price including a front-end sales
charge during the
90-day
period prior to the distributor receiving the Letter of Intent,
and (2) the historical cost of shares of other funds you
currently own acquired in exchange for shares of funds purchased
during that period at a price including a front-end sales
charge. You may combine purchases and exchanges by family
members (limited to spouse, and children under the age of
21) during the periods referenced in (1) and
(2) above. You should retain any records necessary to
substantiate historical costs because the Fund, the Transfer
Agent and any financial intermediaries may not maintain this
information. You can obtain a Letter of Intent by contacting
your Morgan Stanley Smith Barney Financial Advisor or other
authorized financial representative, or by calling toll-free
(800) 869-NEWS.
If you do not achieve the stated investment goal within the
13-month
period, you are required to pay the difference between
24
the sales charges otherwise applicable and sales charges
actually paid, which may be deducted from your investment.
Shares acquired through reinvestment of distributions are not
aggregated to achieve the stated investment goal.
Other Sales
Charge Waivers. In addition to investments
of $1 million or more, your purchase of Class A shares
is not subject to a front-end sales charge (or a CDSC upon sale)
if your account qualifies under one of the following categories:
n
A trust for which a banking affiliate of the Investment Adviser
provides discretionary trustee services.
n
Persons participating in a fee-based investment program (subject
to all of its terms and conditions, including termination fees,
and mandatory sale or transfer restrictions on termination)
approved by the Fund’s distributor, pursuant to which they
pay an asset-based fee for investment advisory, administrative
and/or
brokerage services.
n
Qualified state tuition plans described in Section 529 of
the Code and donor-advised charitable gift funds (subject to all
applicable terms and conditions) and certain other investment
programs that do not charge an asset-based fee and have been
approved by the Fund’s distributor.
n
Employer-sponsored employee benefit plans, whether or not
qualified under the Code, for which an entity independent from
Morgan Stanley serves as recordkeeper under an alliance or
similar agreement with Morgan Stanley’s Retirement Plan
Solutions (“Morgan Stanley Eligible Plans”).
n
A Morgan Stanley Eligible Plan whose Class B shares have
converted to Class A shares, regardless of the plan’s
asset size or number of eligible employees.
n
Insurance company separate accounts that have been approved by
the Fund’s distributor.
n
Current or retired Directors or Trustees of the Morgan Stanley
Funds, such persons’ spouses, and children under the age of
21, and trust accounts for which any of such persons is a
beneficiary.
n
Current or retired directors, officers and employees of Morgan
Stanley and any of its subsidiaries, such persons’ spouses,
and children under the age of 21, and trust accounts for which
any of such persons is a beneficiary.
25
CLASS B
SHARES Class B shares
are offered at net asset value with no initial sales charge but
are subject to a CDSC, as set forth in the table below. For the
purpose of calculating the CDSC, shares are deemed to have been
purchased on the last day of the month during which they were
purchased.
Contingent
Deferred
Sales Charge
or CDSC
A fee you pay
when you sell shares of certain Morgan Stanley Funds purchased
without an initial sales charge. This fee declines the longer
you hold your shares as set forth in the table.
Year Since Purchase Payment Made
CDSC as a Percentage of Amount
Redeemed
First
5.0%
Second
4.0%
Third
3.0%
Fourth
2.0%
Fifth
2.0%
Sixth
1.0%
Seventh and thereafter
None
The CDSC is assessed on an amount equal to the lesser of the
then market value of the shares or the historical cost of the
shares (which is the amount actually paid for the shares at the
time of original purchase) being redeemed. Accordingly, no sales
charge is imposed on increases in net asset value above the
initial purchase price. In determining whether a CDSC applies to
a redemption, it is assumed that the shares being redeemed first
are any shares in the shareholder’s Fund account that are
not subject to a CDSC, followed by shares held the longest in
the shareholder’s account.
Broker-dealers or other financial intermediaries may impose a
limit on the dollar value of a Class B share purchase order
that they will accept. You should discuss with your financial
advisor which share class is most appropriate for you, based on
the size of your investment, your expected time horizon for
holding the shares and other factors, bearing in mind the
availability of reduced sales loads on Class A share
purchases of $25,000 or more and for existing shareholders who
hold over $25,000 in Morgan Stanley Funds.
CDSC
Waivers. A CDSC, if otherwise applicable,
will be waived in the case of:
n
Sales of shares held at the time you die or become disabled
(within the definition in Section 72(m)(7) of the Code
which relates to the ability to engage in gainful employment),
if the shares are: (i) registered either in your individual
name or in the names of you and your spouse as joint tenants
with right of survivorship; (ii) registered in the name of
a trust of which (a) you are the settlor and that is
revocable by you (i.e., a “living trust”); or
(b) you and your spouse are the settlors and that is
revocable by you or your spouse (i.e., a “joint living
trust”); or (iii) held in a qualified corporate or
self-employed retirement plan, IRA or 403(b) Custodial Account;
provided, in each case, that the sale is requested within one
year after your death or initial determination of disability.
n
Sales in connection with the following retirement plan
“distributions”: (i) lump-sum or other
distributions from a qualified corporate or self-employed
retirement plan following retirement (or, in the case of a
“key employee” of a “top heavy” plan,
following attainment of
age 591/2);
(ii) required minimum distributions and certain other
distributions (such as those following attainment of
26
age 591/2)
from an IRA or 403(b) Custodial Account; or (iii) a
tax-free return of an excess IRA contribution (a
“distribution” does not include a direct transfer of
IRA, 403(b) Custodial Account or retirement plan assets to a
successor custodian or trustee).
n
Sales of shares in connection with the systematic withdrawal
plan of up to 12% annually of the value of each fund from which
plan sales are made. The percentage is determined on the date
you establish the systematic withdrawal plan and based on the
next calculated share price. You may have this CDSC waiver
applied in amounts up to 1% per month, 3% per quarter, 6%
semi-annually or 12% annually. Shares with no CDSC will be sold
first, followed by those with the lowest CDSC. As such, the
waiver benefit will be reduced by the amount of your shares that
are not subject to a CDSC. If you suspend your participation in
the plan, you may later resume plan payments without requiring a
new determination of the account value for the 12% CDSC waiver.
The Fund’s distributor may require confirmation of your
entitlement before granting a CDSC waiver. If you believe you
are eligible for a CDSC waiver, please contact your Morgan
Stanley Smith Barney Financial Advisor or other authorized
financial representative call toll-free (800) 869-NEWS.
Distribution
Fee. Class B shares are subject to an
annual distribution and shareholder services
(12b-1) fee
of up to 1.00% of the average daily net assets of Class B
shares. The maximum annual
12b-1 fee
payable by Class B shares is higher than the maximum annual
12b-1 fee
payable by Class A shares. Currently, the distributor has
agreed to waive the 12b-1 fee on Class B shares to the
extent it exceeds 0.24% of the average daily net assets of such
shares on an annualized basis. The distributor may discontinue
this waiver in the future.
Conversion
Feature. After eight years, Class B
shares generally will convert automatically to Class A
shares of the Fund with no initial sales charge. The eight-year
period runs from the last day of the month in which the shares
were purchased or, in the case of Class B shares acquired
through an exchange, from the last day of the month in which the
original Class B shares were purchased; the shares will
convert to Class A shares based on their relative net asset
values in the month following the eight-year period. At the same
time, an equal proportion of Class B shares acquired
through automatically reinvested distributions will convert to
Class A shares on the same basis. This conversion will be
suspended during any period in which the expense ratio of the
Class B shares of the Fund is lower than the expense ratio
of the Class A shares of the Fund.
In the case of Class B shares held in a Morgan Stanley
Eligible Plan, the plan is treated as a single investor and all
Class B shares will convert to Class A shares on the
conversion date of the Class B shares of a Morgan Stanley
Fund purchased by that plan.
If you exchange your Class B shares for shares of a Money
Market Fund or the Limited Duration U.S. Government Trust,
the holding period for conversion is frozen as of the last day
of the month of the exchange and resumes on the last day of the
month you exchange back into Class B shares.
Exchanging Shares
Subject to a CDSC. There are special
considerations when you exchange Fund shares that are subject to
a CDSC. When determining the length of time you held the shares
and the corresponding CDSC rate, any period (starting at the end
of the month) during which you held shares of a fund that does
not charge a CDSC will not be counted. Thus, in
effect the “holding period” for purposes of
calculating the CDSC is frozen upon exchanging into a fund that
does not charge a CDSC.
27
For example, if you held Class B shares of the Fund for one
year, exchanged to Class B of another Morgan Stanley
Multi-Class Fund for another year, then sold your shares, a
CDSC rate of 4% would be imposed on the shares based on a
two-year holding period — one year for each fund.
However, if you had exchanged the shares of the Fund for a Money
Market Fund (which does not charge a CDSC) instead of the
Multi-Class Fund, then sold your shares, a CDSC rate of 5%
would be imposed on the shares based on a one-year holding
period. The one year in the Money Market fund would not be
counted. Nevertheless, if shares subject to a CDSC are exchanged
for a fund that does not charge a CDSC, you will receive a
credit when you sell the shares equal to the
12b-1 fees,
if any, you paid on those shares while in that fund up to the
amount of any applicable CDSC.
CLASS C
SHARES Class C shares
are sold at net asset value with no initial sales charge, but
are subject to a CDSC of 1.00% on sales made within one year
after the last day of the month of purchase. The CDSC will be
assessed in the same manner and with the same CDSC waivers as
with Class B shares.
Broker-dealers or other financial intermediaries may impose a
limit on the dollar value of a Class C share purchase order
that they will accept. For example, a Morgan Stanley Smith
Barney Financial Advisor generally will not accept purchase
orders for Class C shares that in the aggregate amount to
$250,000 or more. You should discuss with your financial advisor
which share class is most appropriate for you based on the size
of your investment, your expected time horizon for holding the
shares and other factors, bearing in mind the availability of
reduced sales loads on Class A share purchases of $25,000
or more and for existing shareholders who hold over $25,000 in
Morgan Stanley Funds.
Distribution
Fee. Class C shares are subject to an
annual distribution and shareholder services
(12b-1) fee
of up to 1.00% of the average daily net assets of that Class.
The maximum annual
12b-1 fee
payable by Class C shares is higher than the maximum annual
12b-1 fee
payable by Class A shares. Unlike Class B shares,
Class C shares have no conversion feature and, accordingly,
an investor that purchases Class C shares may be subject to
distribution and shareholder services
(12b-1) fees
applicable to Class C shares for as long as the investor
owns such shares.
CLASS I
SHARES Class I shares
are offered without any sales charge on purchases or sales and
without any distribution and shareholder services
(12b-1) fee.
Class I shares are offered only to investors meeting an
initial investment minimum of $5 million ($25 million
for Morgan Stanley Eligible Plans) and the following investor
categories:
n
Investors participating in the Investment Adviser’s or an
affiliate’s mutual fund asset allocation program (subject
to all of its terms and conditions, including termination fees,
and mandatory sale or transfer restrictions on termination)
pursuant to which they pay an asset-based fee.
n
Persons participating in a fee-based investment program (subject
to all of its terms and conditions, including termination fees,
and mandatory sale or transfer restrictions on termination)
approved by the Fund’s distributor pursuant to which they
pay an asset-based fee for investment advisory, administrative
and/or
brokerage services.
n
Certain investment programs that do not charge an asset-based
fee and have been approved by the Fund’s distributor.
n
Employee benefit plans maintained by Morgan Stanley or any of
its subsidiaries for the benefit of certain employees of Morgan
Stanley and its subsidiaries.
n
Certain unit investment trusts sponsored by Morgan
Stanley & Co. or its affiliates.
28
n
Certain other open-end investment companies whose shares are
distributed by the Fund’s distributor.
n
Investors who were shareholders of the Dean Witter Retirement
Series on September 11, 1998 for additional purchases for
their former Dean Witter Retirement Series accounts.
n
The Investment Adviser and its affiliates with respect to shares
held in connection with certain deferred compensation programs
established for their employees or the Fund’s Directors.
A purchase order that meets the requirements for investment in
Class I shares can be made only in Class I shares.
Class I shares are not offered for investments made through
Section 529 plans, donor-advised charitable gift funds and
insurance company separate accounts (regardless of the size of
the investment).
Meeting
Class I Eligibility Minimums. To meet
the $5 million ($25 million for Morgan Stanley
Eligible Plans) initial investment to qualify to purchase
Class I shares you may combine: (1) purchases in a
single transaction of Class I shares of the Fund and other
Morgan Stanley Multi-Class Funds;
and/or
(2) previous purchases of Class A and Class I
shares of Multi-Class Funds you currently own, along with
shares of Morgan Stanley Funds you currently own that you
acquired in exchange for those shares. Shareholders cannot
combine purchases made by family members or a shareholder’s
other related accounts in a single transaction for purposes of
meeting the $5 million initial investment minimum
requirement to qualify to purchase Class I shares.
NO
SALES CHARGES FOR REINVESTED CASH DISTRIBUTIONS
If you receive a cash
payment representing an ordinary dividend or capital gain and
you reinvest that amount in the applicable Class of shares by
returning the check within 30 days of the payment date, the
purchased shares would not be subject to an initial sales charge
or CDSC.
PLAN
OF DISTRIBUTION
(RULE 12b-1
FEES) The Fund has adopted a
Plan of Distribution in accordance with
Rule 12b-1
under the Investment Company Act with respect to the
Class A, Class B and Class C shares.
(Class I shares are offered without any
12b-1 fee.)
The Plan allows the Fund to pay distribution fees for the sale
and distribution of these shares. It also allows the Fund to pay
for services to shareholders of Class A, Class B and
Class C shares. Because these fees are paid out of the
Fund’s assets on an ongoing basis, over time these fees
will increase the cost of your investment and reduce your return
in these Classes and may cost you more than paying other types
of sales charges.
The
Investment Adviser
and/or the
distributor may pay compensation (out of their own funds and not
as an expense of the Fund) to certain affiliated or unaffiliated
broker-dealers or other financial intermediaries or service
providers in connection with the sale, distribution, marketing
or retention of Fund shares
and/or
shareholder servicing. Such compensation may be significant in
amount and the prospect of receiving any such additional
compensation may provide such affiliated or unaffiliated
entities with an incentive to favor sales of shares of the Fund
over other investment options. Any such payments will not change
the net asset value or the price of the Fund’s shares. For
more information, please see the Fund’s SAI.
29
Financial
Highlights
The financial highlights table is intended to help you
understand the Fund’s financial performance for the periods
indicated. Certain information reflects financial results for a
single Fund share throughout each period. The total returns in
the table represent the rate an investor would have earned or
lost on an investment in the Fund (assuming reinvestment of all
dividends and distributions). The ratio of expenses to average
net assets listed in the tables below for each class of shares
of the Fund are based on the average net assets of the Fund for
each of the periods listed in the tables. To the extent that the
Fund’s average net assets decrease over the Fund’s
next fiscal year, such expenses can be expected to increase
because certain fixed costs will be spread over a smaller amount
of assets.
The information has been audited by
[ ],
an independent registered public accounting firm, whose report,
along with the Fund’s financial statements, are
incorporated by reference in the SAI from the Fund’s
annual report, which is available upon request.
The
per share amounts were computed using an average number of
shares outstanding during the period.
(3)
Does
not reflect the deduction of sales charge. Calculated based on
the net asset value as of the last business day of the
period.
(4)
Reflects
overall Fund ratios for investment income and non-class specific
expenses.
(5)
Reflects
rebate of certain Fund expenses in connection with the
investments in Morgan Stanley Institutional Liquidity
Funds – Money Market
Portfolio – Institutional Class during the
period. The rebate had an effect of less than 0.005%.
The
per share amounts were computed using an average number of
shares outstanding during the period.
(3)
Does
not reflect the deduction of sales charge. Calculated based on
the net asset value as of the last business day of the
period.
(4)
Reflects
overall Fund ratios for investment income and non-class specific
expenses.
(5)
Reflects
rebate of certain Fund expenses in connection with the
investments in Morgan Stanley Institutional Liquidity
Funds – Money Market
Portfolio – Institutional Class during the
period. The rebate had an effect of less than 0.005%.
(6)
If
the Distributor had not rebated a portion of its fee to the
Fund, the expense and net investment income ratios would have
been 0.85% and 1.37%, respectively.
The
per share amounts were computed using an average number of
shares outstanding during the period.
(3)
Does
not reflect the deduction of sales charge. Calculated based on
the net asset value as of the last business day of the
period.
(4)
Reflects
overall Fund ratios for investment income and non-class specific
expenses.
(5)
Reflects
rebate of certain Fund expenses in connection with the
investments in Morgan Stanley Institutional Liquidity
Funds – Money Market
Portfolio – Institutional Class during the
period. The rebate had an effect of less than 0.005%.
The
per share amounts were computed using an average number of
shares outstanding during the period.
(3)
Calculated
based on the net asset value as of the last business day of the
period.
(4)
Reflects
overall Fund ratios for investment income and non-class specific
expenses.
(5)
Reflects
rebate of certain Fund expenses in connection with the
investments in Morgan Stanley Institutional Liquidity
Funds – Money Market
Portfolio – Institutional Class during the
period. The rebate had an effect of less than 0.005%.
33
Notes
34
35
Morgan Stanley
Funds
EQUITY
FIXED
INCOME
U.S. CORE
Dividend Growth Securities
ASSET ALLOCATION
Balanced Fund Global Strategist Fund
INTERNATIONAL
European Equity Fund International Fund International Value Equity Fund Pacific Growth Fund
GLOBAL
Global Advantage Fund Global Dividend Growth Securities
U.S. GROWTH
Capital Opportunities Trust Focus Growth Fund Mid Cap Growth Fund Special Growth Fund
U.S. INDEX
Equally-Weighted S&P 500 Fund S&P 500 Index Fund
SATELLITE
Alternative Opportunities Fund Commodities Alpha Fund Convertible Securities Trust FX Alpha Plus Strategy Portfolio FX Alpha Strategy Portfolio Global Infrastructure Fund Health Sciences Trust Real Estate Fund Technology Fund
U.S. VALUE
Fundamental Value Fund Mid-Cap Value Fund Small-Mid Special Value Fund Special Value Fund Value Fund
TAXABLE SHORT TERM
Limited Duration U.S. Government Trust*
TAXABLE INTERMEDIATE TERM
Flexible Income Trust High Yield Securities Mortgage Securities Trust U.S. Government Securities Trust
TAX-EXEMPT
California Tax-Free Income Fund New York Tax-Free Income Fund Tax-Exempt Securities Trust
MONEY MARKET* TAXABLE
Liquid Asset Fund U.S. Government Money Market Trust
TAX-EXEMPT
California Tax-Free Daily Income Trust New York Municipal Money Market Trust Tax-Free Daily Income Trust
There may be funds created or terminated after this
Prospectus was published. Please consult the inside back
cover of a new fund’s prospectus for its designations,
e.g., Multi-Class Fund or Money Market Fund.
Unless otherwise noted, each listed Morgan Stanley Fund is a
Multi-Class Fund. A Multi-Class Fund is a mutual fund
offering multiple classes of shares.
*
Single-Class Fund(s)
Additional information about the Fund’s investments is
available in the Fund’s Annual and Semiannual
Reports to Shareholders. In the Fund’s Annual
Report, you will find a discussion of the market conditions
and investment strategies that significantly affected the
Fund’s performance during its last fiscal year.
The Fund’s Statement of Additional Information also
provides additional information about the Fund. The Statement
of Additional Information is incorporated herein by
reference (legally is part of this Prospectus). For a
free copy of the Fund’s Annual Report, Semiannual Report
or Statement of Additional Information, to request
other information about the Fund, or to make shareholder
inquiries, please call toll-free (800) 869-NEWS.
Free copies of these documents are also available from our
internet site at: www.morganstanley.com/im.
You also may obtain information about the Fund by calling your
Morgan Stanley Smith Barney Financial Advisor or by visiting our
Internet site.
Information about the Fund (including the Statement of
Additional Information) can be reviewed and copied at the
SEC Public Reference Room in Washington, DC. Information about
the Reference Room’s operations may be obtained by calling
the SEC at
(202) 551-8090.
Reports and other information about the Fund are available on
the EDGAR Database on the SEC’s Internet site at:
www.sec.gov and copies of this information may be obtained,
after paying a duplicating fee, by electronic request at the
following
E-mail
address: publicinfo@sec.gov, or by writing the Public Reference
Section of the SEC, Washington, DC
20549-1520.
(THE
FUND’S INVESTMENT COMPANY ACT FILE NO. IS
811-3128)
This Statement of Additional Information (“SAI”)
is not a prospectus. The Prospectus (dated
June 30, 2010) for Morgan Stanley Dividend Growth
Securities Inc. may be obtained without charge from the Fund at
its address or telephone number listed below.
The Fund’s audited financial statements for the fiscal year
ended February 28, 2010, including notes thereto, and the
report of
[ ],
are herein incorporated by reference from the Fund’s
Annual Report to Shareholders. A copy of the Fund’s
Annual Report to Shareholders must accompany the delivery
of this SAI.
Description of the Fund and Its Investments and Risks
4
A. Classification
4
B. Investment Strategies and Risks
4
C. Fund Policies/Investment
Restrictions
21
D. Disclosure of Portfolio Holdings
23
III.
Management of the Fund
27
A. Board of Directors
27
B. Management Information
28
C. Compensation
36
IV.
Control Persons and Principal Holders of Securities
38
V.
Investment Advisory and Other Services
38
A. Investment Adviser and
Administrator
38
B. Principal Underwriter
39
C. Services Provided by the
Investment Adviser and Administrator
39
D. Dealer Reallowances
40
E. Rule 12b-1
Plan
40
F. Other Service Providers
43
G. Fund Management
44
H. Codes of Ethics
45
I. Proxy Voting Policy and Proxy
Voting Record
46
J. Revenue Sharing
46
VI.
Brokerage Allocation and Other Practices
48
A. Brokerage Transactions
48
B. Commissions
48
C. Brokerage Selection
48
D. Directed Brokerage
49
E. Regular Broker-Dealers
49
VII.
Capital Stock and Other Securities
50
VIII.
Purchase, Redemption and Pricing of Shares
50
A. Purchase/Redemption of Shares
50
B. Offering Price
51
IX.
Taxation of the Fund and Shareholders
52
X.
Underwriters
54
XI.
Performance Data
55
XII.
Financial Statements
55
XIII.
Fund Counsel
56
Appendix A. Proxy Voting Policy and Procedures
A-1
2
Glossary of
Selected Defined Terms
The terms defined in this glossary are frequently used in this
SAI (other terms used occasionally are defined in the text of
the document).
“Administrator ” or “Morgan
Stanley Services ” — Morgan Stanley
Services Company Inc., a wholly-owned fund services subsidiary
of the Investment Adviser.
“Custodian ” — State Street Bank
and Trust Company.
“Directors ” — The Board of
Directors of the Fund.
“Distributor ” — Morgan Stanley
Distributors Inc., a wholly-owned broker-dealer subsidiary of
Morgan Stanley.
“Financial Advisors ” — Morgan
Stanley authorized financial services representatives.
“Fund ” — Morgan Stanley
Dividend Growth Securities Inc., a registered open-end
investment company.
“Independent Directors ” —
Directors who are not “interested persons” (as defined
by the Investment Company Act of 1940, as amended
(“Investment Company Act”)) of the Fund.
“Investment Adviser ” — Morgan
Stanley Investment Advisors Inc., a wholly-owned investment
adviser subsidiary of Morgan Stanley.
“Morgan Stanley &
Co. ” — Morgan Stanley & Co.
Incorporated, a wholly-owned broker-dealer subsidiary of Morgan
Stanley.
“Morgan Stanley Funds ” —
Registered investment companies for which the Investment Adviser
serves as the investment adviser and that hold themselves out to
investors as related companies for investment and investor
services.
“Morgan Stanley Smith Barney ” —
Morgan Stanley Smith Barney LLC, a majority-owned broker-dealer
subsidiary of Morgan Stanley.
“Transfer Agent ” — Morgan
Stanley Trust, a wholly-owned transfer agent subsidiary of
Morgan Stanley.
3
I.
FUND HISTORY
The Fund was incorporated in the state of Maryland on
December 22, 1980 under the name InterCapital Dividend
Growth Securities Inc. On March 16, 1983, the Fund’s
shareholders approved a change in the Fund’s name,
effective March 22, 1983, to Dean Witter Dividend Growth
Securities Inc. On June 22, 1998, the name of the Fund was
changed to Morgan Stanley Dean Witter Dividend Growth Securities
Inc. Effective June 18, 2001, the Fund’s name was
changed to Morgan Stanley Dividend Growth Securities Inc.
II.
DESCRIPTION
OF THE FUND AND ITS INVESTMENTS AND RISKS
The Fund is an open-end, diversified management investment
company whose investment objectives are to provide reasonable
current income and long-term growth of income and capital.
The following discussion of the Fund’s investment
strategies and risks should be read with the sections of the
Fund’s Prospectus titled “Principal Investment
Strategies,”“Principal Risks” and
“Additional Information about the Fund’s Investment
Objectives, Strategies and Risks.”
Derivatives. The Fund may, but is not required
to, use various derivatives and related investment strategies as
described below. Derivatives may be used for a variety of
purposes including hedging, risk management, portfolio
management or to earn income. Any or all of the investment
techniques described herein may be used at any time and there is
no particular strategy that dictates the use of one technique
rather than another, as the use of any derivative by the Fund is
a function of numerous variables including market conditions.
The Fund complies with applicable regulatory requirements when
using derivatives, including the segregation of liquid assets
when mandated by United States Securities and Exchange
Commission (“SEC”) rules or SEC staff positions.
Although the Investment Adviser seeks to use derivatives to
further the Fund’s investment objectives, no assurance can
be given that the use of derivatives will achieve this result.
General Risks of Derivatives. Derivatives
utilized by the Fund may involve the purchase and sale of
derivative instruments. A derivative is a financial instrument
the value of which depends upon (or derives from) the value of
another asset, security, interest rate or index. Derivatives may
relate to a wide variety of underlying instruments, including
equity and debt securities, indexes, interest rates, currencies
and other assets. Certain derivative instruments which the Fund
may use and the risks of those instruments are described in
further detail below. The Fund may in the future also utilize
derivatives techniques, instruments and strategies that may be
newly developed or permitted as a result of regulatory changes,
consistent with the Fund’s investment objectives and
policies. Such newly developed techniques, instruments and
strategies may involve risks different than or in addition to
those described herein. No assurance can be given that any
derivatives strategy employed by the Fund will be successful.
The risks associated with the use of derivatives are different
from, and possibly greater than, the risks associated with
investing directly in the instruments underlying such
derivatives. Derivatives are highly specialized instruments that
require investment techniques and risk analyses different from
other portfolio investments. The use of derivative instruments
requires an understanding not only of the underlying instrument
but also of the derivative itself. Certain risk factors
generally applicable to derivative transactions are described
below.
•
Derivatives are subject to the risk that the market value of the
derivative itself or the market value of underlying instruments
will change in a way adverse to the Fund’s interests. The
Fund bears the risk that the Investment Adviser may incorrectly
forecast future market trends and other financial or economic
factors or the value of the underlying security, index, interest
rate or currency when establishing a derivatives position for
the Fund.
4
•
Derivatives may be subject to pricing or “basis” risk,
which exists when a derivative becomes extraordinarily expensive
(or inexpensive) relative to historical prices or corresponding
instruments. Under such market conditions, it may not be
economically feasible to initiate a transaction or liquidate a
position at an advantageous time or price.
•
Many derivatives are complex and often valued subjectively.
Improper valuations can result in increased payment requirements
to counterparties or a loss of value to the Fund.
•
Using derivatives as a hedge against a portfolio investment
subjects the Fund to the risk that the derivative will have
imperfect correlation with the portfolio investment, which could
result in the Fund incurring substantial losses. This
correlation risk may be greater in the case of derivatives based
on an index or other basket of securities, as the portfolio
securities being hedged may not duplicate the components of the
underlying index or the basket may not be of exactly the same
type of obligation as those underlying the derivative. The use
of derivatives for “cross hedging” purposes (using a
derivative based on one instrument as a hedge on a different
instrument) may also involve greater correlation risks.
•
While using derivatives for hedging purposes can reduce the
Fund’s risk of loss, it may also limit the Fund’s
opportunity for gains or result in losses by offsetting or
limiting the Fund’s ability to participate in favorable
price movements in portfolio investments.
•
Derivatives transactions for non-hedging purposes involve
greater risks and may result in losses which would not be offset
by increases in the value of portfolio securities or declines in
the cost of securities to be acquired. In the event that the
Fund enters into a derivatives transaction as an alternative to
purchasing or selling the underlying instrument or in order to
obtain desired exposure to an index or market, the Fund will be
exposed to the same risks as are incurred in purchasing or
selling the underlying instruments directly.
•
The use of certain derivatives transactions involves the risk of
loss resulting from the insolvency or bankruptcy of the other
party to the contract (the “counterparty”) or the
failure by the counterparty to make required payments or
otherwise comply with the terms of the contract. In the event of
default by a counterparty, the Fund may have contractual
remedies pursuant to the agreements related to the transaction.
•
Liquidity risk exists when a particular derivative is difficult
to purchase or sell. If a derivative transaction is particularly
large or if the relevant market is illiquid, the Fund may be
unable to initiate a transaction or liquidate a position at an
advantageous time or price.
•
Certain derivatives transactions are not entered into or traded
on exchanges or in markets regulated by the Commodities Futures
Trading Commission (“CFTC”) or the SEC. Instead, such
over-the-counter (“OTC”) derivatives are entered into
directly by the counterparties and may be traded only through
financial institutions acting as market makers. OTC derivatives
transactions can only be entered into with a willing
counterparty that is approved by the Investment Adviser in
accordance with guidelines established by the Board. Where no
such counterparty is available, the Fund will be unable to enter
into a desired transaction. There also may be greater risk that
no liquid secondary market in the trading of OTC derivatives
will exist, in which case the Fund may be required to hold such
instruments until exercise, expiration or maturity. Many of the
protections afforded to exchange participants will not be
available to participants in OTC derivatives transactions. OTC
derivatives transactions are not subject to the guarantee of an
exchange or clearinghouse and as a result the Fund would bear
greater risk of default by the counterparties to such
transactions.
•
The Fund may be required to make physical delivery of portfolio
securities underlying a derivative in order to close out a
derivatives position or to sell portfolio securities at a time
or price at which it may be disadvantageous to do so in order to
obtain cash to close out or to maintain a derivatives position.
5
•
As a result of the structure of certain derivatives, adverse
changes in the value of the underlying instrument can result in
losses substantially greater than the amount invested in the
derivative itself. Certain derivatives have the potential for
unlimited loss, regardless of the size of the initial investment.
•
Certain derivatives may be considered illiquid and therefore
subject to the Fund’s limitation on investments in illiquid
securities.
•
Derivatives transactions conducted outside the United States may
not be conducted in the same manner as those entered into on
U.S. exchanges, and may be subject to different margin,
exercise, settlement or expiration procedures. Brokerage
commissions, clearing costs and other transaction costs may be
higher on foreign exchanges. Many of the risks of OTC
derivatives transactions are also applicable to derivatives
transactions conducted outside the United States. Derivatives
transactions conducted outside the United States are subject to
the risk of governmental action affecting the trading in, or the
prices of, foreign securities, currencies and other instruments.
The value of such positions could be adversely affected by
foreign political and economic factors; lesser availability of
data on which to make trading decisions; delays on the
Fund’s ability to act upon economic events occurring in
foreign markets; and less liquidity than U.S. markets.
•
Currency derivatives are subject to additional risks. Currency
derivatives transactions may be negatively affected by
government exchange controls, blockages, and manipulations.
Currency exchange rates may be influenced by factors extrinsic
to a country’s economy. There is no systematic reporting of
last sale information with respect to foreign currencies. As a
result, the available information on which trading in currency
derivatives will be based may not be as complete as comparable
data for other transactions. Events could occur in the foreign
currency market which will not be reflected in currency
derivatives until the following day, making it more difficult
for the Fund to respond to such events in a timely manner.
Options
An option is a contract that gives the holder of the option the
right, but not the obligation, to buy from (in the case of a
call option) or sell to (in the case of a put option) the seller
of the option (the “option writer”) the underlying
security at a specified fixed price (the “exercise
price”) prior to a specified date (the “expiration
date”). The buyer of the option pays to the option writer
the option premium, which represents the purchase price of the
option.
Exchange traded options are issued by a regulated intermediary
such as the Options Clearing Corporation (“OCC”),
which guarantees the performance of the obligations of the
parties to such option. OTC options are purchased from or sold
to counterparties through direct bilateral agreement between the
counterparties. Certain options, such as options on individual
securities, are settled through physical delivery of the
underlying security, whereas other options, such as index
options, are settled in cash in an amount based on the value of
the underlying instrument multiplied by a specified multiplier.
Writing Options. The Fund may write call and
put options. As the writer of a call option, the Fund receives
the premium from the purchaser of the option and has the
obligation, upon exercise of the option, to deliver the
underlying security upon payment of the exercise price. If the
option expires without being exercised the Fund is not required
to deliver the underlying security but retains the premium
received.
The Fund may only write call options that are
“covered.” A call option on a security is covered if
(a) the Fund owns the security underlying the call or has
an absolute and immediate right to acquire that security without
additional cash consideration (or, if additional cash
consideration is required, such amount is maintained by such
Fund in segregated liquid assets) upon conversion or exchange of
other securities held by the Fund; or (b) the Fund has
purchased a call on the underlying security, the exercise price
of which is (i) equal to or less than the exercise price of
the call written, or (ii) greater than the exercise price
of the call written, provided the difference is maintained by
the Fund in segregated liquid assets.
6
Selling call options involves the risk that the Fund may be
required to sell the underlying security at a disadvantageous
price, below the market price of such security, at the time the
option is exercised. As the writer of a covered call option, the
Fund forgoes, during the option’s life, the opportunity to
profit from increases in the market value of the underlying
security covering the option above the sum of the premium and
the exercise price but retains the risk of loss should the price
of the underlying security decline.
The Fund may write put options. As the writer of a put option,
the Fund receives the premium from the purchaser of the option
and has the obligation, upon exercise of the option, to pay the
exercise price and receive delivery of the underlying security.
If the option expires without being exercised, the Fund is not
required to receive the underlying security in exchange for the
exercise price but retains the option premium.
The Fund may only write put options that are
“covered.” A put option on a security is covered if
(a) the Fund segregates liquid assets equal to the exercise
price; or (b) the Fund has purchased a put on the same
security as the put written, the exercise price of which is
(i) equal to or greater than the exercise price of the put
written, or (ii) less than the exercise price of the put
written, provided the difference is maintained by the Fund in
segregated liquid assets.
Selling put options involves the risk that the Fund may be
required to buy the underlying security at a disadvantageous
price, above the market price of such security, at the time the
option is exercised. While the Fund’s potential gain in
writing a covered put option is limited to the premium received
plus the interest earned on the liquid assets covering the put
option, the Fund’s risks of loss is equal to the entire
value of the underlying security, offset only by the amount of
the premium received.
The Fund may close out an options position which it has written
through a closing purchase transaction. The Fund would execute a
closing purchase transaction with respect to a call option
written by purchasing a call option on the same underlying
security and having the same exercise price and expiration date
as the call option written by the Fund. The Fund would execute a
closing purchase transaction with respect to a put option
written by purchasing a put option on the same underlying
security and having the same exercise price and expiration date
as the put option written by the Fund. A closing purchase
transaction may or may not result in a profit to the Fund. The
Fund could close out its position as an option writer only if a
liquid secondary market exists for options of that series and
there is no assurance that such a market will exist with respect
to any particular option.
The writer of a option generally has no control over the time
when the option is exercised and the option writer is required
to deliver or acquire the underlying security. Once an option
writer has received an exercise notice, it cannot effect a
closing purchase transaction in order to terminate its
obligation under the option. Thus, the use of options may
require the Fund to buy or sell portfolio securities at
inopportune times or for prices other than the current market
values of such securities, may limit the amount of appreciation
the Fund can realize on an investment, or may cause the Fund to
hold a security that it might otherwise sell.
Purchasing Options. The Fund may purchase call
and put options. As the buyer of a call option, the Fund pays
the premium to the option writer and has the right to purchase
the underlying security from the option writer at the exercise
price. If the market price of the underlying security rises
above the exercise price, the Fund could exercise the option and
acquire the underlying security at a below market price, which
could result in a gain to the Fund, minus the premium paid. As
the buyer of a put option, the Fund pays the premium to the
option writer and has the right to sell the underlying security
to the option writer at the exercise price. If the market price
of the underlying security declines below the exercise price,
the Fund could exercise the option and sell the underlying
security at an above market price, which could result in a gain
to the Fund, minus the premium paid. The Fund may buy call and
put options whether or not it holds the underlying securities.
As a buyer of a call or put option, the Fund may sell put or
call options that it has purchased at any time prior to such
option’s expiration date through a closing sale
transaction. The principal factors affecting the market value of
a put or a call option include supply and demand, interest
rates, the current market price of the underlying security in
relation to the exercise price of the option, the volatility of
the underlying security,
7
the underlying security’s dividend policy, and the time
remaining until the expiration date. A closing sale transaction
may or may not result in a profit to the Fund. The Fund’s
ability to initiate a closing sale transaction is dependent upon
the liquidity of the options market and there is no assurance
that such a market will exist with respect to any particular
option. If the Fund does not exercise or sell an option prior to
its expiration date, the option expires and becomes worthless.
OTC Options. Unlike exchange-traded options,
which are standardized with respect to the underlying
instrument, expiration date, contract size and strike price, the
terms of OTC options generally are established through
negotiation between the parties to the options contract. This
type of arrangement allows the purchaser and writer greater
flexibility to tailor the option to their needs. OTC options are
available for a greater variety of securities or baskets of
securities, and in a wider range of expiration dates and
exercise prices than exchange traded options. However, unlike
exchange traded options, which are issued and guaranteed by a
regulated intermediary, such as the OCC, OTC options are entered
into directly with the counterparty. Unless the counterparties
provide for it, there is no central clearing or guaranty
function for an OTC option. Therefore, OTC options are subject
to the risk of default or non-performance by the counterparty.
Accordingly, the Investment Adviser must assess the
creditworthiness of the counterparty to determine the likelihood
that the terms of the option will be satisfied. There can be no
assurance that a continuous liquid secondary market will exist
for any particular OTC option at any specific time. As a result,
the Fund may be unable to enter into closing sale transactions
with respect to OTC options.
Index Options. Call and put options on indices
operate similarly to options on securities. Rather than the
right to buy or sell a single security at a specified price,
options on an index give the holder the right to receive, upon
exercise of the option, an amount of cash determined by
reference to the value of the underlying index. The underlying
index may be a broad-based index or a narrower market index.
Unlike options on securities, all settlements are in cash. The
settlement amount, which the writer of a index option must pay
to the holder of the option upon exercise, is generally equal to
the difference between the fixed exercise price of the option
and the value of the underlying index, multiplied by a specified
multiplier. The multiplier determines the size of the investment
position the option represents. Gain or loss to the Fund on
index options transactions will depend on price movements in the
underlying securities market generally or in a particular
segment of the market rather than price movements of individual
securities. As with other options, the Fund may close out its
position in index options through closing purchase transactions
and closing sale transactions provided that a liquid secondary
market exists for such options.
Index options written by the Fund will generally be covered in a
manner similar to the covering of other types of options, by
holding an offsetting financial position and/or segregating
liquid assets. The Fund may cover call options written on an
index by owning securities whose price changes, in the opinion
of the Investment Adviser, are expected to correlate to those of
the underlying index.
Foreign Currency Options. Options on foreign
currencies operate similarly to options on securities. Rather
than the right to buy or sell a single security at a specified
price, options on foreign currencies give the holder the right
to buy or sell foreign currency for a fixed amount in U.S.
dollars. Options on foreign currencies are traded primarily in
the OTC market, but may also be traded on United States and
foreign exchanges. The value of a foreign currency option is
dependent upon the value of the underlying foreign currency
relative to the U.S. dollar. The price of the option may vary
with changes in the value of either or both currencies and has
no relationship to the investment merits of a foreign security.
Options on foreign currencies are affected by all of those
factors which influence foreign exchange rates and foreign
investment generally. As with other options, the Fund may close
out its position in foreign currency options through closing
purchase transactions and closing sale transactions provided
that a liquid secondary market exists for such options.
Foreign currency options written by the Fund will generally be
covered in a manner similar to the covering of other types of
options, by holding an offsetting financial position and/or
segregating liquid assets.
8
Additional Risks of Options Transactions. The
risks associated with options transactions are different from,
and possibly greater than, the risks associated with investing
directly in the underlying instruments. Options are highly
specialized instruments that require investment techniques and
risk analyses different from those associated with other
portfolio investments. The use of options requires an
understanding not only of the underlying instrument but also of
the option itself. Options may be subject to the risk factors
generally applicable to derivatives transactions described
herein, and may also be subject to certain additional risk
factors, including:
•
The exercise of options written or purchased by the Fund could
cause such Fund to sell portfolio securities, thus increasing
the Fund’s portfolio turnover.
•
The Fund pays brokerage commissions each time it writes or
purchases an option or buys or sells an underlying security in
connection with the exercise of an option. Such brokerage
commissions could be higher relative to the commissions for
direct purchases of sales of the underlying securities.
•
The Fund’s options transactions may be limited by
limitations on options positions established by the exchanges on
which such options are traded.
•
The hours of trading for exchange listed options may not
coincide with the hours during which the underlying securities
are traded. To the extent that the options markets close before
the markets for the underlying securities, significant price and
rate movements can take place in the underlying securities that
cannot be reflected in the options markets.
•
Index options based upon a narrower index of securities may
present greater risks than options based on broad market
indexes, as narrower indexes are more susceptible to rapid and
extreme fluctuations as a result of changes in the values of a
small number of securities.
•
The Fund is subject to the risk of market movements between the
time that an option is exercised and the time of performance
thereunder, which could increase the extent of any losses
suffered by the Fund in connection with options transactions.
Futures
Contracts
A futures contract is a standardized agreement between two
parties to buy or sell a specific quantity of a commodity at a
specific price at a specific future time (the “settlement
date”). Futures contracts may be based on a specified
equity security (securities futures), a specified debt security
or reference rate (interest rate futures), the value of a
specified securities index (index futures) or the value of a
foreign currency (forward contracts and currency futures). The
value of a futures contract tends to increase and decrease in
tandem with the value of the underlying instrument. The buyer of
a futures contract agrees to purchase the underlying instrument
on the settlement date and is said to be “long” the
contract. The seller of a futures contract agrees to sell the
underlying instrument on the settlement date and is said to be
“short” the contract. Futures contracts differ from
options in that they are bilateral agreements, with both the
purchaser and the seller equally obligated to complete the
transaction. Futures contracts call for settlement only on the
expiration date and cannot be “exercised” at any other
time during their term.
Depending on the terms of the particular contract, futures
contracts are settled through either physical delivery of the
underlying instrument on the settlement date (such as in the
case of securities futures and interest rate futures based on a
specified debt security) or by payment of a cash settlement
amount on the settlement date (such as in the case of futures
contracts relating to interest rates, foreign currencies and
broad-based securities indexes). In the case of cash settled
futures contracts, the settlement amount is equal to the
difference between the reference instrument’s price on the
last trading day of the contract and the reference
instrument’s price at the time the contract was entered
into. Most futures contracts, particularly futures contracts
requiring physical delivery, are not held until the settlement
date, but instead are offset before the settlement date through
the establishment of an opposite and equal futures position
(buying a contract that had been sold, or selling a contract
that had been purchased). All futures
9
transactions (except currency forward contracts) are effected
through a clearinghouse associated with the exchange on which
the futures are traded.
The buyer and seller of a futures contract are not required to
deliver or pay for the underlying commodity unless the contract
is held until the settlement date. However, both the buyer and
seller are required to deposit “initial margin” with a
futures commodities merchant when the futures contract is
entered into. Initial margin deposits are typically calculated
as a percentage of the contract’s market value. If the
value of either party’s position declines, the party will
be required to make additional “variation margin”
payments to settle the change in value on a daily basis. The
process is known as
“marking-to-market.”
Upon the closing of a futures position through the establishment
of an offsetting position, a final determination of variation
margin will be made and additional cash will be paid by or
released to the Fund.
In addition, the Fund may be required to maintain segregated
liquid assets in order to cover futures transactions. The Fund
will segregate liquid assets in an amount equal to the
difference between the market value of a futures contract
entered into by such Fund and the aggregate value of the initial
and variation margin payments made by the Fund with respect to
such contract or as otherwise permitted by SEC rules or SEC
staff positions. See “Regulatory Matters” below.
Currency Forward Contracts and Currency
Futures. A foreign currency forward contract is a
negotiated agreement between two parties to exchange specified
amounts of two or more currencies at a specified future time at
a specified rate. The rate specified by the forward contract can
be higher or lower than the spot rate between the currencies
that are the subject of the contract. Settlement of a foreign
currency forward contract for the purchase of most currencies
typically must occur at a bank based in the issuing nation.
Currency futures are similar to currency forward contracts,
except that they are traded on an exchange and standardized as
to contract size and delivery date. Most currency futures call
for payment or delivery in U.S. dollars. Unanticipated changes
in currency prices may result in losses to the Fund and poorer
overall performance for such Fund than if it had not entered
into forward contracts. The Fund may enter into forward
contracts under various circumstances. The typical use of a
forward contract is to “lock in” the price of a
security in U.S. dollars or some other foreign currency, which
the Fund is holding in its portfolio. By entering into a forward
contract for the purchase or sale, for a fixed amount of dollars
or other currency, of the amount of foreign currency involved in
the underlying security transactions, the Fund may be able to
protect itself against a possible loss resulting from an adverse
change in the relationship between the U.S. dollar or other
currency which is being used for the security purchase and the
foreign currency in which the security is denominated during the
period between the date on which the security is purchased or
sold and the date on which payment is made or received. The
Investment Adviser also may from time to time utilize forward
contracts for other purposes. For example, they may be used to
hedge a foreign security held in the portfolio or a security
which pays out principal tied to an exchange rate between the
U.S. dollar and a foreign currency, against a decline in value
of the applicable foreign currency. They also may be used to
lock in the current exchange rate of the currency in which those
securities anticipated to be purchased are denominated. At
times, the Fund may enter into “cross-currency”
hedging transactions involving currencies other than those in
which securities are held or proposed to be purchased are
denominated.
The Fund will not enter into forward contracts or maintain a net
exposure to these contracts where the consummation of the
contracts would obligate the Fund to deliver an amount of
foreign currency in excess of the value of the Fund’s
portfolio securities.
When required by law, the Fund will cause its custodian bank to
earmark cash, U.S. government securities or other appropriate
liquid portfolio securities in an amount equal to the value of
the Fund’s total assets committed to the consummation of
forward contracts entered into under the circumstances set forth
above. If the value of the securities so earmarked declines,
additional cash or securities will be earmarked on a daily basis
so that the value of such securities will equal the amount of
the Fund’s commitments with respect to such contracts.
10
The Fund may be limited in its ability to enter into hedging
transactions involving forward contracts by the Internal Revenue
Code requirements relating to qualification as a regulated
investment company.
Forward contracts may limit gains on portfolio securities that
could otherwise be realized had they not been utilized and could
result in losses. The contracts also may increase the
Fund’s volatility and may involve a significant amount of
risk relative to the investment of cash.
Options on Futures Contracts. Options on
futures contracts are similar to options on securities except
that options on futures contracts give the purchasers the right,
in return for the premium paid, to assume a position in a
futures contract (a long position in the case of a call option
and a short position in the case of a put option) at a specified
exercise price at any time prior to the expiration of the
option. Upon exercise of the option, the parties will be subject
to all of the risks associated with futures transactions and
subject to margin requirements. As the writer of options on
futures contracts, the Fund would also be subject to initial and
variation margin requirements on the option position.
Options on futures contracts written by the Fund will generally
be covered in a manner similar to the covering of other types of
options, by holding an offsetting financial position and/or
segregating liquid assets. The Fund may cover an option on a
futures contract by purchasing or selling the underlying futures
contract. In such instances the exercise of the option will
serve to close out the Fund’s futures position.
Additional Risk of Futures Transactions. The
risks associated with futures contract transactions are
different from, and possibly greater than, the risks associated
with investing directly in the underlying instruments. Futures
are highly specialized instruments that require investment
techniques and risk analyses different from those associated
with other portfolio investments. The use of futures requires an
understanding not only of the underlying instrument but also of
the futures contract itself. Futures may be subject to the risk
factors generally applicable to derivatives transactions
described herein, and may also be subject to certain additional
risk factors, including:
•
The risk of loss in buying and selling futures contracts can be
substantial. Small price movements in the commodity underlying a
futures position may result in immediate and substantial loss
(or gain) to the Fund.
•
Buying and selling futures contracts may result in losses in
excess of the amount invested in the position in the form of
initial margin. In the event of adverse price movements in the
underlying commodity, security, index, currency or instrument,
the Fund would be required to make daily cash payments to
maintain its required margin. The Fund may be required to sell
portfolio securities, or make or take delivery of the underlying
securities in order to meet daily margin requirements at a time
when it may be disadvantageous to do so. The Fund could lose
margin payments deposited with a futures commodities merchant if
the futures commodities merchant breaches its agreement with the
Fund, becomes insolvent or declares bankruptcy.
•
Most exchanges limit the amount of fluctuation permitted in
futures contract prices during any single trading day. Once the
daily limit has been reached in a particular futures contract,
no trades may be made on that day at prices beyond that limit.
If futures contract prices were to move to the daily limit for
several trading days with little or no trading, the Fund could
be prevented from prompt liquidation of a futures position and
subject to substantial losses. The daily limit governs only
price movements during a single trading day and therefore does
not limit the Fund’s potential losses.
•
Index futures based upon a narrower index of securities may
present greater risks than futures based on broad market
indexes, as narrower indexes are more susceptible to rapid and
extreme fluctuations as a result of changes in value of a small
number of securities.
Swap Contracts
and Related Derivative Instruments
A swap contract is an agreement between two parties pursuant to
which the parties exchange payments at specified dates on the
basis of a specified notional amount, with the payments
calculated by reference to specified securities, indexes,
reference rates, currencies or other instruments. Most swap
11
agreements provide that when the period payment dates for both
parties are the same, the payments are made on a net basis
(i.e., the two payment streams are netted out, with only the net
amount paid by one party to the other). The Fund’s
obligations or rights under a swap contract entered into on a
net basis will generally be equal only to the net amount to be
paid or received under the agreement, based on the relative
values of the positions held by each counterparty. Swap
agreements are not entered into or traded on exchanges and there
is no central clearing or guaranty function for swaps.
Therefore, swaps are subject to the risk of default or
non-performance by the counterparty. Accordingly, the Investment
Adviser must assess the creditworthiness of the counterparty to
determine the likelihood that the terms of the swap will be
satisfied.
Swap agreements allow for a wide variety of transactions. For
example, fixed rate payments may be exchanged for floating rate
payments, U.S. dollar denominated payments may be exchanged for
payments denominated in foreign currencies, and payments tied to
the price of one security, index, reference rate, currency or
other instrument may be exchanged for payments tied to the price
of a different security, index, reference rate, currency or
other instrument. Swap contracts are typically individually
negotiated and structured to provide exposure to a variety of
particular types of investments or market factors. Swap
contracts can take many different forms and are known by a
variety of names. To the extent consistent with the Fund’s
investment objectives and policies, the Fund is not limited to
any particular form or variety of swap contract. the Fund may
utilize swaps to increase or decrease its exposure to the
underlying instrument, reference rate, foreign currency, market
index or other asset. The Fund may also enter into related
derivative instruments, including caps, floors and collars.
The Fund may be required to cover swap transactions. Obligations
under swap agreements entered into on a net basis are generally
accrued daily and any accrued but unpaid amounts owed by the
Fund to the swap counterparty will be covered by segregating
liquid assets. If the Fund enters into a swap agreement on other
than a net basis, the Fund will segregate liquid assets with a
value equal to the full amount of the Fund’s accrued
obligations under the agreement.
Index Swaps. An index swap consists of an
agreement between two parties in which a party exchanges a cash
flow based on a notional amount of a reference index for a cash
flow based on a different index or on another specified
instrument or reference rate. Index swaps are generally entered
into on a net basis.
Inflation Swaps. Inflation swap agreements are
contracts in which one party agrees to pay the cumulative
percentage increase in a price index, such as the Consumer Price
Index, over the term of the swap (with some lag on the
referenced inflation index), and the other party pays a
compounded fixed rate. Inflation swap agreements may be used to
protect the net asset value of the Fund against an unexpected
change in the rate of inflation measured by an inflation index.
The value of inflation swap agreements is expected to change in
response to changes in real interest rates. Real interest rates
are tied to the relationship between nominal interest rates and
the rate of inflation. If nominal interest rates increase at a
faster rate than inflation, real interest rates may rise,
leading to a decrease in value of an inflation swap agreement.
Swaptions. An option on a swap agreement, also
called a “swaption,” is an option that gives the buyer
the right, but not the obligation, to enter into a swap on a
future date in exchange for paying a market based
“premium.” A receiver swaption gives the owner the
right to receive the total return of a specified asset,
reference rate, or index. A payer swaption gives the owner the
right to pay the total return of a specified asset, reference
rate, or index. Swaptions also include options that allow an
existing swap to be terminated or extended by one of the
counterparties.
General Risks of Swaps. The risks associated
with swap transactions are different from, and possibly greater
than, the risks associated with investing directly in the
underlying instruments. Swaps are highly specialized instruments
that require investment techniques and risk analyses different
from those associated with other portfolio investments. The use
of swaps requires an understanding not only of the underlying
instrument but also of the swap contract itself. Swap
transactions may be subject to the risk
12
factors generally applicable to derivatives transactions
described above, and may also be subject to certain additional
risk factors, including:
•
Swap agreements are not traded on exchanges and not subject to
government regulation like exchange traded derivatives. As a
result, parties to a swap agreement are not protected by such
government regulations as participants in transactions in
derivatives traded on organized exchanges.
•
In addition to the risk of default by the counterparty, if the
creditworthiness of a counterparty to a swap agreement declines,
the value of the swap agreement would be likely to decline,
potentially resulting in losses.
•
The swaps market is a relatively new market and is largely
unregulated. It is possible that further developments in the
swaps market, including potential governmental regulation, could
adversely affect the Fund’s ability to utilize swaps,
terminate existing swap agreements or realize amounts to be
received under such agreements.
Combined
Transactions
Combined transactions involve entering into multiple derivatives
transactions (such as multiple options transactions, including
purchasing and writing options in combination with each other;
multiple futures transactions; and combinations of options,
futures, forward and swap transactions) instead of a single
derivatives transaction in order to customize the risk and
return characteristics of the overall position. Combined
transactions typically contain elements of risk that are present
in each of the component transactions. The Fund may enter into a
combined transaction instead of a single derivatives transaction
when, in the opinion of the Investment Adviser, it is in the
best interest of the Fund to do so. Because combined
transactions involve multiple transactions, they may result in
higher transaction costs and may be more difficult to close out.
Regulatory
Matters
As described herein, the Fund may be required to cover its
potential economic exposure to certain derivatives transactions
by holding an offsetting financial position and/or segregating
liquid assets equal in value to the Fund’s potential
economic exposure under the transaction. The Fund will cover
such transactions as described herein or in such other manner as
may be in accordance with applicable laws and regulations.
Assets used to cover derivatives transactions cannot be sold
while the derivatives position is open, unless they are replaced
by other appropriate assets. Segregated liquid assets and assets
held in margin accounts are not otherwise available to the Fund
for investment purposes. If a large portion of the Fund’s
assets are used to cover derivatives transactions or are
otherwise segregated, it could affect portfolio management or
such Fund’s ability to meet redemption requests or other
current obligations. With respect to derivatives which are
cash-settled (i.e., have no physical delivery
requirement), the Fund is permitted to set aside liquid assets
in an amount equal to the Fund’s daily
marked-to-market
net obligations (i.e., the Fund’s daily net
liability) under the derivative, if any, rather than the
derivative’s full notional value or the market value of the
instrument underlying the derivative, as applicable. By setting
aside assets equal to only its net obligations under
cash-settled derivatives, the Fund will have the ability to
employ leverage to a greater extent than if the Fund were
required to segregate assets equal to the full notional amount
of the derivative or the market value of the underlying
instrument, as applicable.
Each of the exchanges and other trading facilitates on which
options are traded has established limitations on the maximum
number of put or call options on a given underlying security
that may be written by a single investor or group of investors
acting in concert, regardless of whether the options are written
on different exchanges or through one or more brokers. These
position limits may restrict the number of listed options which
the Fund may write. Option positions of all investment companies
advised by the Investment Adviser are combined for purposes of
these limits. An exchange may order the liquidation of positions
found to be in excess of these limits and may impose certain
other sanctions or restrictions.
13
The Fund’s use of derivatives may be limited by the
requirements of the Code, for qualification as a regulated
investment company for U.S. federal income tax purposes.
The CFTC eliminated limitations on futures trading by certain
regulated entities, including registered investment companies,
and consequently registered investment companies may engage in
unlimited futures transactions and options thereon provided that
the investment adviser to the company claims an exclusion from
regulation as a commodity pool operator. In connection with its
management of the Fund, the Investment Adviser has claimed such
an exclusion from registration as a commodity pool operator
under the Commodity Exchange Act (“CEA”). Therefore,
it is not subject to the registration and regulatory
requirements of the CEA. Therefore, there are no limitations on
the extent to which the Fund may engage in non-hedging
transactions involving futures and options thereon except as set
forth in the Fund’s Prospectus or SAI. There
is no overall limitation on the percentage of the Fund’s
net assets which may be subject to a hedge position.
Money Market Securities. In addition to the
money market securities in which the Fund may otherwise invest,
the Fund may invest in various money market securities for cash
management purposes or when assuming a temporary defensive
position, which among others may include commercial paper,
bankers’ acceptances, bank obligations, corporate debt
securities, certificates of deposit, U.S. government
securities, obligations of savings institutions and repurchase
agreements. Such securities are limited to:
U.S. Government Securities. Obligations
issued or guaranteed as to principal and interest by the United
States or its agencies (such as the Export-Import Bank of the
United States, Federal Housing Administration and Government
National Mortgage Association) or its instrumentalities (such as
the Federal Home Loan Bank), including Treasury bills, notes and
bonds;
Bank Obligations. Obligations (including
certificates of deposit, time deposits and bankers’
acceptances) of banks subject to regulation by the
U.S. Government and having total assets of $1 billion
or more, and instruments secured by such obligations, not
including obligations of foreign branches of domestic banks
except to the extent below;
Eurodollar Certificates of Deposit. Eurodollar
certificates of deposit issued by foreign branches of domestic
banks having total assets of $1 billion or more;
Obligations of Savings
Institutions. Certificates of deposit of savings
banks and savings and loan associations, having total assets of
$1 billion or more;
Fully Insured Certificates of
Deposit. Certificates of deposit of banks and
savings institutions, having total assets of less than
$1 billion, if the principal amount of the obligation is
federally insured by the Bank Insurance Fund or the Savings
Association Insurance Fund (each of which is administered by the
FDIC), limited to $250,000 principal amount per certificate (a
temporary increase from $100,000, which is due to expire on
December 31, 2013) and to 10% or less of the Fund’s
total assets in all such obligations and in all illiquid assets,
in the aggregate;
Commercial Paper. Commercial paper rated
within the two highest grades by Standard &
Poor’s Rating Group, a division of The McGraw-Hill
Companies, Inc. (“S&P”), or by Moody’s
Investors Service, Inc. (“Moody’s”) or, if not
rated, issued by a company having an outstanding debt issue
rated at least AA by S&P or Aa by Moody’s; and
Repurchase Agreements. The Fund may invest in
repurchase agreements. When cash may be available for only a few
days, it may be invested by the Fund in repurchase agreements
until such time as it may otherwise be invested or used for
payments of obligations of the Fund. These agreements, which may
be viewed as a type of secured lending by the Fund, typically
involve the acquisition by the Fund of debt securities from a
selling financial institution such as a bank, savings and loan
association or broker-dealer. The agreement provides that the
Fund will sell back to the institution, and that the institution
will repurchase, the underlying security serving as collateral
at a specified price and at a fixed time in the future, usually
not more than seven days from the date of purchase. The
collateral will be marked-to-market daily to determine that the
value of the collateral, as specified in the agreement, does not
decrease
14
below the purchase price plus accrued interest. If such decrease
occurs, additional collateral will be requested and, when
received, added to the account to maintain full
collateralization. The Fund will accrue interest from the
institution until the time when the repurchase is to occur.
Although this date is deemed by the Fund to be the maturity date
of a repurchase agreement, the maturities of securities subject
to repurchase agreements are not subject to any limits.
While repurchase agreements involve certain risks not associated
with direct investments in debt securities, the Fund follows
procedures approved by the Directors that are designed to
minimize such risks. These procedures include effecting
repurchase transactions only with large, well-capitalized and
well-established financial institutions whose financial
condition will be continually monitored by the Investment
Adviser. In addition, as described above, the value of the
collateral underlying the repurchase agreement will be at least
equal to the repurchase price, including any accrued interest
earned on the repurchase agreement. In the event of a default or
bankruptcy by a selling financial institution, the Fund will
seek to liquidate such collateral. However, the exercising of
the Fund’s right to liquidate such collateral could involve
certain costs or delays and, to the extent that proceeds from
any sale upon a default of the obligation to repurchase were
less than the repurchase price, the Fund could suffer a loss.
Real Estate Investment Trusts
(“REITs”). REITs pool investors’
funds for investment primarily in real estate properties or real
estate-related loans. REITs generally derive their income from
rents on the underlying properties or interest on the underlying
loans, and their value is impacted by changes in the value of
the underlying property or changes in interest rates affecting
the underlying loans owned by the REITs. REITs are more
susceptible to risks associated with the ownership of real
estate and the real estate industry in general. These risks can
include fluctuations in the value of underlying properties;
defaults by borrowers or tenants; market saturation; changes in
general and local economic conditions; decreases in market rates
for rents; increases in competition, property taxes, capital
expenditures, or operating expenses; and other economic,
political or regulatory occurrences affecting the real estate
industry. In addition, REITs depend upon specialized management
skills, may not be diversified (which may increase the
volatility of a REIT’s value), may have less trading volume
and may be subject to more abrupt or erratic price movements
than the overall securities market. Furthermore, investments in
REITs may involve duplication of management fees and certain
other expenses, as the Fund indirectly bears its proportionate
share of any expenses paid by REITs in which it invests.
U.S. REITs are not taxed on income distributed to
shareholders provided they comply with several requirements of
the Internal Revenue Code of 1986, as amended (the
“Code”). U.S. REITs are subject to the risk of
failing to qualify for tax-free pass-through of income under the
Code.
Loans of Portfolio Securities. The Fund may
lend its portfolio securities to brokers, dealers, banks and
other institutional investors. By lending its portfolio
securities, the Fund attempts to increase its net investment
income through the receipt of interest on the cash collateral
with respect to the loan or fees received from the borrower in
connection with the loan. Any gain or loss in the market price
of the securities loaned that might occur during the term of the
loan would be for the account of the Fund. The Fund employs an
agent to implement the securities lending program and the agent
receives a fee from the Fund for its services. The Fund will not
lend more than
331/3%
of the value of its total assets.
The Fund may lend its portfolio securities so long as the terms,
structure and the aggregate amount of such loans are not
inconsistent with the Investment Company Act or the rules and
regulations or interpretations of the SEC thereunder, which
currently require that (i) the borrower pledge and maintain
with the Fund collateral consisting of liquid, unencumbered
assets having a value at all times not less than 100% of the
value of the securities loaned; (ii) the borrower add to
such collateral whenever the price of the securities loaned
rises (i.e., the borrower “marks to market” on a daily
basis); (iii) the loan be made subject to termination by
the Fund at any time; and (iv) the Fund receives a
reasonable return on the loan (which may include the Fund
investing any cash collateral in interest bearing short-term
investments), any distributions on the loaned securities and any
increase in their market value. In addition, voting rights may
pass with the loaned securities, but the Fund will retain the
right to call any security in anticipation of a vote that the
Investment Adviser deems material to the security on loan.
15
There may be risks of delay and costs involved in recovery of
securities or even loss of rights in the collateral should the
borrower of the securities fail financially. These delays and
costs could be greater for foreign securities. However, loans
will be made only to borrowers deemed by the Investment Adviser
to be creditworthy and when, in the judgment of the Investment
Adviser, the income which can be earned from such securities
loans justifies the attendant risk. All relevant facts and
circumstances, including the creditworthiness of the broker,
dealer, bank or institution, will be considered in making
decisions with respect to the lending of securities, subject to
review by the Fund’s Board of Directors. The Fund also
bears the risk that the reinvestment of collateral will result
in a principal loss. Finally, there is the risk that the price
of the securities will increase while they are on loan and the
collateral will not be adequate to cover their value.
Borrowing. The Fund has an operating policy,
which may be changed by the Fund’s Board of Directors, not
to borrow except from a bank for temporary or emergency purposes
in amounts not exceeding 5% (taken at the lower of cost or
current value) of its total assets (not including the amount
borrowed). Should the Board of Directors remove this operating
policy, the Fund would be permitted to borrow money from banks
in accordance with the Investment Company Act or the rules and
regulations promulgated by the SEC thereunder. Currently, the
Investment Company Act permits a fund to borrow money from banks
in an amount up to
331/3%
of its total assets (including the amount borrowed) less its
liabilities (not including any borrowings but including the fair
market value at the time of computation of any other senior
securities then outstanding). The Fund may also borrow an
additional 5% of its total assets without regard to the
foregoing limitation for temporary purposes such as clearance of
portfolio transactions. The Fund will only borrow when the
Investment Adviser believes that such borrowings will benefit
the Fund after taking into account considerations such as
interest income and possible gains or losses upon liquidation.
The Fund will maintain asset coverage in accordance with the
Investment Company Act.
Borrowing by the Fund creates an opportunity for increased net
income but, at the same time, creates special risks. For
example, leveraging may exaggerate changes in and increase the
volatility of the net asset value of Fund shares. This is
because leverage tends to exaggerate the effect of any increase
or decrease in the value of the Fund’s portfolio
securities. The use of leverage also may cause the Fund to
liquidate portfolio positions when it may not be advantageous to
do so to satisfy its obligations or to maintain asset coverage.
In general, the Fund may not issue any class of senior security,
except that the Fund may (i) borrow from banks, provided
that immediately following any such borrowing there is an asset
coverage of at least 300% for all Fund borrowings and in the
event such asset coverage falls below 300% the Fund will within
three days or such longer period as the SEC may prescribe by
rules and regulations, reduce the amount of its borrowings to an
extent that the asset coverage of such borrowings shall be at
least 300%, and (ii) engage in trading practices which
could be deemed to involve the issuance of a senior security,
including but not limited to options, futures, forward contracts
and reverse repurchase agreements, provided that the Fund
earmarks or segregates liquid assets in accordance with
applicable SEC regulations and interpretations.
When-Issued and Delayed Delivery Securities and Forward
Commitments. From time to time, the Fund may
purchase securities on a when-issued or delayed delivery basis
or may purchase or sell securities on a forward commitment
basis. When these transactions are negotiated, the price is
fixed at the time of the commitment, but delivery and payment
can take place a month or more after the date of commitment.
While the Fund will only purchase securities on a when-issued,
delayed delivery or forward commitment basis with the intention
of acquiring the securities, the Fund may sell the securities
before the settlement date, if it is deemed advisable. The
securities so purchased or sold are subject to market
fluctuation and no interest or dividends accrue to the purchaser
prior to the settlement date.
At the time the Fund makes the commitment to purchase or sell
securities on a when-issued, delayed delivery or forward
commitment basis, it will record the transaction and thereafter
reflect the value, each day, of such security purchased, or if a
sale, the proceeds to be received, in determining its net asset
value. At the time of delivery of the securities, their value
may be more or less than the purchase or sale price. An
16
increase in the percentage of the Fund’s assets committed
to the purchase of securities on a when-issued, delayed delivery
or forward commitment basis may increase the volatility of its
net asset value. The Fund will also establish a segregated
account on the Fund’s books in which it will continually
maintain cash or cash equivalents or other liquid portfolio
securities equal in value to commitments to purchase securities
on a when-issued, delayed delivery or forward commitment basis.
When, As and If Issued Securities. The Fund
may purchase securities on a “when, as and if issued”
basis, under which the issuance of the security depends upon the
occurrence of a subsequent event, such as approval of a merger,
corporate reorganization or debt restructuring. The commitment
for the purchase of any such security will not be recognized in
the portfolio of the Fund until the Investment Adviser
determines that issuance of the security is probable. At that
time, the Fund will record the transaction and, in determining
its net asset value, will reflect the value of the security
daily. At that time, the Fund will also establish a segregated
account on the Fund’s books in which it will maintain cash,
cash equivalents or other liquid portfolio securities equal in
value to recognized commitments for such securities.
An increase in the percentage of the Fund’s assets
committed to the purchase of securities on a “when, as and
if issued” basis may increase the volatility of its net
asset value. The Fund may also sell securities on a “when,
as and if issued” basis provided that the issuance of the
security will result automatically from the exchange or
conversion of a security owned by the Fund at the time of sale.
Private Placements and Restricted
Securities. The Fund may invest up to 15% of its
net assets in securities which are subject to restrictions on
resale because they have not been registered under the
Securities Act of 1933, as amended (the “Securities
Act”), or which are otherwise not readily marketable.
(Securities eligible for resale pursuant to Rule 144A under
the Securities Act, and determined to be liquid pursuant to the
procedures discussed in the following paragraph, are not subject
to the foregoing restriction.) These securities are generally
referred to as private placements or restricted securities.
Limitations on the resale of these securities may have an
adverse effect on their marketability, and may prevent the Fund
from disposing of them promptly at reasonable prices. The Fund
may have to bear the expense of registering the securities for
resale and the risk of substantial delays in effecting the
registration.
Rule 144A permits the Fund to sell restricted securities to
qualified institutional buyers without limitation. The
Investment Adviser, pursuant to procedures adopted by the
Directors, will make a determination as to the liquidity of each
restricted security purchased by the Fund. If a restricted
security is determined to be “liquid,” the security
will not be included within the category “illiquid
securities,” which may not exceed 15% of the Fund’s
net assets. However, investing in Rule 144A securities
could have the effect of increasing the level of Fund
illiquidity to the extent the Fund, at a particular point in
time, may be unable to find qualified institutional buyers
interested in purchasing such securities.
Private Investments in Public Equity. The Fund
may purchase equity securities in a private placement that are
issued by issuers who have outstanding, publicly-traded equity
securities of the same class (“private investments in
public equity” or “PIPES”). Shares in PIPES
generally are not registered with the SEC until after a certain
time period from the date the private sale is completed. This
restricted period can last many months. Until the public
registration process is completed, PIPES are restricted as to
resale and the Fund cannot freely trade the securities.
Generally, such restrictions cause the PIPES to be illiquid
during this time. PIPES may contain provisions that the issuer
will pay specified financial penalties to the holder if the
issuer does not publicly register the restricted equity
securities within a specified period of time, but there is no
assurance that the restricted equity securities will be publicly
registered, or that the registration will remain in effect.
Limited Partnerships. A limited partnership
interest entitles the Fund to participate in the investment
return of the partnership’s assets as defined by the
agreement among the partners. As a limited partner, the Fund
generally is not permitted to participate in the management of
the partnership. However, unlike a general partner whose
liability is not limited, a limited partner’s liability
generally is limited to the amount of its commitment to the
partnership.
17
Warrants and Subscription Rights. The Fund may
acquire warrants and subscription rights attached to other
securities. A warrant is, in effect, an option to purchase
equity securities at a specific price, generally valid for a
specific period of time, and has no voting rights, pays no
dividends and has no rights with respect to the corporation
issuing it.
A subscription right is a privilege granted to existing
shareholders of a corporation to subscribe to shares of a new
issue of common stock before it is offered to the public. A
subscription right normally has a life of two to four weeks and
a subscription price lower than the current market value of the
common stock.
Zero Coupon Securities. A portion of the
fixed-income securities purchased by the Fund may be “zero
coupon” securities. These are debt securities which have
been stripped of their unmatured interest coupons and receipts
or which are certificates representing interests in such
stripped debt obligations and coupons. Such securities are
purchased at a discount from their face amount, giving the
purchaser the right to receive their full value at maturity. A
zero coupon security pays no interest to its holder during its
life. Its value to an investor consists of the difference
between its face value at the time of maturity and the price for
which it was acquired, which is generally an amount
significantly less than its face value (sometimes referred to as
a “deep discount” price).
The interest earned on such securities is, implicitly,
automatically compounded and paid out at maturity. While such
compounding at a constant rate eliminates the risk of receiving
lower yields upon reinvestment of interest if prevailing
interest rates decline, the owner of a zero coupon security will
be unable to participate in higher yields upon reinvestment of
interest received if prevailing interest rates rise. For this
reason, zero coupon securities are subject to substantially
greater market price fluctuations during periods of changing
prevailing interest rates than are comparable debt securities
which make current distributions of interest. Current federal
tax law requires that a holder (such as the Fund) of a zero
coupon security accrue a portion of the discount at which the
security was purchased as income each year even though the Fund
receives no interest payments in cash on the security during the
year.
Foreign Investment. Investing in foreign
securities involves certain special considerations which are not
typically associated with investments in the securities of
U.S. issuers. Foreign issuers are not generally subject to
uniform accounting, auditing and financial reporting standards
and may have policies that are not comparable to those of
domestic issuers. As a result, there may be less information
available about foreign issuers than about domestic issuers.
Securities of some foreign issuers may be less liquid and more
volatile than securities of comparable domestic issuers. There
is generally less government supervision and regulation of stock
exchanges, brokers and listed issuers than in the United States.
In addition, with respect to certain foreign countries, there is
a possibility of expropriation or confiscatory taxation,
political and social instability, or diplomatic development
which could affect U.S. investments in those countries. The
costs of investing in foreign countries frequently are higher
than the costs of investing in the United States. Although the
Investment Adviser endeavors to achieve the most favorable
execution costs in portfolio transactions, fixed commissions on
many foreign stock exchanges are generally higher than
negotiated commissions on U.S. exchanges.
Investments in securities of foreign issuers may be denominated
in foreign currencies. Accordingly, the value of the Fund’s
assets, as measured in U.S. dollars may be affected
favorably or unfavorably by changes in currency exchange rates
and in exchange control regulations. The Fund may incur costs in
connection with conversions between various currencies.
Certain foreign governments levy withholding or other taxes on
dividend and interest income. Although in some countries a
portion of these taxes are recoverable, the non-recovered
portion of foreign withholding taxes will reduce the income
received from investments in such countries.
The Investment Adviser may consider an issuer to be from a
particular country (including the United States) or geographic
region if (i) its principal securities trading market is in
that country or geographic region; (ii) alone or on a
consolidated basis it derives 50% or more of its annual revenue
from goods produced, sales made or services performed in that
country or geographic region; or (iii) it is organized
18
under the laws of, or has a principal office in, that country or
geographic region. By applying these tests, it is possible that
a particular issuer could be deemed to be from more than one
country or geographic region.
Emerging Market Securities. An emerging market
security is one issued by a foreign government or private issuer
that has one or more of the following characteristics:
(i) its principal securities trading market is in an
emerging market or developing country, (ii) alone or on a
consolidated basis it derives 50% or more of its annual revenue
from goods produced, sales made or services performed in
emerging markets or (iii) it is organized under the laws
of, or has a principal office in, an emerging market or
developing country. Based on these criteria it is possible for a
security to be considered issued by an issuer in more than one
country. Therefore, it is possible for the securities of any
issuer that has one or more of these characteristics in
connection with any emerging market or developing country not to
be considered an emerging market security if it has one or more
of these characteristics in connection with a developed country.
Emerging market describes any country which is generally
considered to be an emerging or developing country by major
organizations in the international financial community, such as
the International Bank for Reconstruction and Development (more
commonly known as the World Bank) and the International Finance
Corporation. Emerging markets can include every nation in the
world except the United States, Canada, Japan, Australia, New
Zealand and most nations located in Western Europe.
The economies of individual emerging market or developing
countries may differ favorably or unfavorably from the
U.S. economy in such respects as growth of gross domestic
product, rate of inflation, currency depreciation, capital
reinvestment, resource self-sufficiency and balance of payments
position. Further, the economies of developing countries
generally are heavily dependent upon international trade and,
accordingly, have been, and may continue to be, adversely
affected by trade barriers, exchange controls, managed
adjustments in relative currency values and other protectionist
measures. These economies also have been, and may continue to
be, adversely effected by economic conditions in the countries
with which they trade.
Prior governmental approval for foreign investments may be
required under certain circumstances in some emerging market or
developing countries, and the extent of foreign investment in
certain fixed-income securities and domestic companies may be
subject to limitation in other emerging market or developing
countries. Foreign ownership limitations also may be imposed by
the charters of individual companies in emerging market or
developing countries to prevent, among other concerns, violation
of foreign investment limitations. Repatriation of investment
income, capital and the proceeds of sales by foreign investors
may require governmental registration
and/or
approval in some emerging countries. The Fund could be adversely
affected by delays in, or a refusal to grant, any required
governmental registration or approval for such repatriation. Any
investment subject to such repatriation controls will be
considered illiquid if it appears reasonably likely that this
process will take more than seven days.
Investment in emerging market or developing countries may entail
purchasing securities issued by or on behalf of entities that
are insolvent, bankrupt, in default or otherwise engaged in an
attempt to reorganize or reschedule their obligations and in
entities that have little or no proven credit rating or credit
history. In any such case, the issuer’s poor or
deteriorating financial condition may increase the likelihood
that the Fund will experience losses or diminution in available
gains due to bankruptcy, insolvency or fraud. Emerging market or
developing countries also pose the risk of nationalization,
expropriation or confiscatory taxation, political changes,
government regulation, social instability or diplomatic
development (including war) that could affect adversely the
economies of such countries or the value of a fund’s
investments in those countries. In addition, it may be difficult
to obtain and enforce a judgment in a court outside the United
States.
Investments in emerging markets may also be exposed to an extra
degree of custodial
and/or
market risk, especially where the securities purchased are not
traded on an official exchange or where ownership records
regarding the securities are maintained by an unregulated entity
(or even the issuer itself).
19
Depositary Receipts. Depositary Receipts
represent an ownership interest in securities of foreign
companies (an “underlying issuer”) that are deposited
with a depositary. Depositary Receipts are not necessarily
denominated in the same currency as the underlying securities.
Depositary Receipts include American Depositary Receipts
(“ADRs”), Global Depositary Receipts
(“GDRs”) and other types of Depositary Receipts
(which, together with ADRs and GDRs, are hereinafter
collectively referred to as “Depositary Receipts”).
ADRs are dollar-denominated Depositary Receipts typically issued
by a U.S. financial institution which evidence an ownership
interest in a security or pool of securities issued by a foreign
issuer. ADRs are listed and traded in the United States. GDRs
and other types of Depositary Receipts are typically issued by
foreign banks or trust companies, although they also may be
issued by U.S. financial institutions, and evidence
ownership interests in a security or pool of securities issued
by either a foreign or a U.S. corporation. Generally,
Depositary Receipts in registered form are designed for use in
the U.S. securities market and Depositary Receipts in
bearer form are designed for use in securities markets outside
the United States.
Depositary Receipts may be “sponsored” or
“unsponsored.” Sponsored Depositary Receipts are
established jointly by a depositary and the underlying issuer,
whereas unsponsored Depositary Receipts may be established by a
depositary without participation by the underlying issuer.
Holders of unsponsored Depositary Receipts generally bear all
the costs associated with establishing unsponsored Depositary
Receipts. In addition, the issuers of the securities underlying
unsponsored Depositary Receipts are not obligated to disclose
material information in the United States and, therefore, there
may be less information available regarding such issuers and
there may not be a correlation between such information and the
market value of the Depositary Receipts. For purposes of the
Fund’s investment policies, the Fund’s investments in
Depositary Receipts will be deemed to be an investment in the
underlying securities, except that ADRs may be deemed to be
issued by a U.S. issuer.
Convertible Securities. The Fund may invest in
securities which are convertible into common stock or other
securities of the same or a different issuer or into cash within
a particular period of time at a specified price or formula.
Convertible securities are generally fixed-income securities
(but may include preferred stock) and generally rank senior to
common stocks in a corporation’s capital structure and,
therefore, entail less risk than the corporation’s common
stock. The value of a convertible security is a function of its
“investment value” (its value as if it did not have a
conversion privilege), and its “conversion value” (the
security’s worth if it were to be exchanged for the
underlying security, at market value, pursuant to its conversion
privilege).
To the extent that a convertible security’s investment
value is greater than its conversion value, its price will be
primarily a reflection of such investment value and its price
will be likely to increase when interest rates fall and decrease
when interest rates rise, as with a fixed-income security (the
credit standing of the issuer and other factors may also have an
effect on the convertible security’s value). If the
conversion value exceeds the investment value, the price of the
convertible security will rise above its investment value and,
in addition, will sell at some premium over its conversion
value. (This premium represents the price investors are willing
to pay for the privilege of purchasing a fixed-income security
with a possibility of capital appreciation due to the conversion
privilege.) At such times the price of the convertible security
will tend to fluctuate directly with the price of the underlying
equity security. Convertible securities may be purchased by the
Fund at varying price levels above their investment values
and/or their
conversion values in keeping with the Fund’s objective.
Up to 5% of the Fund’s net assets may be invested in
convertible securities that are below investment grade. Debt
securities rated below investment grade are commonly known as
“junk bonds.” Although the Fund selects these
securities primarily on the basis of their equity
characteristics, investors should be aware that convertible
securities rated in these categories are considered high risk
securities; the rating agencies consider them speculative with
respect to the issuer’s continuing ability to make timely
payments of interest and principal. Thus, to the extent that
such convertible securities are acquired by the Fund, there is a
greater risk as to the timely repayment of the principal of, and
timely payment of interest or dividends on, such securities than
in the case of higher-rated convertible securities.
20
Investment Company Securities. Investment
company securities are securities of other open-end, closed-end
and unregistered investment companies, including foreign
investment companies and exchange-traded funds. The Fund may
invest in investment company securities as may be permitted by
(i) the Investment Company Act, as amended from time to
time; (ii) the rules and regulations promulgated by the SEC
under the Investment Company Act, as amended from time to time;
or (iii) an exemption or other relief applicable to the
Fund from provisions of the Investment Company Act, as amended
from time to time. The Investment Company Act generally
prohibits an investment company from acquiring more than 3% of
the outstanding voting shares of an investment company and
limits such investments to no more than 5% of a portfolio’s
total assets in any one investment company, and no more than 10%
in any combination of investment companies. The Fund may invest
in investment company securities of investment companies managed
by the Investment Adviser or its affiliates to the extent
permitted under the Investment Company Act or as otherwise
authorized by the SEC. To the extent the Fund invests a portion
of its assets in investment company securities, those assets
will be subject to the risks of the purchased investment
company’s portfolio securities, and a shareholder in the
Fund will bear not only his proportionate share of the expenses
of the Fund, but also, indirectly the expenses of the purchased
investment company.
To the extent permitted by applicable law, the Fund may invest
all or some of its short term cash investments in any money
market fund advised or managed by the Investment Adviser or its
affiliates. In connection with any such investments, the Fund,
to the extent permitted by the Investment Company Act, will pay
its share of all expenses (other than advisory and
administrative fees) of a money market fund in which it invests
which may result in the Fund bearing some additional expenses.
Exchange-Traded Funds (“ETFs”). The
Fund may invest in shares of various ETFs, including
exchange-traded index and bond funds. Exchange-traded index
funds seek to track the performance of various securities
indices. Shares of ETFs have many of the same risks as direct
investments in common stocks or bonds. In addition, their market
value is expected to rise and fall as the value of the
underlying index or bond rises and falls. The market value of
their shares may differ from the net asset value of the
particular fund. As a shareholder in an ETF (as with other
investment companies), the Fund would bear its ratable share of
that entity’s expenses. At the same time, the Fund would
continue to pay its own investment management fees and other
expenses. As a result, the Fund and its shareholders, in effect,
will be absorbing duplicate levels of fees with respect to
investments in ETFs.
The investment objectives, policies and restrictions listed
below have been adopted by the Fund as fundamental policies.
Under the Investment Company Act, a fundamental policy may not
be changed without the vote of a majority of the outstanding
voting securities of the Fund. The Investment Company Act
defines a majority as the lesser of (a) 67% or more of the
shares present at a meeting of shareholders, if the holders of
50% of the outstanding shares of the Fund are present or
represented by proxy; or (b) more than 50% of the
outstanding shares of the Fund. For purposes of the following
restrictions: (i) all percentage limitations apply
immediately after a purchase or initial investment, and
(ii) any subsequent change in any applicable percentage
resulting from market fluctuations or other changes in total or
net assets does not require elimination of any security from the
portfolio, except in the case of borrowing and investments in
illiquid securities.
The Fund will:
1. Seek to provide reasonable current income and long-term
growth of income and capital.
The Fund will not:
1.
Invest in a manner inconsistent with its classification as a
“diversified company” as provided by (i) the
Investment Company Act, as amended from time to time,
(ii) the rules and regulations promulgated by the SEC under
the Investment Company Act, as amended from time to time, or
21
(iii) an exemption or other relief applicable to the Fund
from the provisions of the Investment Company Act, as amended
from time to time.
2.
Borrow money, except the Fund may borrow money to the extent
permitted by (i) the Investment Company Act, as amended
from time to time, (ii) the rules and regulations
promulgated by the SEC under the Investment Company Act, as
amended from time to time, or (iii) an exemption or other
relief applicable to the Fund from the provisions of the
Investment Company Act, as amended from time to time.
3.
Make loans of money or property to any person, except
(a) to the extent that securities or interests in which the
Fund may invest are considered to be loans, (b) through the
loan of portfolio securities, (c) by engaging in repurchase
agreements or (d) as may otherwise be permitted by
(i) the Investment Company Act, as amended from time to
time, (ii) the rules and regulations promulgated by the SEC
under the Investment Company Act, as amended from time to time,
or (iii) an exemption or other relief applicable to the
Fund from the provision of the Investment Company Act, as
amended from time to time.
4.
Purchase or sell physical commodities unless acquired as a
result of ownership of securities or other instruments; provided
that this restriction shall not prohibit the Fund from
purchasing or selling options, futures contracts and related
options thereon, forward contracts, swaps, caps, floors, collars
and any other financial instruments or from investing in
securities or other instruments backed by physical commodities
or as otherwise permitted by (i) the Investment Company
Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the Investment Company
Act, as amended from time to time, or (iii) an exemption or
other relief applicable to the Fund from the provisions of the
Investment Company Act, as amended from time to time.
5.
Issue senior securities, except the Fund may issue senior
securities to the extent permitted by (i) the Investment
Company Act, as amended from time to time, (ii) the rules
and regulations promulgated by the SEC under the Investment
Company Act, as amended from time to time, or (iii) an
exemption or other relief applicable to the Fund from the
provisions of the Investment Company Act, as amended from time
to time.
6.
The Fund may not engage in the underwriting of securities,
except insofar as the Fund may be deemed an underwriter under
the Securities Act in disposing of a portfolio security.
7.
Invest more than 25% of the value of its total assets in
securities of issuers in any one industry. This restriction does
not apply to bank obligations or obligations issued or
guaranteed by the U.S. Government, its agencies or
instrumentalities.
8.
Purchase or sell real estate or interests therein (including
limited partnership interests), although the Fund may purchase
securities of issuers which engage in real estate operations and
securities secured by real estate or interests therein.
In addition, as non-fundamental policies, which can be changed
with Board approval and without shareholder vote, the Fund will
not:
1.
Invest in other investment companies in reliance on Sections
12(d)(1)(F), 12(d)(1)(G) or 12(d)(1)(J) of the Investment
Company Act.
2.
Make short sales of securities, except short sales against the
box.
3.
Invest its assets in the securities of any investment company
except as may be permitted by (i) the Investment Company
Act as amended from time to time; (ii) the rules and
regulations promulgated by the SEC under the Investment Company
Act, as amended from time to time; or (iii) an exemption or
other relief applicable to the Fund from the provisions of the
Investment Company Act, as amended from time to time.
22
The Fund has an operating policy, which may be changed by the
Fund’s Board of Directors, not to borrow except from a bank
for temporary or emergency purposes in amounts not exceeding 5%
(taken at the lower cost or current value) of its total assets
(not including the amount borrowed).
Notwithstanding any other investment policy or restriction, the
Fund may seek to achieve its investment objectives by investing
all or substantially all of its assets in another investment
company having substantially the same investment objective and
policies as the Fund.
The Fund’s Board of Directors and the Investment Adviser
have adopted policies and procedures regarding disclosure of
portfolio holdings (the “Policy”). Pursuant to the
Policy, the Investment Adviser may disclose information
concerning Fund portfolio holdings only if such disclosure is
consistent with the antifraud provisions of the federal
securities laws and the Fund’s and the Investment
Adviser’s fiduciary duties to Fund shareholders. The
Investment Adviser may not receive compensation or any other
consideration in connection with the disclosure of information
about the portfolio securities of the Fund. Consideration
includes any agreement to maintain assets in the Fund or in
other investment companies or accounts managed by the Investment
Adviser or by any affiliated person of the Investment Adviser.
Non-public information concerning portfolio holdings may be
divulged to third parties only when the Fund has a legitimate
business purpose for doing so and the recipients of the
information are subject to a duty of confidentiality. Under no
circumstances shall current or prospective Fund shareholders
receive non-public portfolio holdings information, except as
described below.
The Fund makes available on its public website the following
portfolio holdings information:
•
complete portfolio holdings information quarterly, at least 30
calendar days after the end of each calendar quarter; and
•
top 10 (or top 15) holdings monthly, at least 15 business
days after the end of each month.
The Fund provides a complete schedule of portfolio holdings for
the second and fourth fiscal quarters in its semiannual and
annual reports, and for the first and third fiscal quarters in
its filings with the SEC on
Form N-Q.
All other portfolio holdings information that has not been
disseminated in a manner making it available to investors
generally as described above is non-public information for
purposes of the Policy.
The Fund may make selective disclosure of non-public portfolio
holdings. Third parties eligible to receive such disclosures
currently include fund rating agencies, information exchange
subscribers, consultants and analysts, portfolio analytics
providers and service providers, provided that the third party
expressly agrees to maintain the disclosed information in
confidence and not to trade portfolio securities based on the
non-public information. Non-public portfolio holdings
information may not be disclosed to a third party unless and
until the arrangement has been reviewed and approved pursuant to
the requirements set forth in the Policy. Subject to the terms
and conditions of any agreement between the Investment Adviser
or the Fund and the third party recipient, if these conditions
for disclosure are satisfied, there shall be no restriction on
the frequency with which Fund non-public portfolio holdings
information is released, and no lag period shall apply (unless
otherwise indicated below).
The Investment Adviser may provide interest lists to
broker-dealers who execute securities transactions for the Fund
without entering into a non-disclosure agreement with the
broker-dealers, provided that the interest list satisfies all of
the following criteria: (1) the interest list must contain
only the CUSIP numbers
and/or
ticker symbols of securities held in all registered management
investment companies advised by the Investment Adviser or any
affiliate of the Investment Adviser (the “MSIM Funds”)
on an aggregate, rather than a
fund-by-fund
basis; (2) the interest list must not contain information
about the number or value of shares owned by a specified MSIM
Fund; (3) the interest list may identify the investment
strategy, but not the particular MSIM Funds, to which the list
relates; and (4) the interest list may not identify the
portfolio manager or team members responsible for managing the
MSIM Funds.
23
Fund shareholders may elect in some circumstances to redeem
their shares of the Fund in exchange for their pro rata share of
the securities held by the Fund. Under such circumstances, Fund
shareholders may receive a complete listing of the holdings of
the Fund up to seven calendar days prior to making the
redemption request provided that they represent orally or in
writing that they agree not to disclose or trade on the basis of
the portfolio holdings information.
The Fund may discuss or otherwise disclose performance
attribution analyses (i.e., mention the effects of having a
particular security in the portfolio(s)) where such discussion
is not contemporaneously made public, provided that the
particular holding has been disclosed publicly. Additionally,
any discussion of the analyses may not be more current than the
date the holding was disclosed publicly.
The Fund may disclose portfolio holdings to transition managers,
provided that the Fund has entered into a non-disclosure or
confidentiality agreement with the party requesting that the
information be provided to the transition manager and the party
to the non-disclosure agreement has, in turn, entered into a
non-disclosure or confidentiality agreement with the transition
manager.
The Investment Adviser
and/or the
Fund have entered into ongoing arrangements to make available
public
and/or
non-public information about the Fund’s portfolio
securities. Provided that the recipient of the information falls
into one or more of the categories listed below, and the
recipient has entered into a non-disclosure agreement with the
Fund, or owes a duty of trust or confidence to the Investment
Adviser or the Fund, the recipient may receive portfolio
holdings information pursuant to such agreement without
obtaining pre-approval from either the Portfolio Holdings Review
Committee (“PHRC”) or the Fund’s Board of
Directors. In all such instances, however, the PHRC will be
responsible for reporting to the Fund’s Board of Directors,
or designated committee thereof, material information concerning
the ongoing arrangements at each Board’s next regularly
scheduled Board meeting. Categories of parties eligible to
receive information pursuant to such ongoing arrangements
include fund rating agencies, information exchange subscribers,
consultants and analysts, portfolio analytics providers and
service providers.
The Investment Adviser
and/or the
Fund currently have entered into ongoing arrangements with the
following parties:
Name
Information Disclosed
Frequency(1)
Lag Time
Service Providers
RiskMetrics Group (proxy voting
agent)(*)
Complete portfolio holdings
Daily basis
(2)
FT Interactive Data Pricing Service
Provider(*)
Complete portfolio holdings
As needed
(2)
Morgan Stanley
Trust(*)
Complete portfolio holdings
As needed
(2)
State Street Bank and
Trust Company(*)
Complete portfolio holdings
As needed
(2)
Fund Rating Agencies
Lipper(*)
Top ten and complete portfolio holdings
Quarterly basis
Approximately 15 days after quarter end and approximately
30 days after quarter end
Morningstar(**)
Top ten and complete portfolio holdings
Quarterly basis
Approximately 15 days after quarter end and approximately
30 days after quarter end
Standard &
Poor’s(*)
Complete portfolio holdings
Quarterly basis
Approximately 15 day lag
Investment Company
Institute(**)
Top ten portfolio holdings
Quarterly basis
Approximately 15 days after quarter end
Consultants and Analysts
Americh Massena & Associates,
Inc.(*)
Top ten and complete portfolio holdings
Quarterly
basis(5)
Approximately 10-12 days after quarter end
Bloomberg(**)
Complete portfolio holdings
Quarterly basis
Approximately 30 days after quarter end
Callan
Associates(*)
Top ten and complete portfolio holdings
Monthly and quarterly basis,
respectively(5)
Approximately 10-12 days after month/quarter end
24
Name
Information Disclosed
Frequency(1)
Lag Time
Cambridge
Associates(*)
Top ten and complete portfolio holdings
Quarterly
basis(5)
Approximately 10-12 days after quarter end
Citigroup(*)
Complete portfolio holdings
Quarterly
basis(5)
At least one day after quarter end
Credit Suisse First
Boston(*)
Top ten and complete portfolio holdings
Monthly and quarterly basis, respectively
Approximately 10-12 days after month/quarter end
CTC Consulting,
Inc.(**)
Top ten and complete portfolio holdings
Quarterly basis
Approximately 15 days after quarter end and approximately
30 days after quarter end, respectively
Evaluation
Associates(*)
Top ten and complete portfolio holdings
Monthly and quarterly basis,
respectively(5)
Approximately 10-12 days after month/quarter end
Fund Evaluation
Group(**)
Top ten portfolio
holdings(3)
Quarterly basis
At least 15 days after quarter end
Jeffrey Slocum &
Associates(*)
Complete portfolio
holdings(4)
Quarterly
basis(5)
Approximately 10-12 days after quarter end
Hammond
Associates(**)
Complete portfolio
holdings(4)
Quarterly basis
At least 30 days after quarter end
Hartland &
Co.(**)
Complete portfolio
holdings(4)
Quarterly basis
At least 30 days after quarter end
Hewitt
Associates(*)
Top ten and complete portfolio holdings
Monthly and quarterly basis,
respectively(5)
Approximately 10-12 days after month/quarter end
Merrill
Lynch(*)
Top ten and complete portfolio holdings
Monthly and quarterly basis,
respectively(5)
Approximately 10-12 days after month/quarter end
Mobius(**)
Top ten portfolio
holdings(3)
Monthly basis
At least 15 days after month end
Nelsons(**)
Top ten portfolio
holdings(3)
Quarterly basis
At least 15 days after quarter end
Prime, Buchholz & Associates,
Inc.(**)
Complete portfolio
holdings(4)
Quarterly basis
At least 30 days after quarter end
PSN(**)
Top ten portfolio
holdings(3)
Quarterly basis
At least 15 days after quarter end
PFM Asset Management
LLC(*)
Top ten and complete portfolio holdings
Quarterly
basis(5)
Approximately 10-12 days after quarter end
Russell Investment Group/Russell/ Mellon Analytical Services,
Inc.(**)
Top ten and complete portfolio holdings
Monthly and quarterly basis
At least 15 days after month end and at least 30 days
after quarter end, respectively
Stratford Advisory Group,
Inc.(*)
Top ten portfolio
holdings(6)
Quarterly
basis(5)
Approximately 10-12 days after quarter end
Thompson
Financial(**)
Complete portfolio
holdings(4)
Quarterly basis
At least 30 days after quarter end
Watershed Investment Consultants,
Inc.(*)
Top ten and complete portfolio holdings
Quarterly
basis(5)
Approximately 10-12 days after quarter end
Yanni
Partners(**)
Top ten portfolio
holdings(3)
Quarterly basis
At least 15 days after quarter end
Portfolio Analytics Providers
FactSet Research Systems,
Inc.(*)
Complete portfolio holdings
Daily basis
One day
(*)
This entity has agreed to maintain
Fund non-public portfolio holdings information in confidence and
not to trade portfolio securities based on the non-public
portfolio holdings information.
(**)
The Fund does not currently have a
non-disclosure agreement in place with this entity and therefore
the entity can only receive publicly available information.
(1)
Dissemination of portfolio holdings
information to entities listed above may occur less frequently
than indicated (or not at all).
(2)
Information will typically be
provided on a real time basis or as soon thereafter as possible.
(3)
Complete portfolio holdings will
also be provided upon request from time to time on a quarterly
basis, with at least a 30 day lag.
(4)
Top ten portfolio holdings will
also be provided upon request from time to time, with at least a
15 day lag.
(5)
This information will also be
provided upon request from time to time.
(6)
Complete portfolio holdings will
also be provided upon request from time to time.
25
In addition, persons who owe a duty of trust or confidence to
the Investment Adviser or the Fund may receive non-public
portfolio holdings information without entering into a
non-disclosure agreement. Currently, these persons include
(i) the Fund’s independent registered public
accounting firm (as of the Fund’s fiscal year end and on an
as needed basis), (ii) counsel to the Fund (on an as needed
basis), (iii) counsel to the Independent Directors (on an
as needed basis) and (iv) members of the Board of Directors
(on an as needed basis).
All selective disclosures of non-public portfolio holdings
information made to third parties pursuant to the exemptions set
forth in the Policy must be pre-approved by both the PHRC and
the Fund’s Board of Directors (or designated committee
thereof), except for (i) disclosures made to third parties
pursuant to ongoing arrangements (discussed above);
(ii) disclosures made to third parties pursuant to Special
Meetings of the PHRC; (iii) broker-dealer interest lists;
(iv) shareholder in-kind distributions;
(v) attribution analyses; or (vi) in connection with
transition managers. The Investment Adviser shall report
quarterly to the Board of Directors (or a designated committee
thereof) information concerning all parties receiving non-public
portfolio holdings information pursuant to an exemption.
Procedures to monitor the use of such non-public portfolio
holdings information may include requiring annual certifications
that the recipients have utilized such information only pursuant
to the terms of the agreement between the recipient and the
Investment Adviser and, for those recipients receiving
information electronically, acceptance of the information will
constitute reaffirmation that the third party expressly agrees
to maintain the disclosed information in confidence and not to
trade portfolio securities based on the non-public information.
In no instance may the Investment Adviser or the Fund receive
any compensation or consideration in exchange for the portfolio
holdings information.
The PHRC is responsible for creating and implementing the Policy
and, in this regard, has expressly adopted it. The following are
some of the functions and responsibilities of the PHRC:
(a) The PHRC, which will consist of executive
officers of the Fund and the Investment Adviser or their
designees, is responsible for establishing portfolio holdings
disclosure policies and guidelines and determining how portfolio
holdings information will be disclosed on an ongoing basis.
(b) The PHRC will periodically review and have the
authority to amend as necessary the Fund’s portfolio
holdings disclosure policies and guidelines (as expressed by the
Policy).
(c) The PHRC will meet at least quarterly to (among
other matters): (1) address any outstanding issues relating
to the Policy, including matters relating to
(i) disclosures made to third parties pursuant to ongoing
arrangements (described above); (ii) broker-dealer interest
lists; (iii) shareholder in-kind distributions;
(iv) attribution analyses; or (v) transition managers;
(2) review non-disclosure agreements that have been
executed with third parties and determine whether the third
parties will receive portfolio holdings information; and
(3) generally review the procedures that the Investment
Adviser employs to ensure that disclosure of information about
portfolio securities is in the best interests of Fund
shareholders, including procedures to address conflicts between
the interests of Fund shareholders, on the one hand, and those
of the Investment Adviser, the Distributor or any affiliated
person of the Fund, the Investment Adviser or the Distributor,
on the other.
(d) Any member of the PHRC may call a Special Meeting
of the PHRC to consider whether a third party that is not listed
in (c) above may receive non-public portfolio holdings
information pursuant to a validly executed non-disclosure
agreement. At least three members of the PHRC, or their
designees, and one member of the Fund’s Audit Committee, or
his or her designee, shall be present at the Special Meeting in
order to constitute a quorum. At any Special Meeting at which a
quorum is present, the decision of a majority of the PHRC
members present and voting shall be determinative as to any
matter submitted to a vote; provided, however, that the Audit
Committee member, or his or her designee, must concur in the
determination in order for it to become effective.
(e) The PHRC, or its designee(s), will document in
writing all of their decisions and actions, which documentation
will be maintained by the PHRC, or its designee(s) for a period
of at least six years. The PHRC, or its designee(s), will report
their decisions to the Board of Directors at each Board’s
next regularly
26
scheduled Board meeting. The report will contain information
concerning decisions made by the PHRC during the most recently
ended calendar quarter immediately preceding the Board meeting.
General. The Board of Directors of the Fund
oversees the management of the Fund, but does not itself manage
the Fund. The Directors review various services provided by or
under the direction of the Investment Adviser to ensure that the
Fund’s general investment policies and programs are
properly carried out. The Directors also conduct their review to
ensure that administrative services are provided to the Fund in
a satisfactory manner.
Under state law, the duties of the Directors are generally
characterized as a duty of loyalty and a duty of care. The duty
of loyalty requires a Director to exercise his or her powers in
the interest of the Fund and not the Director’s own
interest or the interest of another person or organization. A
Director satisfies his or her duty of care by acting in good
faith with the care of an ordinarily prudent person and in a
manner the Director reasonably believes to be in the best
interest of the Fund and its shareholders.
Directors and Officers. The Board of the Fund
consists of 10 Directors. These same individuals also serve
as directors or trustees for certain of the funds advised by the
Investment Adviser (the “Retail Funds”) and certain of
the funds advised by Morgan Stanley Investment Management Inc.
and Morgan Stanley AIP GP LP (the “Institutional
Funds”). Nine Directors have no affiliation or business
connection with the Investment Adviser or any of its affiliated
persons and do not own any stock or other securities issued by
the Investment Adviser’s parent company, Morgan Stanley.
These are the “non-interested” or
“Independent” Directors. The other Director (the
“Interested Director”) is affiliated with the
Investment Adviser.
Board Structure and Oversight Function. The
Board’s leadership structure features an Independent
Director serving as Chairperson and the Board Committees
described below. The Chairperson participates in the preparation
of the agenda for meetings of the Board and the preparation of
information to be presented to the Board with respect to matters
to be acted upon by the Board. The Chairperson also presides at
all meetings of the Board and is involved in discussions
regarding matters pertaining to the oversight of the management
of the Fund between meetings.
The Board of Directors operates using a system of committees to
facilitate the timely and efficient consideration of all matters
of importance to the Directors, the Fund and Fund shareholders,
and to facilitate compliance with legal and regulatory
requirements and oversight of the Fund’s activities and
associated risks. The Board of Directors has established four
standing committees: (1) Audit Committee,
(2) Governance Committee, (3) Compliance and Insurance
Committee and (4) Investment Committee. The Audit Committee
and the Governance Committee are comprised exclusively of
Independent Directors. Each committee charter governs the scope
of the committee’s responsibilities with respect to the
oversight of the Fund. The responsibilities of each committee,
including their oversight responsibilities, are described
further under the caption “Independent Directors and the
Committees.”
In addition, appropriate personnel, including but not limited to
the Fund’s Chief Compliance Officer, members of the
Fund’s administration and accounting teams, representatives
from the Fund’s independent registered public accounting
firm, the Fund’s Treasurer and portfolio management
personnel, make regular reports regarding the Fund’s
activities and related risks to the Board of Directors and the
committees, as appropriate. These reports include, among others,
quarterly performance reports, quarterly derivatives activity
and risk reports and discussions with members of the risk teams
relating to each asset class.
As needed between meetings of the Board, the Board or a specific
committee receives and reviews reports relating to the Fund and
engages in discussions with appropriate parties relating to the
Fund’s operations and related risks.
27
B.
Management
Information
Independent Directors. The Fund seeks as
Directors individuals of distinction and experience in business
and finance, government service or academia. In determining that
a particular Director was and continues to be qualified to serve
as Director, the Board has considered a variety of criteria,
none of which, in isolation, was controlling. Based on a review
of the experience, qualifications, attributes or skills of each
Director, including those enumerated in the table below, the
Board has determined that each of the Directors is qualified to
serve as a Director of the Fund. In addition, the Board believes
that, collectively, the Directors have balanced and diverse
experience, qualifications, attributes and skills that allow the
Board to operate effectively in governing the Fund and
protecting the interests of shareholders. Information about the
Fund’s Governance Committee and Board of Directors
nomination process is provided below under the caption
“Independent Directors and the Committees.”
The Independent Directors of the Fund, their age, address, term
of office and length of time served, their principal business
occupations during the past five years, the number of portfolios
in the Fund Complex (defined below) overseen by each
Independent Director (as of December 31, 2009) and
other directorships, if any, held by the Directors, are shown
below. The Fund Complex includes all open-end and
closed-end funds (including all of their portfolios) advised by
the Investment Adviser and any funds that have an investment
adviser that is an affiliated person of the Investment Adviser
(including, but not limited to, Morgan Stanley Investment
Management Inc.).
Independent
Directors:
Number of
Portfolios
in Fund
Complex
Position(s)
Length
Overseen by
Name, Age and Address
Held with
of Time
Principal Occupation(s)
Independent
Other Directorships Held
of Independent Director
Registrant
Served*
During Past 5 Years
Director
by Independent Director**
Frank L. Bowman (65)
c/o Kramer
Levin Naftalis & Frankel LLP
Counsel to the
Independent Directors
1177 Avenue of the Americas New York, NY10036
Director
Since
August 2006
President, Strategic Decisions, LLC (consulting) (since February
2009); Director or Trustee of various Retail Funds and
Institutional Funds (since August 2006); Chairperson of the
Insurance Sub-Committee of the Compliance and Insurance
Committee (since February 2007) served as President and Chief
Executive Officer of the Nuclear Energy Institute (policy
organization) through November 2008; retired as Admiral,
U.S. Navy in January 2005 after serving over 8 years
as Director of the Naval Nuclear Propulsion Program and Deputy
Administrator— Naval Reactors in the National Nuclear
Security Administration at the U.S. Department of Energy
(1996-2004),
Knighted as Honorary Knight Commander of the Most Excellent
Order of the British Empire; Awarded the Officer de l’Orde
National du Mérite by the French Government.
162
Director of the Armed Services YMCA of the USA; member, BP
America External Advisory Council (energy); member, National
Academy of Engineers.
*
This is the earliest date the
Director began serving the Retail Funds or Institutional Funds.
Each Director serves an indefinite term, until his or her
successor is elected.
**
This includes any directorships at
public companies and registered investment companies held by the
Director at any time during the past five years.
28
Number of
Portfolios
in Fund
Complex
Position(s)
Length
Overseen by
Name, Age and Address
Held with
of Time
Principal Occupation(s)
Independent
Other Directorships Held
of Independent Director
Registrant
Served*
During Past 5 Years
Director
by Independent Director**
Michael Bozic (69)
c/o Kramer
Levin Naftalis & Frankel LLP
Counsel to the
Independent Directors
1177 Avenue of the Americas New York, NY10036
Director
Since
April 1994
Private investor; Chairperson of the Compliance and Insurance
Committee (since October 2006); Director or Trustee of the
Retail Funds (since April 1994) and Institutional Funds (since
July 2003); formerly, Chairperson of the Insurance Committee
(July 2006-September 2006); Vice Chairman of Kmart
Corporation (December
1998-October
2000), Chairman and Chief Executive Officer of Levitz Furniture
Corporation (November 1995-November 1998) and President and
Chief Executive Officer of Hills Department Stores (May
1991-July
1995); variously Chairman, Chief Executive Officer, President
and Chief Operating Officer (1987-1991) of the Sears Merchandise
Group of Sears, Roebuck & Co.
164
Director of various business organizations.
Kathleen A. Dennis (56)
c/o Kramer
Levin Naftalis & Frankel LLP
Counsel to the
Independent Directors
1177 Avenue of the Americas New York, NY10036
Director
Since
August 2006
President, Cedarwood Associates (mutual fund and investment
management consulting) (since July 2006); Chairperson of the
Money Market and Alternatives Sub-Committee of the Investment
Committee (since October 2006) and Director or Trustee of
various Retail Funds and Institutional Funds (since August
2006); formerly, Senior Managing Director of Victory Capital
Management (1993-2006).
162
Director of various non-profit organizations.
Dr. Manuel H. Johnson (61)
c/o Johnson
Smick Group, Inc.,
888 16th Street, N.W.
Suite 740 Washington, D.C.20006
Director
Since
July 1991
Senior Partner, Johnson Smick International, Inc. (consulting
firm); Chairperson of the Investment Committee (since October
2006) and Director or Trustee of the Retail Funds (since July
1991) and Institutional Funds (since July 2003);
Co-Chairman and a founder of the Group of Seven Council (G7C)
(international economic commission); formerly, Chairperson of
the Audit Committee (July 1991-September 2006), Vice
Chairman of the Board of Governors of the Federal Reserve System
and Assistant Secretary of the U.S. Treasury.
164
Director of NVR, Inc. (home construction); Director of Evergreen
Energy; Director of Greenwich Capital Holdings.
*
This is the earliest date the
Director began serving the Retail Funds or Institutional Funds.
Each Director serves an indefinite term, until his or her
successor is elected.
**
This includes any directorships at
public companies and registered investment companies held by the
Director at any time during the past five years.
29
Number of
Portfolios
in Fund
Complex
Position(s)
Length
Overseen by
Name, Age and Address
Held with
of Time
Principal Occupation(s)
Independent
Other Directorships Held
of Independent Director
Registrant
Served*
During Past 5 Years
Director
by Independent Director**
Joseph J. Kearns (67)
c/o Kearns &
Associates LLC PMB754
23852 Pacific Coast Highway Malibu, CA90265
Director
Since
August 1994
President, Kearns & Associates LLC (investment consulting);
Chairperson of the Audit Committee (since October 2006) and
Director or Trustee of the Retail Funds (since July 2003) and
Institutional Funds (since August 1994); formerly,
Deputy Chairperson of the Audit Committee
(July 2003-September 2006) and Chairperson of the Audit
Committee of the Institutional Funds (October
2001-July 2003); CFO of the J. Paul Getty Trust.
165
Director of Electro Rent Corporation (equipment leasing) and The
Ford Family Foundation.
Michael F. Klein (51)
c/o Kramer
Levin Naftalis & Frankel LLP
Counsel to the
Independent Directors
1177 Avenue of the Americas New York, NY10036
Director
Since
August 2006
Managing Director, Aetos Capital, LLC (since March 2000) and
Co-President, Aetos Alternatives Management, LLC (since January
2004); Chairperson of the Fixed Income Sub-Committee of the
Investment Committee (since October 2006) and Director or
Trustee of various Retail Funds and Institutional Funds (since
August 2006); formerly, Managing Director, Morgan Stanley &
Co. Inc. and Morgan Stanley Dean Witter Investment Management,
President, Morgan Stanley Institutional Funds
(June 1998-March 2000) and Principal, Morgan Stanley &
Co. Inc. and Morgan Stanley Dean Witter Investment Management
(August 1997-December 1999).
162
Director of certain investment funds managed or sponsored by
Aetos Capital, LLC. Director of Sanitized AG and Sanitized
Marketing AG (specialty chemicals).
Michael E. Nugent (74)
c/o Triumph
Capital, L.P.
445 Park Avenue New York, NY10022
Chairperson of the Board and Director
Chairperson of the Boards since July 2006 and Director since
July 1991
General Partner, Triumph Capital, L.P. (private investment
partnership); Chairperson of the Boards of the Retail Funds and
Institutional Funds (since July 2006); Director or Trustee of
the Retail Funds (since July 1991) and Institutional Funds
(since July 2001); formerly, Chairperson of the Insurance
Committee (until July 2006).
164
None.
W. Allen Reed (63)
c/o Kramer
Levin Naftalis & Frankel LLP
Counsel to the
Independent Directors
1177 Avenue of the Americas New York, NY10036
Director
Since
August 2006
Chairperson of the Equity
Sub-Committee
of the Investment Committee (since October 2006) and Director or
Trustee of various Retail Funds and Institutional (since
August 2006); formerly, President and CEO of General Motors
Asset Management; Chairman and Chief Executive Officer of the GM
Trust Bank and Corporate Vice President of General Motors
Corporation (August
1994-December 2005).
162
Director of Temple-Inland Industries (packaging and forest
products); Director of Legg Mason, Inc. and Director of the
Auburn Funds University Foundation; formerly, Director of
iShares, Inc. (2001-2006).
*
This is the earliest date the
Director began serving the Retail Funds or Institutional Funds.
Each Director serves an indefinite term, until his or her
successor is elected.
**
This includes any directorships at
public companies and registered investment companies held by the
Director at any time during the past five years.
30
Number of
Portfolios
in Fund
Complex
Position(s)
Length
Overseen by
Name, Age and Address
Held with
of Time
Principal Occupation(s)
Independent
Other Directorships Held
of Independent Director
Registrant
Served*
During Past 5 Years
Director
by Independent Director**
Fergus Reid (77)
c/o Joe Pietrycka,
Inc.
85 Charles Colman Blvd. Pawling, NY12564
Director
Since
June 1992
Chairman, Joe Pietrycka, Inc.; Chairperson of the
Governance Committee and Director or Trustee of the Retail Funds
July 2003) and Institutional Funds (since June 1992).
165
Trustee and Director of certain investment companies in the
JPMorgan Funds complex managed by JP Morgan Investment
Management Inc.
*
This is the earliest date the
Director began serving the Retail Funds or Institutional Funds.
Each Director serves an indefinite term, until his or her
successor is elected.
**
This includes any directorships at
public companies and registered investment companies held by the
Director at any time during the past five years.
The Director who is affiliated with the Investment Adviser or
affiliates of the Investment Adviser (as set forth below) and
executive officers of the Fund, their age, address, term of
office and length of time served, their principal business
occupations during the past five years, the number of portfolios
in the Fund Complex overseen by the Interested Director (as
of December 31, 2009) and the other directorships, if
any, held by the Interested Director, are shown below.
Interested
Director:
Number of
Portfolios
in Fund
Complex
Position(s)
Length
Overseen by
Name, Age and Address of
Held with
of Time
Principal Occupation(s)
Interested
Other Directorships Held by
Interested Director
Registrant
Served*
During Past 5 Years
Director
Interested Director**
James F. Higgins (62)
c/o Morgan
Stanley Trust
Harborside Financial Center
Plaza Two Jersey City, NJ07311
Director
Since June 2000
Director or Trustee of the Retail Funds (since June 2000) and
Institutional Funds (since July 2003); Senior Advisor of Morgan
Stanley (since August 2000).
163
Director of AXA Financial, Inc. and The Equitable Life Assurance
Society of the United States (financial services).
*
This is the earliest date the
Director began serving the Retail Funds or Institutional Funds.
Each Director serves an indefinite term, until his or her
successor is elected.
**
This includes any directorships at
public companies and registered investment companies held by the
Director at any time during the past five years.
President and Principal Executive Officer (since September 2008)
of funds in the Fund Complex; President and Chief Executive
Officer of Morgan Stanley Services Company Inc. (since September
2008). President of the Investment Adviser (since July 2008).
Managing Director and Head of Americas distribution, product and
marketing for Morgan Stanley Investment Management (since
December 2009). Head of Liquidity and Bank Trust business
(since July 2008) and the Latin American franchise (since
July 2008) at Morgan Stanley Investment Management.
Managing Director, Director and/or Officer of the Investment
Adviser and various entities affiliated with the Investment
Adviser. Formerly, Head of Retail and Intermediary Business,
Head of Strategy and Product Development for the Alternatives
Group and Senior Loan Investment Management. Formerly with Bank
of America (July
1996-March
2006), most recently as Head of the Strategy, Mergers and
Acquisitions team for Global Wealth and Investment Management.
Head, Chief Operating Officer and acting Chief Investment
Officer of the Global Fixed Income Group of Morgan Stanley
Investment Management Inc. and the Investment Adviser (since
April 2008). Head of Global Liquidity Portfolio Management and
co-Head of Liquidity Credit Research of Morgan Stanley
Investment Management (since December 2007). Managing Director
of Morgan Stanley Investment Management Inc. and the Investment
Adviser (since December 2007). Previously, Managing Director on
the Management Committee and head of Municipal Portfolio
Management and Liquidity at BlackRock (October 1991 to January
2007).
Executive Director of the Adviser for MSIF Inc. and various
entities affiliated with the Adviser for MSIF Inc.; Chief
Compliance Officer of the Retail Funds and Institutional Funds
(since May 2010); Chief Compliance Officer of Morgan Stanley
Investment Advisors Inc., Morgan Stanley Investment Management
Inc. and Van Kampen Advisors Inc. (since April 2007).
Managing Director of the Investment Adviser and various entities
affiliated with the Investment Adviser; Vice President of the
Retail Funds (since July 2002) and Institutional Funds (since
December 1997).
Treasurer since July 2003 and Chief Financial Officer since
September 2002
Executive Director of the Investment Adviser and various
entities affiliated with the Investment Adviser; Treasurer and
Chief Financial Officer of the Retail Funds (since July 2003)
and Institutional Funds (since March 2010).
Executive Director of the Investment Adviser and various
entities affiliated with the Investment Adviser; Secretary of
the Retail Funds (since July 2003) and Institutional Funds
(since June 1999).
*
This is the earliest date the
Director began serving the Retail Funds or Institutional Funds.
Each Director serves an indefinite term, until his or her
successor is elected.
In addition, the following individuals who are officers of the
Investment Adviser or its affiliates serve as assistant
secretaries of the Fund: Joanne Antico, Joseph C. Benedetti,
Daniel E. Burton, Tara A. Farrelly, Eric C. Griffith, Lou Anne
D. McInnis, Edward J. Meehan, Elisa Mitchell, Elizabeth Nelson,
Sheri L. Schreck and Julien H. Yoo.
32
For each Director, the dollar range of equity securities
beneficially owned by the Director in the Fund and in the Family
of Investment Companies (Family of Investment Companies includes
all of the registered investment companies advised by the
Investment Adviser, Morgan Stanley Investment Management Inc.
and Morgan Stanley AIP GP LP) for the calendar year ended
December 31, 2009 is set forth in the table below.
Includes the total amount of
compensation deferred by the Director at his election pursuant
to a deferred compensation plan. Such deferred compensation is
placed in a deferral account and deemed to be invested in one or
more of the Retail Funds or Institutional Funds (or portfolio
thereof) that are offered as investment options under the plan.
As to each Independent Director and his immediate family
members, no person owned beneficially or of record securities in
an investment adviser or principal underwriter of the Fund, or a
person (other than a registered investment company) directly or
indirectly controlling, controlled by or under common control
with an investment adviser or principal underwriter of the Fund.
Independent Directors and the Committees. Law
and regulation establish both general guidelines and specific
duties for the Independent Directors. The Board has four
committees: (1) Audit Committee, (2) Governance
Committee, (3) Compliance and Insurance Committee and
(4) Investment Committee. Three of the Independent
Directors serve as members of the Audit Committee, three
Independent Directors serve as members of the Governance
Committee, four Directors, including three Independent
Directors, serve as members of the Compliance and Insurance
Committee and all of the Directors serve as members of the
Investment Committee.
The Independent Directors are charged with recommending to the
full Board approval of management, advisory and administration
contracts,
Rule 12b-1
plans and distribution and underwriting agreements; continually
reviewing fund performance, checking on the pricing of portfolio
securities, brokerage commissions, transfer agent costs and
performance and trading among funds in the same complex; and
approving fidelity bond and related insurance coverage and
allocations, as well as other matters that arise from time to
time. The Independent Directors are required to select and
nominate individuals to fill any Independent Director vacancy on
the board of any fund that has a
Rule 12b-1
plan of distribution. Most of the Retail Funds have a
Rule 12b-1
plan.
The Board of Directors has a separately-designated standing
Audit Committee established in accordance with
Section 3(a)(58)(A) of the Securities Exchange Act of 1934,
as amended. The Audit Committee is charged with recommending to
the full Board the engagement or discharge of the Fund’s
independent registered public accounting firm; directing
investigations into matters within the scope of the independent
registered public accounting firm’s duties, including the
power to retain outside specialists; reviewing with the
independent registered public accounting firm the audit plan and
results of the auditing engagement; approving professional
services provided by the independent registered public
accounting firm and other accounting firms prior to the
performance of the services; reviewing the independence of the
33
independent registered public accounting firm; considering the
range of audit and non-audit fees; reviewing the adequacy of the
Fund’s system of internal controls and reviewing the
valuation process. The Fund has adopted a formal, written Audit
Committee Charter.
The members of the Audit Committee of the Fund are Joseph J.
Kearns, Michael E. Nugent and W. Allen Reed. None of the
members of the Fund’s Audit Committee is an
“interested person,” as defined under the Investment
Company Act, of the Funds (with such disinterested Directors
being “Independent Directors” or individually,
“Independent Director”). Each Independent Director is
also “independent” from the Fund under the listing
standards of the New York Stock Exchange, Inc.
(“NYSE”). The Chairperson of the Audit Committee of
the Fund is Joseph J. Kearns.
The Board of Directors of the Fund also has a Governance
Committee. The Governance Committee identifies individuals
qualified to serve as Independent Directors on the Fund’s
Board and on committees of such Board and recommends such
qualified individuals for nomination by the Fund’s
Independent Directors as candidates for election as Independent
Directors, advises the Fund’s Board with respect to Board
composition, procedures and committees, develops and recommends
to the Fund’s Board a set of corporate governance
principles applicable to the Fund, monitors and makes
recommendations on corporate governance matters and policies and
procedures of the Fund’s Board of Directors and any Board
committees and oversees periodic evaluations of the Fund’s
Board and its committees. The members of the Governance
Committee of the Fund are Kathleen A. Dennis, Michael F. Klein
and Fergus Reid, each of whom is an Independent Director. The
Chairperson of the Governance Committee is Fergus Reid.
The Fund does not have a separate nominating committee. While
the Fund’s Governance Committee recommends qualified
candidates for nominations as Independent Directors, the Board
of Directors of the Fund believes that the task of nominating
prospective Independent Directors is important enough to require
the participation of all current Independent Directors, rather
than a separate committee consisting of only certain Independent
Directors. Accordingly, each Independent Director (Frank L.
Bowman, Michael Bozic, Kathleen A. Dennis, Manuel H. Johnson,
Joseph J. Kearns, Michael F. Klein, Michael E. Nugent,
W. Allen Reed and Fergus Reid) participates in the election
and nomination of candidates for election as Independent
Directors for the Fund. Persons recommended by the Fund’s
Governance Committee as candidates for nomination as Independent
Directors shall possess such experience, qualifications,
attributes, skills and diversity so as to enhance the
Board’s ability to manage and direct the affairs and
business of the Fund, including, when applicable, to enhance the
ability of committees of the Board to fulfill their duties
and/or to
satisfy any independence requirements imposed by law, regulation
or any listing requirements of the NYSE. While the Independent
Directors of the Fund expect to be able to continue to identify
from their own resources an ample number of qualified candidates
for the Fund’s Board as they deem appropriate, they will
consider nominations from shareholders to the Board. Nominations
from shareholders should be in writing and sent to the
Independent Directors as described below under the caption
“Shareholder Communication.”
The Board formed the Compliance and Insurance Committee to
address insurance coverage and oversee the compliance function
for the Fund and the Board. The Compliance and Insurance
Committee consists of Frank L. Bowman, Michael Bozic,
James F. Higgins and Manuel H. Johnson. Frank L. Bowman,
Michael Bozic and Manuel H. Johnson are Independent Directors.
The Chairperson of the Compliance and Insurance Committee is
Michael Bozic. The Compliance and Insurance Committee has an
Insurance Sub-Committee to review and monitor the insurance
coverage maintained by the Fund. The Chairperson of the
Insurance Sub-Committee is Frank L. Bowman.
The Investment Committee oversees the portfolio investment
process for and reviews the performance of the Fund. The
Investment Committee also recommends to the Board to approve or
renew the Fund’s Investment Advisory and Administration
Agreements. The members of the Investment Committee are Frank L.
Bowman, Michael Bozic, Kathleen A. Dennis, James F. Higgins,
Manuel H. Johnson, Joseph J. Kearns, Michael F. Klein, Michael
E. Nugent, W. Allen Reed and Fergus Reid. The Chairperson of the
Investment Committee is Manuel H. Johnson.
34
The Investment Committee has three Sub-Committees, each with its
own Chairperson. Each Sub-Committee focuses on the funds’
primary areas of investment, namely equities, fixed income and
alternatives. The Sub-Committees and their members are as
follows:
(1)
Equity – W. Allen Reed (Chairperson), Frank L. Bowman
and Michael E. Nugent.
(2)
Fixed Income – Michael F. Klein (Chairperson), Michael
Bozic and Fergus Reid.
(3)
Money Market and Alternatives – Kathleen A. Dennis
(Chairperson), James F. Higgins and Joseph J. Kearns.
During the Fund’s fiscal year ended February 28, 2010,
the Board of Directors held the following meetings:
Board of Directors
Committee/Sub-Committee:
Number of meetings:
Audit Committee
Governance Committee
Compliance and Insurance Committee
Insurance Sub-Committee
Investment Committee
Equity Sub-Committee
Fixed Income Sub-Committee
Money Market and Alternatives Sub-Committee
Advantages of Having Same Individuals as Directors for the
Retail Funds and Institutional Funds. The
Independent Directors and the Fund’s management believe
that having the same Independent Directors for each of the
Retail Funds and Institutional Funds avoids the duplication of
effort that would arise from having different groups of
individuals serving as Independent Directors for each of the
funds or even of sub-groups of funds. They believe that having
the same individuals serve as Independent Directors of all the
Retail Funds and Institutional Funds tends to increase their
knowledge and expertise regarding matters which affect the
Fund Complex generally and enhances their ability to
negotiate on behalf of each fund with the fund’s service
providers. This arrangement also precludes the possibility of
separate groups of Independent Directors arriving at conflicting
decisions regarding operations and management of the funds and
avoids the cost and confusion that would likely ensue. Finally,
having the same Independent Directors serve on all fund boards
enhances the ability of each fund to obtain, at modest cost to
each separate fund, the services of Independent Directors of the
caliber, experience and business acumen of the individuals who
serve as Independent Directors of the Retail Funds and
Institutional Funds.
Director and Officer Indemnification. The
Fund’s Articles of Incorporation provides that no Director,
Officer, employee or agent of the Fund is liable to the Fund or
to a shareholder, nor is any Director, Officer, employee or
agent liable to any third persons in connection with the affairs
of the Fund, except as such liability may arise from
his/her or
its own bad faith, willful misfeasance, gross negligence or
reckless disregard of
his/her or
its duties. It also provides that all third persons shall look
solely to Fund property for satisfaction of claims arising in
connection with the affairs of the Fund. With the exceptions
stated, the Articles of Incorporation provides that a Director,
Officer, employee or agent is entitled to be indemnified against
all liability in connection with the affairs of the Fund.
Shareholder Communications. Shareholders may
send communications to the Fund’s Board of Directors.
Shareholders should send communications intended for the
Fund’s Board by addressing the communications directly to
that Board (or individual Board members)
and/or
otherwise clearly indicating in the salutation that the
communication is for the Board (or individual Board members) and
by sending the communication to either the Fund’s office or
directly to such Board member(s) at the address specified for
each Director previously noted. Other shareholder communications
received by the Fund not directly addressed and sent to the
Board will be reviewed and generally responded to by management,
and will be forwarded to the Board only at management’s
discretion based on the matters contained therein.
Each Director (except for the Chairperson of the Boards)
receives an annual retainer fee of $200,000 for serving the
Retail Funds and the Institutional Funds. The Chairperson of the
Audit Committee receives an additional annual retainer fee of
$75,000 and the Investment Committee Chairperson receives an
additional annual retainer fee of $60,000. Other Committee
Chairpersons receive an additional annual retainer fee of
$30,000 and the Sub-Committee Chairpersons receive an additional
annual retainer fee of $15,000. The aggregate compensation paid
to each Director is paid by the Retail Funds and the
Institutional Funds, and is allocated on a pro rata basis among
each of the operational funds/portfolios of the Retail Funds and
the Institutional Funds based on the relative net assets of each
of the funds/portfolios. Michael E. Nugent receives a total
annual retainer fee of $400,000 for his services as Chairperson
of the Boards of the Retail Funds and the Institutional Funds
and for administrative services provided to each Board.
The Fund also reimburses such Directors for travel and other
out-of-pocket expenses incurred by them in connection with
attending such meetings. Directors of the Fund who are employed
by the Investment Adviser receive no compensation or expense
reimbursement from the Fund for their services as Director.
Effective April 1, 2004, the Fund began a Deferred
Compensation Plan (the “DC Plan”), which allows each
Director to defer payment of all, or a portion, of the fees he
or she receives for serving on the Board of Directors throughout
the year. Each eligible Director generally may elect to have the
deferred amounts credited with a return equal to the total
return on one or more of the Retail Funds or Institutional Funds
(or portfolios thereof) that are offered as investment options
under the DC Plan. At the Director’s election,
distributions are either in one lump sum payment, or in the form
of equal annual installments over a period of five years. The
rights of an eligible Director and the beneficiaries to the
amounts held under the DC Plan are unsecured and such amounts
are subject to the claims of the creditors of the Fund.
Prior to April 1, 2004, the Institutional Funds maintained
a similar Deferred Compensation Plan (the “Prior DC
Plan”), which also allowed each Independent Director to
defer payment of all, or a portion, of the fees he or she
received for serving on the Board of Directors throughout the
year. Generally, the DC Plan amends and supersedes the Prior DC
Plan and all amounts payable under the Prior DC Plan are now
subject to the terms of the DC Plan (except for amounts paid
during the calendar year 2004, which remain subject to the terms
of the Prior DC Plan).
36
The following table shows aggregate compensation payable to each
of the Fund’s Directors from the Fund for the fiscal year
ended February 28, 2010 and the aggregate compensation
payable to each of the funds’ Directors by the
Fund Complex (which includes all of the Retail Funds and
Institutional Funds) for the calendar year ended
December 31, 2009.
Compensation(1)
Aggregate
Total Compensation
Compensation
From Fund and Fund Complex
Name of Independent Director:
From the
Fund(2)
Paid to
Director(3)
Frank L. Bowman
$
$
215,000
Michael Bozic
230,000
Kathleen A. Dennis
215,000
Manuel H. Johnson
260,000
Joseph J.
Kearns(2)
300,000
Michael F. Klein
215,000
Michael E. Nugent
400,000
W. Allen
Reed(2)
215,000
Fergus Reid
255,000
Name of Interested
Director:
James F. Higgins
200,000
(1)
Includes all amounts paid for
serving as director/trustee of the funds, as well as serving as
Chairperson of the Boards or a Chairperson of a Committee or
Sub-Committee.
(2)
The amounts shown in this column
represent the aggregate compensation before deferral with
respect to the Fund’s fiscal year. The following Directors
deferred compensation from the Fund during the fiscal year ended
February 28, 2010: Mr. Kearns,
$[ ]; Mr. Reed,
$[ ].
(3)
The amounts shown in this column
represent the aggregate compensation paid by all of the funds in
the Fund Complex as of December 31, 2009 before
deferral by the Directors under the DC Plan. As of
December 31, 2009, the value (including interest) of the
deferral accounts across the Fund Complex for
Messrs. Kearns, Reed and Reid pursuant to the deferred
compensation plan was $338,252, $252,125 and $567,450,
respectively. Because the funds in the Fund Complex have
different fiscal year ends, the amounts shown in this column are
presented on a calendar year basis.
Prior to December 31, 2003, 49 of the Retail Funds (the
“Adopting Funds”), including the Fund, had adopted a
retirement program under which an Independent Director who
retired after serving for at least five years as an Independent
Director of any such fund (an “Eligible Director”)
would have been entitled to retirement payments, based on
factors such as length of service, upon reaching the eligible
retirement age. On December 31, 2003, the amount of accrued
retirement benefits for each Eligible Director was frozen, and
will be payable, together with a return of 8% per annum, at or
following each such Eligible Director’s retirement as shown
in the table below.
The following table illustrates the retirement benefits accrued
to the Fund’s Independent Directors by the Fund for the
fiscal year ended February 28, 2010 and by the Adopting
Funds for the calendar year ended December 31, 2009, and
the estimated retirement benefits for the Independent Directors,
from the Fund for the fiscal year ended February 28, 2010
and from the Adopting Funds for each calendar year following
retirement. Only the Directors listed below participated in the
retirement program.
Retirement benefits
Estimated annual
accrued as fund expenses
benefits upon
retirement(1)
By all
From all
Name of Independent Director:
By the Fund
Adopting Funds
From the Fund
Adopting Funds
Michael Bozic
$
$
42,107
$
$
43,940
Manuel H. Johnson
30,210
64,338
Michael E. Nugent
7,330
57,539
(1)
Total compensation accrued under
the retirement plan, together with a return of 8% per annum,
will be paid annually commencing upon retirement and continuing
for the remainder of the Director’s life.
37
IV.
CONTROL
PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
The following owned beneficially or of record 5% or more of the
outstanding Class A shares of the Fund as of June 1,2010: Morgan Stanley & Co., Harborside Financial
Center, Plaza Two, Jersey City, NJ07311 −
[ ]% and Citigroup Global Markets
Inc., Mutual Funds Department, Reconciliation &
Accounts Control, 333 West 34th Street, New York, NY10001 − [ ]%. The
following owned beneficially or of record 5% or more of the
outstanding Class B shares of the Fund as of June 1,2010: Morgan Stanley & Co., Harborside Financial
Center, Plaza Two, Jersey City, NJ07311 −
[ ]%. The following owned
beneficially or of record 5% or more of the outstanding
Class C shares of the Fund as of June 1, 2010: Morgan
Stanley & Co., Harborside Financial Center, Plaza Two,
Jersey City, NJ07311 −
[ ]%. The following owned
beneficially or of record 5% or more of the outstanding
Class I shares of the Fund as of June 1, 2010: Morgan
Stanley & Co., Harborside Financial Center, Plaza Two,
Jersey City, NJ07311 − [ ]% and
State Street Bank and Trust Co., 105 Rosemont Avenue,
Westwood, MA
02090-2318 −
[ ]%. The percentage ownership of
shares of the Fund changes from time to time depending on
purchases and redemptions by shareholders and the total number
of shares outstanding.
As of the date of this SAI, the aggregate number of
shares of beneficial interest of the Fund owned by the
Fund’s officers and Directors as a group was less than 1%
of the Fund’s shares of beneficial interest outstanding.
V.
INVESTMENT
ADVISORY AND OTHER SERVICES
A.
Investment
Adviser and Administrator
The Investment Adviser to the Fund is Morgan Stanley Investment
Advisors Inc., a Delaware corporation, whose address is
522 Fifth Avenue, New York, New York10036. The
Investment Adviser is a wholly-owned subsidiary of Morgan
Stanley, a Delaware corporation. Morgan Stanley is a preeminent
global financial services firm engaged in securities trading and
brokerage activities, as well as providing investment banking,
research and analysis, financing and financial advisory services.
Pursuant to an Amended and Restated Investment Advisory
Agreement (the “Investment Advisory Agreement”) with
the Investment Adviser, the Fund has retained the Investment
Adviser to manage the investment of the Fund’s assets,
including the placing of orders for the purchase and sale of
portfolio securities. The Fund pays the Investment Adviser
monthly compensation calculated daily by applying the following
annual rates to the average daily net assets of the Fund
determined as of the close of each business day: 0.545% of the
portion of daily net assets not exceeding $250 million;
0.42% of the portion of daily net assets exceeding
$250 million but not exceeding $1 billion; 0.395% of
the portion of daily net assets exceeding $1 billion but
not exceeding $2 billion; 0.37% of the portion of daily net
assets exceeding $2 billion but not exceeding
$3 billion; 0.345% of the portion of daily net assets
exceeding $3 billion but not exceeding $4 billion;
0.32% of the portion of daily net assets exceeding
$4 billion but not exceeding $5 billion; 0.295% of the
portion of daily net assets exceeding $5 billion but not
exceeding $6 billion; 0.27% of the portion of daily net
assets exceeding $6 billion but not exceeding
$8 billion; 0.245% of the portion of daily net assets
exceeding $8 billion but not exceeding $10 billion;
0.22% of the portion of daily net assets exceeding
$10 billion but not exceeding $15 billion; and 0.195%
of the portion of daily net assets exceeding $15 billion.
The investment advisory fee is allocated among the Classes pro
rata based on the net assets of the Fund attributable to each
Class.
Administration services are provided to the Fund by Morgan
Stanley Services Company Inc. (“Administrator”), a
wholly-owned subsidiary of the Investment Adviser, pursuant to a
separate administration agreement (“Administration
Agreement”) entered into by the Fund with the
Administrator. The Fund pays the Administrator monthly
compensation of 0.08% of daily net assets.
and February 28, 2010, advisory fees paid were reduced by
$29,098, $52,112 and $[ ],
respectively, relating to the Fund’s short-term cash
investments in Morgan Stanley Institutional Liquidity
Funds – Money Market Portfolio –
Institutional Class.
For the fiscal years ended February 29, 2008,
February 28, 2009 and February 28, 2010, the Fund
accrued compensation under the Administration Agreement in the
amounts of $2,604,337, $1,552,860 and
$[ ], respectively.
B.
Principal
Underwriter
The Fund’s principal underwriter is the Distributor (which
has the same address as the Investment Adviser). In this
capacity, the Fund’s shares are distributed by the
Distributor. The Distributor has entered into a selected dealer
agreement with Morgan Stanley Smith Barney and Morgan
Stanley & Co., which through their own sales
organizations sell shares of the Fund. In addition, the
Distributor may enter into similar agreements with other
selected broker-dealers. The Distributor, a Delaware
corporation, is a wholly-owned subsidiary of Morgan Stanley.
The Distributor bears all expenses it may incur in providing
services under the Distribution Agreement. These expenses
include the payment of commissions for sales of the Fund’s
shares and incentive compensation to Financial Advisors, the
cost of educational
and/or
business-related trips, and educational
and/or
promotional and business-related expenses. The Distributor also
pays certain expenses in connection with the distribution of the
Fund’s shares, including the costs of preparing, printing
and distributing advertising or promotional materials, and the
costs of printing and distributing prospectuses and supplements
thereto used in connection with the offering and sale of the
Fund’s shares. The Fund bears the costs of initial
typesetting, printing and distribution of prospectuses and
supplements thereto to shareholders. The Fund also bears the
costs of registering the Fund and its shares under federal and
state securities laws and pays filing fees in accordance with
state securities laws.
The Fund and the Distributor have agreed to indemnify each other
against certain liabilities, including liabilities under the
Securities Act. Under the Distribution Agreement, the
Distributor uses its best efforts in rendering services to the
Fund, but in the absence of willful misfeasance, bad faith,
gross negligence or reckless disregard of its obligations, the
Distributor is not liable to the Fund or any of its shareholders
for any error of judgment or mistake of law or for any act or
omission or for any losses sustained by the Fund or its
shareholders.
C.
Services
Provided by the Investment Adviser and Administrator
The Investment Adviser manages the investment of the Fund’s
assets, including the placing of orders for the purchase and
sale of portfolio securities. The Investment Adviser obtains and
evaluates the information and advice relating to the economy,
securities markets, and specific securities as it considers
necessary or useful to continuously manage the assets of the
Fund in a manner consistent with its investment objectives.
Under the terms of the Administration Agreement, the
Administrator maintains certain of the Fund’s books and
records and furnishes, at its own expense, the office space,
facilities, equipment, clerical help and bookkeeping as the Fund
may reasonably require in the conduct of its business. The
Administrator also assists in the preparation of prospectuses,
proxy statements and reports required to be filed with federal
and state securities commissions (except insofar as the
participation or assistance of the independent registered public
accounting firm and attorneys is, in the opinion of the
Administrator, necessary or desirable). The Administrator also
bears the cost of telephone service, heat, light, power and
other utilities provided to the Fund.
Expenses not expressly assumed by the Investment Adviser under
the Investment Advisory Agreement or by the Administrator under
the Administration Agreement or by the Distributor, will be paid
by the Fund. These expenses will be allocated among the four
Classes of shares pro rata based on the net assets of the Fund
attributable to each Class, except as described below. Such
expenses include, but are not limited to: expenses of the Plan
of Distribution pursuant to
Rule 12b-1;
charges and expenses of any registrar, custodian, stock transfer
and dividend disbursing agent; brokerage commissions; taxes;
39
engraving and printing share certificates; registration costs of
the Fund and its shares under federal and state securities laws;
the cost and expense of printing, including typesetting, and
distributing prospectuses of the Fund and supplements thereto to
the Fund’s shareholders; all expenses of shareholders’
and Directors’ meetings and of preparing, printing and
mailing of proxy statements and reports to shareholders; fees
and travel expenses of Directors or members of any advisory
board or committee who are not employees of the Investment
Adviser or any corporate affiliate of the Investment Adviser;
all expenses incident to any dividend, withdrawal or redemption
options; charges and expenses of any outside service used for
pricing of the Fund’s shares; fees and expenses of legal
counsel, including counsel to the Directors who are not
interested persons of the Fund or of the Investment Adviser (not
including compensation or expenses of attorneys who are
employees of the Investment Adviser); fees and expenses of the
Fund’s independent registered public accounting firm;
membership dues of industry associations; interest on Fund
borrowings; postage; insurance premiums on property or personnel
(including officers and Directors) of the Fund which inure to
its benefit; extraordinary expenses (including, but not limited
to, legal claims and liabilities and litigation costs and any
indemnification relating thereto); and all other costs of the
Fund’s operation. The
12b-1 fees
relating to a particular Class will be allocated directly to
that Class. In addition, other expenses associated with a
particular Class (except advisory or custodial fees) may be
allocated directly to that Class, provided that such expenses
are reasonably identified as specifically attributable to that
Class and the direct allocation to that Class is approved by the
Directors.
The Investment Advisory Agreement provides that in the absence
of willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations thereunder, the Investment Adviser
is not liable to the Fund or any of its investors for any act or
omission by the Investment Adviser or for any losses sustained
by the Fund or its investors.
The Investment Advisory Agreement will remain in effect from
year to year, provided continuance of the Investment Advisory
Agreement is approved at least annually by the vote of the
holders of a majority, as defined in the Investment Company Act,
of the outstanding shares of the Fund, or by the Directors;
provided that in either event such continuance is approved
annually by the vote of a majority of the Independent Directors.
The Administration Agreement provides that in the absence of
willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations thereunder, the Administrator is
not liable to the Fund or any of its investors for any act or
omission by the Administrator or for any losses sustained by the
Fund or its investors. The Administration Agreement will
continue unless terminated by either party by written notice
delivered to the other party within 30 days.
D.
Dealer
Reallowances
Upon notice to selected broker-dealers, the Distributor may
reallow up to the full applicable front-end sales charge during
periods specified in such notice. During periods when 90% or
more of the sales charge is reallowed, such selected
broker-dealers may be deemed to be underwriters as that term is
defined in the Securities Act.
E.
Rule 12b-1
Plan
The Fund has adopted a Plan of Distribution pursuant to
Rule 12b-1
under the Investment Company Act (the “Plan”) pursuant
to which each Class, other than Class I, pays the
Distributor compensation accrued daily and payable monthly at
the following maximum annual rates: 0.25%, 1.00% and 1.00% of
the average daily net assets of Class A, Class B and
Class C shares, respectively.
The Distributor also receives the proceeds of front-end sales
charges (“FSCs”) and of contingent deferred sales
charges (“CDSCs”) imposed on certain redemptions of
shares, which are separate and apart from payments made pursuant
to the Plan. The Distributor has informed the Fund that it
and/or
40
Morgan Stanley & Co. received the proceeds of CDSCs
and FSCs, for the last three fiscal years ended the last day of
February, in approximate amounts as provided in the table below.
2009
2008
2007
Class A
FSCs
:(1
)
$
FSCs
:(1
)
$
FSCs
:(1
)
$
CDSCs
:
$
CDSCs
:
$
CDSCs
:
$
Class B
CDSCs
:
$
CDSCs
:
$
CDSCs
:
$
Class C
CDSCs
:
$
CDSCs
:
$
CDSCs
:
$
(1)
FSCs apply to Class A only.
The entire fee payable by Class A and a portion of the fees
payable by each of Class B and Class C each year
pursuant to the Plan equal to 0.25% of such Class’ average
daily net assets are currently each characterized as a
“service fee” under the Rules of the Financial
Industry Regulatory Authority (“FINRA”) (of which the
Distributor is a member). The “service fee” is a
payment made for personal service
and/or the
maintenance of shareholder accounts. The remaining portion of
the Plan fees payable by a Class, if any, is characterized as an
“asset-based sales charge” as such is defined by the
Rules of FINRA.
Under the Plan and as required by
Rule 12b-1,
the Directors receive and review promptly after the end of each
calendar quarter a written report provided by the Distributor of
the amounts expended under the Plan and the purpose for which
such expenditures were made. For the fiscal year ended
February 28, 2010, Class A, Class B and
Class C shares of the Fund accrued payments under the Plan
amounting to $[ ],
$[ ] and
$[ ], respectively, which amounts
are equal to 0.25%, 0.24% and 1.00% of the average daily net
assets of Class A, Class B and Class C,
respectively, for the fiscal year.
The Plan was adopted in order to permit the implementation of
the Fund’s method of distribution. Under this distribution
method the Fund offers four Classes, each with a different
distribution arrangement.
With respect to Class A shares, the Distributor generally
compensates authorized dealers from proceeds of the FSC,
commissions for the sale of Class A shares, currently a
gross sales credit of up to 5.00% of the amount sold and an
annual residual commission, currently a residual of up to 0.25%
of the current value of the respective accounts for which they
are dealers of record in all cases.
With respect to sales of Class B and Class C shares of
the Fund, a commission or transaction fee generally will be
compensated by the Distributor at the time of purchase directly
out of the Distributor’s assets (and not out of the
Fund’s assets) to authorized dealers who initiate and are
responsible for such purchases computed based on a percentage of
the dollar value of such shares sold of up to 4.00% on
Class B shares and up to 1.00% on Class C shares.
Proceeds from any CDSC and any distribution fees on Class B
and Class C shares of the Fund are paid to the Distributor
and are used by the Distributor to defray its distribution
related expenses in connection with the sale of the Fund’s
shares, such as the payment to authorized dealers for selling
such shares. With respect to Class C shares, the authorized
dealers generally receive from the Distributor ongoing
distribution fees of up to 1.00% of the average daily net assets
of the Fund’s Class C shares annually commencing in
the second year after purchase.
The distribution fee that the Distributor receives from the Fund
under the Plan, in effect, offsets distribution expenses
incurred under the Plan on behalf of the Fund and, in the case
of Class B shares, opportunity costs, such as the gross
sales credit and an assumed interest charge thereon
(“carrying charge”). These expenses may include the
cost of Fund-related educational
and/or
business-related trips or payment of Fund-related educational
and/or
promotional expenses of Financial Advisors. In the
Distributor’s reporting of the distribution expenses to the
Fund, in the case of Class B shares, such assumed interest
(computed at the “broker’s call rate”) has been
calculated on the gross credit as it is reduced by amounts
received by the Distributor under the Plan and any CDSCs
received by the Distributor upon redemption of shares of the
Fund. No other interest charge is included as a distribution
expense in the Distributor’s calculation of its
distribution costs for this purpose. The broker’s call rate
is the interest rate charged to securities brokers on loans
secured by exchange-listed securities.
41
The Fund may reimburse expenses incurred or to be incurred in
promoting the distribution of the Fund’s Class A,
Class B and Class C shares and in servicing
shareholder accounts. Reimbursement will be made through
payments at the end of each month. The amount of each monthly
payment may in no event exceed an amount equal to a payment at
the annual rate of 0.25% in the case of Class A, and 1.00%,
in the case of Class B and Class C, of the average net
assets of the respective Class during the month. No interest or
other financing charges, if any, incurred on any distribution
expenses on behalf of Class A and Class C will be
reimbursable under the Plan.
Each Class paid 100% of the amounts accrued under the Plan with
respect to that Class for the fiscal year ended
February 28, 2010 to the Distributor. It is estimated that
the Distributor spent this amount in approximately the following
ways: (i) [ ]%
($[ ])—advertising and
promotional expenses;
(ii) [ ]%
($[ ])—printing and mailing of
prospectuses for distribution to other than current
shareholders; and (iii) [ ]%
($[ ])—other expenses,
including the gross sales credit and the carrying charge, of
which [ ]%
($[ ]) represents carrying charges,
[ ]%
($[ ]) represents commission
credits to Morgan Stanley Smith Barney and Morgan
Stanley & Co. branch offices and other selected
broker-dealers for payments of commissions to Financial Advisors
and other authorized financial representatives, and
[ ]%
($[ ]) represents overhead and
other branch office distribution-related expenses. The amounts
accrued by Class A and a portion of the amounts accrued by
Class C under the Plan during the fiscal year ended
February 28, 2010 were service fees. The remainder of the
amounts accrued by Class C were for expenses, which relate
to compensation of sales personnel and associated overhead
expenses.
In the case of Class B shares, at any given time, the
expenses of distributing shares of the Fund may be more or less
than the total of (i) the payments made by the Fund
pursuant to the Plan; and (ii) the proceeds of CDSCs paid
by investors upon redemption of shares. For example, if
$1 million in expenses in distributing Class B shares
of the Fund had been incurred and $750,000 had been received as
described in (i) and (ii) above, the excess expense
would amount to $250,000. The Distributor has advised the Fund
that in the case of Class B shares [there were no excess
distribution expenses as of February 28, 2010 (the end of
the Fund’s fiscal year)]. Because there is no requirement
under the Plan that the Distributor be reimbursed for all
distribution expenses with respect to Class B shares or any
requirement that the Plan be continued from year to year, this
excess amount does not constitute a liability of the Fund.
Although there is no legal obligation for the Fund to pay
expenses incurred in excess of payments made to the Distributor
under the Plan and the proceeds of CDSCs paid by investors upon
redemption of shares, if for any reason the Plan is terminated,
the Directors will consider at that time the manner in which to
treat such expenses. Any cumulative expenses incurred, but not
yet recovered through distribution fees or CDSCs, may or may not
be recovered through future distribution fees or CDSCs.
In the case of Class A and Class C shares, expenses
incurred pursuant to the Plan in any calendar year in excess of
0.25% or 1.00% of the average daily net assets of Class A
or Class C shares, respectively, will not be reimbursed by
the Fund through payments in any subsequent year, except that
expenses representing a gross sales commission credited to
Morgan Stanley Smith Barney Financial Advisors and other
authorized financial representatives at the time of sale may be
reimbursed in the subsequent calendar year. The Distributor has
advised the Fund that unreimbursed expenses representing a gross
sales commission credited to Morgan Stanley Smith Barney
Financial Advisors and other authorized financial
representatives at the time of sale totaled $1,401 in the case
of Class C at December 31, 2008 (the end of the
calendar year) which amounts were equal to approximately 0.0058%
of the net assets of Class C and that there were no such
expenses that may be reimbursed in the subsequent year in the
case of Class A on such date. No interest or other
financing charges will be incurred on any Class A or
Class C distribution expenses incurred by the Distributor
under the Plan or on any unreimbursed expenses due to the
Distributor pursuant to the Plan.
No interested person of the Fund nor any Independent Director
has any direct financial interest in the operation of the Plan
except to the extent that the Distributor, the Investment
Adviser, Morgan Stanley & Co., Morgan Stanley Smith
Barney, Morgan Stanley Services or certain of their employees
may be deemed to have such an interest as a result of benefits
derived from the successful operation of the Plan or as a result
of receiving a portion of the amounts expended thereunder by the
Fund.
42
On an annual basis, the Directors, including a majority of the
Independent Directors, consider whether the Plan should be
continued. Prior to approving the last continuation of the Plan,
the Directors requested and received from the Distributor and
reviewed all the information which they deemed necessary to
arrive at an informed determination. In making their
determination to continue the Plan, the Directors considered:
(1) the Fund’s experience under the Plan and whether
such experience indicates that the Plan is operating as
anticipated; (2) the benefits the Fund had obtained, was
obtaining and would be likely to obtain under the Plan,
including that: (a) the Plan is essential in order to give
Fund investors a choice of alternatives for payment of
distribution and service charges and to enable the Fund to
continue to grow and avoid a pattern of net redemptions which,
in turn, are essential for effective investment management; and
(b) without the compensation to individual brokers and the
reimbursement of distribution and account maintenance expenses
of Morgan Stanley & Co. and Morgan Stanley Smith
Barney branch offices made possible by the
12b-1 fees,
Morgan Stanley & Co. and Morgan Stanley Smith Barney
could not establish and maintain an effective system for
distribution, servicing of Fund shareholders and maintenance of
shareholder accounts; and (3) what services had been
provided and were continuing to be provided under the Plan to
the Fund and its shareholders. Based upon their review, the
Directors, including each of the Independent Directors,
determined that continuation of the Plan would be in the best
interest of the Fund and would have a reasonable likelihood of
continuing to benefit the Fund and its shareholders.
The Plan may not be amended to increase materially the amount to
be spent for the services described therein without approval by
the shareholders of the affected Class or Classes of the Fund,
and all material amendments to the Plan must also be approved by
the Directors. The Plan may be terminated at any time, without
payment of any penalty, by vote of a majority of the Independent
Directors or by a vote of a majority of the outstanding voting
securities of the Fund (as defined in the Investment Company
Act) on not more than 30 days’ written notice to any
other party to the Plan. So long as the Plan is in effect, the
election and nomination of Independent Directors shall be
committed to the discretion of the Independent Directors.
F.
Other
Service Providers
(1)
Transfer
Agent/Dividend Disbursing Agent
Morgan Stanley Trust is the Transfer Agent for the Fund’s
shares and the Dividend Disbursing Agent for payment of
dividends and distributions on Fund shares and Agent for
shareholders under various investment plans. The principal
business address of the Transfer Agent is Harborside Financial
Center, Plaza Two, 2nd Floor, Jersey City, NJ07311.
(2)
Custodian and
Independent Registered Public Accounting Firm
State Street Bank and Trust Company, One Lincoln Street,
Boston, MA02111, is the Custodian of the Fund’s assets.
Any of the Fund’s cash balances with the Custodian in
excess of $250,000 (a temporary increase from $100,000,
which is due to expire on December 31, 2013) are
unprotected by federal deposit insurance. These balances may, at
times, be substantial.
[ ],
is the independent registered public accounting firm of the
Fund. The Fund’s independent registered public accounting
firm is responsible for auditing the annual financial statements.
(3)
Affiliated
Persons
The Transfer Agent is an affiliate of the Investment Adviser and
the Distributor. As Transfer Agent and Dividend Disbursing
Agent, the Transfer Agent’s responsibilities include
maintaining shareholder accounts, disbursing cash dividends and
reinvesting dividends, processing account registration changes,
handling purchase and redemption transactions, mailing
prospectuses and reports, mailing and tabulating proxies,
processing share certificate transactions, and maintaining
shareholder records and lists. Pursuant to a Transfer Agency and
Service Agreement, as consideration for the services it
provides, the Transfer Agent
43
receives certain fees from the Fund, which are approved by the
Trustees, generally based on the number of shareholder accounts
and is reimbursed for its out-of-pocket expenses in connection
with such services. The Fund and the Transfer Agent may enter
into agreements with unaffiliated third party intermediaries,
pursuant to which such intermediaries agree to provide
recordkeeping and other administrative services for their
clients who invest in the Fund. In such instances, the Fund will
pay certain fees to the intermediaries for the services they
provide that otherwise would have been performed by the Transfer
Agent.
G.
Fund Management
Other Accounts
Managed by Portfolio Managers at February 28, 2010 (unless
otherwise indicated):
Registered Investment Companies
Other Pooled Investment Vehicles
Other Accounts
Number of
Total Assets
Number of
Total Assets
Number of
Total Assets
Portfolio Managers
Accounts
in the Accounts
Accounts
in the Accounts
Accounts
in the Accounts
Gregory R. Lai
$
$
$
Steven W. Pelensky
$
$
$
Michael A. Petrino
$
$
$
Jordan Floriani
$
$
$
Because the portfolio managers may manage assets for other
investment companies, pooled investment vehicles,
and/or other
accounts (including institutional clients, pension plans and
certain high net worth individuals), there may be an incentive
to favor one client over another resulting in conflicts of
interest. For instance, the Investment Adviser may receive fees
from certain accounts that are higher than the fee it receives
from the Fund, or it may receive a performance-based fee on
certain accounts. In those instances, the portfolio managers may
have an incentive to favor the higher
and/or
performance-based fee accounts over the Fund. In addition, a
conflict of interest could exist to the extent the Investment
Adviser has proprietary investments in certain accounts, where
portfolio managers have personal investments in certain accounts
or when certain accounts are investment options in the
Investment Adviser’s employee benefits
and/or
deferred compensation plans. The portfolio managers may have an
incentive to favor these accounts over others. If the Investment
Adviser manages accounts that engage in short sales of
securities of the type in which the Fund invests, the Investment
Adviser could be seen as harming the performance of the Fund for
the benefit of the accounts engaging in short sales if the short
sales cause the market value of the securities to fall. The
Investment Adviser has adopted trade allocation and other
policies and procedures that it believes are reasonably designed
to address these and other conflicts of interest.
Portfolio Manager
Compensation Structure
Portfolio managers receive a combination of base compensation
and discretionary compensation, comprising a cash bonus and
several deferred compensation programs described below. The
methodology used to determine portfolio manager compensation is
applied across all funds/accounts managed by the portfolio
managers.
Base salary compensation. Generally, portfolio
managers receive base salary compensation based on the level of
their position with the Investment Adviser.
Discretionary compensation. In addition to
base compensation, portfolio managers may receive discretionary
compensation.
Discretionary compensation can include:
•
Cash Bonus.
44
•
Morgan Stanley’s Long Term Incentive Compensation
awards—a mandatory program that defers a portion of
discretionary year-end compensation into restricted stock units
or other awards based on Morgan Stanley common stock or other
investments that are subject to vesting and other conditions.
•
Investment Management Alignment Plan (IMAP) awards—a
mandatory program that defers a portion of discretionary
year-end compensation and notionally invests it in designated
funds advised by the Investment Adviser or its affiliates. The
award is subject to vesting and other conditions. Portfolio
managers must notionally invest a minimum of 25% to a maximum of
100% of their IMAP deferral account into a combination of the
designated funds they manage that are included in the IMAP fund
menu, which may or may not include the Fund. For 2008 awards, a
clawback provision was implemented that could be triggered if
the individual engages in conduct detrimental to the Investment
Adviser or its affiliates. For 2009 awards, this provision was
further strengthened to allow Morgan Stanley to claw back
compensation if Morgan Stanley realized losses on certain
trading positions, investments or holdings.
•
Voluntary Deferred Compensation Plans—voluntary
programs that permit certain employees to elect to defer a
portion of their discretionary year-end compensation and
notionally invest the deferred amount across a range of
designated investment funds, including funds advised by the
Investment Adviser or its affiliates.
Several factors determine discretionary compensation, which can
vary by portfolio management team and circumstances. In order of
relative importance, these factors include:
•
Investment performance. A portfolio manager’s compensation
is linked to the pre-tax investment performance of the
funds/accounts managed by the portfolio manager. Investment
performance is calculated for one-, three-, five- and ten-year
periods measured against a fund’s/account’s primary
benchmark (as set forth in the fund’s prospectus), indices
and/or peer
groups where applicable. Generally, the greatest weight is
placed on the three- and five-year periods.
•
Revenues generated by the investment companies, pooled
investment vehicles and other accounts managed by the portfolio
manager.
•
Contribution to the business objectives of the Investment
Adviser.
•
The dollar amount of assets managed by the portfolio manager.
•
Market compensation survey research by independent third parties.
•
Other qualitative factors, such as contributions to client
objectives.
•
Performance of Morgan Stanley and Morgan Stanley Investment
Management, and the overall performance of the investment
team(s) of which the portfolio manager is a member.
Securities
Ownership of Portfolio Managers
As of February 28, 2010, the dollar range of securities
beneficially owned by each portfolio manager in the Fund is
shown below:
Gregory R. Lai
[$10,001-$50,000
Steven W. Pelensky
$1-$10,000
Michael A. Petrino
$1-$10,000
Jordan Floriani
$1-$10,000]
H.
Codes
of Ethics
The Fund, the Investment Adviser and the Distributor have each
adopted a Code of Ethics pursuant to
Rule 17j-1
under the Investment Company Act. The Codes of Ethics are
designed to detect and prevent improper personal trading. The
Codes of Ethics permit personnel subject to the Codes to invest
in securities, including securities that may be purchased, sold
or held by the Fund, subject to a number of
45
restrictions and controls, including prohibitions against
purchases of securities in an initial public offering and a
preclearance requirement with respect to personal securities
transactions.
I.
Proxy
Voting Policy and Proxy Voting Record
The Board of Directors believes that the voting of proxies on
securities held by the Fund is an important element of the
overall investment process. As such, the Directors have
delegated the responsibility to vote such proxies to Morgan
Stanley Investment Management and its advisory affiliates
(“MSIM”).
A copy of MSIM’s Proxy Voting Policy (“Proxy
Policy”) is attached hereto as Appendix A. In
addition, a copy of the Proxy Policy, as well as the Fund’s
most recent proxy voting record for the
12-month
period ended June 30, filed with the SEC, are available
without charge on our web site at www.morganstanley.com/im. The
Fund’s proxy voting record is also available without charge
on the SEC’s web site at www.sec.gov.
J.
Revenue
Sharing
The Investment Adviser
and/or
Distributor may pay compensation, out of their own funds and not
as an expense of the Fund, to Morgan Stanley Smith Barney and
certain unaffiliated brokers, dealers or other financial
intermediaries, including recordkeepers and administrators of
various deferred compensation plans
(“Intermediaries”), in connection with the sale,
distribution, marketing and retention of Fund shares
and/or
shareholder servicing. For example, the Investment Adviser or
the Distributor may pay additional compensation to Morgan
Stanley Smith Barney and other Intermediaries for, among other
things, promoting the sale and distribution of Fund shares,
providing access to various programs, mutual fund platforms or
preferred or recommended mutual fund lists offered by the
Intermediary, granting the Distributor access to the
Intermediary’s financial advisors and consultants,
providing assistance in the ongoing education and training of
the Intermediary’s financial personnel, furnishing
marketing support, maintaining share balances
and/or for
sub-accounting, recordkeeping, administrative, shareholder or
transaction processing services. Such payments are in addition
to any distribution fees, shareholder service fees
and/or
transfer agency fees that may be payable by the Fund. The
additional payments may be based on various factors, including
level of sales (based on gross or net sales or some specified
minimum sales or some other similar criteria related to sales of
the Fund
and/or some
or all other Morgan Stanley Funds), amount of assets invested by
the Intermediary’s customers (which could include current
or aged assets of the Fund
and/or some
or all other Morgan Stanley Funds), a Fund’s advisory fees,
some other agreed upon amount, or other measures as determined
from time to time by the Investment Adviser
and/or
Distributor. The amount of these payments may be different for
different Intermediaries.
With respect to Morgan Stanley Smith Barney, these payments
currently include the following amounts, which are paid in
accordance with the applicable compensation structure:
(1)
On $1 million or more of Class A shares (for which no
sales charge was paid) or net asset value purchases by certain
employee benefit plans, Morgan Stanley Smith Barney receives a
gross sales credit of up to 1.00% of the amount sold.*
(2)
On Class A, B and C shares held directly in traditional
brokerage accounts in the Morgan Stanley channel of Morgan
Stanley Smith Barney or held in non-Morgan Stanley Smith Barney
accounts where the Morgan Stanley channel of Morgan Stanley
Smith Barney is designated by purchasers as broker-dealer of
record:
•
An amount up to 0.11% of the value (at the time of sale) of
gross sales of such shares; and
•
An ongoing annual fee in an amount up to 0.03% of the total
average monthly net asset value of such shares, which is paid
only to the extent assets held in certain Morgan Stanley Funds
exceed $9 billion.
(3)
On Class I shares held directly in traditional brokerage
accounts in the Morgan Stanley channel of Morgan Stanley Smith
Barney or held in non-Morgan Stanley Smith Barney accounts where
the
* Commissions or transaction fees paid when Morgan Stanley
Smith Barney or other Intermediaries initiate and are
responsible for purchases of $1 million or more are
computed on a percentage of the dollar value of such shares sold
as follows: 1.00% on sales of $1 million to
$2 million, plus 0.75% on the next $1 million, plus
0.50% on the next $2 million, plus 0.25% on the excess over
$5 million.
46
Morgan Stanley channel of Morgan Stanley Smith Barney is
designated by purchasers as broker-dealer of record:
•
A gross sales credit of 0.25% of the amount sold and an ongoing
annual fee in an amount up to 0.15% of the total average monthly
net asset value of such shares; or
•
An ongoing annual fee in an amount up to 35% of the advisory fee
the Investment Adviser receives based on the average daily net
assets of such shares.
There is a chargeback of 100% of the gross sales credit amount
paid if the Class I shares are redeemed in the first year
and a chargeback of 50% of the gross sales credit amount paid if
the shares are redeemed in the second year.
(4)
On Class A, B, C and I shares held in taxable accounts
through any fee-based advisory program offered by the Morgan
Stanley channel of Morgan Stanley Smith Barney, an ongoing
annual fee in an amount up to 0.03% of the total average monthly
net asset value of such shares.
(5)
On any shares held in an account through certain 401(k)
platforms in the Morgan Stanley channel of Morgan Stanley Smith
Barney’s Corporate Retirement Solutions, an ongoing annual
fee in an amount up to 0.20% of the total average monthly net
asset value of such shares.
With respect to other Intermediaries, these payments currently
include the following amounts, which are paid in accordance with
the applicable compensation structure for each Intermediary:
(1)
On $1 million or more of Class A shares (for which no
sales charge was paid) or net asset value purchases by certain
employee benefit plans, Intermediaries receive a gross sales
credit of up to 1.00% of the amount sold.*
(2)
On Class A, B and C shares held in Intermediary accounts
other than those held through Intermediary 401(k) platforms, an
ongoing annual fee in an amount up to 0.15% of the total average
monthly net asset value of such shares.
(3)
On Class I shares held in Intermediary accounts other than
those held through Intermediary 401(k) platforms:
•
a gross sales credit of 0.25% of the amount sold; and
•
an ongoing annual fee in an amount up to 0.15% of the total
average monthly net asset value of such shares.
There is a chargeback of 100% of the gross sales credit amount
paid if the Class I shares are redeemed in the first year
and a chargeback of 50% of the gross sales credit amount paid if
the shares are redeemed in the second year.
The prospect of receiving, or the receipt of, additional
compensation, as described above, by Morgan Stanley Smith Barney
or other Intermediaries may provide Morgan Stanley Smith Barney
and such other Intermediaries and/or their financial advisors or
other salespersons, with an incentive to favor sales of shares
of the Fund over other investment options with respect to which
Morgan Stanley Smith Barney or an Intermediary does not receive
additional compensation (or receives lower levels of additional
compensation). These payment arrangements, however, will not
change the price that an investor pays for shares of the Fund or
the amount that the Fund receives to invest on behalf of an
investor. Investors may wish to take such payment arrangements
into account when considering and evaluating any recommendations
relating to Fund shares and you should review carefully any
disclosure provided by Morgan Stanley Smith Barney or another
Intermediary as to its compensation.
* Commissions or transaction fees paid when Morgan Stanley
Smith Barney or other Intermediaries initiate and are
responsible for purchases of $1 million or more are
computed on a percentage of the dollar value of such shares sold
as follows: 1.00% on sales of $1 million to
$2 million, plus 0.75% on the next $1 million, plus
0.50% on the next $2 million, plus 0.25% on the excess over
$5 million.
47
VI.
BROKERAGE
ALLOCATION AND OTHER PRACTICES
A.
Brokerage
Transactions
Subject to the general supervision of the Directors, the
Investment Adviser is responsible for decisions to buy and sell
securities for the Fund, the selection of brokers and dealers to
effect the transactions, and the negotiation of brokerage
commissions, if any. Purchases and sales of securities on a
stock exchange are effected through brokers who charge a
commission for their services. In the OTC market, securities are
generally traded on a “net” basis with dealers acting
as principal for their own accounts without a stated commission,
although the price of the security usually includes a profit to
the dealer. The Fund also expects that securities will be
purchased at times in underwritten offerings where the price
includes a fixed amount of compensation, generally referred to
as the underwriter’s concession or discount. Options
transactions will usually be effected through a broker and a
commission will be charged. On occasion, the Fund may also
purchase certain money market instruments directly from an
issuer, in which case no commissions or discounts are paid.
Pursuant to an order issued by the SEC, the Fund is permitted to
engage in principal transactions involving money market
instruments, subject to certain conditions, with Morgan
Stanley & Co., a broker-dealer affiliated with the
Investment Adviser.
Brokerage transactions in securities listed on exchanges or
admitted to unlisted trading privileges may be effected through
Morgan Stanley & Co. and other affiliated brokers and
dealers. In order for an affiliated broker or dealer to effect
any portfolio transactions on an exchange for the Fund, the
commissions, fees or other remuneration received by the
affiliated broker or dealer must be reasonable and fair compared
to the commissions, fees or other remuneration paid to other
brokers in connection with comparable transactions involving
similar securities being purchased or sold on an exchange during
a comparable period of time. This standard would allow the
affiliated broker or dealer to receive no more than the
remuneration which would be expected to be received by an
unaffiliated broker in a commensurate arm’s-length
transaction. Furthermore, the Directors, including the
Independent Directors, have adopted procedures which are
reasonably designed to provide that any commissions, fees or
other remuneration paid to an affiliated broker or dealer are
consistent with the foregoing standard. The Fund does not reduce
the management fee it pays to the Investment Adviser by any
amount of the brokerage commissions it may pay to an affiliated
broker or dealer.
During the fiscal years ended February 29, 2008,
February 28, 2009 and February 28, 2010, the Fund paid
a total of $417,792, $122,474 and
$[ ], respectively, in brokerage
commissions to Morgan Stanley & Co. During the
fiscal year ended February 28, 2010, the brokerage
commissions paid to Morgan Stanley & Co. represented
approximately [ ]% of the total
brokerage commissions paid by the Fund during the year and were
paid on account of transactions having an aggregate dollar value
equal to approximately [ ]% of the
aggregate dollar value of all portfolio transactions of the Fund
during the year for which commissions were paid.
C.
Brokerage
Selection
The policy of the Fund regarding purchases and sales of
securities for its portfolio is that primary consideration will
be given to obtaining the most favorable prices and efficient
executions of transactions. The Investment Adviser is prohibited
from directing brokerage transactions on the basis of the
referral of clients or the sale of shares of investment
companies for which it acts as investment adviser. Consistent
with this policy, when securities transactions are effected on a
stock exchange, the Fund’s policy is to pay
48
commissions which are considered fair and reasonable without
necessarily determining that the lowest possible commissions are
paid in all circumstances. The Fund believes that a requirement
always to seek the lowest possible commission cost could impede
effective portfolio management and preclude the Fund and the
Investment Adviser from obtaining a high quality of brokerage
and research services. In seeking to determine the
reasonableness of brokerage commissions paid in any transaction,
the Investment Adviser relies upon its experience and knowledge
regarding commissions generally charged by various brokers and
on its judgment in evaluating the brokerage and research
services received from the broker effecting the transaction. The
Investment Adviser is unable to ascertain the exact dollar value
for those services due to the subjective and imprecise nature of
its determination.
In seeking to implement the Fund’s policies, the Investment
Adviser effects transactions with those broker-dealers that the
Investment Adviser believes provide prompt execution of orders
in an effective manner at the most favorable prices. The
Investment Adviser may place portfolio transactions with those
broker-dealers that also furnish research and other services to
the Fund or the Investment Adviser. Services provided may
include (a) furnishing advice as to the value of
securities, the advisability of investing in, purchasing or
selling securities, and the availability of securities or
purchasers or sellers of securities; (b) furnishing
analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy, and the
performance of accounts; and (c) effecting securities
transactions and performing functions incidental thereto (such
as clearance, settlement and custody). Where a particular item
(such as proxy services) has both research and non-research
related uses, the Investment Adviser
and/or the
Sub-Adviser will make a reasonable allocation of the cost of the
item between research and non-research uses and may pay for the
portion of the cost allocated to research uses with commissions.
In certain instances, the Investment Adviser may instruct
certain brokers to pay for research provided by executing
brokers or third-party research providers, which are selected
independently by the Investment Adviser. The information and
services received by the Investment Adviser from broker-dealers
may be utilized by the Investment Adviser and any of its asset
management affiliates in the management of accounts of some of
their other clients and may not in all cases benefit the Fund
directly or at all. To the extent that the Investment Adviser
receives these services from broker-dealers, it will not have to
pay for these services itself.
The Investment Adviser and certain of its affiliates currently
serve as an investment adviser to a number of clients, including
other investment companies, and may in the future act as
investment adviser to others. It is the practice of the
Investment Adviser and its affiliates to cause purchase and sale
transactions (including transactions in certain initial and
secondary public offerings) to be allocated among clients whose
assets they manage (including the Fund) in such manner they deem
equitable. In making such allocations among the Fund and other
client accounts, various factors may be considered, including
the respective investment objectives, the relative size of
portfolio holdings of the same or comparable securities, the
availability of cash for investment, the size of investment
commitments generally held and the opinions of the persons
responsible for managing the portfolios of the Fund and other
client accounts. The Investment Adviser and its affiliates may
operate one or more order placement facilities and each facility
will implement order allocation in accordance with the
procedures described above. From time to time, each facility may
transact in a security at the same time as other facilities are
trading in that security.
D.
Directed
Brokerage
During the fiscal year ended February 28, 2010, the Fund
[did not pay any brokerage commissions to brokers because of
research services provided.]
E.
Regular
Broker-Dealers
During the fiscal year ended February 28, 2010, [the Fund
did not purchase securities issued by brokers or dealers that
were among the ten brokers or ten dealers which executed
transactions for or with the Fund in the largest dollar amounts
during the period. As of February 28, 2010, the Fund did
not hold any securities issued by any of such issuers.]
The Fund is authorized to issue 500,000,000 shares of
common stock of $0.01 par value for each Class. Shares of
the Fund, when issued, are fully paid, non-assessable, fully
transferrable and redeemable at the option of the holder. Except
for agreements entered into by the Fund in its ordinary course
of business within the limitations of the Fund’s
fundamental investment policies (which may be modified only by
shareholder vote), the Fund will not issue any securities other
than common stock.
All shares of common stock are equal as to earnings, assets and
voting privileges except that each Class will have exclusive
voting privileges with respect to matters relating to
distribution expenses borne solely by such Class or any other
matter in which the interests of one Class differ from the
interests of any other Class. In addition, Class B
shareholders will have the right to vote on any proposed
material increase in Class A’s expenses, if such
proposal is submitted separately to Class A shareholders.
Also, as discussed herein, Class A, Class B and
Class C bear the expenses related to the distribution of
their respective shares.
The Fund is not required to hold annual meetings of shareholders
and in ordinary circumstances the Fund does not intend to hold
such meetings. The Directors may call special meetings of
shareholders for action by shareholder vote as may be required
by the Investment Company Act or the Fund’s By-Laws. Under
certain circumstances the Directors may be removed by the
actions of the Directors. In addition, under certain
circumstances the shareholders may call a meeting to remove the
Directors and the Fund is required to provide assistance in
communicating with shareholders about such a meeting. The voting
rights of shareholders are not cumulative, so that holders of
more than 50% of the shares voting can, if they choose, elect
all Directors being selected, while the holders of the remaining
shares would be unable to elect any Directors.
Information concerning how Fund shares are offered to the public
(and how they are redeemed and exchanged) is provided in the
Fund’s Prospectus.
Suspension of Redemptions. Redemptions are not
made on days during which the NYSE is closed. The right of
redemption may be suspended and the payment therefore may be
postponed for more than seven days during any period when
(a) the NYSE is closed for other than customary weekends or
holidays; (b) the SEC determines trading on the NYSE is
restricted; (c) the SEC determines an emergency exists as a
result of which disposal by the Fund of securities owned by it
is not reasonably practicable or it is not reasonably
practicable for the Fund to fairly determine the value of its
net assets; or (d) the SEC, by order, so permits.
Transfer Agent as Agent. With respect to the
redemption or repurchase of Fund shares, the application of
proceeds to the purchase of new shares in the Fund or any other
Morgan Stanley Funds and the general administration of the
exchange privilege, the Transfer Agent acts as agent for the
Distributor and for the shareholder’s authorized
broker-dealer, if any, in the performance of such functions.
With respect to exchanges, redemptions or repurchases, the
Transfer Agent is liable for its own negligence and not for the
default or negligence of its correspondents or for losses in
transit. The Fund is not liable for any default or negligence of
the Transfer Agent, the Distributor or any authorized
broker-dealer.
The Distributor and any authorized broker-dealer have appointed
the Transfer Agent to act as their agent in connection with the
application of proceeds of any redemption of Fund shares to the
purchase of shares of any other Morgan Stanley Fund and the
general administration of the exchange privilege. No commission
or discounts will be paid to the Distributor or any authorized
broker-dealer for any transaction pursuant to the exchange
privilege.
50
Transfers of Shares. In the event a
shareholder requests a transfer of Fund shares to a new
registration, the shares will be transferred without sales
charge at the time of transfer. With regard to the status of
shares which are either subject to the CDSC or free of such
charge (and with regard to the length of time shares subject to
the charge have been held), any transfer involving less than all
of the shares in an account will be made on a pro rata basis
(that is, by transferring shares in the same proportion that the
transferred shares bear to the total shares in the account
immediately prior to the transfer). The transferred shares will
continue to be subject to any applicable CDSC as if they had not
been so transferred.
Outside Brokerage Accounts/Limited
Portability. Most Fund shareholders hold their
shares with Morgan Stanley Smith Barney. Please note that
your ability to transfer your Fund shares to a brokerage account
at another securities dealer may be limited. Fund shares may
only be transferred to accounts held at securities dealers or
financial intermediaries that have entered into agreements with
the Distributor. After a transfer, you may purchase additional
shares of the Morgan Stanley Fund(s) you owned before the
transfer and, in most instances, you will also be able to
purchase shares of most other Morgan Stanley Funds. If you
transfer shares of a fund that is not a Multi-Class Fund
(for example, a Money Market Fund) you will not be able to
exchange shares of that fund for any other Morgan Stanley Fund
after the transfer.
If you wish to transfer Fund shares to a securities dealer or
other financial intermediary that has not entered into an
agreement with the Distributor, you may request that the
securities dealer or financial intermediary maintain the shares
in an account at the Transfer Agent registered in the name of
such securities dealer or financial intermediary for your
benefit. You may also hold your Fund shares in your own name
directly with the Transfer Agent. In either case, you will
continue to have the ability to purchase additional Morgan
Stanley Funds and will have full exchange privileges. Other
options may also be available; please check with the respective
securities dealer or financial intermediary. If you choose not
to hold your shares with the Transfer Agent, either directly or
through a securities dealer or other financial intermediary, you
must redeem your shares and pay any applicable CDSC.
B.
Offering
Price
The Fund’s Class B, Class C and Class I
shares are offered at net asset value per share and the
Class A shares are offered at net asset value per share
plus any applicable FSC which is distributed among the
Fund’s Distributor, Morgan Stanley Smith Barney and other
authorized dealers as described in Section “V. Investment
Advisory and Other Services — E.
Rule 12b-1
Plan.” The price of Fund shares, called “net asset
value,” is based on the value of the Fund’s portfolio
securities. Net asset value per share of each Class is
calculated by dividing the value of the portion of the
Fund’s securities and other assets attributable to that
Class, less the liabilities attributable to that Class, by the
number of shares of that Class outstanding. The assets of each
Class of shares are invested in a single portfolio. The net
asset value of each Class, however, will differ because the
Classes have different ongoing fees.
In the calculation of the Fund’s net asset value:
(1) an equity portfolio security listed or traded on the
NYSE or other exchange is valued at its latest sale price, prior
to the time when assets are valued; if there were no sales that
day, the security is valued at the mean between the last
reported bid and asked price; (2) an equity portfolio
security listed or traded on the Nasdaq is valued at the Nasdaq
Official Closing Price; if there were no sales that day, the
security is valued at the mean between the last reported bid and
asked price; and (3) all other portfolio securities for
which OTC market quotations are readily available are valued at
the mean between the last reported bid and asked price. In cases
where a security is traded on more than one exchange, the
security is valued on the exchange designated as the primary
market. For equity securities traded on foreign exchanges, the
closing price or the latest bid price may be used if there were
no sales on a particular day. When market quotations are not
readily available, including circumstances under which it is
determined by the Investment Adviser that the sale price, the
bid price or the mean between the last reported bid and asked
price are not reflective of a security’s market value,
portfolio securities are valued at their fair value as
determined in good faith under procedures established by and
under the general supervision of the Fund’s Directors. For
valuation purposes, quotations of foreign portfolio securities,
other assets and liabilities and forward contracts stated in
foreign currency are translated into U.S. dollar
equivalents at the prevailing market rates prior to the close of
the NYSE.
51
Short-term debt securities with remaining maturities of
60 days or less at the time of purchase are valued at
amortized cost, unless the Directors determine such price does
not reflect the securities’ market value, in which case
these securities will be valued at their fair value as
determined by the Directors.
Certain of the Fund’s portfolio securities may be valued by
an outside pricing service approved by the Fund’s
Directors. The pricing service may utilize a matrix system
incorporating security quality, maturity and coupon as the
evaluation model parameters,
and/or
research evaluations by its staff, including review of
broker-dealer market price quotations in determining what it
believes is the fair valuation of the portfolio securities
valued by such pricing service.
Generally, trading in foreign securities, as well as corporate
bonds, U.S. government securities and money market
instruments, is substantially completed each day at various
times prior to the close of the NYSE. The values of such
securities used in computing the net asset value of the
Fund’s shares are determined as of such times. Foreign
currency exchange rates are also generally determined prior to
the close of the NYSE. Occasionally, events which may affect the
values of such securities and such exchange rates may occur
between the times at which they are determined and the close of
the NYSE and will therefore not be reflected in the computation
of the Fund’s net asset value. If events that may affect
the value of such securities occur during such period, then
these securities may be valued at their fair value as determined
in good faith under procedures established by and under the
supervision of the Directors.
IX.
TAXATION
OF THE FUND AND SHAREHOLDERS
The Fund generally will make two basic types of distributions:
ordinary dividends and long-term capital gain distributions.
These two types of distributions are reported differently on a
shareholder’s income tax return. The tax treatment of the
investment activities of the Fund will affect the amount, timing
and character of the distributions made by the Fund. The
following discussion is only a summary of certain tax
considerations generally affecting the Fund and shareholders of
the Fund and is not intended as a substitute for careful tax
planning. Tax issues relating to the Fund are not generally a
consideration for shareholders such as tax-exempt entities and
tax-advantaged retirement vehicles such as an IRA or 401(k)
plan. Shareholders are urged to consult their own tax
professionals regarding specific questions as to federal, state
or local taxes.
Investment Company Taxation. The Fund intends
to continue to qualify as a regulated investment company under
Subchapter M of the Code. As such, the Fund will not be subject
to federal income tax on its net investment income and capital
gains, if any, to the extent that it timely distributes such
income and capital gains to its shareholders. If the Fund fails
to qualify for any taxable year as a regulated investment
company, all of its taxable income will be subject to tax at
regular corporate income tax rates without any deduction for
distributions to shareholders, and such distributions generally
will be taxable to shareholders as ordinary dividends to the
extent of the Fund’s current and accumulated earnings and
profits.
The Fund generally intends to distribute sufficient income and
gains so that the Fund will not pay corporate income tax on its
earnings. The Fund also generally intends to distribute to its
shareholders in each calendar year a sufficient amount of
ordinary income and capital gains to avoid the imposition of a
4% excise tax. However, the Fund may instead determine to retain
all or part of any income or net long-term capital gains in any
year for reinvestment. In such event, the Fund will pay federal
income tax (and possibly excise tax) on such retained income or
gains.
Gains or losses on sales of securities by the Fund will
generally be long-term capital gains or losses if the securities
have a tax holding period of more than one year at the time of
such sale. Gains or losses on the sale of securities with a tax
holding period of one year or less will be short-term capital
gains or losses. Special tax rules may change the normal
treatment of gains and losses recognized by the Fund when the
Fund invests in forward foreign currency exchange contracts,
options, futures transactions and
non-U.S. corporations
classified as “passive foreign investment companies.”
Those special tax rules can, among other things, affect the
treatment of capital gain or loss as long-term or short-term and
may
52
result in ordinary income or loss rather than capital gain or
loss. The application of these special rules would therefore
also affect the character of distributions made by the Fund.
The Fund may make investments in which it recognizes income or
gain prior to receiving cash with respect to such investment.
For example, under certain tax rules, the Fund may be required
to accrue a portion of any discount at which certain securities
are purchased as income each year even though the Fund receives
no payments in cash on the security during the year. To the
extent that the Fund makes such investments, it generally would
be required to pay out such income or gain as a distribution in
each year to avoid taxation at the Fund level. Such
distributions will be made from the available cash of the Fund
or by liquidation of portfolio securities if necessary. If a
distribution of cash necessitates the liquidation of portfolio
securities, the Investment Adviser will select which securities
to sell. The Fund may realize a gain or loss from such sales. In
the event the Fund realizes net capital gains from such
transactions, its shareholders may receive a larger capital gain
distribution, if any, than they would in the absence of such
transactions.
Taxation of Dividends and
Distributions. Shareholders normally will be
subject to federal income taxes, and any state
and/or local
income taxes, on the dividends and other distributions they
receive from the Fund. Such dividends and distributions, to the
extent that they are derived from net investment income or
short-term capital gains, are generally taxable to the
shareholder as ordinary income regardless of whether the
shareholder receives such payments in additional shares or in
cash. Under current law, a portion of the income dividends
received by a shareholder may be taxed at the same rate as
long-term capital gains. However, even if income received in the
form of income dividends is taxed at the same rates as long-term
capital gains, such income will not be considered long-term
capital gains for other federal income tax purposes. For
example, you generally will not be permitted to offset income
dividends with capital losses. Short-term capital gain
distributions will continue to be taxed at ordinary income rates.
Distributions of net long-term capital gains, if any, are
taxable to shareholders as long-term capital gains regardless of
how long a shareholder has held the Fund’s shares and
regardless of whether the distribution is received in additional
shares or in cash. Under current law, the maximum tax rate on
long-term capital gains available to non-corporate shareholders
generally is 15%. Without future congressional action, the
maximum tax rate on long-term capital gains will return to 20%
in 2011, and all dividends will be taxed at ordinary income
rates.
Shareholders are generally taxed on any income dividend or
capital gain distributions from the Fund in the year they are
actually distributed. However, if any such dividends or
distributions are declared in October, November or December and
paid to shareholders of record of such month in January then
such amounts will be treated for tax purposes as received by the
shareholders on December 31.
Subject to certain exceptions, a corporate shareholder may be
eligible for a 70% dividends received deduction to the extent
that the Fund earns and distributes qualifying dividends from
its investments. Distributions of net capital gains by the Fund
will not be eligible for the dividends received deduction.
Shareholders who are not citizens or residents of the United
States and certain foreign entities may be subject to
withholding of U.S. tax on distributions made by the Fund
of investment income and short-term capital gains. The Fund is
not required to withhold any amounts with respect to
distributions to foreign shareholders that are properly
designated by the Fund as “interest-related dividends”
or “short-term capital gains dividends,” provided that
the income would not be subject to federal income tax if earned
directly by the foreign shareholder. However, the Fund may
withhold on some of these amounts regardless of the fact that it
is not required to do so. Any amounts withheld from payments
made to a shareholder may be refunded or credited against the
shareholder’s U.S. federal income tax liability, if
any, provided that the required information is furnished to the
IRS. The provisions discussed above relating to distributions to
foreign persons generally would apply to distributions with
respect to taxable years of regulated investment companies
beginning before January 1, 2010. Prospective investors are
urged to consult their tax advisors regarding the specific tax
consequences discussed above.
53
After the end of each calendar year, shareholders will be sent
information on their dividends and capital gain distributions
for tax purposes, including the portion taxable as ordinary
income, the portion taxable as long-term capital gains, and the
amount of any dividends eligible for the federal dividends
received deduction for corporations.
Purchases and Redemptions and Exchanges of
Fund Shares. Any dividend or capital gains
distribution received by a shareholder from any investment
company will have the effect of reducing the net asset value of
the shareholder’s stock in that company by the exact amount
of the dividend or capital gains distribution. Furthermore, such
dividends and capital gains distributions are subject to federal
income taxes. If the net asset value of the shares should be
reduced below a shareholder’s cost as a result of the
payment of dividends or the distribution of realized long-term
capital gains, such payment or distribution would be in part a
return of the shareholder’s investment but nonetheless
would be taxable to the shareholder. Therefore, an investor
should consider the tax implications of purchasing Fund shares
immediately prior to a distribution record date.
Shareholders normally will be subject to federal income taxes,
and state
and/or local
income taxes, on the sale or disposition of Fund shares. In
general, a sale of shares results in capital gain or loss, and
for individual shareholders, is taxable at a federal rate
dependent upon the length of time the shares were held. A
redemption of a shareholder’s Fund shares is normally
treated as a sale for tax purposes. Fund shares held for a
period of one year or less at the time of such sale or
redemption will, for tax purposes, generally result in
short-term capital gains or losses and those held for more than
one year will generally result in long-term capital gains or
losses. Under current law, the maximum tax rate on long-term
capital gains available to non-corporate shareholders generally
is 15%. Without future congressional action, the maximum tax
rate on long-term capital gains will return to 20% in 2011. Any
loss realized by shareholders upon a sale or redemption of
shares within six months of the date of their purchase will be
treated as a long-term capital loss to the extent of any
distributions of net long-term capital gains with respect to
such shares during the six-month period.
Gain or loss on the sale or redemption of shares in the Fund is
measured by the difference between the amount of cash received
(or the fair market value of any property received) and the
adjusted tax basis of the shares. Shareholders should keep
records of investments made (including shares acquired through
reinvestment of dividends and distributions) so they can compute
the tax basis of their shares. Under certain circumstances a
shareholder may compute and use an average cost basis in
determining the gain or loss on the sale or redemption of shares.
Exchanges of Fund shares for shares of another fund, including
shares of other Morgan Stanley Funds, are also subject to
similar tax treatment. Such an exchange is treated for tax
purposes as a sale of the original shares in the Fund, followed
by the purchase of shares in the other fund.
The ability to deduct capital losses may be limited. In
addition, if a shareholder realizes a loss on the redemption or
exchange of a fund’s shares and receives securities that
are considered substantially identical to that fund’s
shares or reinvests in that fund’s shares or substantially
identical shares within 30 days before or after the
redemption or exchange, the transactions may be subject to the
“wash sale” rules, resulting in a postponement of the
recognition of such loss for tax purposes.
The Fund’s shares are offered to the public on a continuous
basis. The Distributor, as the principal underwriter of the
shares, has certain obligations under the Distribution Agreement
concerning the distribution of the shares. These obligations and
the compensation the Distributor receives are described above in
the sections titled “Principal Underwriter” and
“Rule 12b-1
Plan.”
Average annual
returns assuming deduction of maximum sales charge
Period Ended February 28, 2010
Inception
Class
Date
1 Year
5 Years
10 Years
Life of Fund
Class A
07/28/97
%
%
%
%
Class B
03/30/81
%
%
%*
%*
Class C
07/28/97
%
%
%
%
Class I
07/28/97
%
%
%
%
Average annual
returns assuming NO deduction of sales charge
Period Ended February 28, 2010
Inception
Class
Date
1 Year
5 Years
10 Years
Life of Fund
Class A
07/28/97
%
%
%
%
Class B
03/30/81
%
%
%*
%*
Class C
07/28/97
%
%
%
%
Class I
07/28/97
%
%
%
%
Aggregate total
returns assuming NO deduction of sales charge
Period Ended February 28, 2010
Inception
Class
Date
1 Year
5 Years
10 Years
Life of Fund
Class A
07/28/97
%
%
%
%
Class B
03/30/81
%
%
%*
%*
Class C
07/28/97
%
%
%
%
Class I
07/28/97
%
%
%
%
Average annual
after-tax returns assuming deduction of maximum sales charge
Class B
Period Ended February 28, 2010
Inception
Calculation Methodology
Date
1 Year
5 Years
10 Years
Life of Fund
After taxes on distributions
03/30/81
%
%
%*
%*
After taxes on distributions and redemptions
03/30/81
%
%
%*
%*
*
Does not reflect conversion to Class A shares eight years
after the end of the calendar month in which shares were
purchased. The conversion feature is currently suspended because
the total annual operating expense ratio of Class B is
currently lower than that of Class A. See “Conversion
Feature” for Class B shares in “Share
Class Arrangements” provided in the Fund’s
Prospectus for more information.
The Fund’s audited financial statements for the fiscal year
ended February 28, 2010, including notes thereto, and the
report of
[ ],
are herein incorporated by reference from the Fund’s
Annual Report to Shareholders. A copy of the Fund’s
Annual Report to Shareholders must accompany the delivery
of this SAI.
Dechert LLP, located at 1095 Avenue of the Americas, New York,
NY10036, acts as the Fund’s legal counsel.
* * * * *
This SAI and the Prospectus do not contain all of
the information set forth in the Registration Statement
the Fund has filed with the SEC. The complete Registration
Statement may be obtained from the SEC.
56
Appendix
A
MORGAN STANLEY
INVESTMENT MANAGEMENT
PROXY VOTING POLICY AND PROCEDURES
I. POLICY
STATEMENT
Morgan Stanley Investment Management’s (“MSIM”)
policy and procedures for voting proxies (“Policy”)
with respect to securities held in the accounts of clients
applies to those MSIM entities that provide discretionary
investment management services and for which an MSIM entity has
authority to vote proxies. This Policy is reviewed and updated
as necessary to address new and evolving proxy voting issues and
standards.
The MSIM entities covered by this Policy currently include the
following: Morgan Stanley Investment Advisors Inc., Morgan
Stanley AIP GP LP, Morgan Stanley Investment Management Inc.,
Morgan Stanley Investment Management Limited, Morgan Stanley
Investment Management Company, Morgan Stanley Asset &
Investment Trust Management Co., Limited, Morgan Stanley
Investment Management Private Limited, Van Kampen Asset
Management, and Van Kampen Advisors Inc. (each an “MSIM
Affiliate” and collectively referred to as the “MSIM
Affiliates” or as “we” below).
Each MSIM Affiliate will use its best efforts to vote proxies as
part of its authority to manage, acquire and dispose of account
assets. With respect to the MSIM registered management
investment companies (Van Kampen, Institutional and Advisor
Funds — collectively referred to herein as the
“MSIM Funds”), each MSIM Affiliate will vote proxies
under this Policy pursuant to authority granted under its
applicable investment advisory agreement or, in the absence of
such authority, as authorized by the Board of Directors/Trustees
of the MSIM Funds. An MSIM Affiliate will not vote proxies if
the “named fiduciary” for an ERISA account has
reserved the authority for itself, or in the case of an account
not governed by ERISA, the investment management or investment
advisory agreement does not authorize the MSIM Affiliate to vote
proxies. MSIM Affiliates will vote proxies in a prudent and
diligent manner and in the best interests of clients, including
beneficiaries of and participants in a client’s benefit
plan(s) for which the MSIM Affiliates manage assets, consistent
with the objective of maximizing long-term investment returns
(“Client Proxy Standard”). In certain situations, a
client or its fiduciary may provide an MSIM Affiliate with a
proxy voting policy. In these situations, the MSIM Affiliate
will comply with the client’s policy.
Proxy Research Services — RiskMetrics
Group ISS Governance Services (“ISS”) and Glass Lewis
(together with other proxy research providers as we may retain
from time to time, the “Research Providers”) are
independent advisers that specialize in providing a variety of
fiduciary-level proxy-related services to institutional
investment managers, plan sponsors, custodians, consultants, and
other institutional investors. The services provided include
in-depth research, global issuer analysis, and voting
recommendations. While we may review and utilize the
recommendations of the Research Providers in making proxy voting
decisions, we are in no way obligated to follow such
recommendations. In addition to research, ISS provides vote
execution, reporting, and recordkeeping services.
Voting Proxies for Certain
Non-U.S.
Companies — Voting proxies of companies
located in some jurisdictions, particularly emerging markets,
may involve several problems that can restrict or prevent the
ability to vote such proxies or entail significant costs. These
problems include, but are not limited to: (i) proxy
statements and ballots being written in a language other than
English; (ii) untimely and/or inadequate notice of
shareholder meetings; (iii) restrictions on the ability of
holders outside the issuer’s jurisdiction of organization
to exercise votes; (iv) requirements to vote proxies in
person; (v) the imposition of restrictions on the sale of
the securities for a period of time in proximity to the
shareholder meeting; and (vi) requirements to provide local
agents with power of attorney to facilitate our voting
instructions. As a result, we vote clients’
non-U.S.
proxies on a best efforts basis only, after weighing the costs
and benefits of voting such proxies, consistent with the Client
Proxy Standard. ISS has been retained to provide assistance in
connection with voting
non-U.S.
proxies.
A-1
II. GENERAL
PROXY VOTING GUIDELINES
To promote consistency in voting proxies on behalf of its
clients, we follow this Policy (subject to any exception set
forth herein). The Policy addresses a broad range of issues, and
provides general voting parameters on proposals that arise most
frequently. However, details of specific proposals vary, and
those details affect particular voting decisions, as do factors
specific to a given company. Pursuant to the procedures set
forth herein, we may vote in a manner that is not in accordance
with the following general guidelines, provided the vote is
approved by the Proxy Review Committee (see Section III for
description) and is consistent with the Client Proxy Standard.
Morgan Stanley AIP GP LP will follow the procedures as described
in Appendix A.
We endeavor to integrate governance and proxy voting policy with
investment goals, using the vote to encourage portfolio
companies to enhance long-term shareholder value and to provide
a high standard of transparency such that equity markets can
value corporate assets appropriately.
We seek to follow the Client Proxy Standard for each client. At
times, this may result in split votes, for example when
different clients have varying economic interests in the outcome
of a particular voting matter (such as a case in which varied
ownership interests in two companies involved in a merger result
in different stakes in the outcome). We also may split votes at
times based on differing views of portfolio managers.
We may abstain on matters for which disclosure is inadequate.
A.
Routine
Matters.
We generally support routine management proposals. The following
are examples of routine management proposals:
•
Approval of financial statements and auditor reports if
delivered with an unqualified auditor’s opinion.
•
General updating/corrective amendments to the charter, articles
of association or bylaws, unless we believe that such amendments
would diminish shareholder rights.
•
Most proposals related to the conduct of the annual meeting,
with the following exceptions. We generally oppose proposals
that relate to “the transaction of such other business
which may come before the meeting,” and open-ended requests
for adjournment. However, where management specifically states
the reason for requesting an adjournment and the requested
adjournment would facilitate passage of a proposal that would
otherwise be supported under this Policy (i.e. an uncontested
corporate transaction), the adjournment request will be
supported.
We generally support shareholder proposals advocating
confidential voting procedures and independent tabulation of
voting results.
B.
Board of
Directors.
1.
Election of directors: Votes on board nominees
can involve balancing a variety of considerations. In balancing
various factors in uncontested elections, we may take into
consideration whether the company has a majority voting policy
in place that we believe makes the director vote more
meaningful. In the absence of a proxy contest, we generally
support the board’s nominees for director except as follows:
a.
We consider withholding support from or voting against
interested directors if the company’s board does not meet
market standards for director independence, or if otherwise we
believe board independence is insufficient. We refer to
prevalent market standards as promulgated by a stock exchange or
other authority within a given market (e.g., New York Stock
Exchange or Nasdaq rules for most U.S. companies, and The
Combined Code on Corporate Governance
A-2
in the United Kingdom). Thus, for an NYSE company with no
controlling shareholder, we would expect that at a minimum a
majority of directors should be independent as defined by NYSE.
Where we view market standards as inadequate, we may withhold
votes based on stronger independence standards. Market standards
notwithstanding, we generally do not view long board tenure
alone as a basis to classify a director as non-independent,
although lack of board turnover and fresh perspective can be a
negative factor in voting on directors.
i.
At a company with a shareholder or group that controls the
company by virtue of a majority economic interest in the
company, we have a reduced expectation for board independence,
although we believe the presence of independent directors can be
helpful, particularly in staffing the audit committee, and at
times we may withhold support from or vote against a nominee on
the view the board or its committees are not sufficiently
independent.
ii.
We consider withholding support from or voting against a nominee
if he or she is affiliated with a major shareholder that has
representation on a board disproportionate to its economic
interest.
b.
Depending on market standards, we consider withholding support
from or voting against a nominee who is interested and who is
standing for election as a member of the company’s
compensation, nominating or audit committee.
c.
We consider withholding support from or voting against a nominee
if we believe a direct conflict exists between the interests of
the nominee and the public shareholders, including failure to
meet fiduciary standards of care and/or loyalty. We may oppose
directors where we conclude that actions of directors are
unlawful, unethical or negligent. We consider opposing
individual board members or an entire slate if we believe the
board is entrenched and/or dealing inadequately with performance
problems, and/or acting with insufficient independence between
the board and management.
d.
We consider withholding support from or voting against a nominee
standing for election if the board has not taken action to
implement generally accepted governance practices for which
there is a “bright line” test. For example, in the
context of the U.S. market, failure to eliminate a dead hand or
slow hand poison pill would be seen as a basis for opposing one
or more incumbent nominees.
e.
In markets that encourage designated audit committee financial
experts, we consider voting against members of an audit
committee if no members are designated as such. We also may not
support the audit committee members if the company has faced
financial reporting issues and/or does not put the auditor up
for ratification by shareholders.
f.
We believe investors should have the ability to vote on
individual nominees, and may abstain or vote against a slate of
nominees where we are not given the opportunity to vote on
individual nominees.
g.
We consider withholding support from or voting against a nominee
who has failed to attend at least 75% of the nominee’s
board and board committee meetings within a given year without a
reasonable excuse. We also consider opposing nominees if the
company does not meet market standards for disclosure on
attendance.
h.
We consider withholding support from or voting against a nominee
who appears overcommitted, particularly through service on an
excessive number of boards. Market expectations are incorporated
into this analysis; for U.S. boards, we generally oppose
election of a nominee who serves on more than six public company
boards (excluding investment companies).
2.
Discharge of directors’ duties: In
markets where an annual discharge of directors’
responsibility is a routine agenda item, we generally support
such discharge. However, we may vote against discharge or
abstain from voting where there are serious findings of fraud or
other unethical behavior for which the individual bears
responsibility. The annual discharge of responsibility
represents shareholder approval of actions taken by the board
during the year and may make future shareholder action against
the board difficult to pursue.
A-3
3.
Board independence: We generally support U.S.
shareholder proposals requiring that a certain percentage (up to
662/3%)
of the company’s board members be independent directors,
and promoting all-independent audit, compensation and
nominating/governance committees.
4.
Board diversity: We consider on a
case-by-case
basis shareholder proposals urging diversity of board membership
with respect to social, religious or ethnic group.
5.
Majority voting: We generally support
proposals requesting or requiring majority voting policies in
election of directors, so long as there is a carve-out for
plurality voting in the case of contested elections.
6.
Proxy access: We consider on a
case-by-case
basis shareholder proposals to provide procedures for inclusion
of shareholder nominees in company proxy statements.
7.
Proposals to elect all directors annually: We
generally support proposals to elect all directors annually at
public companies (to “declassify” the Board of
Directors) where such action is supported by the board, and
otherwise consider the issue on a
case-by-case
basis based in part on overall takeover defenses at a company.
8.
Cumulative voting: We generally support
proposals to eliminate cumulative voting in the U.S. market
context. (Cumulative voting provides that shareholders may
concentrate their votes for one or a handful of candidates, a
system that can enable a minority bloc to place representation
on a board.) U.S. proposals to establish cumulative voting in
the election of directors generally will not be supported.
9.
Separation of Chairman and CEO positions: We
vote on shareholder proposals to separate the Chairman and CEO
positions and/or to appoint a non-executive Chairman based in
part on prevailing practice in particular markets, since the
context for such a practice varies. In many
non-U.S.
markets, we view separation of the roles as a market standard
practice, and support division of the roles in that context.
10.
Director retirement age and term
limits: Proposals recommending set director
retirement ages or director term limits are voted on a
case-by-case
basis.
11.
Proposals to limit directors’ liability and/or broaden
indemnification of officers and directors. Generally, we
will support such proposals provided that an individual is
eligible only if he or she has not acted in bad faith, gross
negligence or reckless disregard of their duties.
C.
Statutory Auditor
Boards.
The statutory auditor board, which is separate from the main
board of directors, plays a role in corporate governance in
several markets. These boards are elected by shareholders to
provide assurance on compliance with legal and accounting
standards and the company’s articles of association. We
generally vote for statutory auditor nominees if they meet
independence standards. In markets that require disclosure on
attendance by internal statutory auditors, however, we consider
voting against nominees for these positions who failed to attend
at least 75% of meetings in the previous year. We also consider
opposing nominees if the company does not meet market standards
for disclosure on attendance.
D.
Corporate
Transactions and Proxy Fights.
We examine proposals relating to mergers, acquisitions and other
special corporate transactions (i.e., takeovers, spin-offs,
sales of assets, reorganizations, restructurings and
recapitalizations) on a
case-by-case
basis in the interests of each fund or other account. Proposals
for mergers or other significant transactions that are friendly
and approved by the Research Providers usually are supported if
there is no portfolio manager objection. We also analyze proxy
contests on a
case-by-case
basis.
A-4
E.
Changes in
Capital Structure.
1.
We generally support the following:
•
Management and shareholder proposals aimed at eliminating
unequal voting rights, assuming fair economic treatment of
classes of shares we hold.
•
Management proposals to increase the authorization of existing
classes of common stock (or securities convertible into common
stock) if: (i) a clear business purpose is stated that we
can support and the number of shares requested is reasonable in
relation to the purpose for which authorization is requested;
and/or (ii) the authorization does not exceed 100% of
shares currently authorized and at least 30% of the total new
authorization will be outstanding. (We consider proposals that
do not meet these criteria on a
case-by-case
basis.)
•
Management proposals to create a new class of preferred stock or
for issuances of preferred stock up to 50% of issued capital,
unless we have concerns about use of the authority for
anti-takeover purposes.
•
Management proposals to authorize share repurchase plans, except
in some cases in which we believe there are insufficient
protections against use of an authorization for anti-takeover
purposes.
•
Management proposals to reduce the number of authorized shares
of common or preferred stock, or to eliminate classes of
preferred stock.
•
Management proposals to effect stock splits.
•
Management proposals to effect reverse stock splits if
management proportionately reduces the authorized share amount
set forth in the corporate charter. Reverse stock splits that do
not adjust proportionately to the authorized share amount
generally will be approved if the resulting increase in
authorized shares coincides with the proxy guidelines set forth
above for common stock increases.
•
Management dividend payout proposals, except where we perceive
company payouts to shareholders as inadequate.
2.
We generally oppose the following (notwithstanding management
support):
•
Proposals to add classes of stock that would substantially
dilute the voting interests of existing shareholders.
•
Proposals to increase the authorized or issued number of shares
of existing classes of stock that are unreasonably dilutive,
particularly if there are no preemptive rights for existing
shareholders. However, depending on market practices, we
consider voting for proposals giving general authorization for
issuance of shares not subject to pre-emptive rights if the
authority is limited.
•
Proposals that authorize share issuance at a discount to market
rates, except where authority for such issuance is de minimis,
or if there is a special situation that we believe justifies
such authorization (as may be the case, for example, at a
company under severe stress and risk of bankruptcy).
•
Proposals relating to changes in capitalization by 100% or more.
We consider on a
case-by-case
basis shareholder proposals to increase dividend payout ratios,
in light of market practice and perceived market weaknesses, as
well as individual company payout history and current
circumstances. For example, currently we perceive low payouts to
shareholders as a concern at some Japanese companies, but may
deem a low payout ratio as appropriate for a growth company
making good use of its cash, notwithstanding the broader market
concern.
A-5
F.
Takeover Defenses
and Shareholder Rights.
1.
Shareholder rights plans: We generally support
proposals to require shareholder approval or ratification of
shareholder rights plans (poison pills). In voting on rights
plans or similar takeover defenses, we consider on a
case-by-case
basis whether the company has demonstrated a need for the
defense in the context of promoting long-term share value;
whether provisions of the defense are in line with generally
accepted governance principles in the market (and specifically
the presence of an adequate qualified offer provision that would
exempt offers meeting certain conditions from the pill); and the
specific context if the proposal is made in the midst of a
takeover bid or contest for control.
2.
Supermajority voting requirements: We
generally oppose requirements for supermajority votes to amend
the charter or bylaws, unless the provisions protect minority
shareholders where there is a large shareholder. In line with
this view, in the absence of a large shareholder we support
reasonable shareholder proposals to limit such supermajority
voting requirements.
3.
Shareholder rights to call meetings: We
consider proposals to enhance shareholder rights to call
meetings on a
case-by-case
basis.
4.
Reincorporation: We consider management and
shareholder proposals to reincorporate to a different
jurisdiction on a
case-by-case
basis. We oppose such proposals if we believe the main purpose
is to take advantage of laws or judicial precedents that reduce
shareholder rights.
5.
Anti-greenmail provisions: Proposals relating
to the adoption of anti-greenmail provisions will be supported,
provided that the proposal: (i) defines greenmail;
(ii) prohibits buyback offers to large block holders
(holders of at least 1% of the outstanding shares and in certain
cases, a greater amount, as determined by the Proxy Review
Committee) not made to all shareholders or not approved by
disinterested shareholders; and (iii) contains no
anti-takeover measures or other provisions restricting the
rights of shareholders.
6.
Bundled proposals: We may consider opposing or
abstaining on proposals if disparate issues are
“bundled” and presented for a single vote.
G.
Auditors.
We generally support management proposals for selection or
ratification of independent auditors. However, we may consider
opposing such proposals with reference to incumbent audit firms
if the company has suffered from serious accounting
irregularities and we believe rotation of the audit firm is
appropriate, or if fees paid to the auditor for
non-audit-related services are excessive. Generally, to
determine if non-audit fees are excessive, a 50% test will be
applied (i.e., non-audit-related fees should be less than 50% of
the total fees paid to the auditor). We generally vote against
proposals to indemnify auditors.
H.
Executive and
Director Remuneration.
1. We generally support the following:
•
Proposals for employee equity compensation plans and other
employee ownership plans, provided that our research does not
indicate that approval of the plan would be against shareholder
interest. Such approval may be against shareholder interest if
it authorizes excessive dilution and shareholder cost,
particularly in the context of high usage (“run rate”)
of equity compensation in the recent past; or if there are
objectionable plan design and provisions.
•
Proposals relating to fees to outside directors, provided the
amounts are not excessive relative to other companies in the
country or industry, and provided that the structure is
appropriate within the market context. While stock-based
compensation to outside directors is positive if moderate and
appropriately structured, we are wary of significant stock
option awards or other performance-based awards for outside
directors, as well as provisions that could result in
A-6
significant forfeiture of value on a director’s decision to
resign from a board (such forfeiture can undercut director
independence).
•
Proposals for employee stock purchase plans that permit
discounts up to 15%, but only for grants that are part of a
broad-based employee plan, including all non-executive employees.
•
Proposals for the establishment of employee retirement and
severance plans, provided that our research does not indicate
that approval of the plan would be against shareholder interest.
2.
We generally oppose retirement plans and bonuses for
non-executive directors and independent statutory auditors.
3.
Shareholder proposals requiring shareholder approval of all
severance agreements will not be supported, but proposals that
require shareholder approval for agreements in excess of three
times the annual compensation (salary and bonus) generally will
be supported. We generally oppose shareholder proposals that
would establish arbitrary caps on pay. We consider on a
case-by-case
basis shareholder proposals that seek to limit Supplemental
Executive Retirement Plans (SERPs), but support such proposals
where we consider SERPs to be excessive.
4.
Shareholder proposals advocating stronger and/or particular
pay-for-performance
models will be evaluated on a
case-by-case
basis, with consideration of the merits of the individual
proposal within the context of the particular company and its
labor markets, and the company’s current and past
practices. While we generally support emphasis on long-term
components of senior executive pay and strong linkage of pay to
performance, we consider whether a proposal may be overly
prescriptive, and the impact of the proposal, if implemented as
written, on recruitment and retention.
5.
We consider shareholder proposals for U.K.-style advisory votes
on pay on a
case-by-case
basis.
6.
We generally support proposals advocating reasonable senior
executive and director stock ownership guidelines and holding
requirements for shares gained in executive equity compensation
programs.
7.
We generally support shareholder proposals for reasonable
“claw-back” provisions that provide for company
recovery of senior executive bonuses to the extent they were
based on achieving financial benchmarks that were not actually
met in light of subsequent restatements.
8.
Management proposals effectively to re-price stock options are
considered on a
case-by-case
basis. Considerations include the company’s reasons and
justifications for a re-pricing, the company’s competitive
position, whether senior executives and outside directors are
excluded, potential cost to shareholders, whether the re-pricing
or share exchange is on a
value-for-value
basis, and whether vesting requirements are extended.
I.
Social, Political
and Environmental Issues.
We consider proposals relating to social, political and
environmental issues on a
case-by-case
basis to determine likely financial impacts on shareholder
value, balancing concerns on reputational and other risks that
may be raised in a proposal against costs of implementation. We
may abstain from voting on proposals that do not have a readily
determinable financial impact on shareholder value. While we
support proposals that we believe will enhance useful
disclosure, we generally vote against proposals requesting
reports that we believe are duplicative, related to matters not
material to the business, or that would impose unnecessary or
excessive costs. We believe that certain social and
environmental shareholder proposals may intrude excessively on
management prerogatives, which can lead us to oppose them.
A-7
J.
Fund of
Funds.
Certain Funds advised by an MSIM Affiliate invest only in other
MSIM Funds. If an underlying fund has a shareholder meeting, in
order to avoid any potential conflict of interest, such
proposals will be voted in the same proportion as the votes of
the other shareholders of the underlying fund, unless otherwise
determined by the Proxy Review Committee.
III. ADMINISTRATION
OF POLICY
The MSIM Proxy Review Committee (the “Committee”) has
overall responsibility for the Policy. The Committee, which is
appointed by MSIM’s Chief Investment Officer of Global
Equities (“CIO”) or senior officer, consists of senior
investment professionals who represent the different investment
disciplines and geographic locations of the firm, and is chaired
by the director of the Corporate Governance Team
(“CGT”). Because proxy voting is an investment
responsibility and impacts shareholder value, and because of
their knowledge of companies and markets, portfolio managers and
other members of investment staff play a key role in proxy
voting, although the Committee has final authority over proxy
votes.
The CGT Director is responsible for identifying issues that
require Committee deliberation or ratification. The CGT, working
with advice of investment teams and the Committee, is
responsible for voting on routine items and on matters that can
be addressed in line with these Policy guidelines. The CGT has
responsibility for voting
case-by-case
where guidelines and precedent provide adequate guidance.
The Committee will periodically review and have the authority to
amend, as necessary, the Policy and establish and direct voting
positions consistent with the Client Proxy Standard.
CGT and members of the Committee may take into account Research
Providers’ recommendations and research as well as any
other relevant information they may request or receive,
including portfolio manager and/or analyst comments and
research, as applicable. Generally, proxies related to
securities held in accounts that are managed pursuant to
quantitative, index or index-like strategies (“Index
Strategies”) will be voted in the same manner as those held
in actively managed accounts, unless economic interests of the
accounts differ. Because accounts managed using Index Strategies
are passively managed accounts, research from portfolio managers
and/or analysts related to securities held in these accounts may
not be available. If the affected securities are held only in
accounts that are managed pursuant to Index Strategies, and the
proxy relates to a matter that is not described in this Policy,
the CGT will consider all available information from the
Research Providers, and to the extent that the holdings are
significant, from the portfolio managers and/or analysts.
A.
Committee
Procedures
The Committee meets at least annually to review and consider
changes to the Policy. The Committee will appoint a subcommittee
(the “Subcommittee”) to meet as needed between
Committee meetings to address any outstanding issues relating to
the Policy or its implementation.
The Subcommittee will meet on an ad hoc basis to (among other
functions): (1) monitor and ratify “split voting”
(i.e., allowing certain shares of the same issuer that are the
subject of the same proxy solicitation and held by one or more
MSIM portfolios to be voted differently than other shares)
and/or “override voting” (i.e., voting all MSIM
portfolio shares in a manner contrary to the Policy);
(2) review and approve upcoming votes, as appropriate, for
matters as requested by CGT.
The Committee reserves the right to review voting decisions at
any time and to make voting decisions as necessary to ensure the
independence and integrity of the votes. The Committee or the
Subcommittee are provided with reports on at least a monthly
basis detailing specific key votes cast by CGT.
A-8
B.
Material
Conflicts of Interest
In addition to the procedures discussed above, if the CGT
Director determines that an issue raises a material conflict of
interest, the CGT Director will request a special committee to
review, and recommend a course of action with respect to, the
conflict(s) in question (“Special Committee”).
A potential material conflict of interest could exist in the
following situations, among others:
1.
The issuer soliciting the vote is a client of MSIM or an
affiliate of MSIM and the vote is on a matter that materially
affects the issuer.
2.
The proxy relates to Morgan Stanley common stock or any other
security issued by Morgan Stanley or its affiliates except
if echo voting is used, as with MSIM Funds, as described herein.
3.
Morgan Stanley has a material pecuniary interest in the matter
submitted for a vote (e.g., acting as a financial advisor to a
party to a merger or acquisition for which Morgan Stanley will
be paid a success fee if completed).
If the CGT Director determines that an issue raises a potential
material conflict of interest, depending on the facts and
circumstances, the issue will be addressed as follows:
1.
If the matter relates to a topic that is discussed in this
Policy, the proposal will be voted as per the Policy.
2.
If the matter is not discussed in this Policy or the Policy
indicates that the issue is to be decided
case-by-case,
the proposal will be voted in a manner consistent with the
Research Providers, provided that all the Research Providers
have the same recommendation, no portfolio manager objects to
that vote, and the vote is consistent with MSIM’s Client
Proxy Standard.
3.
If the Research Providers’ recommendations differ, the CGT
Director will refer the matter to the Subcommittee or a Special
Committee to vote on the proposal, as appropriate.
The Special Committee shall be comprised of the CGT Director,
the Chief Compliance Officer or
his/her
designee, a senior portfolio manager (if practicable, one who is
a member of the Proxy Review Committee) designated by the Proxy
Review Committee, and MSIM’s relevant Chief Investment
Officer or his/her designee, and any other persons deemed
necessary by the CGT Director. The CGT Director may request
non-voting participation by MSIM’s General Counsel or
his/her designee. In addition to the research provided by
Research Providers, the Special Committee may request analysis
from MSIM Affiliate investment professionals and outside sources
to the extent it deems appropriate.
C.
Proxy Voting
Reporting
The CGT will document in writing all Committee, Subcommittee and
Special Committee decisions and actions, which documentation
will be maintained by the CGT for a period of at least six
years. To the extent these decisions relate to a security held
by an MSIM Fund, the CGT will report the decisions to each
applicable Board of Trustees/Directors of those Funds at each
Board’s next regularly scheduled Board meeting. The report
will contain information concerning decisions made during the
most recently ended calendar quarter immediately preceding the
Board meeting.
MSIM will promptly provide a copy of this Policy to any client
requesting it. MSIM will also, upon client request, promptly
provide a report indicating how each proxy was voted with
respect to securities held in that client’s account.
MSIM’s Legal Department is responsible for filing an annual
Form N-PX
on behalf of each MSIM Fund for which such filing is required,
indicating how all proxies were voted with respect to such
Fund’s holdings.
[APPENDIX A and APPENDIX B of the Proxy Voting Policy
intentionally omitted.]
Articles of Incorporation of the Registrant, dated December 19, 1980,
is incorporated herein by reference to Exhibit 1(a) of Post-Effective
Amendment No. 18 to the Registration Statement on Form N-1A, filed on
April 24, 1996.
(2).
Amendment, dated March 18, 1983 to the Articles of
Incorporation of the Registrant is incorporated herein by reference to Exhibit 1(b)
of Post-Effective Amendment No. 18 to the Registration Statement on Form N-1A, filed
on April 24, 1996.
(3).
Amendment, dated May 23, 1997 to the Articles of Incorporation of the
Registrant is incorporated herein by reference to Exhibit 1(a) of Post-Effective Amendment No. 20 to the Registration Statement on
Form N-1A, filed July 18, 1997.
(4).
Articles Supplementary,
dated July 28, 1997, to the Articles of Incorporation of the
Registrant is incorporated herein by reference to Exhibit 1(b) of Post-Effective
Amendment No. 20 to the Registration Statement on Form N-1A, filed on July 18, 1997.
(5).
Articles of Amendment, dated
July 28, 1997, to the Articles of Incorporation of the Registrant is incorporated herein by reference to Exhibit 1(c)
of Post-Effective Amendment No. 20 to the Registration Statement on Form N-1A, filed
on July 18, 1997.
(6).
Amendment, dated June 19, 1998 to the Articles of Incorporation of the
Registrant is incorporated herein by reference to Exhibit (1) of
Post-Effective Amendment No. 21 to the Registration Statement on Form
N-1A, filed on June 24, 1998.
(7).
Amendment to the Articles of Incorporation of the Registrant, dated
June 18, 2001, is incorporated herein by reference to Exhibit 1(d) of
Post- Effective Amendment No. 26 to the Registration Statement on
Form N-1A, filed on April 26, 2002.
(8).
Certificate of Correction, dated
August 1, 2003, to
Articles Supplementary, filed herein.
(9).
Amendment dated March 27, 2008 to the Articles of Incorporation of
the Registrant, is incorporated herein by reference to Exhibit (a)(5) of Post-Effective Amendment No. 34 to the Registration Statement on Form N-1A, filed on June 27, 2008.
Amended and Restated Investment Advisory Agreement between the Registrant and Morgan Stanley Investment Advisors Inc., dated November 1,2004 and supplemented as of April 24, 2008, is incorporated herein by reference to Exhibit (d) of Post-
Effective Amendment No. 27 to the Registration Statement on Form N-1A
of Morgan Stanley Select Dimensions Investment Series, filed on
April 8, 2009.
(e)
(1).
Amended Distribution Agreement, dated November 1, 2007, is incorporated
herein by reference to Exhibit (e)(1) of Post-Effective Amendment
No. 26 to the Registration Statement on Form N-1A of Morgan Stanley
Income Trust, filed on December 18, 2007.
(2).
Selected Dealer Agreement between Morgan Stanley Distributors Inc.
and Morgan Stanley & Co. Incorporated, is incorporated herein by
reference to Exhibit (e)(2) of Post-Effective Amendment No. 4 to the
Registration Statement on Form N-1A of Morgan Stanley Fundamental
Value Fund, filed on January 25, 2006.
(3).
Addendum No. 1 to the Selected Dealer Agreement, is incorporated
herein by reference to Exhibit (e)(3) of Post-Effective Amendment
No. 24 to the Registration Statement on Form N-1A of Morgan Stanley
Strategist Fund, filed on September 26, 2007.
(4).
First Amendment to Addendum No. 1 to the Selected Dealer Agreement, dated February 15, 2008, is incorporated herein by reference to Exhibit (e)(4) of Post-Effective Amendment No. 19 to the Registration Statement on Form N-1A of Morgan Stanley Limited Term Municipal Trust, filed on July 25, 2008.
(5).
Form of Dealer Agreement is incorporated herein by reference to
Exhibit (e)(3) of Post-Effective Amendment No. 10 to the
Registration Statement on Form N-1A of Morgan Stanley Aggressive
Equity Fund, filed on November 22, 2006.
(f).
Second Amended and Restated Retirement Plan for Non-Interested
Trustees or Directors, dated May 8, 1997, is incorporated herein by
reference to Exhibit 6 of Post-Effective No. 22 to the Registration
Statement on Form N-1A, filed on April 29, 1999.
(g)
(1).
Custodian Contract between State Street Bank and Trust Company and the
Registrant, dated March 7, 2008, is incorporated herein by reference to
Exhibit (g)(1) of Post-Effective Amendment No. 18 to the Registration
Statement on Form N-1A of Morgan Stanley Balanced Fund, filed on
May 28, 2008.
(2).
Data Access Services Agreement is incorporated herein by reference to
Exhibit (g)(2) of Post-Effective Amendment No. 18 to the Registration
Statement on Form N-1A of Morgan Stanley Balanced Fund, filed on May28, 2008.
1
Item 28.
Exhibits
(h)
(1).
Amended and Restated Transfer Agency and Service Agreement
between the Registrant and Morgan Stanley Trust, dated June 26, 2008, is
incorporated herein by reference to Exhibit (h)(1) of Post-Effective
Amendment No. 18 to the Registration Statement on Form N-1A of Morgan Stanley Special Value Fund, filed on
November 24, 2008.
(2).
Administration Agreement between Morgan
Stanley Services Company Inc. and the Registrant, dated November 1, 2004 and supplemented as of April 24, 2008, is incorporated
herein by reference to Exhibit (h)(2) of Post-Effective Amendment No.
27 to the Registration Statement on Form N-1A of Morgan Stanley Select Dimensions Investment Series,
filed on April 8, 2009.
(i)
(1).
Opinion of Clifford Chance US LLP, is incorporated herein by
reference to Exhibit (i)(1) of Post-Effective Amendment No. 30 to the
Registration Statement on Form N-1A, filed on June 29, 2005.
(2).
Consent of Dechert LLP, to be filed by further amendment.
(3).
Opinion of Ballard Spahr Andrews & Ingersoll, LLP, Maryland Counsel,
is incorporated herein by reference to Exhibit (i)(2) of
Post-Effective Amendment No. 30 to the Registration Statement on Form
N-1A, filed on June 29, 2005.
(j).
Consent of Independent Registered Public Accounting Firm, to be filed by further amendment.
(k).
Not Applicable.
(l).
Not Applicable.
(m).
Amended and Restated Plan of Distribution, Pursuant to Rule 12b-1,
dated May 1, 2004, is incorporated herein by reference to Exhibit (m)
of Post-Effective Amendment No. 29 to the Registration Statement on
Form N-1A, filed on April 28, 2005.
(n).
Amended Multi-Class Plan pursuant to Rule 18f-3, dated September 26,2007, is incorporated herein by reference to Exhibit (n) of
Post-Effective Amendment No. 17 to the Registration Statement on Form
N-1A of Morgan Stanley Special Value Fund, filed on November 29,2007.
(o).
Not Applicable
(p)
(1).
Code of Ethics of Morgan Stanley Investment Management, dated May 12,2008 is incorporated herein by reference to Exhibit (p)(1) of
Post-Effective Amendment No. 18 to the Registration Statement on Form
N-1A of Morgan Stanley Balanced Fund filed on May 28, 2008.
(2).
Code of Ethics of Morgan Stanley Funds, is incorporated herein by
reference to Exhibit (p)(2) of Post-Effective Amendment No. 29 to the
Registration Statement on Form N-1A, filed on April 28, 2005.
(q).
Power of Attorneys of Directors, dated March 18, 2010, is
incorporated herein by reference to Exhibit (q) of Post-Effective
Amendment No. 20 to the Registration Statement on Form N-1A of Morgan
Stanley Balanced Fund, filed on March 31, 2010.
ITEM 29. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE FUND.
None
2
ITEM 30. INDEMNIFICATION.
Reference is made to Section 3.15 of the Registrant’s By-Laws and Section
2-418 of the Maryland General Corporation Law.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 ( the “Act”) may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities ( other than the payment by the registrant of expenses
incurred or paid by a director, officer, or controlling person of the Registrant
in connection with the successful defense of any action, suit or proceeding) is
asserted against the Registrant by such director, officer or controlling person
in connection with the shares being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act, and will
be governed by the final adjudication of such issue.
The Registrant hereby undertakes that it will apply the indemnification
provision of its by-laws in a manner consistent with release 11330 of the
Securities and Exchange Commission under the Investment Company Act of 1940, so
long as the interpretation of Sections 17 (h) and 17 (I) of such Act remains in
effect.
The Registrant, in conjunction with the Investment Adviser, the
Registrant’s Directors, and other registered investment management companies
managed by the Investment Adviser, maintains insurance on behalf of any person
who is or was a Director, officer, employee, or agent of registrant, or who is
or was serving at the request of registrant as a trustee, director, officer,
employee or agent of another trust or corporation, against any liability
asserted against him and incurred by him or arising out of his position.
However, in no event will registrant maintain insurance to indemnify any such
person for any act for which Registrant itself is not permitted to indemnify
him.
ITEM 31. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISOR
See “Fund Management” in the Prospectus regarding the business of the
investment adviser. The following information is given regarding directors and
officers of Morgan Stanley Investment Advisors Inc. (“Morgan Stanley Investment
Advisors”). Morgan Stanley Investment Advisors is a wholly-owned subsidiary of
Morgan Stanley.
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Set forth below is the name and principal business address of each
company for which directors or officers of Morgan Stanley Investment Advisors
serve as directors, officers or employees:
Morgan Stanley Distributors Inc.
Morgan Stanley Investment Advisors
Morgan Stanley Investment Management Inc.
Morgan Stanley Services Company Inc.
Van Kampen Advisors Inc.
Van Kampen Asset Management
Van Kampen Investments Inc.
522 Fifth Avenue, New York, New York10036
Van Kampen Investor Services Inc.
2800 Post Oak Blvd., Houston, Texas77056
Listed below are the officers and Directors of Morgan Stanley Investment Advisors
NAME AND POSITION WITH
MORGAN STANLEY INVESTMENT ADVISORS INC.
OTHER SUBSTANTIAL BUSINESS, PROFESSION, OR VOCATION
Randy Takian
Managing Director, Director and President
President and Principal Executive Officer of
the Morgan Stanley Retail and Institutional Funds; President and Chief
Executive Officer of Morgan Stanley Services Company Inc.; Managing
Director and Director of Morgan Stanley Investment Management Inc.; Director of Morgan
Stanley Distributors Inc. and Morgan Stanley Distribution, Inc.
Stuart Bohart
Managing Director
and Director
President, Managing Director and Director of Morgan
Stanley Investment Management Inc.; Managing Director of Van Kampen
Advisors Inc. and Van Kampen Asset Management;
President of Morgan Stanley Distribution, Inc.
Managing Director and Secretary of various entities
affiliated with the Investment Adviser.
Kevin Klingert
Managing Director, Head, Chief
Operating Officer and acting Chief Investment Officer
of the Global Fixed
Income Group
Managing Director, Head, Chief Operating Officer
and acting Chief Investment Officer of the Global
Fixed Income Group of Morgan Stanley Investment Management
Inc.; Vice President of various Morgan Stanley Retail
Funds and Institutional Funds; Managing Director
and acting Chief Investment Officer of the Global
Fixed Income Group of various Van Kampen entities;
Vice President of various Van Kampen Retail Funds
and Institutional Funds.
Mary Ann Picciotto
Executive Director and
Chief Compliance Officer
Executive Director; Chief Compliance Officer of the Retail Funds and Institutional
Funds; Chief Compliance Officer of Morgan Stanley Investment Advisors Inc., Morgan
Stanley Investment Management Inc., Van Kampen Asset Management, Van Kampen
Investments Inc. and Van Kampen Advisors Inc.
Mark Patten
Managing Director, Chief Financial
Officer and Treasurer
Managing Director, Chief Financial Officer and Treasurer
of Morgan Stanley Investment Management and Morgan
Stanley Distribution Inc.; Chief Financial Officer
and Treasurer of Morgan Stanley Asset Management
Holdings II; Chief
Financial Officer and Treasurer of various Van Kampen entities.
Mary Alice Dunne
Managing Director and
Chief Administrative Officer
Managing Director and Chief Administrative Officer
of Morgan Stanley Investment Management Inc.
Joanne Pace
Chief Operating Officer and
Managing Director
Chief Operating Officer
and Managing Director of Morgan Stanley Investment Management Inc.;
Managing Director of various Van Kampen entities.
For information as to the business, profession, vocation or employment of a
substantial nature of additonal officers of the Investment Adviser, reference is
made to the Investment Adviser’s current Form ADV (File No. 801-42061) filed
under the Investment Advisers Act of 1940, incorporated herein by reference.
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ITEM 32. PRINCIPAL UNDERWRITERS
(a) Morgan Stanley Distributors Inc., a Delaware corporation, is the
principal underwriter of the Registrant. Morgan Stanley Distributors is also the
principal underwriter of the following investment companies:
(1) Active Assets California Tax-Free Trust
(2) Active Assets Government Securities Trust
(3) Active Assets Institutional Government Securities Trust
(4) Active Assets Institutional Money Trust
(5) Active Assets Money Trust
(6) Active Assets Tax-Free Trust
(7) Morgan Stanley Balanced Fund
(8) Morgan Stanley California Tax-Free Daily Income Trust
(9) Morgan Stanley California Tax-Free Income Fund
(10) Morgan Stanley Capital Opportunities Trust
(11) Morgan Stanley Convertible Securities Trust
(12) Morgan Stanley Dividend Growth Securities Inc.
(13) Morgan Stanley Equally-Weighted S&P 500 Fund
(14) Morgan Stanley European Equity Fund Inc.
(15) Morgan Stanley Flexible Income Trust
(16) Morgan Stanley Focus Growth Fund
(17) Morgan Stanley Fundamental Value Fund
(18) Morgan Stanley FX Series Funds
(19) Morgan Stanley Global Advantage Fund
(20) Morgan Stanley Global Dividend Growth Securities
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(21) Morgan Stanley Global Infrastructure Fund
(22) Morgan Stanley Global Strategist Fund
(23) Morgan Stanley Health Sciences Trust
(24) Morgan Stanley High Yield Securities Inc.
(25) Morgan Stanley International Fund
(26) Morgan Stanley International Value Equity Fund
(27) Morgan Stanley Limited Duration U.S. Government Trust
(28) Morgan Stanley Liquid Asset Fund Inc.
(29) Morgan Stanley Mid Cap Growth Fund
(30) Morgan Stanley Mid-Cap Value Fund
(31) Morgan Stanley Mortgage Securities Trust
(32) Morgan Stanley New York Municipal Money Market Trust
(33) Morgan Stanley New York Tax-Free Income Fund
(34) Morgan Stanley Pacific Growth Fund Inc.
(35) Morgan Stanley Prime Income Trust
(36) Morgan Stanley Real Estate Fund
(37) Morgan Stanley S&P 500 Index Fund
(38) Morgan Stanley Select Dimensions Investment Series
(39) Morgan Stanley Series Funds
(40) Morgan Stanley Small-Mid Special Value Fund
(41) Morgan Stanley Special Growth Fund
(42) Morgan Stanley Special Value Fund
(43) Morgan Stanley Tax-Exempt Securities Trust
(44) Morgan Stanley Tax-Free Daily Income Trust
(45) Morgan Stanley Technology Fund
(46) Morgan Stanley U.S. Government Money Market Trust
(47) Morgan Stanley U.S. Government Securities Trust
(48) Morgan Stanley Value Fund
(49) Morgan Stanley Variable Investment Series
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(b) The following information is given regarding directors and officers of
Morgan Stanley Distributors. The principal address
of Morgan Stanley Distributors is 522 Fifth Avenue, New York, New York10036.
Books or other documents required to be maintained by Section 31(a) [15 U.S.C. 80a-30(a)] of the
Investment Company Act of 1940, and the rules promulgated thereunder, and
maintained as follows:
State Street Bank and Trust Company
One Lincoln Street Boston, Massachusetts02111
(records relating to its function as custodian)
Morgan Stanley Investment Advisors Inc.
522 Fifth Avenue New York, New York10036
(records relating to its function as custodian)
Morgan Stanley Trust
Harborside Financial Center, Plaza Two
2nd Floor Jersey City, New Jersey07311
(records relating to its function as transfer agent and
dividend disbursing agent)
Morgan Stanley Services Company Inc.
Harborside Financial Center, Plaza Two
7th Floor Jersey City, New Jersey07311
(records relating to its function as administrator)
ITEM 34. MANAGEMENT SERVICES
Registrant is not a party to any such management-related service contract.
ITEM 35. UNDERTAKINGS
None.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Post-Effective Amendment to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York and State of New York on the
28th day of
April 2010.
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 36 has been signed below by the following persons
in the capacities and on the dates indicated.